New month, new week and new attitude? As we do each week I want to look at what is important to watch and see how each will or will not influence market direction. This again promises to be an interesting week with plenty of economic data to review, and any hangover from the new budget cuts that went into effect on Friday. One day at a time as we remain in a news driven market environment.
1) ISM Services data and more job reports than you will want to hear. If the services data matches the bump in the manufacturing sector it should provide a positive boost to the markets and investor confidence. Then there is the infamous jobs data that will start on Wednesday with the ADP report which tends to be a non-event indicator, then jobless claims on Thursday and the delayed jobs report on Friday. I would expect all of them to be non-events relative to the outlook unless there are some major surprises that have not shown in other data reports.
2) Commodities remain the big negative relative to the overall markets. Gold has continued to move lower hurting the metals. Oil is pulling down the energy component and agriculture remains negative. Thus, looking at GSG, iShres Commodities Index ETF you can see the reversal in February and the current test of the December low. The primary issues are first, demand and second, the stronger dollar. The demand issue is world wide as Europe, China and the Emerging Markets experience slower economic growth, thus lower demand. The stronger dollar is a direct result of the Europe’s issues and Japan devaluing the yen. With China still pegged to the dollar not much is influenced there. I don’t see any big changes on the horizon for the sector and expect the downside to remain in play short term.
3) What about retail stocks? This is the one sector that will always garner attention due to the simple fact that the economic engine of the US is driven by the consumer. The sentiment data has continued to improve, but still the negative outlook for retail remains. The spending numbers have been steady, but again the outlook is negative. What is the real story? Defining the difference between discretionary and non-discretionary spending. Separate the two and you gain clarity which opportunity will remain in place based on the outlook for the economy. XLP, SPDR Consumer Staples ETF remains in a solid uptrend with some mild testing the last two week. We continue to hold this position in our portfolio as a result. The focus is non-discretionary consumer stocks. XLY, SPDR Consumer Discretionary ETF has spent the last six weeks in a trading range as a result of the uncertainty of the consumer. We hit our stops on this position last week, but the recent move back towards the previous high is worth watching. This remains a sector to watch on both accounts with the current outlook favoring the non-discretionary stocks.
4) Europe and the euro. The story in Europe continues to filter back into the headlines and they are not likely to go away anytime soon. Italy is still a concern in regards to the euro and the European Union. If there are any significant changes following the ongoing elections it will have an impact. France continues to want to tax the rich to pay for their economic woes, but that has continued to backfire. Germany is feeling the drag in their economic outlook from the rest of Europe along with the slowing in China. Spain is still a debt problem for the EU and it could become an even bigger issue going forward if Italy acts to withdraw from the euro. The bottom line… This is a day by day event and one I compare to the old jack-in-the-box toy. You turn the handle and listen to the music until the clown pops out suddenly to surprise you. I am still waiting for the next surprise from Europe.
5) China dropped 3.7% overnight to start their week reacting to the government attempts to curb the real estate market. Many of the construction and developer stocks fell 10% limit down. This has been brewing, and the downside for China in my view is far from over. FXP has been the play the last couple of weeks and it looks to have a big day to start the week.
6) Technology is on the watch list this week to break from the current trading range if the markets continue to ignore all the noise and move higher. Despite all the bad news, the buyers are still there and still want to own stocks. This is a sector that overall has gone nowhere in the last two months, but the parts remain positive. Software (IGV) and internet (FDN) are two components to look for continued upside should the broad market continue to push higher. The semiconductors (SOXX) are still attractive as well, they have consolidated their recent move to the upside. Watch and play if the opportunity presents itself.
The start of the week will set the tone. Remember to manage your money and focus on a defined strategy to manage your risk. The current volatility increase has to be adjusted for and the lack of direction will only add to the volatility short term. If the noise gets too loud and the volatility too high… go play golf or take a trip and relax.