Surveying the Wreckage
Alan Farley
10/09/08 - 12:45 PM EDT
Editor's note: Alan Farley will analyze his technical charts and provide his analysis on which stocks and sectors could pay off at the '09 at TheStreet.com Investment Conference on Saturday, Oct. 25. Click for details.
Let's survey the damaged landscape after the ferocious selloff and
Fed-inspired recovery attempt. You might be asking yourself, why bother? After all, we all know that everything has fallen apart in recent weeks. But rather than just stating the obvious, this brief examination will get us ready for the best trading opportunities of the year.
The Buffett Factor:
General Electric (GE Quote) and
Goldman Sachs (GS Quote) are both trading lower than the price levels they hit just before their Warren Buffett injections. Dark comparisons are being made with J.P. Morgan, who tried to single-handedly save the financial markets in 1929. I hope Warren is more successful in his not-so-noble endeavor.
Of the two stocks, Goldman Sachs looks more likely to reward investors with high-percentage profits down the road. It's holding the September low and hanging tough above big support near $100. However, now that short-selling is legal once again, this stock has to survive the brutal equity/CDS pair trade. That complicates matters greatly.
IBM (IBM Quote): The stock was a solid performer into early August, when it rallied up to its 2001 swing high, but it's been all downhill for the blue-chip giant since then. The stock cut through support at $100 like butter earlier this week and is now trading near an 18-month low despite its earnings preannouncement.
Small-Caps: The Russell 2000 index has crushed two-year support in a head-and-shoulders breakdown more insidious than the broad index selloff. It lost nearly 25% in the three sessions preceding Wednesday's Fed action, which qualifies as a crash in almost any technician's dictionary.
This breakdown follows several months of relative strength in the small-cap sector as money managers placed ill-advised bets that an economic recovery was just around the corner.
Ironically, the selloff tells us the exact opposite. In fact, I wouldn't look for this group to fully recover until 2010 or 2011.
Utilities: The Dow Jones Utility Average also broke a massive head-and-shoulders pattern in September, completing a 19-month breakdown. It's dropped almost 25% since that event and is currently testing three-year support near 375. I, like others, paid little attention to the breakdown when it happened, which was a big mistake.
The sector has a long-standing reputation as a canary in the coal mine for the economic cycle. The initial selloff, if heeded, proved to be an excellent early warning signal for the destruction we've witnessed in the last month. In any case, look for a bounce near current levels and a 15% to 20% upside trade later in the fourth quarter.
Homebuilders, RIP: Remember the growing elation we felt for the homebuilders, which outperformed the broad indices between July and September? That lovefest evaporated earlier this week when the
SPDR Homebuilders (XHB Quote) and Philadelphia Housing Sector Index (HGX) both violated critical support levels.
Sadly, there's little or no additional support between current levels and the deep July lows. The good news: The group has an opportunity to post a bullish higher low or double-bottom reversal. The bad news: The historic sector downtrend is still intact, with notable bankruptcies becoming more likely as prices head lower.
Citigroup (C Quote): The megabank is testing two deep lows between $13 and $14 after the
Wachovia (WB Quote) news and putting a drag on the entire banking sector. A triple-bottom reversal would be nice, but that bullish outcome isn't a sure thing because distribution is fierce, indicating that "deep" shareholders are jumping ship and getting out of the way.
Gold: The gold futures are holding up well, but gold stocks are falling apart at the seams. This divergence points to a major disconnect between gold as a hedge against fear and gold as an industrial metal needed to fuel growth. It's the industrial side of the equation that no one wants to buy in this ugly deflationary spiral.
VIX: The Market Volatility Index (VIX) isn't just spiking to levels not seen since 2002, but it's also holding its mark for days at a time. In July 2002, VIX poked over 50 for two days and rolled over. After Sept. 11, 2001, and at the October 2002 low, it spiked above 50 for just one session. The fear indicator is now trading over 50 for the fourth day in a row. Scary.
Retail HOLDRs (RTH Quote) - The exchange-traded fund moved sideways in a broad trading range between $83 and $108 for more than five years, before ripping through range support earlier this week. The breakdown has bearish implications, not only for the 2008 holiday season, but also for consumer demand in the next one to three years.
There's an unfilled gap between $83 and $85, at new resistance, that should offer a low-risk short-sale entry later this month or in November. Alternatively, I certainly don't recommend chasing this stock lower in these deeply oversold conditions. This is especially true because September same-store sales are coming in weak, but not catastrophic.
The Death of Speculation:
First Solar (FSLR Quote) and
DryShips (DRYS Quote), two of the hottest stocks on the planet in 2007, have been totally annihilated. Merrill Lynch added fuel to the fire this week, downgrading the solar blue-chip to "sell." The stock has now been cut in half in just three weeks. As for DryShips, selling off from $74 to $20 in two months is absolutely mind-boggling.
