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If you need a laugh for a second, the current situation surrounding the debt ceiling reminds me of a Seinfeld episode. Remember the episode when Kramer test drives the Saab to find out how far he can go on an empty tank of gas? That's what's going on with the market right now.
When it comes to the debt ceiling, the market's nerves are starting to run on fumes and we're actually in danger of the optimistic expectations that a deal had to be done could meet with the stark reality that it may not get done. Not good.
But there's also a tectonic shift in the market that has nothing to do with the negotiations I'm watching with concern. Here it is.
Over the last few weeks, we've seen the market focus all of its attention on technology. Actually, not even technology... just A.I.. It's a dangerous play to jump into one area of the market so quickly, but that's what's happened. We'll talk about that another time.
Here are just a few of the comments that I'm making on the sector shifts.
Let's dig into the materials sector...
Materials Select Sector SPDR Fund (XLB): Bearish
Think "Dr. Copper" here. You know, the old rule that the demand and pricing for copper is an indicator for the economy. Of course, copper is a material, but this sector also includes coal, steel, gold, aluminum, you get it. If you build or manufacture with it it's a basic material.
Why is this a "tectonic shift"? This goes back to the Dr. Copper perspective.
Demand for all of the things that I just listed out is dropping based on a global economic view. We've seen Germany announce that they are in a recession. The U.K. is on the same watch. A growing number of people are saying the U.S. will avoid a recession, but you and I know differently.
Put all of that together and you've got a dimming outlook. There are two more pieces of this puzzle though. Technicals and sentiment.
The technicals of the basic materials sector are poor - at best.
Trading below its 20-month moving average, the XLB shares are in a technical bear market. Add to that the fact that the 200-day moving average (MA200) is shifting into a declining pattern AND the 50-day moving average (MA50) is already declining below that same 200-day and you've got a poor technical trend.
Mark the technical bearish from a long and short-term perspective.
Now the sentiment side of the trade. That's right... sentiment.
Remember that price is not a reflection of sentiment. Instead, price movement is a result of sentiment.
Sentiment towards XLB has been optimistic. Investors have been looking at the sector as one that is on hiatus instead of heading lower. This is because of something I already mentioned, the sentiment that the economy will experience a "soft landing" or "no landing at all".
That "hope" indicates that the basic material…
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.