I don’t know what’s happening to the market or how long it will go on but there is a weird transition happening. Others had talked about for a number of days so I had to see for myself and, lo and behold, it turns out to be true.

Scroll through the charts of the S&P 500 stocks for yourselves, as I did, and you’ll find it hitting you right in the face. The thing that’s happening is that there seem to be only three group of stocks recently moving ahead while the rest of the market seems to have hit a stone wall and have fallen back. You can look at a long-term stock chart and, before looking at the stocks symbol can correctly guess the industry group about an 70% of the time. There’s such a divergence between the groups and such a similarity between the stocks within a group.

The groups moving ahead (big time) are:

• healthcare related like biotech and drugs, equipment, services and health plans, drug wholesalers and retails
• consumer staples like cosmetics, personal care, soft drinks, tobacco, grocery wholesalers and retailers, etc.
• utilities including electrical, natural gas, etc.

Several other groups have actually formed top reversal patterns and are headed south, like oil & gas. The rest of the stocks are at or marginally above long-term resistance levels at either the 2006 or 2000 highs. Most notable among these are the financials including banks, insurance and asset management companies.

Lost in the shuffle are tech, defense, industrial equipment, construction and most retail stocks. Most of the large-cap techs are retreating (MSFT, TXN, BRCM, INTC, QCOM) while the small-tech software, equipment and Internet stocks seem to be deciding in which direction they’ll fall.

What does this survey mean for you; how can you use subjective evaluation like this? I’ll tell you what it means for me. It means that I’m going to reconsider the investment strategy I’ve been following since last November when the “mid-term election cycle” started. Interestingly, the S&P has already done that when viewed on an equal-weighted basis rather as contrasted with the traditional capital-weighted basis.

I’ve been looking for a move to around the previous all-time high on the S&P by year-end with a interim consolidation at around 1325, around the market’s level. Many “talking heads” started calling for the double dip recession which could be forcing a move by the herd towards the safer, low growth, dividend paying stocks…..at least through the summer.

I already have over 20% in health care related stocks and have dumped my energy and precious metals stocks. Should I follow the herd and now also abandon the tech stocks now representing another 20% of the portfolio? How long will this stock rotation phase last and where will it go to next [my guess is back to the long-dormant but waiting-for-a-pop financials]? Tough calls but one that has to be made in order to stay even with the herd.

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