Leadership Still in Play for the Broad Markets

The focus on Bernanke has kept the markets in check over the last couple of weeks. Can he say anything different enough to spark a rally in the equity markets? The new rumor floating in the media is he doesn’t have consensus of the Fed Presidents to add more stimulus. If that is true we won’t see any action until January 2013. However, the reality is the stimulus will be added if the economic picture erodes further and the markets move lower. To this point neither has transpired at the level to act. I think he punts the decision to a later point. How do investors react? Therein lies the challenge for a speculator. Since we don’t like to speculate on those type decisionss, we have to protect against the reaction if it is negative. The downside risk is our concern, and we have to prepare for the worst and hope for the best.

The initial posturing has been done with money reacting and moving to where it will be treated the best if the Fed adds stimulus. The rest is defining the sector and stocks that continue to provide leadership. On Wednesday Consumer Discretionary and Healthcare continued to provide leadership for the broad markets. Breaking down the consumer sector shows the retail stocks remain in a positive uptrend. XRT, SPDR Retail ETF moved back near the recent high of $61.45. Breaking down the sector shows some positive moves on earnings from Jos A Banks (JOSB) and Zales Jewelers (Z). JC Pennys (JCP) is breaking higher short term as are Ann Taylor (ANN), Men’s Warehouse (MW) and Urban Outfitter (URBN). This is an example of one sector that remains in the leadership role, and digging into the ETF provides the stocks that are breaking higher.

Healthcare (XLV) remains in a trading range or channel with the close at the top end of the range. A break higher would be a positive for the sector to continue the current uptrend. The healthcare providers (IHF) broke higher on Wednesday following a sell off over concerns of Obamacare impacting the bottom line for the sector. The move above $66.50 was positive, but puts the two year highs in play as resistance near term. Wellpoint’s (WLP) change of leadership announcement sparked a rally of 7.6% in the stock helping lead the ETF higher. Scanning the ETF offers some upside setups technically worth reviewing. Medical Devices (IHI) have moved back near the highs as well and in position to break the downtrend in play off the March highs. Pharmaceuticals have been a drag on the sector, but they have been consolidating and building a base to continue the uptrend. Biotech (XBI) is pushing to the upside again as well. The sector has repositioned itself as one of the leaders for the broad market.

Energy (XLE) rose towards the $73 level and has traded sideways. Oil has stalled at the $97 level and thus the consolidation. The uptrend remains in play off the June lows and the sector remains in place as a leader. Watch the downside risk and adjust your stops accordingly.

Technology (XLK) has held the gains from the renewed leadership in August. Networking (IGN), Software (IGV) and Semiconductors (SOXX) have all contributed to the move higher. The leadership is still intact, but you have to be aware of the downside risk should investors react to the lack of action by the Federal Reserve.

Breaking the market down always provides some opportunities. The challenge is digesting the broad market news and the impact on these sectors should the news turn negative. With all eyes on Bernanke, and the current level of speculation on this event, has it already played out or been priced into the market? We will know soon enough, but in the meantime look for the leadership and find the opportunities. If we do pullback or sell in reference to the Fed Speak, look to these sectors for the opportunities going forward.