The markets sold lower through lunch time and then some buyers stepped in to help the broad indexes recover from some of the recent selling. The reason for the selling remains mixed through the headlines. China, earnings, economic projections, speculation and more. My favorite headline is, “the S&P 500 is teetering on brink of a technical precipice!” Wow, now that is a speculative comment at its best. Regardless of the reason the fact that the markets are attempting to shift direction/trend short term is news enough. The reason is always clear after-the-fact. In other words hindsight will clarify what is happening and why. The challenge with that is we want to know how to act or react now to the event. Unfortunately that should have been decided last week based on the risk we are willing to accept for each position in our portfolio.
With all that in mind what did we learn today that was worthy of our attention?
- S&P 500 index hit key support at 1775 and bounced. The comment above turned out to be true for today anyway. The need to hold the technical support at this level was obvious looking at a chart and thus to some extent, became a self-fulfilling prophecy. Following a positive open the index reversed heading lower through lunch and then found support and heading back to positive territory. The significance of this level is purely technical and we will continue to watch how the market reacts the balance of the week and going forward.
- The NASDAQ index failed to hold 4075 support and proceeded lower to the 4052 mark and, like the S&P 500 index, reversed directions and back near the 4100 level on the day. The index broke below the 50 DMA for the first time since October 9th. The technology sector had been the key sector to lead the broad markets higher and were the catalyst to the selling on the way down. Semiconductors tested support as well and found support on the day. Overall the index is holding and we will have to see how it unfolds as well going forward.
- Russell 2000 Small Cap index needed to hold 1120 support and fell directly to that number in trading today before getting a modest bounce back above 1135. The test lower also touched the trendline off the November 2012 low which is the current long term uptrend line in play. Another key index with yet another key level held for support on the day. This index will be key going forward as it is the first to test the up trendline.
- New home sales fell seven percent in December. That was not welcome news and did not help the morning attempt to move higher. The 414,000 homes sold was short of the 455,000 expected. Supply rose to five months on the news and it only served to add to anxiety investors are feeling towards the economy currently. XHB sold to the 200 DMA before bouncing back to even with Friday’s close. The sector remains challenged, but it is important to note this is a key barometer for the economy. Interest rates have moved lower the last six weeks and that may help spur some buyers to action sooner more than later, but it is still an area worthy of our attention.
- The FOMC meeting starts tomorrow and with the thought of more stimulus cuts on the way you have to look at the inflation expectations from investors. Interest rates are declining not rising. Commodity prices are not exactly jumping higher of late. This is pointing to no inflation to speak of short term. All of that said, it is a continued disconnect for stocks. At the least interest rates should be rising modestly to validate an economy that is gaining momentum which would enable the Fed to cut stimulus and sustain growth. Watch how this unfolds with the result of the FOMC meeting on Wednesday and the markets reaction to the comments.
- Correction talk is heating up. The headlines over the weekend were focused on the need for a correction and the conditions being right for a correction. This type of talk can be self-fulfilling short term, but not sustain as investors see the selling more as an opportunity than a negative. Maintain a disciplined approach to your portfolio and let the prophets take care of the rest. No one knows what the future holds and each of us has to make decisions based on our goals and objectives. The media is in the business of gaining attention from readers and listeners. You are in the business of managing the risk of your portfolio.
Plenty to digest in terms of today’s activity and plenty of opportunities being created as the pieces come together. The greatest challenge we all face every day is the patience to let it happen. Tomorrow is another day with more information and clues on how to put the puzzle together, one piece at a time.