A change in leadership

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Good Morning. This is Capital Essence’s “Market Outlook” (the technical analysis of financial markets) for Monday August 27, 2007.

A debate that is starting to pick up some “steam” is whether or not the current market decline is a pause that refreshes or it’s the beginning of something worse.  Both sides have merit.  Although, we are not going to get the answer or know which side is correct until all of this is over.  And, it might be just a bit too late, we’ve figured.  So let’s see what the charts are saying.

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As you can see, the financial stocks had led the market higher over the last couple of years.  Although long continuous trend going back to late 2002 has recently been broken (see chart below).

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Technically speaking, the current slide had wrecked the long-term bullish outlook.  And as we’ve said back on July 18 “financial stocks had entered a secular bear market.”

“So, where has the money gone?  They can’t just evaporate into thin air” – you might be wondering.  Well, the best guess, at the moment, is that the financial money might have been migrating into “selected” energy names.

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Despite the overall weakness, the Oil Service Stocks are sailing toward the July’s high.  Of course, we don’t know for sure how energy stocks are going to deal [or have to deal] with the subprime mortgage mess.  Although, from a long-term perspective, we continue to believe that energy will be a relative secular winner.

Let’s take a look at major indices:

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The Standard & Poors 500 Index (weekly) chart above addresses an intermediate-term frame.  Apparently, it doesn’t take a genius to see that the long-term trend is still going up.

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The Dow Jones Industrials Average (weekly) chart above addresses an intermediate-term frame.  Similar to the S&P 500 Index, the blue-chips also suggested that, from a long-term perspective, the path with least resistant is still to the upside.

Bottom line: as far as the charts concern, the current market slide is merely a change in leadership [read: sector rotation] rather than the beginning of the bear market.   Although if you’re viewing the market through the S&P 500 lens, the rotation doesn’t guarantee a “fresh” high and it is simply because energy makes up less than 10% of the S&P whereas financial makes up more than 20%.  With that said, if the financial sneezes, the S&P is more likely to catch a cold.

Until next time, good luck.