What's Not Working?

Crude oil futures reached $74.50 today, the highest point in almost a year. Continuing problems in the North Sea and Nigeria are keeping supply reliability in question while demand shows no signs of slowing. Energy-related equities consolidated after last week's sharp gains.

After inching to more record highs on Friday, the large cap benchmarks decoupled from each other today, with the Dow up and the S&P 500 falling slightly. More significant, perhaps, may have been the -0.5% drop in the Russell 2000 Small Cap Index. The small caps have been unable to break above resistance. While it's not absolutely necessary that they do so in order for the large cap uptrend to continue, bull markets are usually stronger when the small caps are moving higher.

The S&P 500 recent gains have been concentrated in energy, materials, and parts of the technology and industrial sectors. Meanwhile, vast parts of the stock market are moving sideways or even down. The worst place to be invested right now may be the financial sector. Banks, brokerages and insurance companies are all feeling the pinch of higher interest rates and the unwinding of the U.S. housing bubble. Merger activity may be the only thing keeping the financials afloat. Rising rates are also hurting the utilities sector, whose dividend payouts now face competition from Treasury bonds. Health care has popped up in the last few days but faces stiff resistance before it can move much higher. While retail sales numbers haven't been bad, both consumer staples and consumer discretionary stocks are having a hard time building any sustained momentum.

All this adds up to a market that is moving higher with fairly narrow leadership. That doesn't mean a crash is at hand by any means, but until some of the lagging sectors to pick up strength the upside momentum will be held back.