Heading into this week, keep the following important details regarding the market in mind. By the end of trading on Friday, the Dow Jones and the S & P 500 had posted gains in six of the past seven sessions. Coincidentally, this is identical to what took place immediately after the October 27th debacle, when both averages also advanced in six of the next seven sessions. At that time, however, the market began a week long retreat that by the close of trading on November 12th had brought these averages back down almost to their previous lows.
In the opinion of many market technicians, however, the fact that the Dow and the S & P 500 did not decline below their October 27th lows is evidence that there has been a genuine, as well as a successful, testing of support. However, while these two averages are now firmly above the interim peak that was established on November 5th, the Nasdaq Composite and the Russell 2000 have been unable to surpass their levels on that date. This has made life particularly difficult for the technology sectors, and if we should see another decline in the coming days, their losses will probably continue to be larger than most.
At this time, we are looking at two market moves that are extremely similar in terms of both price gains and duration. The overall mood of the market, however, is considerably better than it was two weeks ago. In order for the current uptrend to turn into a genuine and sustainable year end rally, the averages will eventually need to successful surpass their October 21st and October 7th resistance points. From the viewpoint of a technical analyst, therefore, we still have a way to go before we can be fully confident that the market's current uptrend will continue.
This week's fund rankings continue to be dominated by the interest sensitive financials and a diversified collection of fairly conservative sectors. With few exceptions, these funds suffered the smallest losses during the market's pullback between November 5th and 12th, while the technology sectors declined the most during that time. Naturally, those funds that endured only nominal losses found the subsequent recovery process to be that much easier, and in a number of cases they have now begun to outperform the broader market.
At this time, the market is showing a distinct preference for sectors that are defensive in nature, and where the Asian crisis is assumed to have little or no effect on their sales or earnings. Funds such as Retailing, Utilities Growth, Food & Agriculture, Consumer Industries, Leisure and Health Care have thus been able to remain at the top of the standings for the past month. In the past week or so, attention has turned to the interest sensitive financials. Here, industry wide consolidation, and the stability and safe haven status of the bond market, have rapidly improved the fortunes of Regional Banking and Financial Services, and to a lesser extent the Brokerage and Home Finance fund.
The technology sectors have had a particularly rough time of it, and their current situation, therefore, is one that is primarily market driven and systemic in nature, and it continues to overwhelm the positive nature of the charts of most of these funds.
As a result, the Nasdaq Composite has been prevented from surpassing its November 5th high. Of course, if the Dow and the S & P 500 continue to head higher, their success should begin to filter down to the lagging small cap issues. Under this best case scenario, the high tech sectors, and a number of other Selects, would be the immediate and obvious beneficiaries.
The market still has to surpass some additional resistance levels before it can be deemed to be out of the woods, and I will recommend additional investments only when each individual fund succeeds in passing its own technical barriers. We also need to be alert for additional shocks to the system from overseas, although we may have finally run out of countries that can throw the planet off its axis. All told, I am hopeful that the strength of the economy, along with the growing attractiveness of the U.S. stock and bond market, will provide the basis for additional gains between now and the end of the year.
Bernie |
