Keep an Eye on the Financials

Their recent outperformance is a possible bullish signal.
Author:
Publish date:

A disappointing earnings report in a highflying stock. There's nothing like it. It usually results in a sizable correction. And this week former highflier Dell (DELL) - Get Report handed us a doozy with its revenue shortfall.

Typically after such a disappointing report the market takes on the qualities of a witch hunt. Hey, if Dell can disappoint, what about XYZ? And how 'bout ABC? And so on. Of course there's another reason people were selling stocks this week: Can't have high P/E's with rising yields. That's a big no-no. Boy, if you wanted a reason to sell stocks this week, the market offered many of them.

But wait a minute. It's not as though this correction began Tuesday with Dell's announcement. This correction began more than a month ago. The only difference is that now we know why the market has been drifting lower. And once we know why, it's easier to quantify the damage -- but more importantly, it's time to sit up and notice what has not reacted to that negative news.

And what hasn't dropped in the face of the negative news? Those down-and-out financial stocks. On

Tuesday when I showed a chart of the

New York Stock Exchange

Finance Index as it related to the

S&P 500

, I noted the outperformance, but we had to squint to see it. Now we no longer need a magnifying glass -- and that's good news for this market. The financial stocks have been market laggards since the low in October, but now they are showing signs of relative strength. If this strength keeps up, we will begin to see improvement in the market's internal statistics.

The best example of improving statistics comes to us in the overbought/oversold oscillator. Last Friday we hit a peak oversold reading that wasn't breached in Wednesday's whack to the downside. This is the first sign we've seen that the downside momentum of this market is waning. And that's good news.

But being oversold alone is not enough. There's got to be more. There has been a slowing in the downward slope of the McClellan Summation Index. It has not turned yet, but a closer look reveals that one or two minor positive days in the advance/decline line would now turn that indicator higher. This would be the first time since early January that that indicator has a chance of turning positive.

And let's not forget about sentiment. Those bulls are retreating from their "pound the table" stance. So many of them have moved over to that warm-and-fuzzy correction camp. Around 15.6% are looking for a correction, the highest reading we've seen since late October. That's also moving in the right direction.

Finally, as many readers know, I am not a fan of buy and sell signals in the market. I do not believe there is one indicator that can tell you when to buy and when to sell. I do believe that a confluence of indicators pointing in the same direction can be a guide to market direction. However, for as long as I can remember I have used the 10- and 30-day moving averages of the net of the advance/decline line to calculate a signal trend in the market.

The premise is simple: both moving averages must be moving in the same direction when the shorter term (10-day moving average) crosses the longer term (30-day moving average). It is best used when the other indicators are showing similar signs. A close look at this chart reveals a buy signal may be imminent. It has not occurred yet but a positive a/d line (or even a minor negative reading) over the next few days would give us a buy signal. (Note, signals on the chart occurred only where indicated; in all other crossings the lines were headed in opposite directions.)

And when we get a signal, what can we expect? Typically a move that will last about three to six weeks in the market. We cannot tell the magnitude of the move, only the direction.

So, what stocks look good? Some of the drugs are acting much better.

Johnson & Johnson

(JNJ) - Get Report

is my preference in the

DJIA

and

American Home Products

(AHP)

still has that big base, if it can ever break convincingly through 60. Also in the DJIA,

Boeing

(BA) - Get Report

continues to look good.

J.P. Morgan

(JPM) - Get Report

trades well but is now at resistance; buy it into a dip.

Elsewhere,

General Mills

(GIS) - Get Report

and

Kellogg

(K) - Get Report

are still positive charts. In the financials

BankAmerica

(BAC) - Get Report

looks good.

Fannie Mae

has had vast improvement recently.

Nucor

(NUE) - Get Report

is also still a favorite big base.

In techland, I've noticed that

Intel

(INTC) - Get Report

did not break to a new low this week. It may trade sideways for a while, but it's a good chart, as is

Motorola

(MOT)

. And

Cisco's

(CSCO) - Get Report

late-day reversal is tempting in here.

By now it must be obvious to you that many of these indicators require anticipation on my part. I am anticipating. I am anticipating an end to this phase of the correction over the next few days. Sometimes the anticipation is half the fun.

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets for TheStreet.com Tuesdays and Fridays. At the time of publication she had no positions in stocks mentioned in this column, though positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. She appreciates your feedback at

KPMHSM@aol.com.