Investors View Spain with Skepticism

The equity markets are close on Friday in observance of Good Friday and that makes today the final trading day of the week. How investors follow up on Wednesday’s selling will be important. Most indexes and sectors have pulled back to the first level of support creating the first test to confidence. Do we bounce as we have over the past three months or is it time to see the investor fortitude for risk? We will get our first glimpse of reality today and that promises to keep it interesting. The futures aren’t looking promising for a bounce, but it is still early in the day. Today I want to look at how to play the current situation moving forward.

In the Sector Watch Update last night I addressed the difference between Tuesday’s reaction to the FOMC minutes and Wednesday’s hangover to the minutes combined with Spain’s sovereign debt issues and awareness rising to a boil. I am of the opinion Spain is a bigger issue for investors than the FOMC punchbowl effect. This is bringing back memories of 2011 when the same issues rose in Greece. The markets struggled with the potential outcome until the summer sell off. Are we heading for the same type of action relative to Spain. The challenge being that Spain is a much large number to bailout. The potential issues facing Europe are more unsettling to investors than if the market can sustain growth without more easing from the Federal Reserve. If we are going to have speculation to disrupt sentiment, Spain is the bigger story to watch going forward.

The S&P 500 Index fell over 1% on the day and closed below 1400. There is some support at 1386, but 1375 is the first test of support for the broad index. However, scanning the sectors of the major index gives more insight into where the selling is focused. the financials were one primary target moving near the $15.45 support level. The banks were off as well with Bank of America dropping more than 3% on the day. However, the brokers were the leaders on the downside. IAI, iShares Broker/Dealer ETF fell 2.2% and fell to the first key level of support at $24.60. Morgan Stanley was the leader on the downside as rumors swirl about a possible downgrade to the firm by Moody’s. The financial stocks are a key element of leadership currently for the broad markets. How they preform in the coming weeks will be important overall. When the Greece effect hit the market last summer the financials took the brunt of the damage. Watching Spain’s impact on the sector is key short term.

Technology is another key leader for the broad markets and semiconductors took a big shot losing 2.2%. The SOX index has been volatile throughout the move higher off the October low and the test Wednesday back to the 418 level is a big test for the index. A move below this level would open more downside to one of the leading sectors. Set you stops accordingly relative to any positions in the broad sector. Apple held up on the day dropping only 0.8%. Networking, software and internet all dropped in unison with the the technology sector overall. The broader index is holding up bettre than the parts for now.

The consumer services index tested as well, but showed more resolve and strength on the trading day closing on the 20 day moving average. The retail sector was off 1% on the day and holding the uptrend currently. Consumer staples were off only 0.3% showing the strength across the consumer sectors. The economic data over the last week has helped to validate the consumer is still spending and the sentiment is positive. This remains one of the stronger sectors in the broad markets.

There were no major break downs in the sectors worthy of discussion or speculation. The discussion will be how we follow through today and starting next week. How the Spain story unfolds will be key moving forward. Do the sellers get the upper hand when it comes to sentiment? At what point do the buyers step in? Do we sell off into earnings and then rally on the promising earnings reports? We can question and speculate this to death, but the facts are the facts… the uptrend is still in play. The selling once again has the attention of investors. It will take a disruption the proportion of Spain to rock the confidence currently in play. Watch, evaluate, don’t speculate and follow your discipline relative to every holding.

Relax and enjoy your extended weekend.