Signs of Life after Death

12/01/2008 11:54 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, discusses last week’s bounce and whether it has legs.

Losers become winners and sentiment becomes positive. What changed?

Simply put, confidence—$800 billion worth of it.

With the US Treasury Department and the Federal Reserve standing behind Fannie Mae, Freddie Mac, and Ginnie Mae debt, confidence was restored to the credit markets. The rescue of Citigroup (NYSE: C) was a big plus, too.

That confidence bled over to equities, and the rally was a result. This is the same confidence investors exhibited after passage of the $700-billion bailout program named TARP (Troubled Asset Relief Program). The big question is whether the confidence will build or is it just a flash in the pan? (Monday’s early stock sell-off wasn’t encouraging, but we’ll have to see how things shake out.)

Financials were last week’s clear winner, up more than 30%. This, of course, is on the heels of a 32% loss the previous week. Consumer discretionary stocks were up 17.4% on hopes the holiday sales would be better than expected. The preliminary data showed some positive signs, but will consumers continue to shop through Christmas?

Basic materials also gained 15% for the week as oil pushed back towards the $55 per barrel level. (It was trading lower Monday as a weekend meeting of the Organization of Petroleum Exporting Countries failed to agree on production cuts.) This also pushed the energy sector up 13% for the week.

Industrials were one of the surprise winners, up 12.2%. However, all the talk about infrastructure spending would support the rise in the sector. Technology was up 9.7% and telecom gained 9.4%. We are in need of leadership from the tech sector, but even with the move higher, it remains a laggard.

Health care, consumer durables, and utilities were up more than 4% on the week. The utility sector has held up well over the last eight weeks, remaining in a trading range and holding above the October lows. The sector remains attractive near term as a play against the downside risk of equities.

Consumer durables and health care have bounced off the recent lows, but still aren’t convincing as a play in a volatile market. Last week’s activity puts many of the sectors at a decision point: break through short-term resistance or retreat?

The table below shows the move sectors made back above the October lows. Resistance is at the 20-day moving average in many cases, with the 50-day moving average coming into play in some sectors. We could see some early selling this week at resistance, but I expect a move to the top of the current trading range in many cases during this move higher. The top of the range will become the real test for broad markets overall. Utilities are on the verge of breaking higher and worth adding to your watch list this week.

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.

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