Dealing with the new wall-of-worries

Is it time to drag out the WALL-OF-WORRIES again? We have discussed all of the issues for months now, but the market has continued to find a way to move higher. Looking back at our notes from last fall our original target on the break higher for the S&P 500 index was 1575. The index has now essentially achieved that move and there are analyst who believe we are going higher towards targets of 1650 or more on the index this year, and there are analyst who believe we are heading to 1430 or lower before the end of the year. The battle of words and charts leads to all the current concerns facing investors. With that in mind let’s do a rapid look at some things we all need to watch short term and make decisions based on how they unfold.

  1. Defensive stocks are leading the indexes! Oh shock and horror… Yes, we would all like to see the growth stocks step up and take on some leadership, but at this point you have to go with the one leading the dance. Consumer Staples, Healthcare, Utilities and recently Telecom are taking on the leadership role. Until which time they fall out of favor or the trends reverse, stick with what works and ignore the pontification of the “experts”. 
  2. Transports have been down three days in a row! That is astonishing and should lead to excessive selling:)  The challenge isn’t the three days, it is the fact the index has moved lower when the major indexes were moving higher. That divergence is noteworthy. It could very well be a sign of weakness looking forward for stocks. Tuesday when stock indexes moved higher, IYT broke support at $106.70, closed below the 20 day moving average and on Wednesday confirmed the move lower with a break of the 50 day moving average and broke the up trendline off the November low. Technically the sector is showing some early signs of weakness. Thus, it is something to watch and manage relative to the outcome and impact on the broad markets.
  3. Small caps have been equal to the transports on moving lower. Again, this is coming in light of the major indexes moving higher. Thus, the divergence has raised plenty of voices of concern. IWM, iShares Russell 2000 Small Cap ETF broke support of $93.15, fell below the 20 day moving average and Wednesday broke below the 50 day moving average. All very similar to the transports. This another sector to watch relative to the downside risk of the broad indexes.
  4. Semiconductors have been testing lower for the last six weeks. The downside break of the 50 day moving average and the trendline are a negative to the technology sector and the broad market indexes. 412 is support for the index and if it doesn’t hold it gets uglier for the sector.
  5. Banks equally have been selling and breaking all the same support levels and moving averages. As you can see the totals are adding up and that is why the concern relative to the broad indexes is building as well. KBE closed near the $26 level of support and if it breaks it will open the downside risk further.
  6. When looking at the economic data this week alone we register further worries about the growth going forward. Thus far the reports have missed on almost all points for March. That has led to the concern that the last month of the quarter slowed down. Of course that gets extrapolated forward and jumps to the conclusion that the second quarter will be slower than expected. You get the theme, worries compound more worries. That said, we do have to be concerned about the March data points being weaker. However, all we can do is wait until April numbers are released to see if there is a trend. Jumping to conclusions at this point is not the best course of action. However, it does help with the pullback or test that many have been prognosticating for more than two months now.

Interesting that we have discussed six significant points about the markets, but none involve Cypress. Okay that was a cheap shot, but we haven’t discussed Europe and the issues that are ever evolving there. Nor have we discussed the challenges in China, nor the geopolitical issues developing in North Korea. There are plenty of additional concerns for the markets overall. In fact, we would worry ourselves into selling everything and hiding it in our mattress if we really wanted to, but the key is to watch all the data points that matter and weigh out the potential impact to the sectors first and foremost, then to the broad markets.

My advice is to stay focused on what you own or want to own in your portfolio. Determine the risk you are willing to accept going forward, armed with the knowledge available. Set your stops and manage the risk of each position day by day until this all gets resolved and the next trend is established. Focus disciplined is more valuable than all the worries in the world.