The Media Are Over-Hyping Recent Market Gains

Banking

Lately, CNBC has been squawking about how well bank stocks have been doing lately in anticipation of the stimulus package. Sure, many of them have rallied recently, but their charts for the most part hardly scream "buy!" As proxies for this group, look at the charts of the financial spider, the XLF, and the regional banking ETF, the RKH. (In the interest of saving space, I'm only showing the chart of the RKH, but the XLF chart is very similar.)

You can see that the price has been channeling downwards. A breakout above this channel and above its $60 resistance on strong volume would be the signal to go long in this group.

Materials

The financial media has also been crowing about the comeback in the materials sector. Say what? One certainly wouldn't get that idea by looking at the PYZ, the materials ETF. It's been doing a lot of nothing for the past several months as you can see if you look at the charts of its top ten holdings. The only bright spot in that group is the gold miner, Newmont Mining (NEM).

The PYZ has been channeling between $17 and $20. If it eventually manages to fill its exhaustion gap at $24, then that's the time I would be convinced of a turnaround in the materials.

Utilities, Energy, and Agribusiness

The utilities (UTH), energy (XLE), and agribusiness (MOO) sectors have been in the process of consolidation for months. They all sport similar charts, so I'm only showing that of the energy spider, the XLE.

Upper resistance on the XLE is at $53; for the UTH it's $100, and for the MOO (don't you love that symbol?) it's $30 and change. A break through these levels would be bullish.

Drugs & Health Care

The charts of the biotechs (BBH), health care (XLV), and the pharmaceutical companies (PPH) have also been consolidating and they are all threatening to break overhead resistance anytime now. Resistance levels for these sectors are as follows: BBH is $180; XLV is $27.50; PPH is $63.

Gold & Silver

Lately, the precious metals have been among the better performers. The GDX tracks the gold miners, the GLD holds gold bullion, and the SLV tracks silver. (Note that the SLV is a new fund and has only been around for two months.) Of the two gold ETFs, the GDX has been the hands-down winner lately, more than doubling in value since its October low. (GLD has "only" recovered 30% since then.)

The GDX needs to clear $39 resistance to continue its upward progress.

Consumer Staples & Consumer Discretionary

There are many sectors out there that look ugly, but I was mildly shocked to see consumer staples, the XLP, among them. The usual thinking is that in tough times people still need to buy food and toilet paper but apparently this time is, indeed, different. This sector has been consolidating, too, but to the downside rather than to the upside. It's sitting right near it's local low at $22 and I fear that a break through that will spell disaster for this group.

Interestingly, the chart of the consumer discretionary sector, the XLY, is better but not by much. The ETF is currently trading just over $20, two bucks above major support.

Internet Technologies

The charts of the internet ETFs are looking as if they're poised to break out of their consolidation patterns. You can check out the charts yourself: Internet (HHH), Broadband (BDH), B2B (BHH), Internet Infrastructure (IIH). Most of these are thinly traded so bear that in mind when entering a position. It's a good idea to use limit orders in these instances. For an overall look at this sector, check out the XLK, the Technology Spider. It's been consolidating in the $16 range; a break above $18 would be your signal to start taking long positions.

Summary

You can see from the above charts that the financial media may be over-hyping the recent gains in some of the these sectors, especially in financials and materials. The future direction of the market will depend on how successful the stimulus package will be in putting money back into consumers pockets and confidence back into the financial system. Until then, there's nothing wrong with keeping your cash stashed under your mattress.

Comments

[kruser53:]

With regard to the banks, will this be an example of buy the rumor and sell the news? One thing that would counter that is that the rumor has a pretty weak buy (see the chart). My reading of the chart is that there could be a further buy on the news.

Feb 10 09:46 AM

[FredTheSpectre:]

"Note that the SLV is a new fund and has only been around for two months." I'm pretty sure that SLV has been around since 2006. Maybe you mean years not months. Totally agree with your analysis.

Feb 10 10:14 AM

[Larry House:]

Thanks for a dose of reality. I think you are absolutely right. It is so hard to invest and block out the "noise," but it is essential to do so. The market hasn't proven anything yet.

Feb 10 10:15 AM

[Malkiel:]

Thanks Dr. Kris for that sensible summary of the charts, it's refreshing to see chart analysis that focuses on price support and price resistance without getting into all the voodoo thinking about "head and shoulder" patterns and "v's" and "w's"...

Feb 10 11:39 AM

[RetiredAmer...:]

If you think the world will continue to eat during an economic meltdown, MOO is a great investment.

Feb 10 01:04 PM

[kruser53:]

The news is all out and the Dow is down 350 points. So much for my ability to read charts.

Feb 10 02:20 PM

[mr freddo:]

You can stash cash in your mattress until inflation starts heating up. Given the grim macro economic situation, there will be no rally up. Rather, we will drop to 6000 Dow and bounce around 5000 to 6000 through the summer IMHO.

Feb 10 11:24 PM

[je:]

Mr Freddo
I thought I was alone on the target of 6000 but I think you are wrong about the DOW staying there. I think we will rally to10000 to 11000 -the first of it by mid summer and then maybe a secondary rally late 09 to the first quarter 2010.
When the DOW starts down the next time from these ralIies I think we will see 3500 by mid 2011 or so. That is when most of the mortgage resets will be over.
I think we could get a retracement rally today back up to the 61.8 (8150 or so) and then we have unemployment Thursday and Friday plus the stimulus bill will take three weeks to get passed.
When this is passed you will get your bear rally.

Feb 11 08:40 AM

[T.Stamps:]

Excellent article. I can remember CNBC(nbc news basically) three years ago(top of the market)saying the economy wasn't doing well. I
think CNBC got there wish. Now there's somedody new in the white
house(somebody to there liking)and will now try and support the market.

Feb 11 11:20 AM

[old guy:]

Great informative article. Thanks !!!

Feb 13 05:01 AM