Some Sectors Turn the Corner

02/09/2009 11:55 am 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.

In a solid bounce and recovery for the broad market, the Standard & Poor’s 500 index gained 5% for the week, ending on the hope of a comprehensive bank plan and $800-billion stimulus package from Washington.

Oh yes, solid fundamentals from which we can build a lasting rally: government help. I don’t mean to be sarcastic about this—actually, I do—but putting this much money to work in areas that don’t create lasting jobs and meaningful technology is crazy.

We may very well rally further this week on the news of pushing $1 trillion to $3 trillion more at this problem, but what are we doing to make the economy better long term? We could all debate this topic forever—and we will—so, for now let’s look at what we can do to benefit from the current situation.

Last week I wrote that the negative sentiment in the market had pushed eight of ten  sectors to the brink of breaking support. The good news is they held last week and built positive momentum on the government aid programs. The turnaround went from eight of ten sectors in negative territory to all ten in positive territory. The change in sentiment last week was caused by nothing short of hope that throwing money at the economic and financial problems would be the solution.

Health care continued its push higher, breaking through resistance at 274 on the Dow Jones US Healthcare index. The broad sector gained 4.5% last week on solid earnings from health maintenance organizations (HMOs). The index broke back above the 1008 resistance level and closed at 1132 for a gain of 12.3% on the week. iShares DJ US Healthcare Providers (NYSEArca: IHF) is the best ETF to play this sector. 

Technology gained 8.7% as the sector finally followed through on building momentum. The Dow Jones US Technology index has been in a trading range of 340-380 since early December. The close above the top of the range on Friday will be a key point to watch this week. A follow through would be bullish for the sector, but also would provide needed leadership to the broad market.

Semiconductors, computer hardware, and internet companies were the leaders gaining 11% in each of the subsectors. All three have provided strength in the technology sector. iShares Dow Jones US Technology (NYSEArca: IYW) and iShares Standard & Poor’s North American Technology—Semiconductors (NYSEArca: IGW) are two ways to capture the move in this sector. 

Energy was put on the back burner, but still managed to gain 5.4%. Closing the week at $40.17, crude is trading lower on each piece of economic data that indicates no improvement in demand in the immediate future. Last week crude moved lower and energy stocks moved higher. One key note to make in the sector is natural gas. United States Natural Gas (NYSEArca: UNG) broke above resistance at $19.10 and closed above the 20-day moving average, gaining 9.6% for the week. The fund is on my watch list this week for a continuation of the move higher.

Financials gained 5.9% for the week as banks soared 13% Friday to erase a 10% deficit from the first four days of the week. I still consider this sector a toxic waste dump. You should play it only if you wear the appropriate equipment to survive.

This will be an important week for the broad markets and key sectors. Leadership remains the biggest area of concern. The increasing momentum of health care and technology could result in a solid move higher.

The key will be to stabilize the financial sector. The Treasury’s announcement on Tuesday of how the second half of the Troubled Asset Relief Program (TARP) will be structured could help. If the stimulus package is passed, look for additional momentum regardless of what everyone thinks in the short run.

So, take what the market gives, keep your stops firmly in place, and remember we are still in a long-term down trend. Any bullish moves have a long way to go to break the trend, so it’s critical to manage risk.

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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