Tuesday's Rally a Mere Blip on Sector Strength Charts

Even though yesterday was the biggest up day in five years, it still shows up as just a blip on the radar when looking at historical charts of the S&P 500 and its ten sectors. As shown below, the S&P bounced nicely off of the bottom of its downtrend yesterday, but it still has a lot of work to do before the chart looks positive again. The same can be said for Financials.

Yesterday's gains also created a short-term double bottom in the Industrial and Consumer Discretionary sectors. There are fortunately three sectors that aren't currently in downtrends -- Consumer Staples, Energy and Materials. And unfortunately for the index as a whole, the Healthcare sector exists.

Comments

[MattBlackman]

Interesting and useful analysis as always. What is clear to the technician in the above charts is that when areas in green continually fail to generate significant buying opportunities, we are in a bear market. In such a market, oscillators (like the RSI or MACD) continually generate failed buy signals - in a bull market the opposite occurs where these indicators constantly fire failed sell signals.

My point? When buy signals continually fail it is bearish as hell but bear markets also produce violent bear rallies (like we saw Tuesday) that result from short squeezes - short covering and short term opportunist buying and attempts by long-term value investors to pick a bottom.

As I read these charts, with the exception of consumer discretionary, consumer staples and materials that may be putting in at a minimum short term bottoms, the major sectors are in confirmed downtrends and it will take a heck of a lot more than $250 billion in Fed handouts to fix a broken credit system that currently has more than $40 trillion in outstanding credit default swaps, many of which are now impossible to value. And then there is the other more than $500 trillion in derivatives for which few understand the true liabilities....

Has anyone actually studied the terms (so far at least made available) of the latest Fed barter bailout? Only AAA mortgage instruments (that are not subject to review) qualify and they will be priced at a discount to market still to be established. The toxic crap does not qualify... As housing markets fall, fewer will meet the AAA criteria... The Fed has to be careful to not assume debt obligations that will generate losses here or government debt goes up...