Why You Should Be Concerned About Sector Rotation
Looking to the indices, on Wednesday, the Nasdaq gapped
lower and continued lower throughout the morning. Then after a mid-day bounce,
the selling resumed in an accelerated fashion. This action has the index closing
poorly and suggests that traders did not want to be long overnight.
Although it wasn’t hit as hard as the Nasdaq, the S&P
also sold off to close poorly. This action brings it down below its breakout
levels and puts that breakout in question.Â
So what do we do? Since the bubble burst in
2000, we have seen vicious sector rotation. As soon as a sector gets in an
established uptrend, it becomes a “source of funds”. Because retail
was hit hard on Tuesday, I asked the $64,000 question if other sectors would
follow its lead. On Wednesday, I got $128,000 worth of answers: semis and
software. These two areas (and tech) can’t take all of the blame though, the
selling was broad based. Most, with the notable exception of drugs, were also
hit fairly hard. This action has the indices swinging from overbought to
oversold very quickly. However, this, in and of itself, isn’t reason enough to
start buying. Also, I know you don’t need a reminder, but Thursday
is September 11th (my prayers go out to those who lost loved ones). So, at the
least, it could be a somber day. Therefore, on the long side, you might want to
keep you hands in your pockets until you see some bids come into the market. On
the short side, for the aggressive, continue to watch weaker areas of retail for
transitional setups.
No setups tonight. If the indices stabilize, I will
re-evaluate the long side. If they continue to slide, we should start seeing
numerous transitional setups on the short side.Â
 Best of luck with your trading on Thursday!
Dave Landry
P.S. Reminder: Protective stops on
every trade!
“…..I have read your book several times and I found it very empowering to me. My trading improved quite a lot….Grateful for your help…..”Â
George B.
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