Can We Follow Through on the Break Higher?

Investors and economists alike are expecting the Fed to act this week at the FOMC meeting which concludes on Wednesday. Will they follow through on the promises to provide a boast to the US economy? Can they do anything that will really impact the economy moving forward? The consensus is a 50% chance the Fed will enact QE3. The Jobs Report on Friday showed on 96,000 new jobs and shows the lack of growth in the US economy. It sparked more debate on what the Fed should do, what government should do, etc, etc. The reality of the current situation is plain to see in the numbers. The nursery rhyme “Humpty Dumpty” comes to mind for some reason relative to this issue and the Federal Reserve. “All kings men, couldn’t Humpty back together again!” The title of the seminar I gave on Saturday was, “If what you are doing isn’t working — STOP IT!” It is time to try a new course, as the one we are on isn’t working.

That aside we start a new week and plenty to look forward to, but equally as much to be concerned about. As you are fully aware the major indexes made moves above the four year high on the S&P 500 index and is attempting to take the next leg higher in the current trend off the June 4th low. The leadership for this move have come from the Basic Materials, Financials and Energy. Breaking each down below is the story behind the moves, and we have to determine if they are sustainable stories or if this is just a temporary move.

Basic Materials (XLB) were up 4.6% last week to lead the broad market higher based on stimulus announcements from China. They are committed to building out mass transportation systems within the country as a stimulus to the economy. The assumption is it will boost demand on materials such as steel.  A look at the base metals (DBB) chart shows the bounce along with the materials (XLB) chart. The breakout from consolidation is worth watching this week for some short term trading opportunities. Digging further we find steel stocks (SLX) moved off the bottom of the current trading range and are worthy of our attention as well. Looking at the holding of SLX shows MTL, CLF and SCHN all leading the sectors bounce. This is one sector to watch for a follow through this week.

Financials (XLF) were up 3.4% for the week with banks and brokerage firms leading the charge. Bank of America was up more than 10% on the week and Goldman Sachs gained 10% as well. Does the sector continue to benefit from the new out of Europe? The catalyst was the speech by Mr. Draghi who promised stimulus and confidence the ECB would buy bonds when there is unrealistic fear or selling activity in the sovereign debt markets. Thus, the assurance offered relief relative to the banks owning the bonds of countries like Spain and Italy. This is a short term relief from my view as the longer term outlook for Europe remains very questionable, but the upside has been beneficial to our financial positions. We will dig further for any opportunities as this all moves forward.

Energy (XLE) made a move above the resistance at $73 to keep the uptrend off the July lows in play. This is a tough sector for investors to want to go higher as the direct impact on the consumer is a negative to growth. The commodities are being led by gasoline (UGA), which in turn is leading the refiners. The story has been the ability to export gasoline from the US to other countries at higher prices. This trend will continue as long as the demand in the US remains at the current levels. This is a sector where you want to dig into the parts and find the leading stocks. The services stocks are leading overall, but XOM made a move to new high on Friday. Take the time to scan the industry group and find the leaders.

Precious metals continue to provide some solid upside as well. Both gold and silver have made solid moves to the upside along with the mining stocks. If you own these metals raise your stops and protect your gains, but let them run. If you don’t own them… chasing entries is not a good practice or strategy. The vertical moves on Thursday and Friday will likely test and give you a better entry if the trend continues on the upside.

This promises to be another interesting week of trading and we will be disciplined as  always to take what the market gives, but protect the downside of the portfolio. Adjust your stops according to the risk you are willing to accept going forward.