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Can you believe
the market reversed course late in the day on Friday, offsetting what was
going to be a nasty end to the week, and instead let the market make
a gain of 1.8% above the prior week's close? Always an adventure.
The question
is, does the bullishness have any longevity? The answer is, most
likely.
We'll look at
how close the market is to another bullish leg below, and how that's pretty
well supported by the market's fundamentals. Following that, we've identified
an emerging sector leader. We're not going to fight the tape on this one;
we're just going to go with the flow. After all, this move was more
than overdue, and had to happen sometime.
First up though,
it was a busy week in the blog. Here's what you missed:
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Market
Outlook: Technicals 'n Fundamentals |
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What
looked like was going to be a disappointing - perhaps downright bearish
- end to the week early on Friday ended up being something quite
different by the time the closing bell rang. And while every tick is important,
that late-in-the-day surge is incredibly telling about the state
of investors' minds right now.
 How
so? As we've mentioned before, the last price of the day is
the most important one, as that's the price traders are committed to a
stock until the next trading day (and that seventeen and a half hours
until the next opening bell is a virtual eternity to some anxious investors).
To
hold a stock over a weekend is practically a marriage, so to see so many
folks decide to 'get married' to the market on Friday evidences their bullishness
and confidence.
In any case,
the S&P 500 pushed back above the important 200-day moving average
line in the latter party of Friday's trade, making it the fifth straight
close above that long-term indicator (green); it's the best streak we've
seen since May, and we were pointed downward at that time.
 That
said [and this is the part you want to keep in mind next week],
there's still one remaining barrier.... well, two if you want to
get technical. They're pretty much lined up though, so we'll treat them
as one.
The first
one
is the 100-day moving average line (gray) at 1126. The other is
the horizontal resistance line (dashed) at 1130. At this point we'll treat
them as one and the same, since (1) they're so close, and (2) the SPX needs
to hurdle both of them anyway if it's going to get over this last hump.
Our guess?
We think it's going to happen. Though we wouldn't necessarily add any new
long trades just yet, we don't advocate selling any long trades out of
bearish worries either.
Part of the
reason for that bullish outlook is based on the technicals (the chart's
persistent momentum, to be specific).The other part, however, is value-based.
As of Friday's
close, the S&P 500's P/E ratio is about 15.5. For year-end 2011, the
projected P/E ratio is around 12.0. Both are well below historical norms.
The basic worry
investors are fielding isn't over past results, but the questionable
likelihood that the expected earnings will actually be achieved.
That's certainly understandable, though largely overlooks the earnings
momentum that's already been developed. Without question the economy's
growth rate is slowing. We've yet to see any evidence that it's contracting
again though... and that's a big difference.
Earlier in the
week we specifically made the point that basic
materials stocks were starting to rally again. Though these names simply
moved in tandem with the averages for the rest of the week, the call still
stands - basic materials stocks are being revived. There's another
new leader that popped up in the meantime - a surprising one....
healthcare.
After struggling
for weeks just to remain mediocre, something lit a fire under the group
last week, and drove them to an average gain of 3.97% over the last five
trading days - tops among all sectors. We'll take it at face value
and assume the new uptrend is for real, as the 'value' has been there all
along.
But where
exactly is the strength coming from (since that's where you'll want to
start digging)?
Here's the benefit
of having access to a lot of - perhaps too much - information....
we can drill down into the individual industries driving a trend, and even
figure out which stocks are doing most of the legwork. We'll spare you
the latter today, though, and save it for a blog entry this coming week.
 In
any case, the nearby chart tells the tale; pharmaceuticals and biotech
have pulled ahead, though healthcare supplies stocks deserve an honorable
mention.
What's interesting
about this is how none of those three groups was doing very well prior
to early July, when the market started point higher again. In fact, since
April of 2009, those three industries are literally the worst-performers
of all the indices listed on our comparison chart - this leadership is
brand new, Here's
a full-screen shot of the long-term performance.
What happened
to prompt the change of heart? It's actually a combination of messages
we've been delivering for a while now.
The first reason
is a point we made - emphatically - two weeks ago in our newsletter
"Why
the Market Does What it Does". It was then we said, sometimes, there
is no 'reason' the market acts the way it does; it just does things. Rather
than stand by and theorize about what should be happening or why
it's happening though, the right thing to do is to respond to what
is
happening. You CAN overthink it.
The second (related)
message is/was, sector rotation is always happening. If you're chasing
an old leader, you're getting in too late. The leaders you want to 'chase'
are the emerging leaders, like biotech, pharmaceuticals, and supplies
are quickly becoming. And, considering there's a 25% difference between
the best and worst healthcare industry performance over the past twelve
months, playing this rotation IS worth the trouble.
The challenge,
of course, is spotting these emerging trends. That's the value of our charts
and having access to a ridiculous amount of data. Some might suggest it's
information overload. We'll contend it's only 'too much' if it's used ineffectively
and inefficiently. Otherwise, it's a powerful weapon to add to the arsenal.
Odds are, without these simple charts, you wouldn't have realized pharma
and biotech were starting to come out of their funk until months from now,
when
it no longer mattered.
Needless to
say, that's why we maintain a sector rotation vigil. Stay tuned for the
next big sector shake-up.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
