Market Leader Focus: Materials, Techs, Energy

Two market worries this morning are declining fourth quarter earnings and deteriorating internals. Ned Davis, a respected market researcher, specifically pointed to the poor breadth this morning and told his clients "further caution is advised." The bottom line: market leadership is increasingly focused in some materials and techs, and a few energy stocks.

Volume has been disappointing, rallies usually due to lack of sellers rather than enthusiastic buyers. There is occasional bargain hunting in home builders and brokers, but they are usually a one or two day phenomenon, as witnessed by the downdraft in financials today, one day after a modest rally.

Balanced against these negatives are the fact that we are entering the seasonally strongest period of the year (November-December traditionally strong months), and the fact that the S&P 500 is still only 5% below its historic high, which was less than three weeks ago (Oct. 11).

AIG after the bell: The insurance giant has considerable exposure to collateralized debt obligations (CDOs), though most feel that any losses will be minimal. Remember, there is a particular type of CDO that is "toxic"--specifically, those that have subprime in the porftolio and is of a particular vintage (2006 and 2007); these have by far the biggest losses. AIG, according to UBS, has negligible exposure to this class.

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