2. On Market Separation

One of the characteristics of a "normalized" market I've been waiting for is sector differentiation. The problem with the initial stage of a deflationary debt unwind is that nearly all financial assets tend to go down together. In 2008 it didn't really matter whether you pulled up a one-year chart of the S&P 500, the German Dax, Copper or Rough Rice; they all looked nearly identical.

But bear markets don't end all at once. Instead, as individual stocks reach bear market disaster levels, they eventually begin to trade on the possibility that they might remain operational, as opposed to the nightmarish end-of-the-world bear market models that predict all companies are going to cease operations and liquidate.

Two sectors where several of the components are beginning to show signs of separation are Pharmaceuticals and the Airline sector.

Pfizer (PFE) is on bar 8 of a potential 9 TD Buy Setup on the quarterly chart. It will "need" to revisit the low of bar 7 (11.62) to perfect the potential buy setup, but weekly and monthly charts suggest that perfection may be difficult to achieve. There is a TD Sequential Sell Signal that recorded on the daily chart, confirmed by a bearish price flip, so my game plan is to add PFE to my list for purchases over the next six months on weakness.

Southwest Air (LUV) appears in far better shape than the quarterly chart of the S&P 500, which for now suggests we have not yet seen the ultimate low for the overall market.

LUV recorded a TD Buy Setup on its quarterly chart in Q4 2008. The weekly chart suggests there is unfinished business on the downside, but this is certainly a stock on my list to re-consider when/if the market attempts to re visit the March lows.


3. The Week Ahead: All Eyes on the Bond Auctions

The past few weeks has seen tremendous angst over US government bond auctions that have not quite gone so well. In fact, the bond market is one of the biggest short-term risks to the stock market right now. Over the past three weeks, “failed” bond auctions (not “failed” in the Latvian sense, but “failed” in the, Hey, we’re America! sense) have led to selloffs on Wall Street.

So next week all eyes will be on the 10-year Treasury Note auction and the 30-year Treasury Bond auction. The former is at 1:00 p.m. EST Wednesday, the latter at 1:00 p.m. EST Thursday.

It’s always difficult to game what will actually happen at these auctions. Much of the recent disappointment has been over what essentially amounts to the Federal Reserve’s promise to be the bond buyer of last resort coupled with their seeming reticence to actually step up to the plate and fulfill their promise. Keep these auctions on your radar.