Investors Waffle on Sovereign Debt

The auction of the short term Italian notes went well, but the expectations for the longer term notes today created worry in the markets. Thus, the positive futures that went south on the negative longer term debt worries and took the US equity market down more than 1% on the day. The euro fell below $1.30 again and testing support. The sovereign debt issues in Italy were not helping the currency. Throw in the record setting money parked at the ECB by banks and the quiet from Europe turned back to a grumble.

The dividend stocks continue to lead the analyst top picks for 2012. The contrarian in me believes that alone is a reason to look elsewhere, but I tend to be in agreement as we start 2012. The only question is have they moved up too soon in light of fourth quarter earnings data and first quarter growth projections. Both are something to watch as we complete 2011 and begin 2012. I have been tracking and watching iShares DJ Select Dividend ETF (DVY). The fund broke above $53.70 resistance on Tuesday and tested the move on Wednesday. Watch for the move higher to resume, if not immediately, near term. This is a position you can add to on pullbacks and focus longer term (12-18 months) relative to the holding period. The current dividend is 3.3%.

Forecast for earnings are moving lower as revisions for fourth quarter prepare investors for potential missed estimates. 96 companies have revised earnings lower in the S&P 500 index compared to only 27 revising them higher, according to Barron’s. The S&P 500 earnings are estimated to rise 8.5% for the fourth quarter and for the calender year 2012 only 10%. The energy sector is the leading sector for estimated earnings growth in the fourth quarter up 23.9%. The loser is telecom expected to decline 14.1%. The key will be the actual numbers as they start the second week of January. This could have investors focused on yields and cash for the new year.

Sectors on the Move: The selling on Wednesday came on light volume in reference to European sovereign debt. The push lower in the sectors was notable in those bouncing off the previous lows such as semiconductors. Basic materials lost 2.4% on the double impact to the broad markets and oil dropping 1.8%. The commodities fell as well in light of the concerns about the weakening economic conditions globally, but specifically Europe.

The defensive sectors have been the leaders the last two weeks. Utilities and consumer staples held their own only giving up 0.4% on the day. Healthcare dropped 1.1% on par with the broad market indexes. This is why so many analyst have been pointing to the defensive stocks of late. They tend to fall less than the broad markets in slower economic periods. However, it is equally important to note they still fell in value. Thus, you need to manage the risk of owning the sectors as well. Be cautious and set your stops accordingly.

Crude had moved back above the $100 mark on supply speculation pushing the price. The supply disruption concerns are geopolitical relative to Iran’s threat of blocking shipping lanes. The US stated they would use the Navy to maintain the shipping lanes for oil tankers to pass. Thus, the rhetoric continues relative to sanctions on Iran. This is something to keep an eye on as the ramifications economically won’t help if prices start moving back towards the $4 level for gasoline. Watch crude prices as well over the $100 level.

Gold is making news again with the move below $1600 sticking for now. The metal dropped another 2.4% Wednesday in response to the sovereign debt concerns and a strong and stable dollar. The metal is currently down more than 4% for the quarter and it will be the first negative quarter in three years. Closing below $1560 threatens that level of support. Watch today and see how the price responds to the move. $1500 could come into play if the selling gains momentum. Silver fell 5.7% on the day to $26.88 showing continued weakness and a break of support.

Financials gave up 1.6% on the day as well with the move back to $12.80 support on XLF. Banks lost 1.4% and regional banks were off 1.8%. Any weakness in Europe or data relative to the banks having record deposits at the ECB, the financials will struggle. Still worth watching and owning if the news doesn’t erode further or confidence slip back into the panic zone.

Watch, set your stops and be patient.

[ismember]What I am watching today: Response to the Italian long bond auction that prompted the selling Wednesday. Europe is back in the headlines putting the dollar, gold and banks back on the watch list.

Last minute additions to the earnings revision list as we close out the year.

Defensive stocks to hold gains and add to their upside this week.

Joble

Watch and play according to your risk tolerance. Everyone has different tradings styles and you have to find what works for you and your personalty. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your downside risk determines your long term results. Trade smart.[/ismember]