Correction or Are There Bigger Problems?

The relief bounce on Tuesday didn’t offer much in terms of follow through on Wednesday. In fact, the path of least resistance seems for the market to head lower and that is the way the day started for the major indexes. The S&P 500 index touched 1737 before a bounce back toward the break-even mark on the day. It still acts as though it would like a test of the 200 DMA and then bounce. The buyers are hanging around, but they are not committed to the process of pushing the markets higher near term. That begs the question, “are we better served to sell into the rallies and hold cash until the indexes find enough support to mount a serious rally back to the upside?” The simple answer is yes, but let each asset define the exit point through the use of stops. No one ever knows where the market is going or when, and stops allow you to let the market determine where the best exit point is for the moment. Patience is a difficult thing when anxiety levels are rising.

Is this a correction or are there bigger issue for stocks? Volatility has risen to a point of touching off nerves for investors. The initial catalyst for the downside was concerns over the emerging markets. While some believe the selling to be an opportunity in the emerging markets, others (me included) see this (selling) as a potentially bigger problem. To use the word contagion would be overly dramatic, but the meaning is applicable. The spreading of worry through the investment community can happen quickly if it is believable enough. The key currently is believe-ability of the emerging markets to collapse financially. Some are of the opinion that the pressure on currencies is a direct result or issue derived from the Fed stimulus which has strengthened the US economy. Intended consequences of getting the US economy back to a 2% GDP?! There are issues in the emerging markets, and they are more a result of debt and over spending of government.  The need to justify or assign a reason to the selling is what creates most stories assigned to market events. If the correction in the US is going to become more than what it currently is, it will be a result of bigger issues than the emerging markets.  Hint… maybe overspending by government and too much debt would be a good starting place to look.

Speaking of overspending, the affordable care act is still being put into effect and the CBO (congressional budget office) on Tuesday released there revisions on the impact the jobs and cost. In 2011 they estimated 800,000 jobs would be lost, that number in the report is now 2.3 million or nearly three times the original estimates. Cost are estimated to twice the original quotes. This data, added to what is already on the docket, is not helping the healthcare sector short term. XLV is testing support near the $54.55 level and holding for now. Biotech (IBB) is showing a double top pattern with support at $234. Medical Devices (IHI) is testing $91 support. Pharmaceuticals (XPH) are testing $87.30 support. Healthcare Providers (IHF) are testing $90 mark. All together the sector is at a key support level and needs something positive to keep the upside alive. Negative reports about the ACA isn’t helping. Of course the White House responded to the report stating the number failed to account for……. blah, blah, blah! The numbers are not anywhere near what was proposed in the original bill, not to mention 5 million people lost their health insurance even though the promise was they could keep it. Nothing about this process has been good and the outcome isn’t likely to change anytime soon. Watch the downside risk in the sector moving forward as the single payer system controlled by government evolves. That wasn’t the way it was presented to American’s, but that is what is unfolding before our very eyes.

 

What about the economic data? We discussed this on Monday when the ISM manufacturing fell more than expected and rock the markets on the downside. ISM services data was out on Wednesday and it was inline with expectations and continues to show expansion for the month of January. With this behind us and the market shifting to neutral, Friday becomes an even bigger event relative to the jobs report. Estimates are to add 190,000 new jobs. With the December miss fresh in everyone’s mind there are plenty of questions about the number to be released on Friday. If there is a big miss again for January what happens? I am not a prophet, but I will go with the reaction not being positive. A winner in that case may be commodities and they will be worth our attention. DBC has already made a modest bounce this week. Friday promises to be an interesting day for data and reactions.

The key is to remain focused and let the emotions calm relative to all the speculation. This may take time… it may results in more downside than currently projected… but, any way it unfolds we have to be patient with a defined plan in place of how to position our portfolio both now and looking forward.