Sellers Willing to Test the Markets Resolve

The broad markets are starting to struggle with the stimulus outlook? Really? I for one am shocked at that headline! The Federal Reserve Bank of St. Louis President was sent to deliver a message on Thursday some believe. He stated in an interview that he opposed additional easing by the Federal Reserve. Thus,¬†QE3 isn’t around the corner, and¬†that means not¬†September or maybe even October, my opinion.

The debate continues as to what Bernanke will state next week in his annual trek to Jackson Hole for the¬†gathering of central bankers. I wouldn’t expect¬†him to state anything different than what is in the FOMC minutes released on Wednesday. The next FOMC meeting is September 12th and¬†the Fed will have¬†another month of data to review relative to the state of the economy, but I don’t really expect that to change much, nor be a trigger point for the shift in¬†Fed policy. However,¬†if we get a pullback or correction in the markets of 5-10%¬†along with some sluggish economic data heading into the October meeting…¬†look for the Fed to act.¬†They want the stimulus to have an appearance of saving the financial markets not just a olive branch to investors.

That said, how do we approach this market moving forward?¬†One word, CAUTIOUSLY!¬†¬†We are just completing earnings season and there is one resounding theme, companies are making money, but revenue was down or flat for the majority. Hewlett-Packard fell 8.2% on Thursday following an awful earnings announcement. PC’s are not selling in the US or anywhere around the world. That impacts jobs. Thus, the problem facing you and I as investors. We have to find the companies that are making money, growing revenue and adding jobs. This means we have to find the sectors that are working, dig in and find the best stocks to own. That is a task that takes time and energy to accomplish.

Basic Materials, Energy, Utilities and Financials led the downside on Thursday. We have to look at who the winners are or who the winners will be on the downside. The short plays are starting to take shape on the major indexes and some sectors will lead the way lower. The SOX (SOXX) index closed on support at 397 with the 200 day moving average just below at 393 and key support at 390. Definitely one to put on the watch list considering the problems facing the computer stocks. Small Cap stocks (IWM) have been volatile and if the negative sentiment kicks up, look their direction for some downside opportunities. The major index in trouble is the Dow Jones Industrial 30 Average which broke support at the 13,190 mark and 12,950 is clearly in sight. The news from Boeing today on canceled 787 orders only added to the weakness. The Dow is leading on the downside and is worthy of watching for short opportunities.

On the upside you have to look to the precious metals which have run on the FOMC data and the promise of more stimulus around the world. GLD cleared resistance at $157.70 and closed at $161.89 on Thursday. Watch for some consolidation to the move and potentially more upside on the stimulus talks. Silver (SLV) has jumped higher as well to break through resistance on a vertical climb. The mining stocks are following suit with both GDX and SIL moving higher on the move in the metals. Digging into the silver miners, Silver Wheaten has been a big winner on the upside. We added the position to our model last week on the break above $28.50. The key is to manage the risk of the markets and look for what is moving, up or down.

Today ends a tough week of trading for the overall market and the sellers are definitely in a mood to take quick poke at the opportunity on the downside. It is not likely a sustainable move to the downside, but if the test is successful… the sellers will be back.

Manage your risk, adjust your stops and maintain your discipline. No one knows the outcome of the current activity. Up trends don’t die easily and it isn’t likely this one will die here. Look for a test of the run higher and for the buyers to come back. There are too many issues on the table relative to stimulus. Take it one day at a time and let this all play out.