Sunday, September 21, 2008

Market and Sector Perspectives for a Sunday

* Good News, Bad News - Following the recent posts on market cycles, I mapped out (chart above) how I've been viewing the current cycle, given the divergences noted in earlier posts. With the surge of buying in the markets the past two days, it is likely that the recent lows represent price lows for the current cycle, implying higher market prices well into 2009 (given the rough proportionality of the duration of the period from the momentum high to the price lows and the period from those lows to the next cycle high). That's the good news. The bad news is that, at the larger time frame, we made a momentum peak in 1999/2000 and a price peak in October, 2007, implying that we have yet to make momentum and price lows on this larger time frame--and that those lows are likely to take out the 2002-2003 lows.

* Sector Comeback - What a difference a couple of days make! Here are the Technical Strength readings by sector as of Friday's close:

ENERGY: +160

Note that there is still evidence of considerable sector rotation, as money left the relative safe havens (consumer staples, health care) and went into the rescued financial sector. Note also that we are very far from being overbought, despite the sharp rise of the last couple of days.

* Money Finally Flowing Into the Market? - The big question is: how much of the rise late in the week was mass short covering and how much represented fresh buying interest? Money flow data from the Wall St. Journal found significant positive money flows into the Dow stocks and the major S&P sectors on Friday. More on that topic in the indicator review to be posted Monday AM.

* Watch for Themes Going Forward - How will the recent turmoil and the proposed government action play out in the various markets? Some things I'll be watching going forward:

* Signs of risk-taking or risk-aversion: How do emerging market equities behave relative to U.S. stocks?

* Interest rates and Commodities: Hard to imagine tightening moves any time soon, given the vulnerability of the economy, but will long rates and commodities begin to price in further inflation?

* Confidence in U.S. Dollar - If the U.S. government is taking on dodgy debt, will investors want to hold U.S. dollars, and will inflation expectations weigh on the dollar?

* Trader and Investor Sentiment - Will the recent government action boost sentiment among stock market participants or will we begin to see doubts that the rescue can work?

Hard to believe there won't be repercussions from the government's expansion of debt, including missed opportunities to reform social security and health care and limited room to raise spending on other priorities, cut taxes, or tackle new military challenges.