Sector Investing

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Headline Charts Blog always worth reading:

http://headlinecharts.blog.com/



I knew there was something I forgot to include yesterday. Above is Ken's latest breakdown of sector leadership for short-term trading, 1-4 weeks. These sectors have really bounced around lately but that is because commodities have finally fallen off the cliff and that significantly impacts all sectors as a result.

I'm still not ready to buy financials or consumer stocks, and their recent strength looks more like a bounce than the beginning of new leadership by these groups. And I really don't like the prospects for a stock market being led by healthcare and staples which are defensive groups.

Tech is a huge disappointment, but its recent weakness makes sense. If commodities have weakened due to expectations of a weak world economy ahead, that weakness also applies to tech which is an early growth leader. In other words, it is too early to be being buying tech as a group.

Some might be surprised by the weakness in the traditionally defensive utilities, but this makes sense too since they seem more tied to energy prices now, particularly natural gas and coal. Also, they have had a huge multi year runnup in prices that needs to consolidate... and they have lot's and lot's of debt, and need to issue lot's more to tackle the long neglected electrical infrastructure challenges ahead.

There is also the issue of dividend payouts and interest rates. Weakness in the high yield utilities could be indicating higher long-term interest rates ahead. That one I'm not so sure about, but it is a topic for another time.

The news isn't all bad. Breaking the backbone of the uptrend in energy prices gives the market and the economy the chance now to regain its footing. Also, the sector rotation is now making a lot of sense with the economy slowing, the defensive groups are the leaders while the inflation groups are the laggards.

Now we watch and wait for the convincing signal (not just an oversold bounce) that the rate sensitive, early growth leaders are starting to lead over the defensive groups. That is the necessary ingredient for a new bull market.

One last note, IBD still sees the market as in a correction, although they acknowledge there have a been a couple days that looked like potential follow throughs... but they didn't pan out. So they continue to recommend waiting for a market buy signal before buying breakout, growth stocks again.

I wonder if they are following their own advice? It is hard not to see this as a short-term opportunity to make some quick trades. But as Ken mentions, that window of opportunity may be close to shutting down again.

Friday, July 25, 2008
Ken Tower Comments

Ken Tower knows how to call the market, as shown by this annotated chart.



He also makes calls on the current trend as in up, down... and a few weeks back I was confused about when he is talking about a "market signal" versus a "trend change". I'll start tracking the trend signals also to see if it is worth tracking both, or whether it just confuses things. Also, talk about confusing, he sends some really good caution signals on the very short term that aren't shown above. I didn't include them because they clutter up the larger signals, even though these are also short term, which he calls "near term 1-4 weeks".

He currently describes his market outlook as cautiously optimistic. Not very original, but makes the point well. Unfortunately, he sees the upside as only to 1300, and then sees a potential retest down to 1200.