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Ask The Analyst, Sunday, 06/01/2003

Market, sector, stock, and a March 16 review
By Jeff Bailey

Jeff: It's been awhile since you've discussed some of the sector distributions and with the major market bullish percent indicators all at overbought levels, what sectors or stocks might we be looking at from the short side of things?

This is a good question, and perhaps a very timely one. I don't save all my e-mail and I'm not sure if the above e-mail is from the same trader/investor that stimulated a prior discussion on the point and figure methodology back in mid-March, but I agree, it has probably been too long since we've discussed the various sector bullish percent, that some traders have come to know and love.

Wow! Does time fly and can the markets move! It was back on March 16, 2003 when we last looked at the "sector bell curve" bullish %, with the sector bullish percent from Dorsey/Wright and Associates, and perhaps just when that column was thought to be "timely," this week's question from a fellow trader/investor is perhaps a great time to review, assess, and make some plans.

Is it true that a rising tide will lift all boats, when it comes to thinking out price action and cycles for markets, sectors and stocks?

Can it be that a MARKET simply fluctuates up and down as risk is built in and taken out of a market, sector, or stock?

Traders may want to go back and review the March 16, 2003 Ask the Analyst column titled "Market, sector, stock, with bullish percent distribution," as I think both of the question just posed may well be answered with a resounding YES!

That was then... this is now

In order to keep from having to flip back and forth between the article you're currently reading and the March 16, 2003 column, I'm going to take the exact same sector bell curve graph I showed that day, with certain remarks still intact, and we'll take a little trip to current day. As we do this, we'll follow the sector bullish % action, and then look to see if there are some sectors traders may be looking to trade, from the bullish and bearish side of things.

March 16, 2003 Sector Bell Curve

I'll try and recap some of the observations made March 16, 2003 from left to right. Let's start with the observations made as it relates to RISK with the Wall Street Bullish % (BPWALL) and Dow Industrials Bullish % ($BPINDU). I'm going to associate the Wall Street bullish % with the Securities Broker/Dealer Index (XBD.X) which had closed at 360.53 on Friday, March 14th. The Dow Industrials finished their Friday trading session at 7,859.71. Did bears have a high degree of risk at such "oversold" levels?

The Semiconductor Bullish % (BPSEMI) had evidently just reversed back up into "bull confirmed" status. On March 14th, the Semiconductor Index (SOX.X) closed at 305.15 and the popular Semiconductor HOLDRs (AMEX:SMH) closed at $23.98. Was a "bull confirmed" status at an "oversold" level an alert that the NASDAQ-100 Index Bullish % ($BPNDX) might be expected to reverse and give confirmation to the semiconductors? Take note! A sector reversing up into the MOST bullish phase "bull confirmed" from an "oversold" level below 30%! While BULLISH traders lick their lips for such opportunities, BEARISH traders look for "bear phases" that develop from more "overbought" conditions after a bull cycle move.

Now... take special note of the Internet Bullish % (BPINET) and observations of a sector's internals "holding steady" when many sectors were still falling or moving to the left of the bell curve. This was DIVERGENCE as internals held STRONG despite a MARKET that was or had been moving lower, or to the left. The CBOE Internet Index (INX.X) closed at 94.60 on March, 14th. The Internet HOLDRS (AMEX:HHH) closed $27.79, the Internet Infrastructure HOLDRS (AMEX:IIH) closed $2.33, while the Internet Architecture HOLDRS (AMEX:IAH) closed at $25.75 on March 14th. Did the DIVERGENCE pan out for bulls?

The Saving and Loan Bullish % (BPSAVI) was correcting from a bear confirmed status at "bear correction" and while RISKY above 70%, was showing remarkable levels of bullishness in what had been or was a bearish market environment. There isn't a sector that I know of to trade, but a "popular name" in Washington Mutual (NYSE:WM) had closed at $33.53 on March 14. I don't know if any of the mentioned "reasons" why the sector was holding up actually came into play, but we'll look to see if any of the observations above panned out.

Move forward, with a shift to the right!

To better understand what has happened and how we have gotten to where we are, I think it is helpful to try and look at things step by step. Here a March 24, 2003 sector bullish % I put together along with comments as it related to a comparison against the above March 16th sector bell curve. This was posted in the Market Monitor on March 25, 2003 at 01:18:13. The comments were "Look for leadership groups that are the FIRST to reverse up from oversold levels below 30%, or those sectors turning bull confirmed. Can see how sector bell curve begins to shift to right."

Now, when you look at the sector bell curve, take notes as to the change in "colors" of some sectors and major index bullish %.

