After the first down week in ages, nothing refreshes like a look at the charts.
When they are all going up pretty much in unison, the charts do not have a lot of added value. But when we have a decline, particularly a midweek decline including an intraday calamity, they have terrific value. We can see what's gotten vulnerable, what's pulled back and ready to go, what's overextended and what's just plain old broken down.
For the record, I use the S&P's Trendline (hard copy) Daily Action Stock Charts, as I have for 26 years, hand delivered Saturday. They measure stocks using 30-week and 10- week moving averages and, while I am not a chartist, I always respect the profession, as Karen Cramer, whom I worked with for years and years, was a fabulous technician and she took these very same charts and generated a host of charts that she liked and didn't like and then told me to find research on any of them to come up with potential trading ideas.
I like to divide the charts among those I think represent pullback opportunities, those that seem overextended, ones that appear to be on the precipice, and stocks that are breaking down hideously. I then try to find patterns among them that can justify the depictions presented. Of course, not everything shoehorns, but often the buckets make sense because of specific group issues that have arisen into the selloff.
So, let's start with the best-in-show charts, looking for ones I think, to borrow a phrase from the old research department at the old firm that was Pru, are twice-blessed: good-looking chart matched up with intriguing fundamentals.
The best-looking group coming out of the selloff, BY FAR, is the banks, specifically the regional banks. I am struck by how so many of the regionals, Fifth Third (FITB), First Horizon (FHN), Key (KEY) (an Action Alerts PLUS name) Huntington Bancshares (HBAN) and even Wells Fargo (WFC) look. I think that's the tipoff that lending is coming back. Watch this group after Bernanke talks at 10:00 a.m. ET Tuesday on Capitol Hill. Given the immense number of downgrades and number cuts the group has withstood, there might be something bigger going on here than just the same old pat worries about shrinking net interest margins.
Second-best looking? The cyclicals, which were pounded hard last week over worries about China's newfound weakness (liquidity being withdrawn) as well as Europe's endless woes, including another dip down, this time in France.
Here the two most intriguing charts are from Manitowoc (MTW), which many know I believe will be split into two companies, food service and cranes, and Terex (TEX), the crane company that reported a subpar quarter. These are signs of commercial real estate progress, in keeping with the recent spike in architectural billings, an important indicator of future growth, and they buttress the beauty of the regional bank charts.
The other cyclicals that are strongest jive with the return of the truck business as a driver for industrial production after multiple months, such as Paccar (PCAR), Eaton (ETN), Parker-Hannifin (PH), Nucor (NUE) (steel used in trucks and commercial real estate as well as cars) and Cummins, itself the trucking king. We always want to see these stocks go higher because they portend a healthy commercial transport sector down the road.
Housing got crushed this week, something that was predictable because of how overextended it was going in to the Toll Brothers (TOL) report. I have railed several times already about how I didn't see the Toll report as being consequential at all, other than it showing tremendous strength. I think the market agrees because former darlings Sherwin-Williams (SHW), Stanley Works (SWK), Weyerhaeuser (WY) (an Action Alerts PLUS name) Newell-Rubbermaid (NWL) and Whirlpool (WHR) all seem tempting to me, with pullbacks precisely to where they are most compelling. I think this group, which reported among the best quarters, is still in the early innings because we are lucky if we build a million homes this year, which remains well below average.
Tech's also making a serious comeback here, one that has to be noted if only because we are all so transfixed by Apple (AAPL), and I have tried and tried hard to get away from that fixation as it has become a hedge fund/media parlor game.
Of these the most beautiful are two stocks that reported strong earnings and have fallen back on trend lines I believe will hold are Cisco (CSCO) and Oracle (ORCL). If you recall, Cisco truly had an excellent quarter and if CEO John Chambers had left it at that, instead of giving cautious commentary, I believe the stock would be headed back to $24.
Oracle's business is just very strong and while last week Hewlett-Packard's (HPQ) turn to shine, it is worth thinking about the fact that HPQ had been trying to nip at Oracle's heels when it comes to large-scale software and consulting and yet CEO Meg Whitman had nary a mention of that division.
IBM (IBM) ran and ran hard after it reported and it has now pulled back to levels that I think can support a further advance. Two worth noting for their out-of-synch natures are Western Digital (WDC), which remains incredibly strong despite weakened outlooks, and Cypress Semi (CY), a dog of a semiconductor company of late with a 4% yield and a fighting chance to do a ton of touch-screen business with all about Apple. If anyone has any insight into whether Google's (GOOG) Chrome touch screen uses proprietary Cypress technology, I would be be most grateful to find out.