Retail, Financials and "Semis" In Extremely Oversold Territory (SMH, XLF, XRT)

If you held semiconductors for the last 5 years, you've been disappointed. The Semiconductors HOLDRs (SMH) drastically underperformed its sector peers in the bull run of 2003-2007.

That said, there may be some upside for the troubled semiconductor segment. In fact, the biggest underperformers like the Financials Select Sector SPDR (XLF) and the SPDR Retail Fund (XRT) may actually begin to generate buying interest.

Why? All 3 of these sectors are apparently "oversold" when one looks at relative strength numbers.

One of the premier ways that "analysts" make overbought and oversold determinations is through the use of the "Relative Strength Index (RSI)." The RSI can journey from 0 to 100, measuring the magnitude of gains versus the magnitude of losses over a given time period. Some believe that... in a bearish environ... a sub-20 figure on the Relative Strength Index indicates an exceptionally strong buy.

What is the RSI number for the Semiconductor HOLDR (SMH)?  18.

The Financials Select Sector SPDR (XLF) and the SDPR Retail Fund (XRT) post even lower relative strength numbers -- 3.3 and 7.3 respectively.

Obviously, relative strength is merely one bit of information that some investors use to make decisions. Historical P/E ratios at Yahoo Finance may tell a similar tale; that is, the the Semiconductor HOLDR (SMH) at a forward P/E of 17 is 25% below its 5-year average of 24-25. Similarly, Financials Select Sector SPDR (XLF) at a forward P/E of 10 is in historic bargain territory.

Granted, it'll all be how you choose to make your investment decisions. The only true stock market strength exists with materials, mining and energy. (We can thank that, in part, to the unprecedented run-up in commodity prices.)

Yet the RSI data on these areas are approaching overbought levels. Should you keep on mining for resources like metals? Should you keep on drilling for oil?

One thing's for certain. Everyone keeps waiting for more disaster in the financial sector and everyone expects consumers to stop going to the stores. Few seem to think that commodities could be "bubbling." That alone means one should at least be mindful of a potential sell-off in materials, mining and energy.

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