Warnings Are Plentiful, But Trend Still in Play

Following a solid push higher to start the trading day on Monday, stocks shifted lower on the comments from the Fed Chairman defending the actions taken relative to quantitative easing. It smelled of desperation for the Chairman to attack the comments realtive to the justification. This isn’t over yet and there will be plenty more to debate relative to the future of quantitative easing and the impact on the broad markets. Monday’s trading did reflect the current market sentiment and activity. Thus, we have to be patient and look for the opportunities as they are presented. The following are some sector to watch off the September 26th low.

Energy made a solid bounce off support and remains in a uptrend currently. XLE, SPDR Energy ETF show support at $72.75. The bounce off the low is struggling to gain any momentum short term. Oil Services are testing support at the 200 day movoing average currently and looking for a catalyst to push the sector higher. The big question mark is the price of crude. If it stays at the $90-100 range the stocks in the sector will do well looking forward, however any move below the support at $90 will change the current direction. The individual stocks in the sector are worthy of scanning as well looking for the leaders.

Financials have tested the 15.50 support level last week. The uptrend remains in play and the outlook for the sector is mixed. Banks have stuggled to maintain there upside as investors sentiment remains more a love/hate relationship. It is more they love to hate banks than embrace the opportunity. KBE, SPDR Bank ETFis testing support near the $23.30. If it holds and starts to move higher watch for a test of the previous highs. The renewed efforts of stimulus from the Fed will add to the earnings of banks short term. While the sector remains volatile short term the opportunities are for the patient investors. .

Global markets rallied on Monday to hold the current uptrend in play. The EAFE index ETF, EFA showed another bounce off support as most country indexes bounced higher. India, Russia, Poland and France were the winners on the day. GXC, SPDR S&P China ETF is at the top end of the current range and ready to break higher. This has been a volatile area to be invested, but some of the opportunities are worth taking the additional risk. Like the financials, you have to be patient and let this develop.

Bonds or Fixed Income are showing some signs of a short term bounce in price, but the longer term outlook may not be quite as good. As the market volatility has picked up for stocks the same is true with the bonds having exposure to credit risk. A look at HYG, iShares High Yield Corporate Bond ETF shows the recent volatility for junk bonds. The same volatility has appeared in the REITs. IYR, iShares Real Estate ETF Shows steep decline from the mid-September high. The risk in these assets comes from being overbought as investors have been chasing the yield/dividend payments. On the positive side TLT, iShares 20+ Year Treasury Bond ETF has bounced off support for a nice short term gain. The fixed income sector like the equity markets is picking up in volatility, but offers some opportunities.

The short interest continues to grow as investors simply don’t believe in the current market outlook. Volume in the short ETFs has gained as well. Plenty of evidence building in favor of a pullback or correction, but fighting the Fed at this point has been a losing proposition. We maintain the outlook that short plays are simply trading opportunities not trends, and the floor under the broad markets remains the Federal Reserves willingness to put more money into the system

Manage your risk and keep the focus on the discipline.