Another Day of Digesting Data… Looking for Direction

Another day of digesting the move from Friday and dealing with the negative sentiment that built in the market indexes the last two weeks. As much as I don’t want to discuss the fact the market is again building what looks to be momentum for another run higher, that is what it looks to be short term. Why do I say I hate to admit that? Simply put, it shift momentum again and whips in and out on trading positions are getting shorter, which also signifies a topping market. That tells me we are at an extremely dangerous stage in the current uptrend. Bottom line… cash is a sector and trades have to be watch closely. Longer term positions need to have tighter stops and some type of strategy to hedge the potential risk going forward.

The worries that were rattling investors have been put on the back burner for now, but they are alive and well. The media, analyst and investors are looking for reasons to buy stocks versus sell them. I review this in tonight’s video update. The internals for the market show strength more than weakness. That said, you cannot make any assumption, and you have to put your focus entry and exit points. Discipline is the key to success in the current market environment and guessing could get ugly.

State of the Market:

The trend of the market remain on the upside both short term and long term. The micro term (13 weeks or less) is where investors are focused currently. Why? The media and analyst feeding them are concerned about the current valuation of the market overall versus buyers appetite for risk. The VIX index shows the worry factor has subsided and complacency taken over, which explains why stocks are still moving to the upside. We have all voiced our concerns about the movement of the market near term, but the key will be to let it play out versus speculation on direction.

Have investors accepted the inevitable cuts in stimulus as the Fed views the economy as improving and the data for October has backed up that belief. The growth is modest and slow to accelerate, but it is growing nonetheless and the third quarter GDP confirms the progress. The less negative reaction are to the eventual cuts, the more likely the Fed will actually take action. Like politicians they will wait for the consensus to confirm what action should take place.

Index and Sector Watch:

Dow Industrial Index (DIA) – the chart continues to bump against the top of the up trending channel. A break above this resistance level gets interesting for the broad index. This validates what I was discussing above about the markets wanting to move higher despite any sentiment otherwise.

S&P 500 Index (SPY) – the chart is similar in the push back towards resistance of the previous highs. A break above this resistance level is another positive sign for the broad markets.

NASDAQ Index (QQQ) – the chart shows more of a topping formation on the index with the short term 10 DMA pointing down or turning negative short term. This index is a balancing act for the two above as it isn’t as positive relative to the short term look.

Russell 2000 Small Cap Index (IWM) – More pronounced on the topping formation than the NASDAQ index and the 10 DMA approaching a cross below the 20 DMA. Support at the $108 level is going to be telling short term. Again this is a contrast to the two positive indexes above.

Leading Sectors of Interest:

Technology (XLK) was a leader today with a positive move back towards the previous highs. Semiconductors were the leaders in the index, but software and networking are making positive moves the last few days off the recent lows to assist in the move of late.

Consumer Staples (XLP) is still consolidating from the break above the $42 level of resistance. Need a follow through on the upside to keep the upside trend moving micro term (less than 13 weeks).

Retail (XRT) broke to new high on Monday and continue the move today. The consumer services (XLY) has been one of the primary leaders off the November 2012 low. It’s that time of year when investors start to look at who the winners will be for the holiday season.

Negatives Sectors of Interest: gld

Precious Metals – Gold (GLD) reversed off the October high and continued to break support at each step of the way. Today the ETF tested $121.85 low from October 11th. Not pretty and the downside trade has been the best course to take the last two week. The longer term trend of the metal remains negative.

Crude Oil (OIL) – Tested the low from last week and managed to hold, but not pretty. We warned about the topping formation in September and it has been downhill since. The downside pressure is in play for now and it is going to take a significant shift in demand to sway buyers. The stronger dollar has put pressure on the price as well.

Emerging Markets (EEM) – The worry about the Federal Reserve cutting stimulus has the sector on the downside. The chart show the initial reaction to the idea in May. It managed to rally back on the Fed stating they would not cut stimulus in October at the September meeting. Down again on concerns of cuts in December are now in play. Not willing to short here, but worth watching to see how it plays out.

Interest Rates/Treasury Bonds (TLT) – the rise in rates again has bonds moving lower. This is a negative for treasury bonds, but it is a bigger negative for the interest sensitive asset classes like Real Estate, Utilities, Telecom and other bond classes. If the yields continue to creep higher that negative sentiment will potentially spill over to the general stock market indexes as the negative sentiment builds.

What to Watch Tomorrow:

Trading Notes tomorrow morning to set the tone for the trading day. Don’t get them? Send and email to don@jimsnotes.com to find out how to try them free.