The markets end the week quietly and investors got an early start on the long weekend. With that in mind I am inclined to start early myself. But, my work habits seem to keep me working until later than normal… that said, where do we stand? I have some thoughts and some notes on that below…
1) The major indexes all held key levels of support, and posted a positive end to the week on Thursday. That said, we head into next week still looking for the direction to be defined by some direction other than sideways. Since December we have been moving sideways and we remain in that direction. The reality is economic data and earnings the next few weeks will shed light on what to expect and that may not be close to what many thought when the year began. Those 2.5-3% GDP growth numbers are now heading towards zero. That may explain in no uncertain terms why the market is flat in the first quarter. Going forward the outlook isn’t much better. And, that is the good news.
2) Just when you think things are gaining some clarity in the crude oil markets we interject the nuclear deal with Iran. I will not voice my personal opinion, but if this goes through and the sanctions are eased against Iran… oil supply has to rise. Demand isn’t changing currently. Results are worry more about oil prices declining even further in the near term. The speculation is rising again and the sector is responding. Trading range is still in place and that is what we will watch as this all unfolds. Not a buyer or a seller at this point in time, simply and observer.
3) Technology bubble (XLK) was the term I heard the last couple of days. I am not inclined to respond to that as I am not sure where the bubble is, but if the valuations are too high in the sector it would be because growth is slowing and is expected to slow even further. Then I would say the sector has serious issues. I don’t believe we know enough at this point to make that assumption. We do know things are slowing in the economy, but will the economy continue to slow going forward? Again inconclusive currently. I do know XLK is testing lower from the February highs. Semiconductors have been a challenge for the broader sector as well as the internet stocks (FDN). All are still holding key support levels and until those are broken we have to be patient and let it unfold. All of the parts look very similar to the whole at this point and letting the direction unfold is the best course of action. In other words, be patient.
4) Biotech bubble (IBB) was another sector under attack by the media talking heads. Yes, like technology it has shown some downside movement off the March highs. It has held above the 50 day moving average for now and we will continue to watch as we go forward. The major concern in the sector is valuation based on forward growth. Not unusual for a sector that has enjoyed the long run higher biotech stocks have. The trend short to long term remains in place. The micro term adjustments is worthy of attention and if the downside persist or gains momentum then we need to know where the exit points are define by our risk and our strategy… not the media. Be patient and let it unfold for now.
5) Midcap sector (IJH) remains the best looking of the sector relative to the chart. As with the others above, give it room and let it work through the current market environment and set your stops accordingly. If this sector reverses it could be a negative sign for the broad market indexes.
6) Global market rotation continue to be a positive for investors. The belief is the stimulus in Europe and other countries will help stimulate growth. If the growth being discussed is market growth the answer would be yes. If however, the topic is economic growth that may take a lot longer time horizon assuming it works better than it did in the US economy. I am not counting on big growth in the economy, but I do believe the money will find its way into the investment markets very similar to how it did in the US.
Overall it remains cloudy, and cloudy skies bring volatility and uncertainty to the markets. That is where we find ourselves as we begin the second quarter. Patience will be a key ingredient to being successful going forward. We will take it one day at a time and one trade at a time. Stay focused and let the market define itself versus speculating on where it will go.