Sector Investing

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I believe technical analysis is something of an art form. As far as I can tell no one has yet put together an adequate methodology to accurately time the market. I am currently making such an effort by combining technical analysis, market breadth analysis, sentiment analysis and presidential or election year stock market cycles.

I have concentrated the majority of my efforts on the cyclical semiconductor sector. I have borrowed charts and information from a wide variety of people and sites:

For technical analysis I use StockCharts.com charts and refer to their explanations on a regular basis as I did here in this post tonight about the SMH possibly facing a double top breakdown:

http://www.investorshub.com/boards/read_msg.asp?message_id=5861825

I have made some charts on short term timing of the SMH which will show it is oversold and due a bounce here but that bounce will have to come on high volume to break 35:

http://www.investorshub.com/boards/read_msg.asp?message_id=5714536

I have a group of long term market breadth and sentiment indicators useful for the SOX/SMH and NASDAQ by association here:

http://www.investorshub.com/boards/read_msg.asp?message_id=5714540

The S&P 500 and DJIA will more closely follow these long term market breadth and sentiment indicators:

http://www.investorshub.com/boards/read_msg.asp?message_id=5714542

Just keep clicking through the posts when you get there because I think there is a lot of good information including this posts using charts from Chart of the Day that refer to past Presidential Cycles and Election Year Cycles:

http://www.investorshub.com/boards/read_msg.asp?message_id=5714542

Technical analysis is my favorite form of market analysis. Over the last couple of years I have spent a lot of time making charts and reading explanations shared by others. As I said at the beginning of this post it is important to understand that technical analysis is more art than science. I am currently a big believer in volume as a leading indicator. As such I follow the major market charts on a daily basis. Market tops are generally formed with lots of volume. Big up days and big down days but when the volume begins to be largely down even as the market makes new highs like it did in early March for the DJIA and S&P 500 bulls should be worried.

http://www.investorshub.com/boards/read_msg.asp?message_id=5716531

The NASDAQ is already in big trouble as you can see because since the first of the year it has been making lower highs and lower lows. Note that high volume down day in early January that really set the tone.

If you believe in Presidential or Election Year cycles as I do then you accept the premise that Stock Market tops often take place by the end of an Election Year (2004 was an Election Year) plus or minus one quarter. As of the first of the year money began to rotate out of technology stocks on the NASDAQ into an ever dwindling number of stocks on the S&P 500 and DJIA.

Currently the market sits in a very precarious position. I do expect support to hold and for a half hearted rebound effort to take place soon enough that will fail. What could change my mind?

Broad based high volume institutional buying.

In the absence of that kind of high volume buying the rally will fail leading to a similar series of lower highs and lower lows for all the major indices.

I am currently expecting the next major bottom for the market to form in or around October 2006. And why not. The last two major bottoms formed in October 1998 and then 4 years later in October 2002. These bottoms perfectly corresponded to Election Year Cycles and were also marked by huge spikes higher in the Volatility Indices:

http://www.investorshub.com/boards/read_msg.asp?message_id=5714563

BP Indices that have all formed bottoms below 30% and begun to show positive divergences such as higher BP numbers even as the market sets lower lows:

http://www.investorshub.com/boards/read_msg.asp?message_id=5714555

Investors Intelligence Poll Results with far more Bears than Bulls:

http://www.schaeffersresearch.com/streetools/market_tools/inv_intel.aspx?click=jumpto

http://www.vtoreport.com/sentiment/sentiment.htm

Today the market is rife with negative divergences that could correlate to a major market top. But with most investors investment perspective being colored by the gains achieved during the bubble years that led up to the top in 2000 the potential for further declines is being under appreciated.

Inflation is on the rise and may be too much for the market to deal with if the FED drains the punch bowl:

http://www.investorshub.com/boards/read_msg.asp?message_id=5714565

But it is actual recessions or at least the fear of a recession that really deals the market a bearish death blow. The yield curve is extremely useful in predicting the upcoming recessions:

http://www.investorshub.com/boards/read_msg.asp?message_id=5714570

http://www.investorshub.com/boards/read_msg.asp?message_id=5714575

Again, I do expect a short term rally. But this rally should fail in 2005 and should, unlike 2004 which also started badly, actually end badly as the FED tightens money supply and raises rates. There is so much more I could say but others cover the territory with a great deal more clarity than I could ever hope to add here.

The charts speak for themselves.

The final thought I want to highlight is simply that market tops generally form with negative divergences and high volume. Market bottoms generally form with low volume and positive divergences.

Knowing where you are in any particular cycle can be difficult to ascertain but many times it's just as important to know where you are not at.

RtS