Looking at the Scatter graph below of the sectors making up the S&P 500 index we can define the current bounce off the August 27th low as the trend to watch short term. Of course that has been positive for the last two plus weeks. This of course leads to the next question, is it sustainable longer term? There are too many question marks in place to say yes, but the goal is to take what it gives one day at a time going forward and let the long term outlook evolve. The longer term trend for the broad markets is still in a positive uptrend off the November 2012 lows. The question we have to address each week is where is the leadership and what opportunities does it present in relationship to the long term trend? Or, do we just establish trade positions for the short term?
The leadership from the low on August the 27th has come from industrials, basic materials, consumer services, healthcare and financials. Telecom, energy and technology were doing well until the last couple of days where they have traded lower. Is this a combination based on the current environment that can take the markets higher going forward? On the surface the inclination is to say no, but I believe we need more time for the true outcome to be determined. As stated, there are plenty of issues and questions facing the markets going forward, and they are not likely to be answered in the near term debates.
Industrials (10.5%) and basic materials (3.5%) together help define the leadership. Consumer services (12.4%) and healthcare (13%) are the heart of the leadership. Financials (16.4%) would help along with the consumer staples (10.2%), which have moved higher the last two weeks, if they could maintain their recent upside push. The key for the sectors to drive the index higher going forward or this bounce off the August 27th low will stall and the sellers could regain control of the markets short term. The bias is on the upside for now, but we are heading into a resistance zone that will need a defined catalyst and based on today, that may well be the Fed. How much they cut stimulus in the FOMC meeting will be the catalyst many are looking for. If the cuts are deeper than expected watch for the downside react. If don’t happen or seen as a Goldilocks move… just right, the upside is the winner.
The markets did end higher into the close today, they did so on modest volume and Apple was a drag on the NASDAQ. The VIX index tested 13.8 again and picked up in the afternoon to close at 14.4. I am not convinced this goes higher without some type of test short term. Watch, protect your downside risk according to the time horizon of the positions and the risk you are willing to accept near term.
REITs (IYR) finally are holding the bounce off the lows and added 1% to the upside today. The sector was up more than 2% at the open, but failed to hold the entire move. Yields fell early today on the news that Summers was withdrawing his name for consideration as Fed Chairman, when it was over the yield on the 30 year bond gained 2 basis points to 3.81% and the ten year dropped 2 basis point to 2.87%. The rise off the low in yields shows that investors are still of the opinion the Fed cuts stimulus. Utilities are suffering the same fate as the REITs but have managed to bounce off the current lows as yields settle in. Watch both sectors for some upside going forward.
Watch and be patient as we head through a challenging week of trading, which is once again news driven.