Modest Bounce Signals All Clear… Right?

It didn’t take long for all the negative analyst to surface! Some are calling the market broken and more downside on the horizon. The break of key technical areas, like the S&P 500 moving below the 50 day moving average, has the wires buzzing. Then there is the issue with Syria and some believing we will see a strike within the next day or two. Throw in some worry about the change in the Fed Chairmanship, the debt ceiling being hit in October, the cut in stimulus from the Fed, the consequences of those cuts in the emerging markets, the stall in housing, stalled economic growth showing in the numbers again, and spiking oil prices hurting Europe’s recovery. Those are just a few of the issues facing investors as they wrestle with owning stocks or not. Thus, the modest bounce back on Wednesday was not an all clear signal for the upside to resume. In fact, it was a bounce that was expected following the heavy selling on Tuesday. As stated there is still plenty to worry about and we will have to remain disciplined and track the shift for the right opportunities.

Did home sales suffer as the result of higher interest rates? According to the pending home sales falling 1.3% in July, many believe the cause was higher interest rates. Don’t forget that home prices also have risen as well making it harder for buyers when combined with higher borrowing costs. Is this trend going to continuing moving forward? For the short term yes, but that doesn’t mean the buyers have disappeared. The likely outcome will be more patience exercised by both buyers and sellers going forward. Albeit the rate of increase in sales may decline, but more price stability will be the positive takeaway for homeowners and lenders. XHB, SPDR Homebuiders ETF was up 0.4% on Wednesday, but  remains down 11.5% from the May 15th high. I continue like the outlook for the sector overall, you just have to be a patient investor.

Brent crude is rising faster than West Texas Crude due to the dependency in Europe for Brent Crude which is shipped from the Middle East. This is a development to watch as we move forward. Should the gap continue being short Europe may be a better play than being long Crude Oil. Rising oil prices will impact the economic recover in Europe. Remember this has been true for one day… that isn’t a trend, but it is a warning shot. Tracking these speculative events offers an opportunity if it is true, but also if it fails to materialize and traders have pushed price up or down. Watch IEV, iShares Europe 350 index ETF which declined to support at $41.45 Wednesday before bouncing back to $41.70 on the day. Not to mention the price of Brent crude rose to $115.70.

Despite the challenges that could result from any actions taken against Syria, oil was already heading higher? Will that trend continue? Why was oil heading higher? That was and remains the bigger question. Some food for thought on oil continuing higher regardless of Syrian issues. A weaker dollar leads to higher oil prices and the buck has declined 4.4% since early July. This is a trend that could very well continue. A break of support at $21.80 on UUP and it could get even uglier than it already is. What if the economy does improve as the Fed is peddling? What if it is already stronger than the numbers show? That is a negative for oil as consumption will rise. Supply and demand imbalance would keep the pressure on the upside for oil. Have production companies underestimated demand? The answer to that is yes, if we see a better recovery in Europe and Asia than many expect. This is another area to watch going forward for answers to the speculation of my thoughts. If the hypothesis proves to be correct the upside in oil may be more than an opportunity to put money to work.

When the speculators get investors to believe in their theory, and prices in sectors move as a result, there is always opportunity on the other side of the trade. The challenge for investors is having the patience to let the opportunities and the trades develop. Start with a watch list of your ideas or speculation theories. Watch to see how they develop and play out. If  you are right, take the trades and enjoy the benefit. If you are wrong, no reason to invest, just keep panning for opportunities and take the ones that play out.