Did the modest bounce on Tuesday signal anything relative to sentiment or market direction? No, simply put, but the Bernanke comments to the Senate, strong earnings from Home Depot and home sales hitting a 4 1/2 year high all contributed to bring the buyers back to nibble on stocks. The bigger question is where do we go from here?
Bernanke to the rescue? He defended the bond buying activity of the Fed as beneficial and he deemed the ability to contain the risk, doable. If you are a fan of the Fed intervening in the free-market then you liked his comments. If you believe that all things will take care of themselves, you were yelling at the TV as he spoke before the Senate on Tuesday. In the end, he said what the market wanted to hear to calm the fears. That led to a modest move higher in response.
The volatility index stole the show on Monday with at 33% spike on the upside. On Tuesday it fell 11% as emotions were put in check and reality concerning the Italian election was put in perspective. The index closed at 16.87 and right on the 200 day moving average. The primary concern from investors was the issues in Europe returning. The conclusion Tuesday, yes there is a possibility of a repeat in the European markets, but it was less than worthy of the selling generated on Monday. That leaves it to the budget cuts that will take place beginning next week. That will become the focus for the balance of the week as the Senate announced late Tuesday there was little hope of a deal. The question, will it be enough disruption to push the markets lower? That answer will come soon enough and we have to protect against the downside risk of such an outcome.
Still plenty of talk relative to the M&A activity that may take place in 2o13. The focus is on the balance sheets where not just Apple is sitting on cash to deploy. Without the need to expand the workforce or product offering, companies eye expansion through acquisition. Historically the winners are the companies being acquired versus the buyer. Thus, how to you benefit from this activity? Be accurate in whom you think will be bought out or define the sectors where the opportunity is the greatest for this type of activity. As we discussed several weeks ago… insider information is not a good ideas as shown by those attempting to benefit from Heinz being acquired by Berkshire Hathaway. Telecom in one of the sectors that stands to see it’s share of deals. But, don’t forget about the brokerage firms putting the deals together. IAI, iShares Broker/Dealer ETF is a way to participate from the fees garnered by such deals. You may not be paid 30, 50 or 100% premium as the acquired company is, but you will still earn a reasonable return if the M&A deals get going. Sometimes it is better to benefit a little with less risk than much more with the risk of being completely wrong.
The technology sector remains in limbo relative to the upside or the downside currently defining the trend. XLK, SPDR Technology ETF is holding near the bottom end of the current trading range with the support at $29.20. A reversal off the bottom of the trading range still requires some kind type of catalyst. One sector we know is being challenged is the PC market. The demand continues to weaken even more than originally expected. The downgrades continue for the semiconductors directly impacted by this news. LSI, ATML, AMD, NVDA and INTC are all on the forefront of being impacted by this type of news. SSG, ProShares Ultra Short Semiconductor ETF is one way to play the sector overall if the downside continues. The interest to play on the downside is growing for these stocks and sectors.
The issue remains uncertainty. The challenge with that is the news whips the market around and volatility rises. That creates a negative trading environment as the market works through the short term ups and downs. If you focus is longer term you turn a deaf ear to the noise and focus on the horizon. You have your exit points set outside the noise to avoid the day to day movements and believe that the upside or downside will play out based on your strategy. That is why you define the position objectives prior to taking them in your portfolio.
Time to buckle up for another day of trading.