Sector Analysis: Storm in a Teacup

 
It was the 20th Anniversary of the 1987 stock market crash last month, and the last two to three weeks have been quite fretish. For those who are unfamiliar with the events of Black Monday, a quick history lesson. On 6 October 1987 the SPI made its final move to the top and then failed and ran down 1333 points to find a low on 11 November 1987.

This move took away approximately half the value of the SPI. A decade later on 2 October 1997, the SPI hit a high and then ran down 617 points to find a low on 28 November 1997.

The point here is straightforward: October of any year is a month to watch for a change in trend, but October 2007 is especially significant. However events have not been as exciting as they might have been. Are we still expecting a major correction – even into November? Many people took profits in October in anticipation of a correction, and we have seen pronounced volatility. But sellers have turned back into buyers and an upwards trend is under way.

Chart 1 illustrates four sectors that have been trending very well from the August 2007 lows: Materials, Energies, Financials and Industrials. These sectors have shown the strongest rallies and are the ones, of course, to scrutinize for opportunities and good buying signals.

Chart 1 – Sector Analysis Daily Bar Chart

click here for more detail

Recent market action seems to indicate that the bulls are back in control. For the bullish among us, this opens the gates. We can with trade with the trend rather than against it.

The US Fed meets again at the end of October for a review of interest rates. The question weighing on the markets is, will they or won’t they lower them? In early November the RBA will also sit for interest rate discussions. Will we see a rise in Australia? Historically the answer has been no, but as we have seen history does not always repeat.

How this will pan out remains to be seen. Whatever the case, the market will keep trading. It is important to keep an ear to the ground but also to remember that the truth lies in the charts, not in media speculation and the like.

Keeping the Dream Alive

David Dixon
Trading Tutors Team