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Jeff Saut: Taking Commodity Convertibles Out for a Spin


Archer Daniels, Bunge, Freeport all worth watching.


Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

John Murphy of recently noted:

"The S&P 500 ETF moved to a new high in October 2007, but this new high was not confirmed by 2 key sectors. I consider the consumer discretionary, financial and technology sectors the most important to overall market performance. Think of it in terms of Dow Theory. If the Dow industrials move to a new high, then the Dow transports need to confirm with a new high of their own.

"Instead of the Dow Transports and the Dow Industrials, substitute these 3 sectors to confirm or refute broad market moves. When the S&P 500 ETF or one of the key sectors moves to a new high, it should be confirmed by the other sectors. Failure results in a non-confirmation that shows underlying weakness.

"...The S&P 500 ETF and the Technology SPDR (XLK) moved to new highs in October 2007. However, the Financials SPDR (XLF) and Consumer Discretionary SPDR (XLY) did not confirm with new highs. Instead, both formed lower highs and showed relative weakness.

"Since October 2007, there have been 2 more non-confirmations from the Financials SPDR. XLF failed to confirm [the upside] in March 2008 and again in January 2009. The financial sector remains the Achilles' heel of the stock market."

On November 27, 2008, I noted the Dow Theory sell signal of November 21st. More recently, I was hopeful that a Dow Theory buy signal would be registered when and if the DJIA (8281.22) closed above its November 4, 2008 closing high of 9625.28, and confirmed by the D-J Transportation Average (TRAN) bettering its like high at 4071.81. For that to happen, the financials needed to stop going down.

Obviously this just hasn't occurred, with most of the financial-centered indices getting eviscerated last week, and in the process traveling below their respective December lows.

Click to enlarge

While the December Low Indicator doesn't really apply to anything but the DJIA, such action by the financials can hardly be good.

Interestingly, despite the Dow's 3.7% weekly wilt, it still didn't breach its December closing low of 8149.09. The S&P 500, however, did travel below what I deemed its "Maginot Line" at 851, which now becomes overhead supply (read: resistance); that breach stopped me out of most of my "long" trading positions. Still, since I was traveling late last week, I have yet to hedge the investment portfolio for the downside.

Indeed, the violation of that Maginot Line caused the S&P 500 to quickly decline to 817.04, which was marginally above its December low closing price of 816.21, before rallying back into its overhead resistance zone at 846-856 last Friday. If the SPX's December low continues to hold, it could be construed as some kind of successful downside retest. However, there's now formidable resistance between 862-867, and it would take a move above 886 to turn my indicators more constructive.

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