Tropical storm Debby is sitting in the Gulf of Mexico churning and waiting to come on shore in the Panhandle of Florida. Watching the news on the storm made me think of the correlation to the markets currently. There is a potential storm brewing with all the disruption and uncertainty in the global economies. The rumors surrounding Europe, China and the United States have created enough uncertainty that the financial markets are churning and not make much progress. Both the buyers and the sellers have made their attempts to give the market direction, but to this point neither has taken control of the overall direction.
As we start the final week of trading for the quarter headlines are full of the same issues. As we discussed in the Friday night notes, this could be a positive week for stocks. The quite period between the end of the quarter and the start of the economic reports and earnings. The market has a feel of wanting to bounce. How high? I can’t see it moving past the previous highs if it manages to do so. We have to take what the market gives, but you have to have some belief of what is on the horizon.
The reality of the numbers are the nagging issue for me. The economic data remains depressed relative to growth. The news from earnings are not overly impressive. Darden Restaurants missed earnings last week with same store sales off enough to lower their forward guidance. The restaurant sector has been one of the leaders in the leisure and consumer services sector. Is this a sign that the consumer is pulling back again? Or is this the signs of stagflation? Wages have not risen over the past three years, unemployment remains a problem and the regulations are choking small business growth. They are all longer term problems facing the financial markets and investors, but the create enough doubt short term to keep investors from making a serious commitment to stocks.
This week is about the major indexes holding support. The S&P 500 index moved back above 1330, but the key is the 1305 level holding if there is more selling on news. The NASDAQ has been the leader of late and needs to hold above the 2800 mark. There is plenty of room for both indexes between those levels and Friday’s close. The upside is where most seem to be looking, including me a this point. Be patient and let the market define the short term momentum before you commit capital.
The sectors to watch this week are financials and technology. They are the ones with the most to prove if we are to move higher short term. The banks were downgraded last week, but the impact was a rally of more than 1% on Friday. Why? The news wasn’t as bad as some expected. Bad news being good news? That is what this rally/bounce is based on currently… turning bad news in to good. XLF, SPDR Financials held above the $14.25 level on Friday and we are looking for a move towards the $14.75 – $15 mark short term. If these two sectors can produce enough to help the upside the bounce continues. If they fail, so does the bounce.
Put your stops in place, plan your trades and be disciplined as all this plays out short term. This remains a traders market. The longer term investor is either in cash and on vacation or they are praying things get better for there positions to make money. Either way we are all in the same boat short term… uncertain of how this plays out.