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Are Leading Sectors and Economic Data Signaling Market Top?


Investors are conditioned right now to buy up every pullback. The support ledge had better have some super glue on it.


Minyanville is happy to welcome Gary Kaltbaum to our roster of contributors. He is an investment adviser with over 25 years experience, the author of Gary K's Equity Trading Setups newsletter. Mr. Kaltbaum is also the host of the nationally syndicated radio show "Investors Edge" on over 50 radio stations.

In the past, I have mentioned that the economy may have topped. This thought came from my own research but also by the fact that the whole commodity sector had broken down. This past week, we finally started to get economic numbers that I thought were coming... and they weren't pretty. I stand by the opinion that the feeble economy has already topped. But that doesn't mean the market has to break down. In fact, so far, despite a decent amount of deterioration underneath the surface, the major indices continue to hold support and/or moving averages. But markets remain on the ledge, and I do not think it will take much more deterioration. If we see a clean break of support/moving averages, I suspect we could see something akin to last May where major averages were hit for 12-20% losses depending on which index.

In recent reports, I have discussed the tops we have seen in several important areas. For starters:

Commodities of all stripes have broken support and on volume. Rallies have been fleeting and anemic. It is these commodities that had analysts stating the economy was fine because higher commodity prices meant strong demand. What do they say now? The good news about all this is that the consumer gets some relief at the pump as well as the store.

Financials continue to act like it is '07 all over again. Back in '07, financials labored badly when markets were rallying and led the market down when they corrected. Have you seen the action in Goldman (GS) lately? The rest do not look much better. Financials have always been an important cog in the wheel for the markets. To be watched closely!

Defensive Stocks
Defensive issues have led. Food, drugs, tobacco, beverages, utilities, and medical stocks have all had the bid... signifying a slowdown. These are all defensive, recession-resistant areas.

That leads me to retail. Most of this sector had been acting fine... until late last week when retail came under significant heavy volume selling. To be clear, I do not think the markets can take too many other important sectors breaking down. This must be watched.

Foreign Markets
A few important foreign markets look to have topped before us. India, China, Brazil and other emerging economies may be tracing out broadening tops.

Lastly, I have been less than thrilled about the too-many IPOs, leading to the frothy one by LinkedIn (LNKD). I have been less than thrilled about the too many secondaries. I have been less than thrilled about overly bullish sentiment leading one well-known prognosticator to call for S&P 2600 by 2013. Yeah... that's the ticket! I have been less than thrilled by all the buyouts we have been seeing. I have been less than thrilled at the low cash levels in mutual funds. All this bullish sentiment activity does not happen at bottoms.

The 50 day moving average/support levels to watch:

  • Dow 12,378
  • S&P 1319-1327
  • Nasdaq 2759-2777
  • NDX 2320-2340.

The NDX and the NYSE are currently sitting right around support. The transports are better than most. Keep in mind, just breaking these levels does not mean the end of the world is coming. But I must note, I believe investors are conditioned right now to buy up every pullback. The ledge had better have some super glue on it.

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No positions in stocks mentioned.
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