The markets have pulled back to support levels I would like for it to hold currently. The S&P 500 index is resting on short term support at 1430. Holding at this level would be a short term positive against the negative sentiment building in the broad index. If we start to accelerate on the downside the index would correct more than many expect short term. In our video update last night we looked at how 9 of the 10 sectors for the index have been moving down in unison over the last three days. That reflects broad based selling as investors juggle portfolios in light of the renewed concerns about growth in the US and European woes with Spain and Greece. The infamous wall-of-worry is back relative to uncertainty. When the outlook gets cloudy money rotates to where is feels it will be treated the best. The defensive sectors and bonds have been the current benefactors.
Looking at the rotation there are five sectors to watch:
Technology stocks have been under pressure after hitting a high last week. The challenges have been from the the NASDAQ 100 index and Semiconductors. Both have been under pressure due to the erosion of the PC market. Intel has been a big drag as the stock remains under pressure from sellers. The large cap stocks in the indexes have been the catalyst to the selling and they deserve our attention short term. Apple has moved back towards support at $656 after hitting a high above $700 last week. The sales of the new iPhone where not as robust as some analyst had expected. The combination of news and speculation have been a drag on the sector overall.
The short interest in the semiconductors has been growing. However, looking at a chart of the SOX index support at 373 seems to be the level to watch for now. The index is oversold short term and may bounce back, but the downside is the current trend. Watch to see how this plays out short term, and spend some time breaking the sector down. There are components that are benefiting from the tablet sales versus the erosion of the PC market.
Retail broke to a new high over the last three weeks and is testing the move higher. There are always concerns about the consumer contracting spending as the economic picture continues to be weak. While the consumer may contract spending they are still spending. We just have to find where they are spending and invest in those areas or sub-sectors. The obvious place to look is the non-discretionary stocks or what I call the toilet paper stocks. These are areas where the consumer has to spend. Example of late has been gasoline. UGA has been in a solid uptrend as the price of gasoline has been steadily rising. If we dig further into that idea we find the refineries have been the leaders for the energy stocks. Stocks like Valero and Western Refining have moved to new highs. Money will be spent by consumers based necessity alone, look for the areas they are spending and follow the money.
Financials have become the poster child for hatred by both the general population and the regulators. I will not say it isn’t deserved, but they continue be a volatile sector of the broad markets. But, like anything there is opportunity in controversy. After hitting a high two weeks ago at $16.40 on XLF, SPDR Financial ETF the index has pulled back to support near the $15.50 level. Short term we would look for a bounce in the sector off support, but more importantly is the outlook longer term. The sub-sectors to watch are the banks (KBE), brokers (IAI) and regional banks (KRE). They have all pullback as well over the last two weeks to support. Don’t make assumptions relative to the public whipping the sector is taking. Dig in and find the leaders with a positive outlook. Wells Fargo, BB&T, PNC Bank and others offer opportunities longer term.
Treasury bonds have been moving higher once again after moving lower on investor confidence. As the stimulus from the Fed was being debated and implemented, investors gained confidence and were willing to put money into higher risk assets. Thus the yield on the thirty year bond rose to 3.1% while the price of the bond declined. With the renewed concerns about Europe and growth in the US economy, yields have declined again to 2.8% and the price of the bond has risen more than 4%. While I am not a buyer of Treasury bonds currently I am interested in what the migration of money to bonds says about investor confidence and sentiment short term. Watch this sector as an indicator for stocks looking forward. If yields continue to fall and bond prices rise, I would see it as a negative short term for stocks.
The dollar has fallen more than 6% on the open ended stimulus announced by the Fed. The current bounce off the lows is a result of fear building in Europe. If it escalates the dollar will continue to benefit. However, if the issues with Spain and Greece currently subside, the dollar will continue or resume its decline lower. This has a negative impact on the US relative to imports. In essence we import inflation as the price of goods rise from foreign countries. Oil moves higher as it is priced in dollars which pushes the price of goods higher that use oil in the production process. This is a key point going forward as the broad based impact of a lower dollar impacts everyone. A higher dollar will put further stess on the US economy.
As you can see there is plenty going on in the markets and these five sectors will offer us some insight going forward, but they also offer investment opportunities. Watch the sectors and dig into them looking for the parts that are leading and offer the best growth for our money.