A bounce but…

In the past month I felt it more important to discuss sector analysis much
more than market analysis as the “market” continued to hold up while many
sectors went into their own private bear market. Not any more.

The reversal from Thursday has led to a near-term bounce…anemic so far…but
a near-term bounce nonetheless. I believe we can get more of a bounce this
week. I say this because of all of the oversold readings I am seeing. Just
keep in mind, in poor market conditions, bounces only serve to relieve the
oversold condition…leading to an eventual drop. I am also seeing a couple of
subtle positive divergences as the TRANSPORTS did not confirm recent
breakdowns in the DOW and S&P, while the NASDAQ and NDX are still above their
longer-term 200 day averages. The RUSSELL 2000 also held the 200 day average
almost to the penny. The key now is for you to separate the trees (short-term
conditions) from what really matters (the forest)…which is the longer-term
deterioration that continues.

Whether a bounce occurs or not, it is negative that fewer and fewer stocks are
working. The most important point that I will continue to hammer away at is
that regardless of any bounce, FEWER AND FEWER STOCKS CONTINUE TO CARRY THE
DAY…AND THIS TYPE OF HUGE NEGATIVE DIVERGENCE ALMOST ALWAYS LEADS ULTIMATELY
TO LOWER PRICES. About 4 out of 10 stocks are in good technical shape…and
that is being nice. If there is one indicator that needs to be watched…it is
how many stocks are in good technical shape. It is a negative that more and
more sectors continue to go into the negative side of the ledger. In fact, I
am down to a handful of sectors in good technical shape. It is a negative that
the DOW is now WAY below its longer term moving averages and recently made a
lower high as well as breaking support. It is a negative that the S&P also
made a lower high, broke support and now trades below its longer-term moving
averages. The good news is that the S&P is only a stone’s throw from getting
back above the moving averages…but that still won’t change the overall
negative conditions.

Sectors

OIL STOCKS are now bouncing from their bungee jump action. I suspect there may
be more to go…but a near-term top has been put in and for the first time in
a while, the top could be of intermediate consequence.

RETAIL, RESTAURANTS, GAMING and HOUSING should still be avoided as they
continue to be in the own private bear markets. These areas topped first and
for the most part, have shown no strong accumulation.

ON TOP OF THOSE AREAS…we would continue to be underweight all the negative
areas we have been mentioning including: AUTOS, AUTO PARTS, BANKING,
CHEMICALS, HOTELS/MOTELS, MEDIA, MORTGAGE-RELATED, NEWSPAPERS,
PHARMACEUTICALS, S&Ls and TELECOM SERVICES.

The only areas that have emerged recently are AIRLINES…yes I said AIRLINES,
GOLD/SILVER and RAILROADS. Sectors that are still in good shape but are
showing some fraying at the edges are BROKERAGES, COPPER, HMOs, METALS and
TOBACCO.