WEEKLY SECTOR WRAP-UP: Sept 29 - Oct 3

This week was an emotional rollercoaster for investors. The volatility was probably embraced by traders, but I’m sure it wasn’t easy for them either. I can say for a fact that although I made out ok, there were times where if I didn’t act quickly, I would have been in trouble. If you’re a trader then you’ll know that it was one of those weeks where we had run in and run out of the bathroom really quickly if we needed to use it. Every tick, every one-minute bar was important. We’ve seen sudden and major reversals for most of the days this week and also made financial history nearly every day. With the bailout bill finally passed and signed by the president, this week marks as one of the most important historical market milestones that none of us will forget. People will be writing countless books on the events of this crisis.

It is important for investors and traders to analyze every week’s market action to determine what their plan will be for the following week. I attempt to present that information in my weekly sector wrap-ups. Although I use only the SPDR ETFs, they are applicable to individual stocks – just pick the sector they’re in. In a bear market, 4 out of 5 stocks follow the decline and we have seen some major declines this week. We’ve become so numb that 100-150 point up or down days are considered “normal”. I know that they don’t have much significance to me anymore. If you thought that the 778 point down day on Monday was bad, we are highly likely to see those magnitudes again in the coming days and weeks. We are in the middle of the markdown/distribution/selling stage of the bear market. Expect excessive selling from institutions and individuals alike. They’re only concern is to save their accounts with whatever capital they have left. This will create more volatility. It’s important to keep that in mind going forward into next week.

The Materials sector (XLB) was the sector that declined the sharpest. In this sector we have the commodities and chemical names, both of which declined considerably this week. Take a look at names like CF, POT, MOS, MON, NUE, WLT, and FCL. You didn’t want to be long in any of those names. The sector has not finished declining but we may see a bounce from the $30 level we are currently testing. After the bounce, I advise taking on short positions and the names listed above are a good place to start.

Of all the sectors, the Utilities sector (XLU) is the last sector to decline. Notice how they recently broke the neckline of their head-and-shoulders formation. Start looking for names to short in this sector and plan to hold for several months. Trader’s looking to short and go on vacation for 1-2 months will do extremely well here without much worry.

The Technology sector (XLK) may hit close to 10, or where the bottom of the NASDAQ bear market occurred. If we break this last support level (indicated on the chart), then the possibility is extremely high.

The Industrial sector (XLI) is still in its early stages of the middle part of the decline. Out of the top 10 holdings in the XLI, 8 present excellent intermediate-term short candidates. They are: CAT, MMM, UPS, UTX, BA, HON, EMR, and UNP. DE and GE have fallen considerably and do not present favorable risk/reward ratios as the others. We have a while to go on this sector.

The Financial sector (XLF) has broken through 2000, 2002 and 2003 lows. IT is safe to say that we are not even close to forming a bottom here. We should see a sharp decline in this sector soon. This 10-year chart is the entire chart for the XLF since inception in 1999. We have no more support levels remaining.

The Energy sector (XLE) should hit 50 in the coming days. This has nothing to do with fundamentals, this is what the chart is dictating – we have room to fall further. We broke major support at around 62 and will test 52 next.

The Consumer Discretionary sector (XLY) is falling fast and hard. Unlike the staples, people actually have a choice whether they want to spend on these items. Since consumers are hardly spending and will continue that trend, this sector is far from hammering out a bottom. Currently testing 25, I expect the XLY to hit 20 shortly.

The Consumer Staples sector (XLP) is doing extremely well this year. That is expected because they perform well in hard times. If an institution needs to get allocate capital, they might as well go with the consumer staples and ditch everything else. This is the strongest sector out of all sectors.

The Health Care sector (XLV) is testing the 30 support level once again. This will be fifth major test for the sector in the past 3 years. We may see a bounce, but I ultimately see the sector making a new low. Note the descending triangle that has a high reliability with breakdowns.

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