Skip to main content

Weekly Market Update - bears in control, time to short tech?

A tough week for stocks closed with a thud Friday. The new year got off to a bad start with a weak ISM Manufacturing report. That was followed up by a weak non-farm payrolls report that caught the market's attention and prevented investors from appreciating the reasonably decent ISM Services report. Note that rising prices were a theme in both ISM reports. This has investors worried that inflation will prevent the Fed from freely doling out rate cuts to save the economy. It was all too much for market participants and they sold stocks with abandon.

As for the TradeRadar model portfolio, we were stopped out of our position in SanDisk (SNDK). But the carnage in the NASDAQ encouraged us to move from neutral on tech to a bearish stance. Accordingly, I initiated a small position in the ProShares UltraShort Technology ETF (REW). Here's the background on this decision.

I have written a couple of posts on how the Durable Goods report over the last couple of months has led me to believe that tech as a broad category was in trouble. We have now seen downgrades of the entire semiconductor sector and bellwether Intel in particular, analysts saying a slowing economy will have a strong negative impact on the previously soaring Software-as-a-Service sector, Cisco's famous "lumpy" demand comment from their last earnings conference call, analysts saying Oracle will do fine but the rest of the software sector is facing slowing growth, signs of contracting IT spending, etc.

It seems the drumbeat for a tech slowdown is growing louder and more insistent. Given that tech was one of the best performing sectors last year, it would not be surprising to see a rotation out of last year's winners and into this year's winners, whoever they might be.

By the way, if you don't think the tech sector is having problems, just look at this list of 52-week lows from


Then there are the charts.

When considering a position in an ultrashort ETF, I always look at the corresponding long ETF and do the technical analysis there first. Looking at the Technology SPDR (XLK), we can see the ETF opening Friday's trade with a gap down. This brought XLK below its 200-day moving average. The chart of XLK is beginning to form a head-and-shoulders top. Looking at a 3-year chart of XLK it appears the first support level is at $24 (another 4% drop). If the ETF reaches that level (and it is not far from it as of today), it will pretty much confirm the head-and-shoulders. If that happens, we could see the ETF fall at least to the next support level around $22 (about 12% below where it closed today). (Support levels are indicated by horizontal black lines in chart below.) As further confirmation, the weekly TradeRadar chart shows a clear SELL signal.

Chart of Technology SPDR (XLK)
With this kind of chart setup in XLK, the next step is to look at the chart of REW. Here, somewhat surprisingly, the chart pattern is not exactly a mirror image of XLK. There is no head-and-shoulders bottom apparent. What is encouraging for buyers, however, is that today's action displayed a move above the downward trend line and the move was on high volume. In addition, we have a TradeRadar BUY signal that was first flashed back in November 2007 (see second chart below.)

Chart of REW

TradeRadar BUY signal for REW
In summary, the charts and the red flags in the fundamental industry backdrop provide sufficient negativity on the tech sector to prompt us to jump into REW.

As for the rest of the TradeRadar portfolio, our bear ETFs had a very good week with the UltraShort S&P 500 ETF (SDS) moving up 8.6% and the UltraShort China ETF (FXP) climbing 9.3%.

Oil hit $100 a barrel this week and our position in DBO benefited. Unfortunately, Friday's profit-taking and the weak jobs report causing demand concerns prompted DBO to give back a bit of the week's gain. Still, the position remains modestly profitable and the gap up from earlier this week has not yet been closed.

Disclosure: author is long SDS, FXP, REW and DBO


Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Thursday Bounce: Trend Busters, Swing Signals and Trend Leaders for July 9, 2009

This is a quick post to announce that we have published Thursday's Trend Leaders, Swing Signals and Trend Busters at Alert HQ . All are based on daily data. Today we have the following: 72 Swing Signals -- A couple of days ago we had 35 signals, today we have twice as many. Happily, we now have 65 BUY signals, a mere 4 SELL Signals plus 3 Strong BUYs. Whoo-hoo! 56 Trend Leaders , all in strong up-trends according to Aroon, MACD and DMI. There are 18 new stocks that made today's list and 60 that fell off Tuesday's list. 48 Trend Busters of which 5 are BUY signals and 43 are SELL signals The view from Alert HQ -- Talk about mixed signals. If you look at our Swing Signals list you would think the market was in the middle of a big bounce. BUY signals are swamping the SELL signals and we even have a few Strong BUYs. Yes, there's a good sprinkling of tech stocks and tech ETFs but the distribution is pretty broad-based with a good number of different sectors represented, eve

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here: Contact us if you have questions or identify any new issues.