Rev Shark:
Engaging Battle of Rotation
3/3/05 8:46 AM ET
Let a man who has to make his fortune in life remember this maxim: Attacking is the only secret. Dare and the world yields, or if it beats you sometimes, dare it again and you will succeed.
-- William M. Thackeray.
The bulls were on the attack yesterday, but the powerful forces of rising crude oil prices turned them back. The bulls were able to shake off a poor open caused by some nervousness in the semiconductor sector and by midday it looked like they were in position to breakout to new highs. But the bears unleashed their most powerful weapon, crude oil, and the bulls were thwarted once again.
The bulls may have lost the battle but they have not lost the war. The S&P 500 and Dow Jones Industrial Average still have very attractive technical patterns and are within one solid day of making new highs. The Nasdaq has shown signs that it may begin to outperform. Semiconductors and retailers have been acting better in recent days and could easily take a leadership role.
The key to the market right now is whether we see rotation out of more defensive groups -- such as oils, steels, metals and homebuilding -- and into semiconductors, retailers, technology and biotech. The primary driving force for such a rotation is the price of oil. If oil begins to falter, that will help drive the rotation. Yesterday was a particularly good example of the power that oil is exerting on this market right now. The rotation was under way, but as soon as oil began to rise, it reversed and we closed weak.
The choppiness we have been seeing in the market recently shows how difficult this battle is. Rotation is not easy to accomplish. The forces that are in place tend to stay in place and a shift to new leadership requires expending a substantial amount of energy.
Our job right now is to monitor the battle of rotation and to take advantage as soon a we feel we have an edge in determining who will be the victor. We will need to monitor the key groups, oil and semiconductors, and see if one can seize the momentum.
The current technical setup favors the bulls. They keep attacking and have been turned back, but with each run at the technical overhead, they weaken it and set the stage for a future victory.
While we wait for the weekly unemployment report, the bulls are perking up and preparing for battle. The Semiconductors Industry Association had some positive comments about the state of demand, which is helping the chips in the early going.
It certainly is going to be an interesting battle. The lines are clearly drawn and we are setup for a strong move. I'm leaning toward the bullish side but still have plenty of cash on the sidelines that I'm waiting to deploy once the situation becomes clearer.
Good luck and go get 'em.
Gary B. Smith:
