Looking for Direction… Up or Down

Volatility is back, but not extreme. The downside is in play, but not overly negative. The S&P 500 index broke the downtrend line, but not with irreparable damage. Economic data is slowing, but not dead. Earnings are mixed, but not overly negative. In other words, the market remains in a transition mode as investors continue to look for clarity. Unfortunately Thursday provided none and stocks fell further. The S&P 500 index closed at 1541 which established a lower low on the chart. Technically that is the start of a trend shift. The biggest question is what will be the catalyst to determine if the downside accelerates, or the buyers step in on the dip lower? For now, I am going with earnings. Those reporting thus far have been mixed enough to raise plenty of questions. Last night Microsoft was better than expected on both earnings and revenue, Google beat earnings and missed revenue, and IBM missed both revenue and earnings. That results sums up what is happening with earnings and that could be what pushes stocks lower and completes the trend reversal.

Today you have to watch the Dow Jones Industrial Average as IBM weighting is 11% of  the index and currently the largest stock. That should impact the index on down side. The Dow closed on support at 15,520 with 14,400 the next level. The S&P 500 index is at 1538 support with the lower low on Thursday in play. The NASDAQ is broke 3205 on Thursday along with the 3180 mark. 3120 is the next level of support to hold. Technology continues to exert downside pressure on the index. Today is an important day for the broad markets as they face support levels that are important to the first phase of this pullback.

The S&P 500 index closed the day with four major sectors holding their own on the move lower. Healthcare, Utilities, Telecom and Consumer Staples. Five have progressed lower off the April 11th high. The downside leaders are Basic Materials, Industrials,¬†Financials, Consumer Services and Technology. Energy broke support and is the only sector¬†establishing¬†a current downtrend. The rotation lower is gaining strength and that is what we have to watch. Our nightly scans didn’t change relative to downside or upside sectors on Thursday. However, the negative side gained in momentum.

There are plenty of fixed income assets filtering to the top in our scans. The Treasury bonds (TLT), corporate bonds (LQD), high yield (HYG)and convertible bonds (CWB) are all doing well in reestablishing their uptrends. Even Floating Rate Funds have regained some positive money flow from investors. This could be a danger zone for investors if stocks regain¬†their¬†uptrend. The concern would be a rise in interest rates in response to a positive move in stocks. Every time the analyst are convinced rates are going higher they find a way to reverse lower, and bring the buyers back to the perceived safety of bonds. The “great rotation” has still not¬†occurred¬†and I don’t think I would hold my breath waiting for that to transpire near term. This has been a good resting place for money as stocks look for clarity and purpose of direction.

Natural Gas remains the lone energy commodity trending higher. The commodity has been doing well, but it has not translated into the stocks (FCG). The downtrend in the stocks has moved back to the key support level at $15.30  and worth keeping on a watch list for the discrepancy to play out, either the stocks rise or the commodity drops.

The defensive sectors remain the leaders despite the test lower. Utilities (XLU) hit another new high on Thursday, Consumer Staples (XLP) is holding near the highs currently with small moves to the downside on both Wednesday and Thursday, Telecom (IYZ) has pushed towards recent highs and holding, and Healthcare (XLV) is at support near $47 on the pullback Thursday. If these start to falter the downside leadership will grow along with the rate of descent.  Take it one day at a time for now. Keep your stops in place and look at the developing opportunities on the downside.