November got off to a strong start early last week, and the rally broadened to include financial and retail stocks. But after a torrid six weeks of bullish behavior while ignoring (or perhaps reveling in) concerns about the global economy during, U.S. stocks encountered some strong technical resistance in the middle of last week, and it has continued into Monday. The Dow Jones Transportation Index continues to a drag on the overall market, and this segment will need to gather some enthusiasm if the broader indexes are to resume their advance. Nevertheless, seasonality and a strong technical picture have renewed bullish conviction, so the path of least resistance is still up.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.

Market overview:

The title of this article might make a good verse for a new market-oriented Christmas carol. You are welcome to offer up your own suggestions (I can’t wait to see this, especially from the market Scrooges out there).

Friday brought us the first dose of holiday cheer from an economic standpoint when we learned that the economy added 271,000 jobs in October, the unemployment rate fell to 5.0%, and average hourly earnings rose 2.4%. The weak US employment report for September was seen as at least partially responsible for October’s global rally. So, the question is, will the strong October jobs report do the opposite?

In a classic case of good-news-is-bad-news, this terrific economic news appears to have been taken as a temporary sell signal by investors since it was perceived as a green light for unwanted changes to monetary policies. Actually, it’s not so much that the changes are unwanted as that it creates uncertaintyabout the ultimate impact of moving away from the long-standing ZIRP policy. After all, nothing is ever as simple as it seems. Any change in policy, whether fiscal or monetary, will have direct and indirect effects that are both positive and negative, and we can only guess as to what those might be.

So, investors took some risk off the table on Friday, and then Monday’s trading brought a continuation of the pullback, which market commentators blamed on weak Chinese trade data and a reduction in the OECD’s global growth forecast.

But the reality from a technical (chart) standpoint is that the market simply became so overbought that it needed to stop for a breather. Any excuse would do. The big October rally began with short-covering as the major driver, and more recently was led by large and mega-caps that masked the persistently weak market breadth. It has been particularly hard this year to outperform the cap-weighted S&P 500 large cap index.

Notably, ETFGI reported that exchange-traded funds listed in the U.S. have gathered a record $175 billion in net new assets this year, as of the end of October, with over $28 billion coming in October alone, which marked the ninth consecutive month of positive net inflows. Also S&P reported that ETFs in all U.S. sectors except Healthcare experienced inflows during the month, with Consumer Staples and Real Estate segments particularly strong, while Utilities and Energy were the most highly correlated internally (which makes sense given that these sectors are typically buffeted by macro issues).

Certainly, market participants are factoring in higher short-term rates and a further strengthening dollar, which are expected to negatively impact income-oriented companies (like REITs and Utilities) and export-oriented multinationals, as well as emerging market debtors (whose debt is usually repaid in more-expensive dollars). Indeed, immediately after the Friday jobs report, the 10-year Treasury yield popped while REITs and Utilities fell.