BEARS! Take note! Not of what happened, but what you'll want to look for as it relates to the future!

March 24 to March 14 Sector Bell Curve Comparison -

Six trading days had passed between the above sector bell curve comparisons! We could see a light "shift to the right" and some removal of RED, or "bear confirmed" to either "bull alert" or "bull confirmed."

Starting from the left, you bottom feeders may have traded some partial positions when the Broker/Dealer Index (XBD.X) was trading at 400.00 that day.

The Semiconductor Bullish % (BPSEMI) did indeed move above the 30% level with the SOX.X trading 325.

The NASDAQ-100 Bullish % ($BPNDX) from was indeed showing some "internal confirmation" as it moved to the right in the sector bull curve and status had reversed from "bear confirmed" to "bull alert".

The Internet Bullish % (BPINET) still appeared stuck, but the CBOE Internet Index (INX.X) itself looked to be moving higher at 102.00.

Maybe the Retail Bullish % (BPRETA) caught a bull's eye and the Retail HOLDRS (AMEX:RTH) at $72.48.

I won't go through all the sectors, but you should be getting the idea of a "rising tide" and then monitoring for sector leadership, from which individual stocks, with strong relative strength can be identified.

For a discussion on RELATIVE STRENGTH, we discussed one technique in a December 29, 2002 Ask the Analyst column titled "Relative strength, but with X's and O's."

Onward and upward, with a slight shift to the right!

Let's fast forward some more and look at a sector bell curve after the conclusion of trade on March 28, 2003. I posted the following chart in the Market Monitor on March 29, 2003 at 01:25:30.

March 28, 2003 Sector Bell Curve -

Comments from that day's Market Monitor post were... "The Sector Bell Curve showed modest bullishness this week. Restaurant (BPREST) and Healthcare (BPHEAL) both reversed back up into "bull confirmed" status this week, with Protection/Safety (BPPROT) reversing up from "bear confirmed" to "bull alert."

One stock I've discussed in the restaurant sector in recent weeks and had mentioned as "bullish on a break higher at $26.00, on March 28th in the 11:00 AM EST update was Yum! Brands (NYSE:YUM). On March 28th, the stock was trading $24.77 and a trade at $26.00 would have the stock trading a "triple-top buy signal" and also have the stock breaking above its longer- term 200-day SMA.

That same 11:00 Update, I made special note that I had previously profiled a "healthcare" / "drug" related stock McKesson (NYSE:MCK) and that it probably best for bears holding short/put, "move to the sidelines" and close out the position as it was my belief, based on past observation, that a rising tide in a sector and MARKET tends to lift all boats. MCK was trading at $25.36 in that March 28, 2003 11:00 Update.

On April 4th, the sector's weren't fooling!

Moving forward, here's what the April 4th sector bell curves were doing. This chart was posted in the Market monitor on April 4, 2003 at 10:12:37 PM EST.

April 4, 2003 Sector Bell Curve -

Things were really starting to get "green" and a more pronounced shift to the right was being seen from the sector bell curve. The results of sector bullishness had the broader S&P 500 Bullish % ($BPSPX) and VERY broad NASDAQ Composite Bullish % ($BPCOMPQ) now turning "bull confirmed." The narrower NASDAQ-100 Bullish % ($BPNDX) was on the move to the right in the 52%-56% bullish.

Warp speed to today!

Traders/investors should now have a pretty good grasp of what was taking place. Let's go warp speed and to get the full perspective of how things have changed, let's compare how the sector bell curve looks TODAY (May 30, 2003) and when we began this exercise, with the March 16, 2003 bell curve.

May 30, 2003 and March 16, 2003 sector bell curve

Wow! There's a lot of "green on the screen" and a pretty good "shift to the right" has been seen.

With the major indexes now at either relative highs dating back to December of 2002, it continues to amaze me how/when the MARKET suddenly, but with notice, will systematically have the sectors and indexes shifting left to right as it relates to RISK. At some point, but with notice, the higher levels of RISK will be removed, in systematic fashion.

As it currently stands, I don't see any sectors/indexes at this point that are exhibiting any weakness as it relates to their internals as depicted by the bullish percent indicators.

Oh... there are some sectors/indexes that will be "ripe" for a pullback, especially those that have moved from "oversold" to "overbought." It would make sense at some point that the "smart money" that bought the lower risk levels, will eventually find the "smart money" selling at the higher risk levels (from bullish perspective).

