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Sector Observations

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I like to divide the market into its different pieces. So, after reviewing the major market averages (INDU, SPX, NDX) each morning and evening, I break the market down into its sectors.

For the most part, I follow about 25 sectors. The following list displays the sectors that I regularly monitor. It's divided into nine basic groups: Consumer, Financial, Industrial, Material, Technology, Utility, Energy, Telecom, and Health Care.

Sector List

Let's make a few observations...

Consumer

The consumer sector, especially the Retail Sector Index (RLX.X), is obviously leveraged to the consumer. Last week's employment numbers didn't speak well for the consumer to continue spending. The RLX is holding up pretty well relative to the broader market, but like most sectors, it's overbought in the short-term.

Financial

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Industrial

The Morgan Stanley Cyclical Index (CYC.X) is weak again today and having trouble with the 465 resistance area. The index is closely tied to the business cycle and will be a good barometer for measuring when the U.S. rebounds.

The Airline Index (XAL.X) has been extremely volatile recently for obvious reasons. It's pulled back in the last three sessions, but bounced from the 70 level today. The 70 level was a point of resistance following the terrorist attacks before the XAL broke out last Tuesday.

Materials

The Gold and Silver Index (XAU.X) has the most steady ascending trend in the market currently. Granted, it's an extremely slow mover with a very low beta. But, it's been climbing steadily since early July, tracing a series of higher lows and highs. The group's strength is most likely a product of fear over inflation, with the Fed printing money and cutting rates faster than any time in modern history. The group may also be benefiting from a flight to safety in light of the current military efforts.

The Forest & Paper Products Index (FPP.X) should be benefiting from lower energy prices, but the index is stuck in a rut. It's been under performing the broader market recently, which may hint towards an extension of the recovery.

The S&P Chemical Index (CEX.X) is probably one of the better shorts in the market currently if one believes that the economic recovery in the U.S. has been pushed back. The sector, like many others, is currently overbought and obviously having trouble clearing its 38.2 percent retracement level. If the fundamentals support shorting stocks within the CEX, it'd be easy to manage risk in any bearish bet with the retracement level on the chart below.

Technology

Tech is still a very tough place.

In the Hardware Index (GHA.X), the Storage Area Networkers (SANs) such as QLogic (NASDAQ:QLGC) and Emulex (NASDAQ:EMLX) have gone near-parabolic in the last few days. In other words, short covering. Meanwhile, Dell (NASDAQ:DELL) says things are stable, but Compaq (NYSE:CPQ) and Gateway (NYSE:GTW) say things aren't.

The Semiconductor Index (SOX.X) has had a very nice run recently, and continues higher today. But, earnings season could change that if the chip companies don't have anything good to say, which will probably be the case. Motorola (NYSE:MOT) and Lam Research (NASDAQ:LRCX) report tomorrow, which will shed some light on the group's fundamentals.

Cisco's (NASDAQ:CSCO) comments last week spurred a massive short covering rally in the Networking Index (NWX.X). But did Cisco say that things are getting better? There's still a lot of work to do in this group and the semiconductor earnings reports from the likes of Broadcom (NASDAQ:BRCM) and Xilinx (NASDAQ:XLNX) will help to shed some light on the NWX.

Utility

A slow economy doesn't need as much juice, which is why the Utility Sector Index (UTY.X) continues lower. The index has displayed a pattern of lower highs since late May. Of course AES' (NYSE:AES) warning didn't help much.

Energy

The energy group is a bit of wild card in here. On one hand, slumping demand due to the recession and loss of airline demand has been wreaking havoc on drillers and the integrated companies alike. However, it remains to be seen what, if any, impact future military action has on the price of crude.

The Natural Gas Index (XNG.X) is trading higher today and would benefit from a colder winter, which is right around the corner. The price of the commodity looks to have stabilized and may trade higher in the next few months, which could boost shares in the XNG.

The Oil Service Index (OSX.X) trades heavy and is contending with terrible fundamentals. However, a cut by OPEC or military action in oil producing and exporting countries could lead the group higher.

Telecom

The carriers in the Wireless Index (YLS.X) had been performing quite well in the wake of the terrorist attacks due to the increase in demand for communications. But dogs in the index such as Qualcomm (NASDAQ:QCOM) have been dragging the YLS lower. Nokia (NYSE:NOK), also a component, is beginning to show signs of strength.

Health Care

Perhaps the group with the "safest" earnings and prospects for growth, but the speedy rotations can be quick to catch. Defensive in nature, which is part of the appeal, there are also issues to contend with such as Lilly's (NYSE:LLY) shortfall due to its Prozac patent expiration. Plus, the Drug Sector Index (DRG.X) is having a hard time getting above its 200-dma and the 400 price level, which seems to be a point of contention.

Eric Utley
OptionInvestor

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