What Friday’s Reversal Means

  • August 25, 2003
  • Gary Kaltbaum

Hey…I told you there
was going to be some whipsawing. What a week! There are still
plenty of positives for the market in the foreseeable future…but short-term,
Friday’s negative reversal may have put in a trading top. But before I get
into the market, it is now more important to talk about sectors. Side by side,
there are some important sectors both acting great and at the same time,
breaking down. Simply put, if you don’t pay attention to the ongoing sector
rotation, your performance will suffer.

First off, take a look at the chart of the BANKING
INDEX
(
$BKX.X |
Quote |
Chart |
News |
PowerRating). It is now showing an ominous pattern.


image src=”https://tradingmarkets.com/media/2003/Kaltbaum/gk082503-05.gif” width=”381″ height=”326″ />

Take a gander at these names:
(
BAC |
Quote |
Chart |
News |
PowerRating),

(
C |
Quote |
Chart |
News |
PowerRating), and
(
WM |
Quote |
Chart |
News |
PowerRating).


image src=”https://tradingmarkets.com/media/2003/Kaltbaum/gk082503-04.gif” width=”382″ height=”329″ />


image src=”https://tradingmarkets.com/media/2003/Kaltbaum/gk082503-03.gif” width=”381″ height=”325″ />


image src=”https://tradingmarkets.com/media/2003/Kaltbaum/gk082503-02.gif” width=”383″ height=”325″ />

You don’t need me to tell you what these charts
look like. I can’t overstate how important it is to have the
FINANCIALS in gear with the market. It is not
very often FINANCIALS lag a strong market.

Other sectors that are now decisively bearish and
should be sold on any bounce are DRUGS,  FOODS,
BEVERAGES, HOUSEHOLD PRODUCTS... notice the DEFENSIVE nature of these
areas. Other weakness can be found in NEWSPAPERS, HMOs,
RAILS, TELCOM SERVICES.

On the positive side, I can’t begin to tell you
how strong the SEMICONDUCTORS have been. The
Semis
(
$SOX.X |
Quote |
Chart |
News |
PowerRating)
broke out at 410 and ran all the way to 458…IN THREE
DAYS... before reversing on Friday.


image src=”https://tradingmarkets.com/media/2003/Kaltbaum/gk082503-01.gif” width=”383″ height=”330″ />

Pullbacks are buyable in this strong group.
Other areas that have been strong  are CYCLICALS…which
I think are ready right here for their first decent pullback since their run.
Most other areas remain in good shape.

As far as the “market” goes, I consider Friday’s
action to be somewhat of a near-term blow-off top. This happens out of
strength, not out of weakness. INTERNETS, SEMIS and other TECHS went parabolic
for 10 days…and have to pull in their horns somewhere. What better day to
pull in its horns than the day that Intel
(
INTC |
Quote |
Chart |
News |
PowerRating) gaps up the whole
SEMI-group and sucks in the world?  Friday’s action is typical of why you
don’t buy into an extended move.

But do not let the near-term action take you away
from the game plan. There are a ton of small and mid-cap names that just need
to set up in proper bases…and then break out for you to buy them. Small-mid
caps are the name of the game right now…evidenced by the strength in the
RUSSELL indices vs. the lagging S&P 500.

Gary Kaltbaum