Bottoms Up!

This week, I suddenly became a fan of bottom up investing after decades of affinity for the top down approach. For starters, traditional technical analysis has been tricky to apply in the age of socialism, er, government intervention. And I say this a member of neither political party because they are all totally off their rockers in DC. I am also a new fan of term limits - as in one term - for everyone in Congress but I am getting way off the topic.

So why my change in view? Over the weekend, as I was preparing Monday's Quick Takes Pro with my staff I noticed that many economically sensitive stocks - the cyclicals - were sitting in precarious positions. Even superstars such as CAT and DE sported bearish RSI divergences so something seemed amiss. Forget that AA sported a possible breakout failure with technical divergences before earnings.

So-so stocks, such as steel, were sitting on important support. Did you see X break down?

And heaven help the weakest in the bunch such as autos and auto parts. We ran a chart yesterday of MGA, an auto parts maker, that cratered in February and continued to bleed money through last week. It broke down again on Monday and is getting clocked again today.  Does GM stand for "good money" that investors threw after bad?

If the economy is on such a nice, but slow, path to recovery then this overall weakness in economically sensitive stocks cannot be good. Tech is weak. Banks are weak. And despite the current correction in oil, it is in a bull trend that is not over.

Bottoms up! And for many of us, that means a pint or three at the end of the work day because it will be needed.

Cutting room floor - corporate bonds

Here is some text left out of the final version of my Barron's Online story today:

In the corporate bond market, the charts a little different. During the financial crisis in 2008, investors flocked to the safety of Treasuries causing yields to tumble as prices soared. In contrast, yields of corporate bonds moved higher as their prices moved lower.

But since last summer, iShares iBoxx $ InvesTop Investment Grade Corp. Bond Fund (LQD) has held up better than its Treasury bond counterpart. After easing lower from September through December of last year, the corporate bond proxy settled into a trading range (see Chart 3).

I'll leave full analysis of the fundamentals to others but with profits improving and reports of hoards of cash stuffing corporate coffers, it does make sense that their bonds would look better. However, while corporate bonds are usually traded according to their presumed safety vs. Treasuries, they also depend on the overall level of interest rates. If Treasuries yields break out to the upside, then corporate yields could move higher with them.

For the corporate bond prices and the iShares exchange traded fund, that means lower prices. And if it moves below the bottom of the trading range at 106.75, the next support does not come into view until 103.35. This would wipe out all of its 2010 gains.