Watching the Indexes for Direction

Jeff asked me yesterday to keep an eye on a few key charts for signals to buy or sell within that sector, or the sector itself. So, I will monitor the S&P 10 sectors plus a few other specialty sectors like Materials and Mining. I will post them here regularly, as there are changes to report.

We talked about Technology. After hearing the Cisco news yesterday, it seems like Tech might be taking a little turn for the better. Tech is a good sector to buy as a sector since there are a lot of casualties in that sector. The chart for the S&P Tech is XLK. It does show a recent breakout where the third green arrow was made two days ago, so now is a time to buy the sector, or good stocks within the sector. I hope this change in trend helps out Microsoft, which I have in a big way:




Another sector to monitor is the Energy sector. We recently looked at the OIH (yesterday it was in a report I sent out). Jeff was concerned about the prospects of equipment builder RIG, which has been declining steadily along with the entire sector. You can make the comparison yourself, but both charts are down about 25% from their high and are trending lower.

RIG is getting very cheap by all measures (P/E, P/CF, Book Value, PEG, etc). But what about the overall Energy Sector, XLE? It is in a downturn and should be watched for a break to the upside. But there is no rush. When a chart is in steep decline as this one is, it can continue quite a bit lower. Don't try to catch the falling knife, is the saying. A cheap Value guy like me, has been stabbed numerous times by not heeding this advice. The 12 month low in XLE is 10 points lower than where it is today (62.50). Don't fight the tape is another of the oldest sayings in investing. We should wait till we get three Green arrows, before we commit new money to Energy stocks.

Finally, we should continue to watch the Banking and Financials sector as it is the source of all our economic problems (Housing is a huge contributor to economic decline with Mortgages and Building Materials in the tank, plus high construction unemployment). When Financials turn higher for good, the economy will be on its way back. But the chart right now suggests that while it may have made a bottom on July 23 when the XLF spiked lower to $17.50, it may also take a long time to come back. It looks like a sideways phase has begun where the stock price will form a "base" in the chart. This phase could take months, so represents a trading opportunity as the line wiggles within its range between 20 and 23 (today, it is right in the middle of that range, so no action is called for).

Finally, I would like to congratulate Jeff for getting out of Walmart recently, after a nice gain. It is down big today, and the chart would not have got him out till today's drop. It had just recently started moving up to over $60 off a holding level around $57.50. Earlier the past 12 months it was as low as $42.50, so had been making higher highs for some time. This is typically very bullish. But, today's drop is below the MA, so it is likely it will cause a breakdown in the indicators and create a Sell signal, unless quickly reversed. Jeff got out in front of this and saved himself a few bucks. Sometimes instincts are better than charts.