Bounce is Just a Bounce for Now

Are we experiencing big worries over little problems? Some believe Greece is too small to topple the financial markets and equally, some believe that too much is being made over JP Morgan’s derivative trading losses. Determining in both instances if they are symptoms of a larger problem is still unfolding. One thing we do know, uncertainty disturbs investors, and the reaction is always exagerated at first blush. Only time will tell who and what is right relative to both issues, but in the meantime investors have been more willing to sell first, and ask questions later.

Worries remain the driving factor for investord despite the bounce on Monday. The yield on the ten year Treasury stayed below 1.8%. The dollar held it’s gourng depsite a 1.5% rally in Europe. If the bounce is to take root and clmb from here it will take news worthy of buying stocks. The one piece of data that I believe would drive stocks higher again, the central banks doing something to ease money supply acting as a stimulus to stocks. The ECB has been reticent to do anything like the Fed did in 2009 relative to easing and is unlikely to do more at this time. The US Federal Reserve bank with Mr. Bernanke at the helm would like to do something big,  but they don’t have the availability of money. Thus, I don’t expect the central banks to act anytime soon. This leaves us with upside coming from economic data or earnings. There is plenty of news coming on the week as we discussed in the notes on Monday. If it is positive it will help the upside. However, negative news will only accelerate the downside.

Monday will act as a pivot point looking forward. The makrets will either support and confirm this point on the upside or it fails and moves lower. Thus, each day we look to determine what direction we take from here. To put numbers around this idea using the S&P 500 index we held 1295 support and bounced back above the 1300 level and closed at 1315. The key number to hold moving forward is 1295 with a series of higher highs from this level. The first level of rsistance will be the 1340 mark. Watch and see how this moves near term. The result could be a new trading range of 1295 – 1340. For now I would remain cautious and let this play out.

The biggest losing sectors prior to Monday’s trading were the biggest winners. XLB, XLI, XLK and XLE all gained more than 2% on the day. XLI, the industrial sector bounced off support making the move worthy of watching near term for a opportunity. XLE, energy is in the same spot holding support and worthy of watching for future opportunity. Utilities (XLU) held support at the $34.30 level and remains the leading defensive sector short term. Financials (XLF) were voted the most dangerous of the sector based on Monday’s bounce. They gained 0.9% and were below the S&P 500 index on the day. The banks continue to be the drag on the sector. JP Morgan was off nearly 3% on the day and Bank of America fell 2.7%. Pressue is on the sector again and I would expect them to continue to underperform.

Treasury bonds and the dollar remain the leaders of the major asset classes. Not exactly the leadership you want to see if stocks are going to reverse and head higher. Europe (IEV), Emerging Markets (EEM), China (GXC) and EAFE index (EFA) are all trading in unison with US stocks. The high correlation isn’t positive for any signficant changes in the short term. Thus, trade smart and maintain your discipline.