Fighting to Hold Support

01/26/2009 1:09 pm EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, sees some new sectors exerting leadership as the market struggles to advance.

Markets completed another losing week as financial stocks, earnings, and the economy weigh on investors. Throw in some banking issues in Europe and no one was willing to step up and buy stocks.

The Standard & Poor’s 500 index once again traded all around its support levels at 815. By the end of the week we had successfully recaptured that level, and we head into this week hoping to do the same. The November low of 742 is still in play, and we could eventually test that level before moving higher in the current trading range.

Economic data were bad overall, but did show some signs of improvement with the December Chicago purchasing managers index improving to 34.1% versus 33.7% for November. It is still below breakeven at 50%, but considering the disappointing news the last four months, this is a move in the right direction.

The Institute for Supply Management’s Services component improved to 40.6% for December versus 37.3% for November.  Non-defense capital spending was up 3.9%, the first gain in four months. Commercial construction was up 0.7% and 12.1% over the past three months. Disposable income was higher by 1% and 7.1% over the past three months. Real spending rose 0.6%. This is all positive from my view, but none of it made much difference to the markets last week. Keep an eye on this as the momentum shift towards stocks.

This week I am looking for the technical bounce off support (815 on the S&P 500) to continue. Leadership is likely to come from health care (biotech and drugs), energy (oil services), small-cap value stocks, metals, and semiconductors.

The laggards will still be the financials, and this week I am adding consumer durables to that list.

The financial sector continues to be a wild card because of lack of clarity about how much capital will be enough to turn the corner and get things moving in a positive direction.  There is still too much risk currently for my taste. We did bounce off support at 156 and expect short-term resistance at 175 on the Dow Jones Financial Index.

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Consumer durables are rolling over, and the weakness is building steam as earnings in the sector have been weak with a lack of clarity on guidance from the companies in the sector.

The test of support this week could be a positive for the broad market to rally back towards the top of the current trading range. For the S&P 500 index, that would be near 920. If we break 800 early, look for a test of the low at 742 and then a bounce. If we hold support early in the week, look for momentum to build and a run at the top of the trading range.

Be disciplined as the market remains volatile and news-driven. There is plenty of earnings and economic news on tap this week, and that will have an emotional impact, so pay attention to momentum and guidance. We remain in a bottoming process and we aren’t going anywhere fast.

The table below is updated each week to provide you the data for the ten S&P 500 sectors (and you can listen to our podcast each Monday on SectorExchange.com). Currently opportunities are developing if we hold support and gather some upward momentum.

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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