Was Monday the beginning of the test lower? Unless there was something which transpired that I missed… that would not qualify as a test, pullback or corrective move. It would qualify as a reaction to the ISM manufacturing data. The fact that the economy can’t validate any stable growth, makes looking forward a consistent problem for investor confidence. We all know that confidence is the number one ingredient to building a sustainable uptrend in the broad markets. Thus, it is back to the drawing board with plenty of data yet to come this week, and next ,that will give insight to the health of the economy, followed by earnings which will give testimony to how stocks did last quarter. One thing is certain, it isn’t going to boring for the next couple of weeks.
The technology sector was one of the biggest losers on Monday, and I am not talking about the reality TV show for losing weight. I am talking about a sector that has been underperforming the broad indexes going back to low in November. The NASDAQ Composite index has outperformed the technology sector. IYW, iShares Technology ETF have been slower on the upside and quicker on the downside like yesterday. Taking that into account is this a sector to watch and own following a bounce of support? Or, is this a sector to avoid going forward as the downside risk is too great? I like the sector and the fundamental data isn’t that bad or off base relative to the outlook for growth. Thus, I would lean more towards watching for the next opportunity to own the sector and ride the catch-up wave.
Networking, Software, Semiconductors and Internet sectors have all formed topping patterns over the last four to six weeks. None, to this point, have broke support or created negative trends or a negative outlook. Thus, they all are in position to test further and then bounce leading the broader sector back to the upside. Semiconductors led the downside on Monday dropping 2% and testing support at $58 level again on SOXX.
Financials have been struggling of late as well. The blame can easily go to Cypress, but the reality is the sector was a little ahead of itself relative to the broad markets and trailing earnings. XLF, SPDR Financial ETF shows the several weeks of consolidation near the current highs. The fund is comprised of the large cap stocks and they have been associated with the Cypress issues, but the link is difficult to correlate. The real issue is the euro and the ties to the European banks. That has acted as a weight on the stocks. IYF, iShares Financial ETF doesn’t show much different relative to the chart and the topping pattern short term. Again this is a sector that longer term can sustain growth through solid growth in earnings. For those with patience this remains a viable sector to to accumulate on the downside.
There are other stories within the financials space that have equal interest or greater interest than the broader sector. KRE, SPDR Regional Bank ETF has been in a solid uptrend off the November low and has been topping at the recent highs. The longer term outlook for the sector remains positive as banks like SunTrust and Regions Financial start to clean up their balance sheet of bad loans in the real estate sector. The newly form REITs that are raising billions of dollars to fund real estate purchases from the banks at a discount continue to grow in numbers. The regional bank space is in good position to be a benefactor in the restructuring and recovery of the housing market as they dump bad properties from their portfolios and balance sheets.
The key currently is to not chase the markets higher, but find the potential stories that are developing, and that could be the next potential rotation of funds from the broad markets. If the upside is to continue as many are suggesting, it will take some rotation to the sector that have not participated in the growth equally, but offer some discounted value relative to the future growth and require patience to own. There are opportunities in sectors, we just have to stop long enough to smell the coffee and see them for what they are.