Weekly Review - 2008-09-26

2008-09-29T02:17:33-04:00

Stock indices retreated from typical resistance at their 50 DMAs on lower volume in the first half of the week, only to bounce on Thursday and Friday.

In friday's paper, IBD called the start of a new rally based on it's "follow through" criteria. After the market makes a potential bottom, IBD looks for a follow through day--that is, a day a minimum of 4 days into the rally attempt when a major index posts significant gains in volume greater than the previous day. This price and volume action is supposed to be indicative of institutional money reentering the market. Thursday's action in the S&P 500 and NYSE Composite fulfilled their requirements.

A host of bad news on friday cast a pallor on the market, including the failure of Washington Mutual. The intraday action in the NYSE is indicative of the whipsaw movements throughout the day.

If there's a silver lining here, it is that the market responded relatively well to the WaMu news. On the Bear Stearns/Frannie/Lehman/AIG news, the market swooned. On WaMu, the action was tame by comparison. The S&P and Dow Jones even closed Friday with some gains while the NASDAQ and NYSE Composites were basically flat.

It still looks like the 18th may be at least a near term bottom, but it's hard to see much upside to this market yet. Using the SPDRs sector analysis method, the better performing sectors have been consumer staples and health care--defensive sectors that you don't expect to spark any sort of lasting rally.

As I write this on Sunday, I see that Congress ~~has passed~~ will vote on some bailout legislation which will make for an interesting week to come. At this point, continue to sit back and watch things unfold.

Sector Analysis using ETFs

2008-05-30T01:44:55-04:00

Since over half of a stock's performance is due to its sector, it is important to have a method to evaluate broad sector and industry trends. As readers of my previous posts may guess, I am quite partial to IBD's industry ranking feature which ranks 197 industry sub-groups according to six month price performance. This level of detail is hard to emulate easily at home, but even simpler systems can give you insight into the market and help you make better informed trades. One easy way to gauge broad sector trends is to track sector ETFs versus a broad market index.

The Select Sector ETFs divide the S&P 500 into 9 sectors:

Materials (XLB)
Health Care (XLV)
Consumer Staples (XLP)
Consumer Discretionary (XLY)
Energy (XLE)
Financial (XLF)
Industrial (XLI)
Technology (XLK)
Utilities (XLU)

Charting the ratio of the sector ETF to the S&P 500 provides a convenient visualization of the trend. If the ratio is increasing, then the sector is outperforming the broader market; if it is decreasing, it is underperforming. Of course, you can use moving averages (MA) as you would with a stock: Is the sector trading above or below the MA? Finding support or resistance? Is the MA sloping up or down?

Below are these sector ETFs charted over the past year. Energy (XLE), Materials (XLB), and Industrials (XLI) have been on bullish tears while the Financials (XLF) have been free-falling Tom Petty style. Of course, this is probably not news to you, informed reader. However, were you aware of the steady downtrend in the health care sector (XLV) since the beginning of the year? How about the fact that tech stocks (XLK) have been performing well again in the new fledgling uptrend?--a trait you like to see at the start of a new bull market. Or that consumer discretionary stocks (XLY) may have bottomed after a long downtrend since they're trading about on par with the broader S&P and have regained some support at the 20 week MA?