By John Murphy | 6 July 2008
SECTOR ROTATION MODEL... One of our readers asked where we are in the Sector Rotation Model. That model shows the normal sector rotation that takes place at various stages in the business cycle. The chart shows that basic materials and energy are market leaders at a market peak. As the economy starts to slow, money starts to rotate out of those two inflation-sensitive groups. Basic materials peak first and energy last. This week's downturn in basic material stocks suggests that the topping process is moving even further along.
Energy may be the next to roll over. As the economy slows, money flows into consumer staples, healthcare services, and utilities. That's where we appear to be right now. One way we can tell that a bottom is near is when money starts to flow into financial and consumer discretionary stocks. So far, there's no sign of that happening. That leaves us in the midst of a bear market with money flowing toward staples, healthcare, and utilities.
http://stockcharts.com/commentary/archives/20080706/images/20080703006-sc.png
STOCKS LEAD THE ECONOMY... Everytime I show the Sector Rotation Model, I feel the need to point out that the stock market (red line) peaks well before the economy (green line). Although most of us are aware that the stock market is a leading indicator of the economy, that point keeps getting lost on Wall Street and the media. Ever since the market peaked last fall, the media has presented a parade of economists arguing that the economy was still on sound footing. I remember seeing a headline "fear versus fundamentals" back in January (that was repeated again this week on CNBC).
The implication being that the market was falling on "fear" instead of "fundamentals". With the stock market having had one of the worst first halfs in decades, we're now starting to get confirmation that the economy is in bad shape [[and the financial companies in even worse shape: normxxx]]. It's a little late for that to do anybody any good. That's why we study the market and pretty much ignore the media, economists, and Wall Street suits.
Bear Market Expands!
By Arthur Hill | 7 July 2008
Sector performance in May and June shows the bear extending its grip into other key sectors. The Financials SPDR (XLF) and the Consumer Discretionary SPDR (XLY) woke up the bear with dismal performances in May. The first PerfChart shows sector performance from 1-May until 2-June, which is basically the month of May. XLF and XLY led the way lower in May. Notice that the Industrials SPDR (XLI), Materials SPDR (XLB) and Technology SPDR (XLK) held up relatively well in May. In fact, selling pressure in May was pretty much limited to the financial and consumer discretionary sectors.
Click Here, or on the image, to see a larger, undistorted image.
The second PerfChart shows sector performance from 3-June to 1-July, which is basically the month of June. There are two items worth noting here. First, the Technology SPDR, Industrials SPDR and Materials SPDR declined rather sharply in June. These three held up in May, but fell apart in June as selling pressure expanded among the sectors. Second, the Utilities SPDR (XLU), Consumer Staples SPDR (XLP) and Healthcare SPDR (XLV) held up the best in June. Well, outside of the Energy SPDR (XLE) that is.
Click Here, or on the image, to see a larger, undistorted image.
Utilities, healthcare and consumer staples represent the defensive sectors. No matter what happens in the economy, we still need electricity (XLU), toothpaste (XLP) and medicine (XLV). While the S&P 500 moved lower in May and June, XLU edged higher both months and showed relative strength. XLV and XLP are down over the last two months, but less than the S&P 500 and this shows less weakness, which can also be interpreted as relative strength. Fund managers that are required to be fully-invested in stocks are no doubt watching these relative performance numbers and looking for the sectors that are holding up the best.
Panic And Fear? No Signs Just Yet
By Thomas J. Bowley | 7 July 2008
I'm the conservative type. I'm also nervous. I never like to see the market fall precipitously while market participants yawn. In a nutshell, that's what we've been seeing. Yes, the talking heads will say the sky is falling, but unfortunately for bulls, that's not the case amongst those actually trading the market. I've provided in previous articles how the put call ratio correlates to market tops and bottoms. I won't go into the details again.
However, everyone needs to understand that market participants are not panicking yet. That is a very big clue to me that we've got more work to the downside before we can declare a bottom. It doesn't mean we can't bounce and I'll provide an argument below that suggests a near-term bounce is imminent. But it will likely be just that— a bounce.
First, let's talk sentiment. Thursday, the put call ratio printed a closing reading of 1.21. Finally! It was the 3rd highest end of day reading since the mid-March lows. That's the good news. The bad news is that one day of negative sentiment doesn't mark a bottom. Below is a favorite chart of mine, measuring the 5 day moving average of the put call ratio against the 60 day moving average.
It simply plots the short-term pessimism against the longer-term pessimism, and provides us with a measure of relative pessimism. I like to see the short-term 20%-30% higher to begin to mark bottoms (and 20%-30% lower to mark tops). From Chart 1, you'll see we're simply not there yet so strap on your helmets and buckle your seatbelts.
Click Here, or on the image, to see a larger, undistorted image.
We could continue lower, the pessimism could build, and a significant bottom could form in the near-term. Given the severely oversold conditions though, I expect to see a bounce first and that will likely return the 5 day put call ratio down closer to the 60 day moving average, possibly even below the 60 day.
Furthering my belief of a short-term bounce is the positive divergence that has printed on the 60 minute charts. The major indices have put in new lows the last 3 days, and with each new low has come a higher MACD reading on the 60 minute chart. Take a look at the NASDAQ below in Chart 2.
Click Here, or on the image, to see a larger, undistorted image.
I'll leave you with one more chart to ponder. Normally when the market sells off, the Dow outperforms the NASDAQ. That makes perfect sense as investors flock to high quality, "safer" investments. From Chart 3 below, you can see that the ratio between the Dow and the NASDAQ moved much higher during the summer of 2006 and again in fall of 2007 into the first quarter of 2008 as the market sold off hard.
Any time this ratio moves up, it indicates relative outperformance by the Dow. A declining ratio suggests relative outperformance by the NASDAQ. Here's the interesting part: Since the May 19th top, this ratio has actually declined. We just suffered through the worst June in many decades, yet the money did not gravitate towards the Dow— interesting indeed. Is this a short-term phenomenon that will rectify itself in due time? I say yes. I've highlighted the recent move up in the ratio and believe that the move above the recent high is technically significant.
Click Here, or on the image, to see a larger, undistorted image.
We'll find out in time. In the meantime....
Happy trading!
ߧ
Normxxx
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
No comments:
Post a Comment