Simplespread

An analyst recently bemoaned how momentum just wasn't working anymore. Rallies run out of steam and selloffs dissolve into nothing. Well, he's right.

Since the middle of May, the Dow Jones Industrial Index is down 1.27%, the S & P 500 Index is up 0.05%, and NASDAQ is down 4.39%. We call it the "summer doldrums." Indexers are wasting money. They'd have done better in their local bank's CDs.

While it's true that the stock market goes up, down, and sideways, it's also true that any investor who wants to be a long-term player needs to be able to operate successfully in all three conditions. John Kenneth Galbraith (and others) quipped that "Genius is a bull market." Yes, in a bull market, you have to really work hard to lose money. But what about the other two stock market environments which will visit you in the coming years? Can you survive them long enough to be alive for the easy next bull market?

Unfortunately, most of what is made during bull markets is given back during succeeding bear markets. That's why all our work here at the Simplespread Institute implies or contains the phrase TAKING IT OUT OF WALL STREET. It isn't yours unless you've gotten it safely put away from Harm's Way.

We believe in being ready for anything. We also freely admit that we are unable to predict when one type of market turns into another. By the time bulls admit they've been eaten by the bear, much of their money has been lost on the long side. Then, by the time bears admit they've been trampled by the bull, much of their money has also been lost on the short side. And by the time both bulls and bears get worn out by frustrated attempts at rallies and declines, they have just about been wiped out.

Throughout stock market history and during all three types of markets, stocks in strong industries have outperformed all the rest of the stocks (see pages 61-108 of Dr Simplespread and Rule 23 and Rule 77 of 80 Rules). Real momentum is present in all markets. Even during the horrific selloff bookending 9/11 (August 2000 - August 2002), almost half of the industries rose in value, including Auto Dealerships up 150%, Auto Parts Stores up 143%, Residential Construction up 82%, Gold up 42%, and so on. The major averages didn't fare so well: the Dow Jones Industrial Average was down 22%, Standard & Poor's 500 Index was down 39%, and NASDAQ was down 67%. We won't even bring up the disastrous Internet Service Providers being down 97%!

Yes, it's a market of stocks, and those investors who dwell in mutual funds or invest with the various indexes will frequently find themselves frustrated by lack of momentum, or even worse, a reversal of momentum.

Memo to above analyst: Since the June bottom, Silver is up 39%, Independent Oil & Gas is up 22%, Gold is up 21%, and Oil & Gas Refining/Marketing is up 18%. That's not bad for a couple of month's work. And it's plenty of momentum too.

So, stick with the strong stocks in the strong industries and sectors, and you'll have all the momentum you need...when you need it.

We don't know if it is just Otis Redding's Sittin' on the dock of the bay...wastin' time... or Carly Simon's Anticipation is keepin' me waitin'... But whatever it is, it's coming to a head. We can't keep flipping back and forth between run-ups and run-downs very much longer. As Old Blue Eyes warned us, "When an irresistible force ...Meets an old immovable object...You can bet just as sure as you live, Somethin's gotta give." And it will.

Tobacco continued its reign at the top of the list. Energy climbed back up to the #2 position on the strength of oil bouncing off $70 support. Metals & Mining stood fast in the #3 spot. Defensive candidate Food & Beverage looked good in the #4 position. And Utilities, another defensive sector, rounded out the Top Five at #5.

Real Estate moved up to the #6 position, with investors looking at cash flow rather than cash gains. Media spent its second week in the Top Ten, coming in at #7. This badly bruised sector is looking better than it has in quite awhile. Aerospace/Defense slipped to the #8 spot. Automotive hung in there in the #9 position...barely. Drugs rounded out its fifth straight week in the Top Ten - looking better and better all the time at the #10 spot.

With market leadership concentrated in the defensive and natural resource sectors, you have to wonder what the rest of the economy is doing. Medical, Media, and Communications are showing strength and may be getting ready to take the lead away from those sectors that have shepherded us through a lackluster summer. One thing is certain about the market - it's going to change, one way or the other.

This past week saw anything connected with consumer discretionary spending getting whacked. The question always arises of whether the stock market is discounting future economic conditions, or whether future economic conditions are affecting current financial conditions. The argument goes on unabated and will never be settled.

These are dangerous times - not only geopolitically, but also financially. A changing of the 'old guard' leadership usually implies some dislocation - either to the upside or the downside. We don't look into the crystal ball very often, preferring to let the various sectors to tell us what to do. There are times when things look so good that you can afford to be comfortably aggressive, and then there are other times when it appears that dark clouds are all over the place. This is one of those times. But there will always be new opportunities later for those still in the game.

Although we might expect some strength as we go into the end of the month (window dressing, as they call it), it pays to play your cards close to your chest and keep your powder dry.

