Survivors Amid the Selloff

This column was originally published on RealMoney on Oct. 13 at 11:38 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

The selloff this week has been widespread, with few stocks or sectors avoiding technical damage. In fact, the New York Stock Exchange posted its first 4-1 downside breadth day in over a year last week.

So where's all the money going and can bulls find a little relief in this hostile environment?

Lopsided breadth numbers are setting up a good news-bad news scenario. The bad news: The majority of capital is moving back to the sidelines instead of rotating into less vulnerable stocks.

The good news: Extreme selling pressure usually precedes a washout that yields a benign period of buying interest.

First, let's identify the 10 sectors that have suffered the least damage in the last five trading days. These survivors may offer a clue about opportunities after this wave of selling has passed.

Silver

Airlines

Music and video stores

Discount variety stores

Trucking

Gold

Air delivery and freight

Specialty eateries

Electronic stores

Mortgage investment

The rally in gold and silver is a no-brainer. The combination of fear-based trading and inflation paranoia is creating the perfect environment for precious metal stocks. Silver's rise has been a bit surprising, however, given its long-term underperformance.

Silver stocks are being accumulated right now, albeit at a slow pace. Silver Standard Resources' (SSRI Quote) chart looks relatively bullish, but it still faces a considerable challenge breaking above long-term resistance. While its 19-month triangle looks encouraging, there could be a decline to $10 before it moves considerably higher.

I like the recent recovery in the airline stocks for several reasons: It's happening despite the recent wave of bankruptcy filings at major carriers, and it suggests that crude oil and gasoline prices will keep moving lower in the weeks ahead.

For several years, energy traders who favor equities over commodities have been playing spreads between oil and airline stocks. In other words, they trade the inverse relationship between the two sectors. The recent accumulation of airline stocks suggests that longer-term bets are now being placed against the energy sector.

Unfortunately most airline stocks have months of work to do before they attract genuine bull interest, and group patterns aren't supportive of higher prices in the short-term. However, there are notable exceptions.

The regional airlines look better than the major carriers, which are saddled with higher fuel, labor and facility costs. Mesa Airlines(MESA Quote) is the standout in this subsector.

It's currently trading at a 52-week high, which is quite a feat in this tough market. The stock has just broken resistance over $9 and appears likely to head above $10 during the fourth quarter.

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Trucking stocks have also seen a limited recovery due to falling oil prices. The sector has taken a nasty beating in 2005. It's been selling off since the second quarter, when an unfavorable response to the Yellow Roadway (YELL Quote) acquisition of USFsent the group into a tailspin.

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Most trucking stocks still look terrible despite last week's uptick, but don't tell that to CNF Transportation(CNF Quote). The stock just hit an all-time high in this unforgiving market. That's quite an accomplishment. The latest surge broke nine-year resistance in the upper $40s, so this rally should have legs in the months ahead.

Three retail subgroups made it onto the top-10 list. When retailers reported September same-store sales data Oct. 6, many issues topped expectations in a month hobbled by two destructive hurricanes. The best performers jumped off long-term support after grinding lower for the last three months.

However, there was a hit or miss flavor to last week's data, so it's doubtful a broad sector recovery is in the cards. But group leaders could benefit from a stockpicker's market as we head toward the holiday season.

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Target (TGT Quote) sold off in July following a critical Barron's article. The stock has been moving lower in a bull flag pattern, and it's now sitting at its 200-day moving average with 62% Fibonacci support.

Accumulation has stayed favorable throughout the 10-week decline. A rally above $53 could start a recovery back to the 2005 high at $60.

Finally, I was surprised to see mortgage investment make the gainer list given the hostile rate environment. As it turns out, Freddie Mac's (FRE Quote) drove the bulk of last week's outperformance, with a short squeeze triggered by their decision to buy back their stock.

Unfortunately, the broad financial sector still looks like a disaster in the making -- it should be avoided completely unless you're an aggressive short seller.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
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