Are Investors Really Ready to Take on Risk?

Investors respond positive to the tone in Washington as the President and others attempt to reassure the market and others that they are close to cutting a deal to resolve the current fiscal dilemma. Was it enough to shift the trend? Was it enough of a olive branch that investors believe it is safe to take on risk again? Only time will answer the questions, but it was enough to reverse the intraday selling that had pushed the markets lower from the open. The reversal was more than 1.3% from the lows to the close.

We continue to watch for the same test of the bounce and follow through to the upside with the catalyst being an early resolution to the fiscal problems. The chart of the S&P 500 index bounced off 1350 as support and has moved aggressively in a V-bottom to the 1405 level of resistance. We had two days of testing the move with a solid move back near support early on Wednesday followed by another bounce to resistance. Are two days of testing and an intraday push to support enough of a test for the current outlook or trend change? Today will be important to the move and it will be key to how this all unfolds looking forward. My view is it will follow through based on the sentiment overnight. The economic data will play into the decision as well today.

Some key moves are where we need to focus our attention short term:

Technology (XLK) has been a key leaders off the lows and the bounce. The resistance at $29 is in play and then the 200 day moving average is just overhead at the $29.35 mark. The trade set up on the break through these resistance points is the sum total of the current target of any upside movement. Thus, the risk/reward is a challenge. Volume isn’t impressive on the move higher and if there isn’t enough conviction from investors to add the risk to their portfolios. Despite the risk the upside play in the sector has to come from a longer term view to willing to step into any positions. Watch for a follow through to Wednesday’s bounce off support near $28.50. If the broader sectors are going to follow through on the upside technology has to be one of the key leaders short term.

Financials (XLF) is another of the early leaders on the upside. The move above $15.45 was positive. The test of $15.45 on Wednesday was positive for the reason it held and the bounce was back towards the $15.85 resistance. Banks (KBE) are the vital component to push the sector higher. Watch for the opportunities in the sector either through the broad sector ETF or digging in and finding the winning stocks. The broad market indexes need the financial sector to take on the leadership role if we are to continue higher.

Consumer Services (XLY and XRT) will be equally important to the upside move. The consumer has shown some positive signs at the start of the holiday shopping period. Watch retail to be the leader here and it is a sector worth watching the individual stocks on the upside. XLY tested the downtrend line and bounced leaving the upside in play short term. The consumer is a key part of the progress for the economy as well as the broad markets.

Decision time for the broad indexes yet again on this bounce off the November 15th lows. The S&P has to clear the resistance at 1405 which it managed on Wednesday, but we need to see a follow through on the upside Thursday if the short term bounce is to carry forward. 1430 is the next resistance level and that doesn’t offer much upside for new entry points on the index. The NASDAQ is at the 200 day moving average and 3000 resistance. A clear break through those levels would offer some potential on the upside, but like the S&P 500 index, the risk/reward is not in our favor without the belief we move through these levels on the upside. The key is to be patient and determine what the outlook is moving forward. Simply put, if the bounce or move higher is based on the fiscal issues being resolved by year end this is nothing more than a trading opportunity. If however, the sentiment and confidence is building for an improving economic picture and earnings growth, we should be looking to hold positions longer term. Watch the GDP data due out today with a forecast of 2.8% growth in Q3. It will give some insight into the latter taking place. The economic data can add another layer of confidence for investors to being to add risk to portfolios.