Trader Talk

Where's the Market Floor?


Stocks are weaker with good reason, but don't get fooled: Most traders believe there is a floor under the market.

Blame it on high gas prices, blame it on whatever you want, but the July Michigan consumer sentiment was a surprise, with sentiment, economic outlook, and present conditions all weaker than expected.

Traders regularly poo-poo consumer sentiment, since it often does not match consumer spending.

But professional traders cannot afford this gamble, because they have bought heavily into the summer rally.  They have particularly bought into a rally in the classic cyclical groups--industrials, commodities, REITs, housing.

Bottom line:  Professionals are--rightly so--taking some profits in these sectors after an immense move in the last month.

I said SOME profits.  Fact is, volume is seasonally light, so there is no avalanche of selling going on.

And the betting is still that there is a floor under the market, that any notable drop in the market will soon be met by buyers who missed the summer rally, eager to scoop up stocks at lower prices.

The higher volume (higher than the rest of the market) plays today are in the ETFs associated with cyclicals and commodities:  the Xinhua China 25, the Brazil Index, and the Materials Index .

Look what the classic cyclical sectors have done since the summer rally began July 10:

Housing     up 36.5%

Banks        up 32.1%

Materials    up 22.0%

Industrials  up 18.0%

REITs        up 30.7%

Retailers    up 16.6%

And how they have outperformed more defensive names:

Drugs          up 6.9%

Telecom      up 6.0%

Consumer staples up 4.9%



Questions?  Comments?