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Breakfast with Brodsky


Good morning. January came to a close last week and for all of you that subscribe to the old adage, "As goes January, so goes the year," it seems we may be headed for a flattish type year. This goes along with my hypothesis that the coming year will provide us with more opportunity on the long side than on the short to make money, but it will be much more sector and stock specific as opposed to the broad market rally we experienced in 2003.

We continue to see massive amounts of money flowing into mutual funds, deals are taking place, and with money so cheap right now, you are almost being penalized for not putting it to work. So where can we look to put money to work? What are going to be the areas that may attract the most money? Why is it that people think that just because the NASDAQ rose by such an incredible amount last year, that tech is dead? Why do people think that if the Fed hikes rates we will immediately plummet? I guess it is thinking like that, that has caused the market to generally RISE during the first six to nine months of a fed rate hike cycle.

I guess it is people's propensity to want to call a top rather than look at what drives a market. There are companies that have reported earnings, risen in price and are now cheaper than they were before they reported! How is this possible? With their new guidance, a company that reported and is trading a few dollars higher could in fact be less expensive on a fundamental basis. Now I am not a fundamental analyst, but these are the companies that are driving this market. These are the companies that will attract investors and will provide solid returns. So before you listen to a bear case that things are "so overvalued" look a bit closer to see if that is really the truth. Just because stock XYZ (fictional ticker) was trading at $70, then reported earnings and is now trading at $78, does not mean it is too expensive. Look and dig a little deeper before you listen to some of these bears. Just some food for thought.

The S&P was able to hold its ground in the second half of the week although we still need to look at the support and resistance levels closely. Near term support for the S&P can be found at 1127 and then at 1121. The S&P closed right above its trendline (connect the lows from Nov, Dec and last week) at 1131. If this line is broken the market could sell off down to the 1121 area. The Dow could also see lower prices if the lows (10,420-10,440) are broken. Look for the next level of support to come in at the 10,315-10,370 area.

The NDX has been putting in some work at its current support area of 1490. This level represents a 38% retrace from the low on 12/16 to the high on 1/20. If this level is broken, look for the next support area to come in at 1470, which is a 50%, retrace of that same time frame. Resistance is Friday's high of 1505.

The BTK (Amex Biotech) seems to be tracing out a nice consolidation pattern after running from 470 to 530 last month. The consolidation channel's resistance is at 522 and support is at 508. If either levels are broken the index could run in the same direction. The SOX (Phil Semi) is attempting to hold its 50-day (515) which also happens to be a 50% retrace from the 12/16 low to the 1/12 high. A trade above Friday's high of 517 could push this index higher. Look for support in the 505-511 area.

The CYC (cyclicals), which has been on an incredible run, continued its pullback on Friday but seemed to be stabilizing a bit. The index is approaching a support level that is a convergence of a trendline connecting the Sept. and Nov. lows, its 50-day MA (661) and a 38% retracment level. This band, which is in the 660-670 area, could provide a nice support level. The HGX (housing) closed near the bottom of its trading range, which it has been in since October. On a weekly chart we can see that 346-350 is a strong support level and this level should be looked at carefully.

The NWX (networking) has retraced 38% to 300, which is where it held on Friday. A break of this level could push the index down to the 288 range. Look for resistance to be in the 307 area. The XAU (Gold/Silver) continued to trade sloppy but it held the 95 level. A break of this level could push the index down to the 90 range. Good luck.
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