The "Test" Is Here

The much awaited "test" of the November lows is here for the Dow Jones Industrials Average.  While this is quite depressing while it's occurring, it's a normal part of a "bottoming process" if the bottom is indeed being made.  If the market holds and can bounce off of these levels over the next few days, those hoping that the lows are in will breathe a sigh of relief.  If, however, this support level breaks and the market heads lower, the last three months of a "bottoming process" will be a complete waste, and the cycle will have to be repeated again once a new short-term bottom is put in.

 

A number of indicators are showing that the market in its current state looks much better than it did in November.  We have detailed these in Bespoke Premium reports over the past few weeks, but one of them is the fact that recent declines have been concentrated in just one or two sectors.  As shown below, Financials and Consumer Staples are the only two sectors that have gone down since November 20th, with Financials declining the most at -11.8%.  On the other hand, four sectors are still up more than 10%, even though the market as a whole is flat.  These four sectors include Consumer Discretionary, Materials, Technology, and Health Care.

 

Comments

[Greg Feirman]

That says it all. This whole selloff seems to be premised on a vague fear about nationalization and the endgame for the banks.

[dj]

Tim the Temp has to stop bailing out the Banksters

[Jody Wilson]

You're mixing apples and oranges. Sure, the Dow is re-testing a low, but the S&P 500 hasn't yet reached the November 20th low of 740 - that's why the average S&P sector is still positive. Besides, diverging sectors don't necessarily indicate future strength. Sectors were beginning to diverge like crazy in 2007, and that signaled a weak market, not a strong one.

In S&P land, the test is NOT here.

[Alan Wynnewood]

When we achieved the November lows, most investers did not understand that a "debt deflation" was underway. They were thinking "just another recession." Europe is just beginning to experience its credit collapse. China is playing games, but can't keep it up for long. I enjoyed the rally off Nov 20. Don't kid yourself. Other sectors will be hit hard as the months roll by, depending on excess capacity in those sectors.