Markets Bounce… Now What?

The broad markets were up more than 2% on Wednesday and everyone I have talked with is scratching their collective heads. Why the big bounce in stocks? What has changed? The assumption that stocks are cheap is the primary answer that analyst have to offer. I can say it is certainly not improving economic data. The productivity numbers released were disappointing at best, they declined 0.9% and only slightly worse than expected, but they were revised down from a 0.5% decline previously projected. There isn’t much when it comes to the economic outlook that is motivational at this point. Then why the rally? Stimulus talk is all the rage. We discussed this in the weekend update and investors are looking for more stimulus to come from the Fed and the worlds central banks.

The pressure is mounting for Mr. Bernanke and the twelve dwarfs (Fed Presidents). The next FOMC meeting is slated for June 20th and if they do nothing the rise in expectations will come crashing down. The Fed’s Beige Book was no help in giving any indication relative to weakness in the US economic picture. In fact, the data was better than what we have seen in the economic calendar reports. Seven of the twelve districts did show some moderate growth. Some analyst stated the report would lead you to believe the slowing in autos, payrolls and manufacturing were only temporary. Residential real estate was seen as improving and consumer spending was up modestly. Overall not a bad report. Does that mean the Fed will wait for some clarity in the monthly reports? We won’t have to wait long to find out , but if they don’t act in some way to pacify those looking for stimulus the outcome won’t be pretty.

This all begs the same question we have been asking almost daily, what is the best strategy looking forward for investors? The bounce is in play ,and the test of the lower ranges near 1267 on the S&P 500 index have held, what now? The best case scenario is to be patient and let the rumor mill churn. The data has to improve for the market to sustain any move to the upside. Europe remains a mystery for investors relative to the debt issues and economic slowing. I will say that I am speculated out on the European topic and we will have to see how it unfolds going forward.

The Sector Watch shows a shift off the lows and some have moved back to the next resistance point. The following is a brief breakdown of key moves in the sectors:

Technology (XLK) – Back to the upper end of the previous channel and testing resistance. A move above this level gets interesting relative to a trade opportunity. Semiconductors (SMH) are in a similar situation looking for a push through resistance at the $31.45 mark. Both has moved quickly off the lows and should see some consolidation before defining the up or down direction.

Basic Materials (XLB) – gapped back to the resistance near the $34.30 mark with a double bottom pattern in play. The sector has been under pressure from falling commodities prices, but that seems to be a thing of the past for now. Watch the move on lower volume, and it needs to show some conviction if the upside is really in play.

Financials (XLF) – Solid bounce back to the $14 mark on a recovery in the bank stocks. The pressure remains on the sector short term with $14.25 resistance at the top end of the previous consolidation. A break higher needs volume and support from investors to break higher. Worth watching short term.

Utilities (XLU) – Solid move higher through resistance at the top end of the channel. The move will be tested, but it came on solid volume to the upside. We continue to like this sector from a longer term outlook.

Treasury Bonds (TLT) – Gave back some of the fear move higher. If the move in stocks is sustainable and the economic picture does improve the downside risk in Treasury bonds will rise. Moved down to support and a break of $124.50 is a negative short term.

High Yield Bonds (HYG) – Sold with the credit risk issue as well as trading in sympathy with stocks. Be patient and let the move play out. If you are okay with volatility the sell off is worth adding to positions.

Industrials (XLI), Healthcare (XLV), Telecom (IYZ), Consumer Services (XLY), Consumer Durables (XLP) and Energy (XLE) all bounced off their respective lows today. They are equally worthy of watching on the bounce, but the upside opportunities short term are covered above. One day at a time, one news event, economic data point and speculation at a time. Don’t assume and don’t take undo risk relative to the current environment. The trend is your friend and if the reversal is in play it will be shown in the charts with a break through resistance and a rise in volume. Confidence is the key word if the move is sustainable.