Headlines to Watch and Filter

On Wednesday I discussed some headlines to watch relative to market worries and opportunities. I want to refresh them and add a few points as the broad market face resistance and more talk about a pullback of 3-5% relative to valuations emerge. First, let me say no one knows where the market is going or when it will go there. That said, we have to form our own beliefs and convictions relative to our portfolios, invest accordingly and manage the risk of the market reality going forward. If we are wrong we will stop out or sell our positions, if we are right, we ride the trend until which time the trend breaks and the next opportunity evolves.

The macro view for the market involves issues of longer term events that will evolve into reality or only some portion of the perceived event. But, they seem to dominate the headlines when it is important to make a point. Filter and digest what is important. Some examples are; the broadening and expanding geopolitical events in the Middle East are ever present. The latest issues with Iran and Israel are pushing oil prices above $105. The bigger question relative to the Middle East is will erupt this time into something bigger than a worry? China is slowing, India is slowing, Japan still isn’t growing. The threat of a global food shortage and oil shortage are ever present. Monetary policy are driving the US an Europe economic plans versus a growth policy. No realistic budgets in the US are a looming showdown politically and financially. The list goes on, but the key for you and I is to have a filter that allows us to find our own convictions and build a portfolio based on those convictions regardless of the noise. The following are a few sectors we have filtered looking forward.

One risk to the market continuing its current advance is the price of oil closing near the $106 per barrel mark. This takes out the $103 resistance levels and brings $114 squarely into play. I discussed on Friday the rotation of leadership towards the energy sector. The primary driver for crude prices moving higher are Iran sanctions and the fear of a shortage in supply. The chart of crude oil below shows the clear break from the trading range and the near term target of $114. I always say if you don’t like the price of gasoline at the pump you better buy the stocks or the commodities to afford the price of gas. That is true currently. The jump of nearly 10% at the pump has equated to a better than 10% gain in the price of crude. The same can be said for gasoline. UGA has moved from $49 on the break of the downtrend line January 3rd to $55.80 on the close Tuesday. Equally a gain of better than 10%. Thus, your money has kept pace with the cost to fill your tank with gas. This is definitely a sector to watch near term. The geopolitical risk in the Middle East is alive and well. This is an ongoing issues we have to monitor, but the rising fear level of supply disruption from Iran is driving the price of crude and it has evolved into an opportunity for a trade in the sector.

Greece bailout settlement. Is this another buy on the rumor, sell on the news stories? The global response to the settlement was mixed as investors look towards the economy and the outlook for growth. EFA, EAFE index ETF has moved off the double bottom lows in December to resistance near the $54.50 level. The headlines in Europe shows weaker PMI data and thus, questions about the economic growth. Europe solves one issue with Greece, but the overall issues of recovery is still in play. This will be a volatile area of investing for the foreseeable future. Proceed with caution and treat this as a trade more than an investment for now.

The emerging markets trade has paid off over the last two months. Can the trend continue without China and India regaining momentum? I think this is a tough play the balance of the year and we are watching China currently to define the forward direction. China manufacturing data was up slightly, but this is another area of concern relative to global economic growth. A look at the chart of FXI, iShares FTSE China 25 Index ETF shows the solid uptrend off the October lows. The move has come with its share of challenges, but it has progressed nicely nonetheless. The topping pattern over the last three weeks is a concern in the short term. But, the bigger question is will China regain it’s leadership role relative to the global economic picture? Too soon to answer completely, but the trend for stocks are improving, but the economic picture is still sketchy at best. If you can stomach the volatility it remains a positive picture long term. Short term look for a test of the uptrend line near $37.80 and longer term a move to $42.80 and $46.30 are not out of the question.

Retail remains one of the leaders for the broad markets as earnings show strengths and weaknesses in the sector. Saks stated the high end consumer was back and willing to pay full price for goods. SKS jumped 3.3% on Tuesday and broke through resistance short term. Home Depot (HD) continues to benefit from the positive sentiment in the homebuilders. Wal Mart (WMT) however, disappointed with a miss n revenue data sending the stock down hitting stops or exit points. XRT, SPDR Retail ETF shows a solid break higher in the sector in mid January and the rise has been steady since. It is earnings time for the sector and the reports from the fourth quarter are due. As seen already some are winners and some are struggling. The overall sector tested lower giving up 1.5% on Tuesday. The uptrend is in play, but the news will be interesting to watch along with the reaction in the stocks. I am not one to bet or play earnings, but the sector overall is looking for a positive boost from earnings. Short term target is $61 for XRT.

It is important to understand that news otherwise known as noise short term is not always right relative to the direction of stocks, market sectors or the market overall. Be disciplined in your approach to managing your money and invest based on your strategies and convictions. Manage the risk and keep you focus on your strategy, conviction and discipline.