Monday, July 5, 2010

Technology Leadership

There are so many components to Technology and so much going on in the group, that I need to break it up into a couple of pieces. I want to start with the names everybody knows, because people tend to like to buy what they know, even though it may not be a great place to be investing.

Here are a couple pairs of current leaders versus past leaders. You tell me which ones the institutions are selling and which ones they are adding to – Apple (AAPL)/Research In Motion (RIMM), BIDU (BIDU)/ Google (GOOG). RIMM is almost at its Bear Market lows! Google’s decision to take on China has been a windfall for BIDU.

What do you think Priceline (PCLN) and Amazon (AMZN) both breaking down together tells you about online consumer spending? EBAY looks worse!

SanDisk (SNDK) makes the “flash” memory for mobile devices, while Seagate (STX) has always focused on Hard Disk Drives for computers and servers. You can see that the mobile devices are where the growth is.

For semiconductors that go into phones, the key is to be a supplier of Apple and not a competitor. Cirrus Logic (CRUS) has chips in iPhones, while Nokia (NOK) devices are clearly not popular at the present time.

Will these trends of outperformance continue? I do not know, but the ability to determine what is leading and what is lagging is a critical skill for investors.

Also keep in mind that although these leaders have held up so far, they often get hit hard too when the markets correct.

Financial Sector Internals

The Financial Index ETF (XLF) looks like it is holding up well. But what is really going on inside the Financial Sector?

Broker Dealers ($XBD), Regional Banks (RKH) and Asset Managers (DJUSAG) have failed to hold key support and bellwether GE has also failed at support.

Broker Dealers

Take a look at the charts of Morgan Stanley (MS) and Goldman Sachs (GS). Nothing bullish here, with price < 50-day < 200-day. Those are Bear Markets.

Regional Banks

The charts of Bank of America (BAC), JPMorgan (JPM) and Wells Fargo (WFC) have broken key support.
Smaller regional banks like BB&T (BBT), Regions Financial (RF), Keycorp (KEY) and Suntrust (STI) have broken support.
PNC Financial (PNC), Fifth Third Bancorp (FITB) and Huntington Bancshares (HBAN) are holding on for dear life.

Asset Managers
Look at the charts of T Rowe Price (TROW), Janus (JNS), Franklin Funds (BEN), Federated Investors (FII), Waddell & Reed (WDR), Eaton Vance (EV) and Cohen & Steers (CNS). What do you think they are telling you about future fees in the Asset Management business?

Discount Brokers
The charts of Charles Schwab (SCHW), Ameritrade (AMTD), E*Trade (ETFC) and Stifel (SF) are all telling me that the markets are expecting trading volume to diminish significantly. I assume that most people like for buy long, so that would not be a bullish indicator for the markets.

I don’t know how to categorize these, but look at the charts of State Street (STT) and Northern Trust (NTRS). State Street peaked last October and Northern Trust is actually at the lows of the Bear Market!

Why are the banks important? Because every single one of them has the capacity to blow up the entire financial system with their exposure to derivatives. I haven’t posted this chart in a long time, but it is clear that the Derivative nightmare has never been address and may still come back to haunt us.

Very Oversold

I’m going to make this post an overview of different markets and sectors. I will then follow it up with a series of emails about key sectors so that you will be able to see the real damage that has been done within the components of the markets.

First, I want to show you are chart that I posted a few weeks ago. It is of the Energy ETF (XLE). I posted about how XLE had a classic reversal pattern and that I would not have been surprised by a bounce. In a bullish market, this bounce would probably have led to new highs, but the fact that the bounce failed into the 200-day (Green Line) shows you how the institutions were using the bounce to sell. This action is the definition of a Bear Market.

I bring this up, because the S&P 500 ($SPX) is very oversold and has the same potential pattern setting up. $SPX actually has two of the same pattern (Blue and Orange triangles), and the pattern low is right on the 38% retracement at 1,008.

I am not telling you that the market has bottomed. I am not telling you to go buy a bunch of anything. I am simply showing you what I see and what I look for. I have to keep looking at what is and making decisions off of what I see. The fact that two Follow Through Days have now failed concerns me greatly.

Here is the hourly S&P 500 futures chart. You can see that it is a downtrend made up of sharp plunges and shallow consolidations. Price seems set to make a sharp move very soon. Will it be up or down? A break of 1,010 would be a significant failure, as it would indicate that the potential bounce lasted all of a few days where most traders were out of town and that the bounce was sold hard. If there is a rally from here, then is it merely an opportunity to short the bounce?

Here are some of the sectors I will be deconstructing today.

Financials (XLF) are holding right on support. Failure from here would not be bullish. This chart looks like a goal line save, but wait until you see how some of the subsectors of Financials look…

Semiconductors have held support four times in recent weeks. Support had better hold or you know the big boys have been selling the bounces. Semiconductors are normally a leading indicator for stocks. It would be very bad it they break critical support.

The 30-year Treasury Yield is on the brink of breaking down. This would be very bullish for Treasury Bonds and give you a clear picture of just how bad things are for the economy.

Crude Oil ($WTIC) has held support and bounced weakly into the 200-day average. If price breaks support, then what does that say for the economy – especially if it happens with a breakdown in some of these other indexes and the 30-day Treasury Yield?