Why semiconductor leadership is so important

Gary Kaltbaum is an investment advisor with over 18 years experience, and a Fox News Channel Business Contributor. Gary is the author of The Investors Edge. Mr. Kaltbaum is also the host of the nationally syndicated radio show "Investors Edge" on over 50 radio stations. Gary is also editor and publisher of "Gary Kaltbaum's Trendwatch"...a weekly and monthly technical analysis research report for the institutional investor. If you would like a free trial to Gary's Daily Market Alerts click here. 888-484-8220 ext. 1.

The investigators looking at Fannie Mae decided not to press criminal charges against anyone despite finding a $10.8 billion fraud. Let me get this straight...Martha Stewart goes to jail for something that affected absolutely no one...but the scabs that ran Fannie Mae get off free as a bird in flight. Ladies and gentlemen, there is not a level playing field in corporate America. It pays to be politically well-connected.

Iran is ignoring the U.N.  No kidding! In case you did not know, the U.N. Security Council gave Iran 30 days to halt its uranium enrichment. THAT WAS BACK ON MARCH 29. This is just another in the long list of Iran shooting the middle finger at the rest of the world. Hopefully, the rest of the world wakes up one day.

On a lighter note:

The over/under on Terrell Owens lasting with the Cowboys is now 6 games...and I think that is being optimistic.

Reggie Bush is the next Barry Sanders...if not better. You heard it right here.

Over a year ago on Fox News Channel, I stated that not only was there a housing bubble but worse, there was a credit bubble. I received a lot of hate mail on this...not any more. The housing market is now getting its comeuppance while and the lending business is imploding. H&R Block just took a $102 million loan loss provision because of an increase in early payment deliquencies. This is just the beginning as so many bought homes that they could not afford because the lenders were enablers.  

When I told you at the top of this bear phase that the DOW and S&P would outperform, little did I know by how much. My thesis was simple. In past bearish action, the market would become very defensive by buying up the most mega-cap of stocks. This occurs because the big money crowd wants to own the most liquid and most boring stocks because they don't want to get in trouble. It is simply easier to sell a GE or a CITIGROUP than a BROADCOM or a QUALCOM.

There is now a heck of a lot of talk about the DOW and S&P being only a few percent off their highs...but the DOW and S&P are not representative of the MARKET. Because of cap-weighting, 50 of the 500 stocks that represent the S&P make up almost half the indices' movement...and of course, the DOW is only 30 stocks. I can also tell you that 10 stocks account for 53% of the NASDAQ 100 but that is not what is important to me right now. What is important is that the DOW and S&P are masking some major carnage in the market.

The easiest way to look at this is by comparing the big-cap indices to the small and mid cap indices. There is no comparison right now as big cap is outperforming by a wide margin. I do not believe this can last. I believe something has to give...and believe it is going to be sooner rather than later. Either the major indices are going to drop to play catch-up just like they did starting in May or all the sectors that are imploding are going to find a low and turn back up. I suspect the major indices are going to play catch-up to the RAILS, AIRLINES, TRUCKERS, AIR FREIGHT which all make up the TRANSPORTS. I suspect they will also play catch-up to the RETAILERS, GAMING, HOUSING, LENDERS, MORTGAGE-RELATED, CONSTRUCTION, INDUSTRIALS, RESTAURANTS and many other sectors that you don't here about. The average investor hears about the DOW and S&P. What I suspect does not matter though. My job as a technician is to see what I am seeing and then wait for the next move. The next move will tell me everything I need to know. I will be just fine if the bottom lifts. I just do not believe this is what odds favor right now.

The DOW, S&P, NASDAQ, NDX and the SOX are all in decent shape after the move up in the past few weeks. The DOW and S&P are in normal pullback mode near their recent highs.. The NASDAQ, NDX and the SOX are also in pullback mode but they are just off their lows. I don't put it past those areas to move above near-term resistance but if all those negative areas listed do not join, it will be just a screaming negative divergence. Those resisitance areas are DOW 11,393...S&P 1302...NASDAQ 2168...NDX 1584...SOX 453. There is just no way that TOBACCO, FOOD, BEVERAGES, DRUGS, MEDIA  and miscellaneous HEALTHCARE are going to lead the market for too long. These are the DEFENSIVE areas I have been telling you about that lead when the economy is in a major slowdown. Nothing has changed there. You can also add the SHIPPERS as in a bull market. Notice one area I have mentioned in the past as a leader is now off the list...and this could be the catalyst for the next move....

That group is  the INTEREST-RATE-sensitive group which includes the BIG FINANCIALS which are now starting to show distibution as well as many other INTEREST-RATE SENSITIVE stocks. I would not ignore this as INTEREST-RATE SENSITIVE stocks make up a big part of the S&P as well as the NYSE. I am seeing near-term tops in BROKERS, REGIONAL BANKS and many smaller banks. I am also seeing some subtle distribution in names like WELLS FARGO and BANK AMERICA. The market will not stand losing this area and will be watching closely.

Lastly, I am watching the TECHNOLOGY/SEMICONDUCTORS like a hawk. As you know, I am a big believer in SEMICONDUCTOR leadership. Right now, many names are acting constructively off their lows and even finding some leadership in names like IDTI, VSEA, and a couple of others. So far...so good. But let me be clear, the day the market loses this decent action, stick a fork into the market.

Gary Kaltbaum