Many Looking for Test or Pullback… Others, More Upside

Does the rise in volatility point towards the market showing signs of fatigue? After an extended period of low volatility in the broad market indexes it would lead one to believe a change in the trend short term may be on the horizon. But, then that is speculating and we are not in the that business. Our focus remains on the trend relative to the move off the November 15th low. There isn’t enough evidence to conclude the trend is changing or even being challenged at this point. Thus, we continue to watch the uptrend, manage the downside risk if it should accelerate, and keep going forward for now… one day at a time.

One interesting note relative to the options market is the price of protection is rising. Put options on the SPY, SPDR S&P 500 Index ETF are priced higher than the comparable call options. Thus, the implied volatility is leaning towards a correction or pullback on the horizon based on the current situation and pricing. This shows the current sentiment in the options market is reflecting what we are hearing in the media and financial circus networks… stocks are overbought and due for a pullback or test of the current move. If you talk about it long enough and loud enough it is likely to come true at some point.

Another article that gives some food-for-thought was in USA Today Money section on Tuesday – “Stock Market Strength Lures Investors”. The inflow into stock mutual funds was up $29.9 billion, add in ETF stock funds and the number jumps to $77.4 billion according to TrimTab. Thus, the issue again leans towards speculation that the individual investor is always late to the party. Right or wrong the money flow towards stocks has jumped… finally. As stated by one analyst, one positive month of inflows doesn’t change the trend. Over the last four plus years the positive money flow has been towards bonds versus stocks. This is yet another example of some believing there is a need for a pullback versus those willing to jump into the markets at current levels with a longer term time horizon.

The following are some interesting charts to watch:

XOP, SPDR Oil & Gas Exploration and Production ETF broke above the $58.25 resistance short term and continued the uptrend. The refining stocks continue to be the clear leaders for the ETF with both Valero (VLO) and Tesoro (TSO) showing positive gains. Noble Energy(NBL) and Whiting Petroleum (WLL) made solid breaks higher from current consolidation as well. This is a sector watch on the upside going forward.

Banks are leading the financial sector higher with both the Regional Banks (KRE) and Large Banks (KBE) posting new highs. Scanning the ETF holdings it is easy to spot the leaders in both sub-sectors of the financials.

Pharmaceutical stocks are back near the October highs and in position to move higher. XPH, SPDR Pharmaceutical ETF needs to clear the $61 level for the large cap stocks. This is another sector where scanning the holding of the ETF shows clearly the leadership. Biotech (IBB) equally is in position to attempt to break higher short term.

Treasury bonds continue to move lower on the rise in intermediate to long term bond yields. TBF, ProShares 20+ Year Short Treasury Bond ETF is a simple way to play the downside move in the long bond without leverage. The move may take time to fully play out and this fund allows you to hold without having to deal with the leverage of other short side ETFs.

China has continued to struggle after moving to a new high the last month. The issue is one of confidence in the data being reported and longer term outlook for growth to continue. FXI, iShares China 25 ETF broke below the support level at $40.80. No clear indication on the downside near term, but it is worth watch to see if the downside accelerates.

There are plenty of story lines building in the current market environment. The key is to track and validate the moves. We all want to maximize our return on investment, but it is equally, if not more important to keep our focus and maintain our discipline as we move forward. Money management is the ability to manage risk in light of what is taking place in the markets looking forward.