SECTOR AND GLOBAL ROTATION VIEWS ARE PART OF MARKET ANALYSIS -- RECENT ROTATIONS AND MARKET SIGNALS HAVE WARNED OF GLOBAL CORRECTION -- DURING AN INTERMEDIATE DOWNSIDE CORRECTION, SHORT-TERM TRADERS SHOULD BE SELLING BOUNCES NOT BUYING THEM

SECTOR ROTATION STRATEGIES ARE PART OF MARKET ANALYSIS... Given all of the warnings sounded by Arthur Hill and myself since mid-January, I was somewhat surprised at some e-mail messages I received today. One reader accused me of focusing too much on sector rotation strategies and ignoring the broader market. A short-term swing trader chided me for not making more of the two-day oversold bounce that ended yesterday which cost him some short-term profits. Let's start with the sector rotation question. It's not possible to separate sector rotation from a broader market view. We've repeatedly shown over the last month a notable rotation out of former market groups like technology (which often falls hardest in a market correction) and into healthcare (which usually leads near market tops). I've warned that that rotation was reflective of a more defensive turn in the market. I also did so to suggest some safer places to put some money in the event of market downturn. Although healthcare is losing some ground, its losing a lot less than most other groups. Chart 1 shows the Technology SPDR (red line), S&P 500 (black line), and Healthcare SPDR (blue line) trending in the same general direction since March. Chart 2 shows how those two sectors have acted "relative" to the S&P 500. Technology, which led the market higher last year, is leading it lower this year. Healthcare, which underperformed last year, is this year's top gainer. There are two messages from those charts. One is to rotate out of economically-sensitive technology stocks and into economically-resistant healthcare. The other message is that the stock market is entering a downside correction. That's why sector rotation charts and strategies are linked with an overall view on the market.

Chart 1

Chart 2

GLOBAL ROTATIONS HAVE ALSO BEEN NEGATIVE ... I've also used global rotations in various financial markets to warn of market problems. A January 12 message entitled "Chinese Bank Tightening Worries Global Stocks and Commodities -- Another Worry is that Chinese Stocks are No Longer Leading the Rest of the World Higher" was followed by a January 26 message with the title: "China Leads Global Retreat -- Intermarket Reversals Raise Warning Flags -- Market is Oversold Short-Term -- But Weekly MACD Lines Have Turned Negative -- That Increases Odds for a 10% Correction". A January 28 message headlined: "January Rotation Out of Emerging Markets and Basic Materials and Into Consumer Staples and Healthcare Shows Move Away from Risk to Safety -- Technology is Pulling Rest of Market Lower -- Daily EMA Lines Turn Negative and Weeklies Weaken -- That's Indicative of an Intermediate Correction of at least 10%". A second January 28 message was "The Dollar isn't the only Safe Haven Currency -- The Japanese Yen has been even stronger during January -- The Yen is also turning up relative to other global currencies in unwinding of carry trade and move to safety". The point of repeating those headlines is to show that my style of analysis is to blend intermarket rotation strategies with traditional technical market indicators. As an example, Chart 3 shows Chinese iShares (red line) falling "relative" to the Dow Jones World Stock Index (flat black line) since last November. The blue line shows the Japanese Yen rising versus global stocks since the start of 2010. Both are warning signals of a global correction. And that's the main theme of most of my market messages since the start of the new year. I don't know how someone can accuse me of ignoring broader market trends.

Chart 3

SELL RALLIES IN A DOWNTREND... I addressed a group of short-term traders a couple of weeks ago. While they were studying intra-day and daily charts to time their short-term trades, I warned them that they had to take longer-range trends into consideration. Short-term buy signals work fine when the market is rising (as it was for most of last year). However, short-term buys don't work when the market enters an intermediate downside correction (as it appears to have done). In that environment, it doesn't make any sense for short-term traders to try to catch minor bounces. By contrast, I suggested that they should be selling bounces short for the time being. Chart 1 shows the S&P 500 having broken its 50-day moving average a couple of weeks ago. That turned its short-term trend lower. Sell signals in weekly MACD lines have turned the intermediate trend lower. I've stated my expectation for an eventual drop to the early November low (1029) which would be a drop of approximately 10% from the January high. Let's study the "hourly bars" in Chart 5 to see the bounce that the short-term trader is mad about missing. From its January top at 1150 to its late January low at 1071, the S&P 500 lost a little over 6%. The two-day bounce that started last Friday was 3% and has been entirely lost over the last two days. It turned back down after regaining 38% of its January drop. Instead of buying that 3% bounce, a short-term trader would have done better selling into the rally with the potential of another 6% drop to the November low. That's why I didn't make much of the rebound and why a short-term trader shouldn't have either.

Chart 4

Chart 5