Analyst spread worries in hopes of a pullback or test

The S&P 500 Index held above the 1500 level for the second consecutive day and starts to work on the next leg higher. The move comes as many analyst call for a pullback or mini-correction in stocks. The hope is for a 3-5% test of the trend short term. If that were to take place the obvious reaction they are suggesting is buying the dip. For all the headache they are going through relative to this exercise why not just hold the positions and let the trend play out? If the pullback or correction is going to take place currently there will have to be a catalyst. Spain gave it a shot, but it wasn’t a big enough worry for now. It will not be a one-off announcement that moves the market lower, it will have to be series of events that will add up to selling and protecting principle as the market drama plays out. All I can say at this point is don’t speculate… watch for the opportunities in all this jockeying relative to stocks and the future outcome and remain patient.

Another area of growing concerns is that of a global currency war. Are there really currency wars taking place globally? Like it or not, they are not actually wars as much as they are methods of pushing or nudging economies along as well as potentially lowering the unemployment rate. The US has been very active in the activity with the Fed building its balance sheet of assets to help stimulate the economy. The Bank of Japan recently has attempted a similar effort to get the Japanese economy moving faster. The side effect of this activity is a weaker currency. This allows the country to compete globally in terms of exports as well help domestic producers compete internationally. This has been common practice in the US for many years. The European Central Bank does not practice this art of stimulation to the economy and weakening currency to compete internationally. As a result the euro has been moving higher of late, it is $1.35 currently, up from $1.20 in July 2012. That has prompted a call in Europe to devalue the euro to make the countries competitive with the US and Japan. Thus, the answer is yes, it is a war of words and deeds to keep the currency in check and allow the respective country to compete globally. Thus, I wouldn’t be surprise to see the dollar gain some strength short term. UUP is the long dollar ETF.

The financial sector has been abuzz with the news that a hedge fund investor took a large position (100,000 XLF put contracts for April at $16). Of course the talking heads think this is yet another sector of the market ready to implode on itself. The close on XLF was $17.60 on Wednesday, and that would translate into the sector dropping 9% between now and April expiration. Why is this news or a concern to the media? First, to stir up interest in what they have to say, second, those who write the contract are going to hedge their risk in some way and that just adds fuel to the fire that the sector has negative sentiment short term, figuratively speaking. If everyone is wrong the upside will sling shot higher potentially off the unwinding effect of the trades. The downside will be equally effected by the piling on effect of the trades. This shows the compounding effect of the sentiment it creates, real or manufactured, not to mention the potential volatility from the speculation on why the trade exists to begin with. XLF did experience more intraday volatility than normal, but the impact to the stock price in the end was minimal. Remember the media needs news, you need to manage money. It is worth watching to see how this plays as we are long banks.

Staying within the financial sector and breaking down the sub-sectors we find banks (KBE) are trading at a new near term high. Regional banks (KRE) broke through to a new near term high this week. Broker-Dealers (IAI) was a leader in establishing the current uptrend several months ago. But, the true leadership relative to the upside movement has been the insurance sector (KIE). Digging in the sector you find Metlife (MET) breaking out to a long term high on the weekly chart. This shows the continued leadership from the insurance sector overall.  The financial sector and the underlying stocks have been laggards since 2009 and even with the current burst higher there is still plenty of room to play catch up when you look at the long term charts. Thus, don’t allow the talking heads to spook you out of positions that potentially still have plenty of upside.

The markets remain in the uptrend off the November 15th low. There may or may not be a test of the trend short term. Either way, you goal is to manage the risk of each position relative to the objective you set out when you purchased them. News is noise short term, focus on the objective.