Geithner's Flop Prompts Sector Selloff

02/16/2009 3:49 pm EST

Focus: MARKETS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, says all major sectors lost ground last week after the underwhelming response to the Treasury Secretary's latest bank rescue plan.

After the market put in a solid week of moving higher, Treasury Secretary Timothy Geithner laid an egg as he outlined the new administration's "comprehensive bailout plan" for banks, homes, and the financial markets. Wall Street's response to the plan was a 5% selloff that erased the gains of the prior week. Throw in a stimulus plan that is full of garbage and you have investors headed for safer ground.

Last week I said that a rally based on government intervention wasn't the strongest catalyst for an up trend. In the ensuing trading, we saw the results of the weak catalyst. The need remains for a plan to restore growth in the US and global economies. So far, the plan has not evolved, but what has evolved is more focused on spending than stimulating lasting growth and job creation.

Last week all ten sectors of the Standard & Poor's 500 index ended on an up note. This week, all ten lost ground. The leadership from health care and technology continued as these groups posted the smallest losses of the ten major sectors. Health care lost 2% and technology forfeited 3.1%.

A quick glance at both charts shows the up trends remain in play. The table below shows the trends, support levels, and outlook for ETFs representing the different sectors.

Technology gave up 3.1% of its move higher, yet the up trend remains and the outlook is still positive. The Dow Jones US Technology index has been in a trading range of 340-380 since early December. We closed above the top of the range last week, but we didn't hold it as we closed at 377 and back within the range. Semiconductors, computer hardware, and Internet stocks remain the leading subsectors. The iShares Dow Jones US Technology ETF (NYSEArca: IYW) and the iShares Dow Jones North American Technology-Semiconductor ETF (NYSEArca: IGW) are two ways to capture a breakout move.

Financials are back to being the weak link, falling 9.1% on the week and giving back most of the previous week's gains. If Treasury Secretary Geithner comes through with details on the bailout, expect a rally, but if no details emerge soon, the financials will fall more. I still consider this sector a toxic waste dump. It should be played only by using disciplined trading strategies to protect principle exposed.

Health care lost 2% on the week, but remains in an up trend off the November low. HMOs have been the leading subsector taking the index higher. Biotech and medical devices (equipment) have contributed as well. Pharmaceuticals are still in a trading range short term. This remains one of the sector leaders in the short run.

On the economic front, there will be plenty of data this week, and it is not likely to be encouraging. Housing data, the producer price index (PPI) and consumer price index (CPI), the Leading Economic Indicators (LEI), and the Philadelphia Federal Reserve report are all on tap. Economists have said the reports are likely to be as bad as, if not worse than, December's numbers.

Still, there are signs of some improvement. Retail sales have risen, regional manufacturing is off the lows, bond yields are improving slightly, pending and existing home sales are picking up, and credit markets are healing. If the trend continues, we could see a bottom established.

Yet, the risk/reward relationship currently is too high for more exposure to stocks. Until we have a concrete catalyst to change the current down trend, cash remains king. The government spending is presumed to help, but from my view it is likely to be more inflationary than a lasting stimulus to the economy. For that reason, I remain very cautious.

In the shortened trading week following the President's Day holiday, holding support on six major sectors (see table above), as well as the S&P 500 index and the Dow Jones Industrial index, will be key. Keep your stops in place and be disciplined in how you approach this high-risk market environment.

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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