Sector View
29-Jan-03 00:03 ET
[BRIEFING.COM - Jim Schroeder] The market put together a solid advance in the first part of the month which triggered a fair amount of talk about the next leg of the new bull market. Unfortunately, this never developed with most sectors putting together an aggressive decline over the next few weeks. While the swirl of uncertainty surrounding the geopolitical situation has clearly been key regarding this weak performance, the technical posture of the market suggests that at least from a short term perspective the market is better positioned now for an advance than it was earlier in the month.
Technical Posture
There were several technical reasons for the failure. First, in the early part of the month the major averages and a number of stock sectors were approaching major resistances at previous monthly highs or long term moving averages such as the 200 day sma. Second, at the same time that important barriers were being confronted, the technical indicators were overbought. Third, sentiment/volatility readings suggested that the marketplace was too positive or complacent at that time for a strong extension.
As is often said by technicians, a chart is worth a thousand analyst/talking head comments. The examples below show how in line the posture of the market was as financial, technology and cyclical (paper) sector indices all tested important levels at the same time while holding an overbought posture.
Where Are We Now?
OK, so we can make the case for the January breakdown. Who cares about that now, what is the technical posture of the marketplace at this time? Encouragingly, many of the sector indices, as we can see in the few examples above, are now holding an oversold posture based on the stochastic indicator. While we don't have any buy signals yet, they are also at decent support zones. Sentiment readings are not at key levels suggesting a major bottom, but at this point we are looking for any kind of reversal.
Other sectors that are in a similar position (meaning at or near a support while holding on to an oversold posture) include: Broker/dealer (XBD); Chemical (CEX); Biotech (BTK); Networking (NWX); Semiconductor (SOX); Utility (UTY); Healthcare (HMO). Note that the sectors can be played in some cases with an ETF (HOLDRS, iShares) or through individual components. Sector Scorecard briefs from February 27, 2002 and March 04, 2002 list the components of the most widely followed sector indices.
Sector Seasonals
In the past we have highlighted various sectors as they near seasonally strong or weak periods as presented by the Stock Trader's Almanac. These are patterns that have developed over time and do not take into consideration the current market environment. However, they are worth being aware of as background information as it may bolster or in some cases perhaps work against a near term rebound off of support.
Beginning a positive seasonal period in February is: Natural Gas (XNG). Ending positive seasonal periods (can be extended) are: Semiconductor (SOX); Computer Tech (XCI); Nasdaq Composite (COMP); Nasdaq 100 (NDX); Consumer (CMR); High Tech (MSH); Telecom (XTC). Unfortunately, the latter two are also starting a negative seasonal period. The MSH is 1 month long but the XTC negative seasonal runs from February through August.
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