How Do We Approach Our Portfolio Now?

The FOMC meeting concluded without much in the way of change. The Fed vowed to continue to put more money into the system until unemployment reached 6.5%. They added that the economic activity paused the last few months as further reason to keep engaged in the process of buying bonds. They are correct in stating that the economy paused as the data has clearly showed. Thus, what is going to change? More importantly, is the stock market overvalued based on the current level of economic activity and growth? Those are questions we are likely to get answers to in the coming weeks. For now the response to the FOMC meeting was some selling by investors.

Thus, we have to explore the question, is the Dow more likely to see 13,000 or move above 14,000? Let’s look past the Dow for a second and consider what is taking place in both the small cap and emerging markets. IWM, iShares Russell 2000 Small Cap Index ETF has been a leader in the move higher. The drop of 1.2% on Wednesday got the attention of most investors. The above average volume on the selling shows some testing of the upside move and is worthy of our attention going forward as a leading indicator currently for the broad markets. EEM, iShares Emerging Markets ETF has been trading gradually lower since hitting a high in early January. Thus, the micro trend lower is a concern as well relative to direction going forward. Both funds could be issuing warning signs for the near term, and if it is just a test or pullback it will offer a great upside opportunity off support. Neither is conclusive, but both offer information and insight into the potential direction on the market.

Another sign of interest developing of late has been the renewed push higher in Healthcare (XLV), Utilities (XLU) and Consumer Staples (XLP). These are the defensive sectors yet they have been leading to some degree the broad markets. These low-beta sectors are generally buffered on the downside and money tends to rotate in that direction. Again, this is not conclusive on direction, but another indicator to watch.

The bump in interest rates on Treasury bonds is another concern relative to the price of stocks. As we stated in an earlier update the 30 year bond has dropped more than 11% as stocks have rallied. As some believe that stocks are overbought, bonds are approaching an oversold reading as well.

All of these issues are adding up to a case for stocks to sell off at some point in the near term. As we learned with Apple, eventually the reality sets in and stocks correct back to levels that make sense to investors. This will all work out in time and we as investors need to manage the risk of our money accordingly.

What are we watching today? Besides all the issues above there is the issue of the NASDAQ 100 index which cannot find the right formula to break above the 2750 resistance level. First it was Apple dropping and offsetting any good news in the rest of the index. Now it is the rest of the index offsetting a positive move in Apple. We have been looking for a break to the upside, but to this point that has not materialized, but then neither has any significant selling. Thus, the narrow trading range on the chart for the index. We continue to watch for a solution to the range… up or down.

Commodities took center stage on Wednesday with oil pushing closer to the $100 per barrel level. Gasoline breaking higher on reduced inventory data. Palladium hitting a new high. The sector has been very consistent at being volatile over the last four months. This remains a trading sector from my view and the jump in gasoline (UGA) to $63.76 and a new high could warrant some profit taking. Manage the risk of the sector and don’t over stay your welcome.

Investor response to Facebook earnings was negative after-hours Wednesday. Amazon got a pass on a mixed (at best) earning report, and Facebook may receive some benefit of the doubt as well. The stock dropped more than 6% at one point in after-hours trading only to bounce back and close the extended session down 3%. The weakest point of the announcement was the better than 80% jump in operating expenses. That hurts margins and the impression from investors is that growth rates may not continue going forward.

Small Caps fell 1.2% and Transpiration fell 1.5% on Wednesday. They set the pace for the broad markets since the first of January and they may set the pace on a test or pullback short term. Watch to see how they play out from here.

Last, but not least, our stops. We want to tightin our stops on the positions we think have the greatest risk going forward. We want to give other assets room to continue the move higher even if they pullback short term. And, we want to sell those positions that are under-performing our expectations. Take what the market gives, protect against the downside risk and keep moving forward.