The major indexes started lower on Thursday and managed to fight back to almost even on the day. Does Wednesday and Thursday summarize the selling? Is the worry over the Fed complete? Events such as the Fed are outside market events and we cannot predict or image how much they will impact the markets as their basis is speculation. News has a faster and sharper impact on markets than fundamentals or inside marke events. That is why we saw better than a 2% intraday swing on Wednesday and better than a 1% swing on Thursday. As we end the trading week I don’t expect much on either side heading into a three day weekend. With that in mind lets look at some points of interest going forward.
Economic data has been on the positive side this week, but for the most part has been lost in the Bernanke headlines. The housing market remains the bright spot as both new and existing home sale were better than expected. Despite the good news in housing the homebuilders sector ETF, ITB has struggled to move higher. The sector was downgraded to a hold yesterday by analyst and earlier in the week Beazer Homes got hit with a downgrade. Looking at the chart of ITB it has been a great run and there are plenty of concerns facing the sector going forward. Labor costs, materials, land and tools are all rising based on the increased demand. The availability of lending is weighing in as well. The upside remains, but it will come with slower growth in the bottom line for the sector and thus, the downgrades. Watch for the sector to find support and then look for the opportunities from there forward.
Commodities are a speculation nightmare currently. Is there rising demand or not? Analyst are predicting demand to rise, but the inventory data doesn’t validate that currently. Thus, the speculation war. If things are improving globally then you would believe that future demand will rise. If they are only improving incrementally in the US markets, that isn’t going to impact demand significantly. Oil has pulled back near the $93 support level and looking at the chart shows the desire to want to move higher. Volatility has made it difficult to want to own oil, but the energy stocks have done very well. Go where the trend is versus the speculation is my recommendation. XLE, IEZ and XOP are ways to invest in the energy sectors upside even if crude stays in a trading range of $90-100 per barrel. Natural Gas (UNG) has found support and is attempting to move higher again. FCG, the natural gas stock ETF broke above resistance, tested with the pullback and resumed the upside. Gold has made some attempts to bounce off support, but the metal is not showing any true signs of moving higher at this point. My bias remains on the downside and a break of the current support levels would open the door for another short opportunity. Commodities are trades only at this point.
The S&P 500 index remains in an uptrend despite the rumblings and some selling this week. The outlook is still for the index to move higher. The move off the April 18th test is still intact and the two day test lower is what we are watching currently. We would have to move back below the 1600 mark to negate the current uptrend. The leadership has been a challenge as Financials, Energy, Technology, Industrial and Basic Materials have all been influencing the broad index overall. Utilities and Consumer Staples have been the drag on the index. Looking at a chart of all the sectors in relationship to the index there has not been any clearly defined leadership and owning the index has been more of a positive without the volatility. I look for that trend to continue going forward.
Overall the markets are still in a positive trend, the news is injecting some volatility, but even that is short lived. Manage your positions in accordance with your discipline and filter out the noise. The challenge comes in the understanding that the valuations are high, speculation starts at the drop of a hat and that creates stress relative to managing your positions. Trade and invest in what you can manage psychologically, don’t put yourself into positions that will demand you to act against your core beliefs. The market is not your friend, nor does it even care about you or your money. Trade within yourself and your strategy to be successful. There will be plenty of opportunities going forward, you don’t have to force trades now in an environment that doesn’t make sense or give you confidence.