The stress test for banks acted as a catalyst for the financial sector on Tuesday and taking the S&P 500 index above the 1370 level, the Dow above 13,000 and the NASDAQ above 3000. That is positive for all three of the major indexes and sets a positive tone for the broad markets. Is this the next leg higher for the markets? One would certainly believe that to be true based on the move. There are no shortage of those not believing the move higher will be sustainable, but for now the breakout is in play and only time will determine for how long and how high it will move.
When markets move up or down there are those who believe in the move and those who don’t, that is what makes it a stock market. The proliferation of news and data today just puts it in our face at every step of the way. The data points have continued to improve and the outlook for renewed global growth, continued US growth, no more Fed intervention in quantitative easing and banks improving fundamentally are the catalyst to the current move higher for stocks. I am not beating the drum of the bulls, but you have to take the improvement in stride and respect the trend. In short, take what the market gives and keep moving forward.
Sectors to watch start with financials. They have been in our portfolios and one we have been looking to for leadership for awhile. The breakout move relative to XLF, SPDR Financials ETF above $15 was positive and saw a significant spike in volume. The prudent side of me asks if it is time to take money off the table on the move? The other side shows the upside is still strong and the opportunities remain in the sector. The chart below shows the move in the sector and the next target. Banks, regional banks, brokers and insurance sub-sectors all broke through the current consolidation patterns to the upside. Watch and protect the gains moving forward.
Technology (XLK) made a solid move to continue the upside on Tuesday as well. After a short term pullback and stumble the index has made a solid return to the previous uptrend. Semiconductors (SOXX) set the pace on the upside, but still has some work to do to recover from the selling two weeks ago. Software (IGV) moved to the previous highs from 2011 and is setting the pace for the sector overall. Internet (FDN) is joining the upside move breaking from consolidation as well. Networking (IGN) continues to struggle with the upside and remains the laggard of the sector. Watch for technology to continue to provide solid leadership as this move unfolds.
The consumer (XLY) remains engaged and continues to add to the upside. Other than a minor hiccup the uptrend since November has been methodical and without hesitation for the sector overall. The retail sales data announced on Tuesday showed a 1.1% growth in sales for February. Take out gasoline and auto sales and the number was up 0.6%, still better than expected. No matter how many times the consumer is questioned the number has remained positive. XRT, SPDR Retail ETF remains on a trek higher and the outlook is positive. For now you stay on the horse until it is time to dismount.
Energy (XLE) is one sector which has attempted to move higher on oil prices moving above the $100 level. The challenge has been perception relative to demand versus speculation concerning the geopolitical issues in the Middle East. Speculation has been driving the price short term, but if the improving economic picture remains demand will become a legitimate concern. If the issues in the Middle East prevail along with higher demand, the prices will escalate even higher. The consolidation pattern is still in play for the sector, but we have to watch how this unfolds moving forward. Demand is rising in Asia. Europe and the US are still flat to declining. If growth remains at 3% or accelerates watch for prices to follow along with stock prices. This is still a sector to watch.
The trend is your friend and that currently is higher. Maintain your commitment to stocks and manage your downside risk as the future unfolds. There are not guarantees only opportunities and we have to manage them one day at a time.