Rev Shark:
Tech Bucks for Leadership Role
3/2/05 8:24 AM ET
"To live is to change, and to be perfect is to have changed often."
-- John Henry Newman
Yesterday we saw some indications that the character of the market may be changing. Money rotated out of oils, steels and homebuilders and into technology, primarily semiconductors, and retailers. If the market is going to make an upward move these are the groups that will lead us to the promised land. The bulls hope that the Nasdaq will start outperforming relatively and provide market leadership.
That sounds like an attractive scenario but it may not be that easy to attain. First, semiconductors and many technology stocks simply do not have sufficiently attractive fundamentals to bring in the buyers. We saw last night how fragile some of these companies can be as Novellus (NVLS:Nasdaq) and several other technology companies offered up weak guidance. These stocks don't have the huge earnings numbers we see in oils and homebuilders, and investors are going to have difficulty embracing them, especially if we see more warnings.
In addition, we have some macroeconomic headwinds to contend with. Germany reported particularly bad unemployment numbers and there is concern about how robust the European economy is and the consequent impact on demand for U.S. products and services. The dollar is trading up this morning in response to the news.
In addition, we have Alan Greenspan testifying before Congress today and the market will be listening carefully for talk about inflation, interest rates and the dollar. The market has become increasingly tuned in to concerns about inflation and many market participants are convinced that we have not priced in those worries.
So we have a nascent sector rotation that can lead the market but it is extremely fragile and can easily reverse course if the news flow is not cooperative. We have to be very careful in anticipating a change in market leadership. If it happens and we catch it early it will pay off nicely but if fails to develop we need to be prepared to take quick defensive action.
The technical condition of the indices is good overall but we can't seem to generate the sort of volume we need to give us a higher level of confidence. The DJIA and S&P 500 are on the verge of a breakout but have not had sufficient life to push through and bring in the buyers and cause shorts to cover.
We have a shaky start this morning following some warnings last night, poor economic numbers in Europe and concerns about what Mr. Greenspan may say today. One good thing recently is that the market has been closing strong, so as long as that continues it will be a good sign.
No positions in stock mentioned