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Breakfast with Brodsky


Good morning, and let me say hello to all you Minyans. It is a pleasure and a privilege for me to join and I hope you enjoy my arrival as much as I enjoy being a part of this great community. As I sat in my apartment this weekend and reviewed last week's market activity, I could not shake this nervous feeling that something had changed and I missed it. What made Friday's sell off different then the ones we had in September or during the second half of October? It did not seem that there was significantly more supply this time, or that the bears had taken total control of the market. Fundamentally nothing had really changed either and we did not get any reports that screamed to sell the broad market. Economically we are still strong, corporate profits are continuing to get better and sentiment is improving as well.

Then what was different you ask? Well, the big difference that I came up with was that for the first time this year Pharma and Energy stocks ROSE during an overall market decline. There was a big divergence and it was clear that money was rotating into these sectors and out of technology. Looking back over the past nine months, we see that when the market pulled back so did pharma and energy. In fact, the DRG (Pharma index) and the OSX (Oil service index) have been lagging all year and have been hard pressed to rally even with the overall market. Is this a call to sell all tech and roll money into the defensive sectors? In my opinion it is too soon to tell. The overall up trend in the SPX is still in tact and even in light of today's weak futures picture; we are still trading above the key near term support levels. One thing is certain though, that we have been stuck in a trading range in the SPX since October 28. Support is at 1044 and resistance is found at 1060-1062. In addition to watching those levels like a hawk, I am going to pay close attention to where money is moving. If a sector rotation is underway and money is moving out of tech and into defensive names we may see more pressure on this market in the coming days.

The Dow is nearing its first support level of 9720, and if broken look for the next level to come in the 9600 area. Its 50-day MA (moving average) is 9639 and the last three tests of this level have proved to be tremendous buying opportunities. The 50-day was tested in August; end of September, and most recently at the end of October. All three tests took about four trading days to work off before bouncing and only time will tell if we will even test the 50-day, let alone bounce again. The NDX looks similar with its first level of support coming in at 1400. Its 50-day MA is at 1390 so one would expect the index to hold that 1400-1390 level. Below that level look for support at 1340.

Most indexes look rather bleak after Friday's close. The BKX (Banking index) broke support of 942 and drifted lower all day closing near its low. It did hold 934, which is a 62% retracment of its latest upswing. If 934 is broken, look for support in the 920 level. Without a strong banking picture, it will be hard for the overall market to move higher. On the same note, the XBD (Broker/Dealer index) broke hard and finished Friday on its low, which was 632. Support for the XBD may come at its 50-day MA, which is 628. In my opinion the index looks more likely to test the 615 level, which is where it held in late October. Retail looked weak across the board with very little standouts on Friday. The BTK (Amex Biotech), which has been on a wild ride for the past five trading sessions, closed at the highly watched 450 level. A break of this level has room to the 436 level (where it held last week). The SOX (Philly Semi Index) closed on its low and support for this index can be found at 497 then at 490. The OSX (Oil Service Index) and the XOI (Amex Oil index) have broken their near term downtrend and look poised to move higher. The DRG (Amex Pharma) continued to explode to the upside on Friday, breaking above its resistance of 322, to close at 326. Watch closely to see if new money continues to flow into this sector because it will give us a good idea if a major sector rotation is underway. Lastly the XAU looks ready to move higher with spot Gold prices looking strong. Look for support at 100 in the XAU and we will find near term resistance at $400 in Gold itself. Good luck.

No positions in stocks mentioned.

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