Bottoms Up

Trying to pick key market turning points is tricky business. Downtrends usually end with something traders call "capitulation." You could also call it "surrender." When the last bearish investor sells his shares and heads to the sidelines, then stocks have nowhere to go but up. Did the last bear sell today? We don't know yet. There was a fairly substantial turnaround in the afternoon after a very weak morning. This suggests that many of the "weak hands" may now be out of the picture. If so, we may look back on November 8th as a day of capitulation, much like August 16th and March 14th. Unfortunately we do not yet have the benefit of hindsight to be sure.

There is a key difference in the past week's action that we are watching closely. Technology has been the strongest sector for several months now with only a few short periods of underperformance. At the same time, financials have been the weakest sector. Tech stocks, the thinking goes, have little or no exposure to subprime mortgage derivatives. This explains the relative strength of both technology sector funds and Nasdaq-based style funds, which tend to have a heavy weighting in technology and only minimal exposure to financials. In the last few days technology and financials dropped together. Financials were still weaker, but the difference shrank considerably. What does this mean? Maybe nothing, but it is a significant change.

Today's technology sell-off was sparked by news from Cisco Systems (CSCO), which said that a decline in sales to automotive and financial companies is curbing growth. So maybe the tech sector is exposed to subprime mortgage losses - but indirectly as its customers in that sector are forced to cut spending. One day and one company does not make a general trend, of course. We will watch carefully for more signs of change.