Looking for Confirmation and Follow Through of New Highs

As we start the week following a strong Friday where economic data led the way, can or will the investor stay engaged on the upside? The level of optimism from investors, both professionals and individuals is amazing. There has been a parade of analyst to speak and write about the great rise in stocks ahead. Along with their enthusiasm you have to love the rationalizing of the slow growth, anemic economic data seen as improving and everything looks rosy. While you never want to fight the trend of the tape, you do want to be rational enough to know when the merry-go-round stops, and get off the ride. I am not going to put all the numbers in front of you to show how slow this economy is, nor do I want to be negative about what the future may hold. All I want to say emphatically is, protect against the downside should the trend come to an end. Plain and simple, when the ride is over… get out.

There is plenty of additional economic data out this week to add to those reported on Friday for January.  Factory Orders, ISM Services, Productivity, Wholesale Inventories and the Trade Deficit. All will add to the story concerning future growth and, if negative, they will have an impact on investors and stock prices. Watch how investors react to the data and what impact, if any, it has on investor sentiment.

Dell is back in the news with speculation that taking the company private could happen as soon today. The details of the deal are still forthcoming, and what impact it will have outside of Dell and Microsoft is hard to say, but both are worth our attention. The PC market has continued to decline and the strategy behind this move is still not clearly understood by many. Watch the impact, if any, to the technology sector.

Technology got a boost from the move in the broad markets on Friday, and XLK, SPDR Technology ETF cleared the first level of resistance at the $29.62 level. Networking (IGN) continues to consolidate near the highs, Software (IGV) is pushing back towards a new high, Internet (FDN) is near the current high as well, and Semiconductors (SMH) broke to a new high on Friday. If we can find some leadership from the sector this week it would be helpful to the move higher on Friday in the broad markets.

Energy remains the current leader off the December 28th low. XLE, SPDR Energy ETF is trading near the high hit last week. Oil Services (IEZ) established a new high on Friday and is setting the pace on the upside currently. Exploration (XOP) hit a recent high and is pushing towards the September high on the move Friday. The leadership from energy has been important as it has offset some of lagging in technology. The refiners continue to one of the stronger sub-sectors of late and gasoline (UGA) is hitting a new high for the commodity. Crude is pushing towards the $100 level as well. Overall the sector continues to set the pace on the upside.

The technical view of the market shows the buyers firmly in control. However, you cannot ignore the fundamental data, along with the sluggishness of earnings and economic data. The question begs, why the upside then? The simple answer is the $85 billion the Fed continues to pump into the market every month buying US Treasury bonds. Not to mention they are still in the mortgage bond arena putting roughly $40 billion a month to work. The total comes to roughly $1.4 trillion per year… amazing that seems to be the current spending deficit produced by a non-budgeted Congress. Regardless, we will track and take what the market gives, but keep our focus on the downside risk should it arise… until then enjoy the merry-go-round.