Trade the Extended Sector Rotation

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.

The SPX continues to range out on a closing basis between 1305.32-1266.07, which is just a 3.1% range for a month. It made a 1265.60 low yesterday before closing at 1274.98 The NYSE volume has dried up during this trading range, and the price reactions have all been reactions to financial, or economic news focused on the global slowdown, credit crunch and housing deflation. The global slowdown is on the front burner now, as the TLT is up 6 of the past 7 days, while crude oil and other commodities have declined sharply, and the $US dollar index (DXY) continues its advance, and is trading at 78.21 as I do this. I thought it interesting that the -5.0% decline in crude oil Mon fell on the opening day of the Republican convention. Nothing of consequence happens in the market until the SPX range is resolved.

The energy sector is extended once again to the 1 year -2.0 STDV level, as evidenced by the XLE, and OIH. The XLE bounced +12.5% after it hit this zone on 8/18, so traders should be focusing on this sector closely at these levels (see chart).

NYSE volume was 1.2 billion shares yesterday with the volume ratio neutral at 49, as was breadth at +127 Tech stocks continue to disappoint, despite the big attempt by the street to spin a positive story, The SMH closed at 27.03 yesterday after making a 26.91 intraday low, versus its 5 year low at 26.28, so this is a “fill or kill” zone for the Generals and Hedge Funds. The Generals continue to sponsor the defensive issues such as BAX, ABT, JNJ, PG, GIS, MDT, HNZ, WMT, and MCD, to name a few.

So far in this Quarter the Russell 2000 is +7.1%, versus the COMPX +2.4, INDU +1.5, SPX -0.2, and QQQQ -0.1 YTD the INDU is -13.2, SPX -13, QQQQ -11.8, COMPX -11.4, and RUT -3.6.

Despite the narrow SPX trading range for the last month, the intraday travel range has been tradable because of the many news reactions, and light volume with reduced liquidity. However, long term is after lunch, and you need a fast trigger finger when you are managing your trades. Sept is a very erratic trading month at best, and this year we have a Presidential election, so the PPT (Plunge Protection Team) probably has marching orders to prevent any lasting significant declines in front of the election, so there will most likely see some good short term bounces after any quick down drafts in the major indexes. However, I have not changed my opinion that this current bear market will trade lower than the 1200.44 7/15/08 low, the recession will be more severe than expected, the derivative meltdown will intensify, and the housing deflation is not over.

Have a good trading day!

Click here to find full details on Kevin's courses including Trading with the Generals with over 20 hours of professional market strategies. And for a free trial to Kevin’s daily trading service, click here.