My notes on Friday morning addressed the issue of what it would take for the market to follow through on the upside. Needless to say, the activity on Friday was anything but a follow through on the gains from Thursday. As we start a new week of trading the questions are the same, but on Tuesday we will add a new twist with the election results. The presidential race is one thing, but what about the House and Senate races? They will have an impact on what the elected President will be able to accomplish in the next four years. Needless to say we still have to determine what action we will take going forward.
The NASDAQ index retreated from Thursday’s gains and closed back near the 200 day moving average and the uptrend line. As we have stated, a break of these key support levels and the downside gains momentum. Hold and bounce the trend has a chace to continue short term. There are two influences at work on the index, first is the large cap technology stocks. There has to be a reversal in sentiment relative to Apple, Google, Amazon, Microsoft, etc. Without them providing at least some stabilization the upside will not gain any traction. A good barometer for the sector is XLK, SPDR Technology ETF which consists of all the large cap technology stocks in the S&P 500 index, but many reside on the NASDAQ as well. Second, is the small cap stocks. The Russell 2000 index bounced off the 200 day moving average and moved to the upside on Thursday, but reversed and tested on Friday. The index is in position to move higher. If the NASDAQ is to maintain the uptrend the small cap stocks will be a key part of any move higher. Both sectors have tested lower and remain in a position to move higher, watch and see if they can provide the needed leadership for the broad index.
The S&P 500 index is in a similar situation with the exception the trend has been sideways more than down. The financials, utility and consumer sectors have held well enough to keep the downside from being as pronounced. Telecom, Technology and Energy have been the weak sectors of late pushing the broad index below support at 1430. The index needs some leadership to reassert itself short term to push back towards the previous highs of September. If the reversal in technology stocks we discussed above takes place in the large cap stocks that would directly benefit the S&P 500 index as well. Like the NASDAQ it is decision time and we will need to see some momentum if the trend is to continue on the upside.
The dollar found renewed strength in the jobs report on Friday. The question begs as to why? Simply put, if the jobs sector gets better and gains upside momentum it would shorten the duration of QE3 by the Federal Reserve. The Chairman stated that QE3 would stay in place until the jobs picture improved. Less money supply by the Fed helps dampen inflation fears and in turn a stronger dollar by having fewer of them in supply. The stronger dollar outlook comes from adding 171,000 new jobs in the month of October. While I understand the concept of the Fed being out sooner than later if the trend continues, but one month isn’t really a trend. Not to mention that we need to add 300-350,000 new jobs per month for an extended period of time to lower the unemployment picture. Hope has never been a rational investment strategy and this is a little more on the hope side than reality of a trend in new jobs being added. This move bares watching for now. If the dollar gains strength on this rational and gold drops for the very same reason (no inflation), bond yields will rise in response as well. This brings new trade opportunities if the trend is real and valid. For now it is speculation that allows for some trading opportunities, nothing more. Watch to see how this plays out in the short term.
There are plenty of moving parts currently. Some favor a more logical approach to the future trend of the markets and some favor an emotional approach to the markets. We have to be disciplined in our approach to the current trends and movement based on logical trends that can be validated. One day at a time… one sector at a time as this all unfolds.