Sector	25Feb06 to 25Aug06	Week of 25Aug06	Visual Chartist Commentary
Tobacco	+17.92%	-0.02%	Nothing new to say.
Energy	+8.61%	+0.88%	The charts aren't that encouraging. All areas of the complex are going through their most lengthy consolidation or topping action since their run began some 4 years ago. Of course, hypothecating about Oil and Metals with the world sitting on a powder keg that could go off at any time is a fool's game. We've had some great successes in this area for several years. Whether new money should linger here or move on to other up-and-coming sectors is debatable.
Metals & Mining	+6.84%	-0.49%	The fact that the stocks are lagging the bullion by a large amount, plus the ominous head-and-shoulders that just keeps on working its way sideways, makes us wary of any new positions here for the current time. Everything initiated during the May collapse should either be exercised by now, or close to. Simplespreaders should have done very well with the Metals over the past few years. New opportunities in other areas appear more promising for the future. But, if Metals do present us with great-looking setups, then perhaps we shouldn't look a gift horse in the mouth.
Food & Beverage	+6.73%	+0.59%	Bounced off support in June. But not much meat on these bones. Better pickings elsewhere, although if this sector stays strong, more volatility should come into the stocks.
Utilities	+4.70%	-0.12%	Everything except Water is hitting on all cylinders. What about the world's coming water shortage? Not reflected in the charts...yet. Too bad there's not much volatility here.
Real Estate	+4.46%	+0.40%	Who cares about residential real estate prices' cracking, just keep collecting the rents. Commercial REITS also doing well. But too little volatility to be worth looking at.
Media	+3.16%	-0.17%	All it needs is one good week and it will clear its 3-year recovery highs. Looking better all the time. Definitely deserves serious consideration during the next market correction.
Aerospace/Defense	+1.98%	-2.34%	Big, lumbering giants have really cheap options. Not worth the trouble.
Automotive	+1.77%	-3.01%	A bad week. But, first, it was GM to hit the gas in June. Now, Ford wants in on the game. How this sector can hold its head above the carburetor is fascinating.
Dow Jones Industrial Avg.	+1.68%	-0.86%	Now the previous resistance of 11250 has the opportunity to serve as support if the summer rally wants to get in gear. "Sell in May and go away" has certainly worked out so far this year. Dullness has been the order of the day. Maybe a re--reading of Tom Paine's "These are the times that try men's souls..." would be appropriate right now. A drop back down through support would not tend well for the future.
AND THE REST...
Drugs	+1.54%	-0.02%	Doing great. Keep your eyes on this sector.
Telecommunications	+1.19%	-0.71%	Also, looking better. Good potential for the future.
Insurance	+0.74%	-0.87%	Not much here to interest Simplespreaders.
Banking	-1.15%	-1.08%	No option availability for juicy premium selling.
Consumer Non-Durables	-0.32%	-0.43%	Also, lack of volatility hampers much interest in this sector.
Chemicals	-0.72%	-1.65%	Better offerings elsewhere.
Conglomerates	-1.57%	-2.02%	Big stocks with tiny options.
Health Services	-3.18%	+0.23%	Ahhhhh. Finally, the giant awakens. Second only to Tobacco for gains coming off the July lows. The sector is definitely looking better. Deserves burning some midnight oil over, getting ready for the next market buying opportunity.
Computer Software & Svcs	-3.57%	-1.75%	Okay, we've had the short-covering rally. Now, where do we go from here? The burden of proof is on the stocks to show us the way.
Retail	-4.95%	-3.44%	Consumers appear to have shredded their credit cards.
Consumer Durables	-4.95%	-2.19%	Same as above.
Computer Hardware	-5.56%	-0.35%	Same as Software, only weaker. We've had the bounce. Now, does it continue upward so the sector can start looking better, or does it go back into its funk?
Transportation	-5.97%	-2.73%	Still has plenty of room to continue dropping down toward supports. Needless to say, this sector looks sick.
Financial Services	-6.19%	-1.85%	Weak rally back from early summer washout. Not much of interest here.
Diversified Services	-7.18%	-1.92%	Still sitting on support. Many areas need to rally from here or else fall into weakness.
Leisure	-7.57%	-2.97%	Too many industries are breaking supports. Only Gaming and Lodging appear to be holding, but just barely.
Specialty Retail	-7.59%	-5.15%	Going sideways for most of the past year. Nothing here to attract our interest.
Wholesale	-8.50%	-0.94%	Appears to have had its day. Needs to rebuild its bases if another rally is in the offing.
Electronics	-8.61%	-2.31%	Whether the rally was just short covering or the beginnings of something more meaningful, these stocks need to eventually break up through the old highs before we can get genuinely interested.
Manufacturing	-9.14%	-2.81%	Although weakness pervades this sector, we will have to wait to analyze what happens when it gets down to supports.
Internet	-13.00%	-2.31%	This sector needs much more work before it is worthy of our interests.
Materials & Construction	-14.10%	-1.47%	Contractors and Heavy Construction are the only areas holding up during this onslaught. Residential Construction, the horse of the sector, has found support over the past few months right here. But inability to rally does not bode well for further upward movement at this time.
Statistical Data: TeleChart 2007