Is the Market Ready to Reverse?

As we start a new trading week one of the key questions hanging over investors heads is the potential short term trend off the May 21st high. As you can see on the chart below the open on Monday pushed the index above the trendline, the 50 day moving average and the back above the previous trendline off the November 15th low. All is good… right?

SP500

 

For now the answer is yes, but moving forward there are plenty of question marks. We have been discussing the global markets and the potential ripple effect they can have on the US markets. Egypt’s political issues are putting pressure on oil prices which have moved above $103 per barrel. That in turn is pushing wholesale gasoline prices higher and that isn’t good news for the consumer if they stay. Greece is back in the dog house with both the IMF and the EU. Portugal is creating worry again about sovereign debt and the EU stated they were willing to keep interest rates low for the foreseeable future. There is no one situation that is going to derail the global markets, but together they offer plenty be concerned about going forward. Don’t count the worries out just yet.

Second quarter earnings start this week as well and the guidance has not been good. Of those companies offering changes of late 80%+ have revised lower. Not the direction you want to go when you are looking for stocks to continue higher. This is a bigger concern moving forward from my view for the trend change above to take root. We will get a good look at earnings this week and next and it will set the tone for the broad indexes.

Financials (XLF) and Consumer Discretionary (XLY) have been the leadership on the reversal off the recent lows. The regional banks (KRE) are getting a boost from the Fed asset test on large banks (KBE), higher interest rates will help the financials across the board, and the brokers (IAI) are moving higher on the rally in stocks. This is a positive sector across the board and one to hold going forward. Adding to the sector if the upside continues to gain momentum would a positive as well.

Small cap (IWM) stocks have equally offers leadership for the markets overall off the recent lows. The move above $99.50 on Monday is a break above the previous high in May. This is the same high the S&P 500 Index and the NASDAQ Index are working back towards. Thus, the leadership attributed to the Small Cap stocks.

The spike higher in rates on Friday has raised some concern from investors relative to the impact to other sectors. If the move is gradual enough and growth in the economy sustains the current trend it could be more of a worry than a reality. It is all going to up to the speed of the climb and amount of the climb that will ultimately be the true test for stocks. If the worry factor escalates then stocks will react. But, stocks did digest a 21 basis point jump in the  yield on the ten year Treasury bond. This is still an area to watch going forward.

Overall the buyers are in control for now. However, as we have just discuss there is plenty to watch as this all unfolds for investors. Take it one day at at time and manage your risk accordingly.