Investors React to the Negative Data

To use the line from “Top Gun” – Goose to Mav after being yelled at by the Colonel … “Thanks, I really enjoyed that!” When the bell rang at 4 pm, that was all I could think of. It started out on slightly negative bias, but as the data and the news trudged through the day investors steadily and orderly moved to the sidelines with the index closing down more than 2.2% on the day. There is no need to rehash the news, but I will say if was more of the same with some addition name calling from Moody’s towards the banks. We have to look forward and determine how to deal with the hand that has been dealt. Are we reversing again to test the lows or does support come into play? We hit most of our stops on Thursday as a result of tightening them heading in to the FOMC meeting. Now we look for the opportunity that is being presented.

S&P 500 index fell to 1325 and failed to hold near 1330. The 1320 level offers some support, but 1305 is more likely. Friday will give some insight to the level of fear or selling we can expect, and we want to see if it moves to support and bounces, moves back above the 1330 level and holds or sells to 1305 on accelerating fear. The action will give insight the to the sentiment. The VIX index did move back to 20 on Thursday and move back above 21 on the close would be a negative short term for the index. SPY, SPDR S&P 500 Index ETF shows support at $131.60. Technically the chart is broken and will require some patience, but the parts of the whole will be where to look.

The downside move was led by technology, basic materials and energy. The selling in energy and materials was the results of Wednesday’s supply data in conjunction with Thursday’s economic data from Europe and China. Crude fell to $81 on Wednesday and followed through with a decline to $78.16 on Thursday. Last October oil hit a low of $75.67, and that is now in play as the next support level for crude. The short side interest is heavy in oil currently and unless something changes in the global picture near term, that is likely to continue. I posted in the evening notes on Wednesday to watch DUG, ProShares Utra Short Energy ETF for an entry at $27.20 if the downside in oil continued. Needless to say, that level was hit and heading towards the target of $30.40.

The decline in technology (XLK) was orderly and on lower volume, but a 2.3% decline nonetheless. Semiconductors (SMH) led the way with a 3.3% loss on Thursday. Broke support and like many charts came to rest on the 30 day moving average. $31.50 is the level to watch on Friday, and then $30.70 as support. If this is an emotional reaction the sector will catch support and bounce back to show interest from buyers. Friday has set up as a follow through day on the downside or bounce and regroup day. Either way we will take our short term direction from the market.

The financial sector was showing signs of leadership again, but Moody’s took care of that. They downgraded 15 banks on risk exposure to capital in light of the situation in Europe. Just what we need, the rating agencies telling us what we already know. The formal downgrade makes it official that they warned us of the dangers of defaults in the European banks and sovereign debt. The sector fell 2.2% and banks fell 2.3% on Thursday. The key to the sector will be the after-shock of the downgrade in addition to the economic picture. Willing to let this settle and then find the opportunities.

The opportunity on Friday is to get in an early 18 at the club, lunch with some friends and a afternoon sauna. The look at the close to determine how the markets handled the news. I just booked a 7:45 tee time and expect to have a relaxing day! After all we hit our stops and hold mostly cash, I have my stops on the few remaining positions and I would rather be relaxed when I look at the results from Friday versus watch the day and getting frustrated. The next few trading days will give plenty of data to tell us where to go for the next opportunity. This weekends update will address what we see and where the opportunities lie.

Enjoy your round of golf!