The media loves a good story. Cyprus has provided the fun for the week, along with the financial headlines. There is every possible combination of what ETFs to play to what happens in the next 24 hours. This is why I stopped watching CNBC! Enough already with which stocks to buy and what political risk exist as a result of this move. For me this is a maximum noise event and until they vote, and we know exactly what they are going to do the rest is speculation. Thus, as we did yesterday we will wait and see how it unfolds. Our stops are in place and we continue to scan for the opportunities in the market. And speaking of that, yesterday was an intraday event that left things pretty much status quo. The declines were modest and the last hour of selling was the greatest disappointment of the day.
The scans last night were nothing new. The reality of the day was emotions stepping in and investors reliving the fears of European sovereign debt all over again. I am not going to completely dismiss this event as a political risk that can erupt into a market event. But, I will say to be cautious about what actions you take relative to your portfolio.
The euro fell to $1.29 on Monday and the dollar gained at it’s expense. Looking at the chart of FXE we can see support is back in play near the $128.25 level and a break lower could result in a test of the November lows at the $126 mark. EUO moved above $19.50 on the upside showing some acceleration on the breakout for the short euro ETF. UUP had tested support at $22.25 for the dollar and bounced back near the highs of last week. Watch this to continue if the headlines continue to create fear towards the euro and Europe overall.
Gold was the other benefactor from the media circus on Monday. The metal was up 0.9%, but the move established a break from the bottoming that was taking place. The question remains if this is a big enough event to create an uptrend in the metal short term? I am not convinced, this is currently nothing more than a trade that will retest the previous lows or trading range in time. The upside may be limited to $158 on the move, unless the fear factor grows relative to Europe. On my watch list, but not jumping in on this one just yet.
Is the test, selling, pullback or potential correction worth playing on the downside? I am still of the opinion the buyers want into the market. The sentiment shift shown in the VIX on Monday is temporary from my view. Remember the key is to have a belief and then wait for the validation from the market you are right. If I am right on my outlook there will be some sectors worth owning on the other side of the circus event created by the Cyprus government and the media. The VIX did jump off the new low at 11.3 to close at 13.36 or an 18.3% move. That is attention getting, but we are operating off extremes on the downside. The move is similar to the event of February 25th. Watch the VIX for some clues of the investors sentiment.
The modest selling of Friday and Monday combined are creating a new potential pivot point to watch. The chart below of the ten sectors of the S&P 500 index shows the progress off the February 25th low and pivot higher. The consumer discretionary, healthcare, consumer staples and energy were all down 1.2% over the last two days. What we see is an across the board reaction to an event. The broad index was off 1.1% showing the correlation between sectors on the move.
Technology was the sector of interest on Monday as it closed unchanged after a test of the low in the current trading range. I like the upside opportunity in tech, but with the semiconductors lagging again it poses an interesting challenge. SOXX is testing support at $58 following more than a 3% decline. Software (IGV) had been the leader in the sector, but it has tested support at the $69.50 mark on Monday. Technology is one sector to watch going forward.
The bottom line is to be patient, let the opportunities develop and protect against the downside emotions in play currently.