Wednesday, November 21, 2007

Market Themes for a Wednesday

* Tale of Two Sectors - We continue to see a major divergence between Consumer Staples stocks within the S&P 500 universe (XLP) and Consumer Discretionary issues (XLY). With the threat of economic slowdown, investors are gravitating to issues that are likely to hold their earnings during difficult times.

* New Lows Continue to Expand - Tuesday saw an expansion of new 20-day lows to 2739, against 237 new highs. New 65-day lows jumped to 1944, against 154 new highs. It is proving difficult to sustain an upmove while investors continue to dump those housing, banking, semiconductor, and consumer discretionary shares.

* Concern for the Bulls - Perhaps most worrisome for the bulls is that we saw new 52-week lows among NYSE common stocks rise to 324, against 31 new highs. This is an expansion of new lows beyond the level registered in August, setting up a situation of weaker highs but also weaker lows. My primary scenario has been one of market correction, rather than outright bear market, but I do follow my indicators and don't buy markets when we see expanding new lows. Interestingly, new 52-week lows among S&P 500 stocks soared to 102 on Tuesday (against 12 new highs), also well beyond the August readings. That tells us that broadening weakness is not limited to small cap issues. Weakness is expanding, not contracting, ever since late last week and that has to be concern for the bulls.

* Sentiment Measure - The Treasuries have become excellent sentiment measures, reflecting the flight to safety both with respect to risky credit and to stocks. The yield on the 10-year Treasury note fell to 4.054% on Tuesday, a multi-month low and also well below the August lows. Similarly, banking stocks have become sentiment measures for the health of the financial system. Note the new lows in such stocks as FNM, C, BSC, and JPM, as well as the new low in the $BKX banking index. We'll need to see some confidence from these measures to put the brakes on the bear.


A Prescient Sector Observation

Illustration of Why Market Participation Matters