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Breakfast with Brodsky



Good morning. Yesterday brought a bit more excitement into the marketplace. Instead of the recent grinding down all day, we actually had some intraday volatility. We rallied off the open, traded back down to the daily lows, held, and then moved higher into the close. The NDX had its first test of the 1450-ish area, which is where we broke out from back in December. Looking at charts of not only the major indices but many stocks, one has to begin wondering what side the risk/reward ratio is skewed toward.

I am not calling for a bottom, or saying that the five-week downturn may be drying up. All I am noticing is that perhaps the easy money on the short side may have been made. As we venture down into the 1450 area on the NDX, the 1135-1125 area on the S&P, and the 10,500-10,400 area in the Dow, we could see demand enter the marketplace.

One thing that was different about yesterday's trading session was that we saw negative news being bought for the first time in a while. The consumer confidence number came in below expectations and while the market did not close on its highs, we certainly had a bid to the tape throughout the day. The theme over the past few weeks has been selling good and bad news. Companies that reported good numbers or news were being sold (Applied Materials (AMAT:NASD), Broadcom (BRCM:NASD)) which told us that the market was priced to perfection. Between a possible change in bias (buying bad news) and the markets starting to enter into support zones, we may see a pick up in trading volume which would signal to me that it could be time to buy some beaten down charts.

I mentioned support areas in the three major indices that could bring demand into the marketplace. Looking at some sector indices we may get an indication of what sectors could see positive money flows and which ones could cool down a bit. Looking at the Amex Biotech index (BTK), we see that it is setting up to test the trend line, which it has held since mid-November. A break of that line could send supply into the sector. Look for 520 to act as support and a trade above yesterday's high of 535 could push this index back to its highs. The SOX has been out of favor for weeks now. All rallies in this sector have been met with selling and there has not been much demand for these names. Looking at a weekly chart of the index, we can see the incredible move up it experienced over the past year. The index does appear to be setting up for a test of its weekly trendline of 490 but this index may need more time before it is ready to push higher.

Looking at the Bank index (BKX) on a weekly chart, we see quite a dramatic run. In my opinion, one of two things need to happen here. We either need to correct by price or time. While it is true that many banks lead (because they comprise a large percentage of companies within the S&P), we may not be seeing much action here for the next few weeks.

Recently, there has been a lot of talk on the subject of oil. I have been receiving emails about the possibility of $3 gallons of gasoline, the NY Times profiled the fact that Saudi oil fields may not have the reserves that were stated by the "government" over there (surprising because they are so honest all the time) and it has been given more lip-service by many on TV. Now, I am not an expert on oil but these issues have been around for a while and have not been a secret. Anyone that has not realized that with many economies around the globe picking up (China, India) we would have increased demand for oil, is simply in denial. Bigger demand plus stagnant oil supplies, or even decreasing supply implies higher prices in this area.

The question now remains, is this priced into oil and energy names? Looking at the OSX, we can see the index has had quite a move since early November (+30%.) Is the index just getting started? Looking at the OSX weekly chart, we do see it is bumping up against a descending trendline that extends back to the 2000 peak. One thing is for sure, this index is in an uptrend and we could continue to see positive money flows here.

Lastly, the consumer staples (CMR index), which have been attracting money recently, may need some time to correct. This could come in either price or time but to me the important thing here is that money may not flow as aggressively into these names. As this index cools we could see a pick up in other more speculative areas. Good Luck.

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No positions in stocks mentioned.

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