But just as we've seen the sectors move from left to right, trader/investor once again see how that sector action moves the major market bullish % like ($BPCOMPQ, $BPNYA, $BPSPX, $BPOEX, $BPNDX) have moved right with the SECTORS driving the bullishness.

At some point, the opposite will be true and it will be the BEAR that picks up on the weakness, will look to attack that weakness first.

Just as a sector drives MARKET action, it will be a weak STOCK, in a WEAK sector that best offers a BEAR and easy meal.

Still, we should understand just how a "rising tide tends to lift all boats and currently, a BEAR that finds a weak stock, must be aware that there are probably more and more bulls just showing up to the party and looking for "cheap" stocks. There's also some BEARS that have seen enough losses mount since March, to be quick to cover another potential loss as he/she can't afford another hit to their account.

I ran a stock screen using Dorsey/Wright and Associates Point and Figure charting system.

As a preliminary scan, I entered the following screen criteria, to try and identify bearish candidates. This stock screen was very basic, but held the MAIN indicators I look for to begin finding WEAKNESS.

Price between $20 and $100
Stock trades with options
Relative strength chart is sell (longer-term under performer)
Relative strength chart is O (intermediate-term under performer)
Trend is negative (stock traded below bearish resistance trend)
All Sectors
Sort by sector

(Note: Price, Options and All Sectors no a bearish criteria).

This basic bearish search produced 100 stocks.

BPAERO (Aerospace/Defense/Airline) : (BA, DRS, GD, HON, TGI)
BPAUTO (Automotive) : (AXL, GM, TM)
BPBUIL (Building) : (MLM, TXI, YRK)
BPBUSI (Bus Pdcts) : (ADP, DNY, HEW, TXT)
BPDRUG (Drug) : (BMY)
BPEUTI (Elec. Util) : (AEP, POM)
BPFINA (Finance) : (IFIN)
BPFOOD (Food/Bev/Soap) : (CPB, MOND, RJR, TR)
BPFORE (Forest/Paper) : (BCC, KMB, PCH)
BPGUTI (Gas Util) : (GAS)
BPHOUS (Househld Gds) : (MYG, SNE)
BPLEIS (Leisure) : (EK)
BPMACH (Machinery) : (CR, DOV, HIT, PH, SPW)
BPMEDI (Media) : (SCHL)
BPOIL  (Oil/Gas) : (AHC, KMG)
BPOILS (Oil Serv) : (BHI, DO, NE, RIG)
BPPROT (Protect) : (INVN)
BPREAL (Real Est) : (AIV, RA.B)
BPREST (Restaurant) : (CEC, CPKI, JBX, KKD, LNY)
BPRETA (Retail) : (ABS, CVS, KSS, MAY)
BPSEMI (Semicon) : (DPMI)
BPSOFT (Softwre) : (INTU)
BPTRAN (Trans) : (USFC)
BPWALL (Wall St.) : (AGE, LAB)
(Disclaimer: The following list of stocks was generated using a general search criteria and is not meant to imply a recommendation for or against that stock.)

Observations: Computers, Chemical and Insurance seem to have more stocks in the list than others right now. Even under such BULLISH market conditions.

Well.... It's late Friday evening and it has been a rather "long" week for all of us.

I hope you found this article helpful, in perhaps understanding how the sector and major market bullish % tend to move from "oversold" to more "overbought" levels.

It never ceases to amaze me, how BULLISH a move can become and continue to be, but how helpful the sector bullish % can be, in actually seeing the market internals strengthen, and.... eventually weaken. I've also been amazed at how BEARISH a move can become and continue to be.

I will continue to monitor the sector bullish %, and try and alert traders to any reversals in the various sectors listed above.

If we as traders/investors think the above display of "sector bell curve" movement only takes place to the upside, then revisit the March 16, 2003 Ask the Analyst article "Market, sector, stock, with the bullish percent distribution.

Better yet! Dorsey/Wright and Associates offers a FREE trial to their point and figure database. I (Jeff Bailey) nor or receive any fee from any subscriptions Dorsey/Wright and Associates receives from our subscribers.

Once you've signed up for your free trial, you should be able to make some sector bell curve comparisons of your own by clicking the "Database" tab, then in the "Database Reports" area, click the "Sector Bell Curve" link.

You may note that Dorsey/Wright will change their horizontal scale from time to time for their sector bell curve ranges. When you look at their current horizontal scale, it will be different that what I've shown in the prior sector bell curves, as I am limited on the width I can display on the web sites. That's OK though! The point of all this is to understand how to use the sector bell curve to identify sector/market strength and weakness.

Jeff Bailey

This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy.


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