Money heads to cash as stocks and bonds sell

There is little to like about the Federal Reserve Chair acting as an analyst relative to the stock markets valuation. It started with our friend Mr. Greenspan and his “irrational exuberance” comments in 1998. Mr. Bernanke did his share of analyzing stock prices, and now we have Ms. Yellen pontificating for the second time in six months what she thinks about prices of stocks. That made investors more skeptical following up on a day selling onTuesday. The VIX index is now pushing into a zone that shows uncertainty and we all know what that means for stock prices. It also begs the question: is it temporary or do prices bounce back as they have over the last year and a half each time nerves rise? Only time can answer that question, but you and I must decide how we are going to treat the positions in our portfolio. We have been discussing this very topic for the last month plus and I hope you have done your homework, set you exit points and mentally are prepared for whatever happens. We will take it one day at a time for now and attempt to avoid falling into the speculation pit.

The ADP employment report disappointed again today showing only 169,000 private-sector jobs create in April. March was revised lower to 175,000 and both were well below the consensus. The growth stocks took the brunt of the selling on the day as money scrambled to find safety. Interestingly enough money was not flowing into treasury bonds as the yield rose 8 basis points on the thirty-year bond. The ten-year bond was up 6 basis points. That sent prices lower by 1.7% on the bonds. The rotation from interest sensitive assets, bonds (BND), REITs (IYR) and utilities (XLU) has been aggressive this week. We discussed rotation of assets earlier in the week, but money is now flowing to cash not other sectors. That is a big negative, my view, if it continues, for stocks. This is shaping up to get ugly as the downside is gaining confidence and momentum. Watch your downside risk.

Technology (XLK), telecom (IYZ) and utilities (XLU) led the downside move for the S&P 500 index. The broad index fell near the 2065 level of support before closing at 2080. The trends remain in place and in the bigger picture the damage is minimal at this point. The mental game is the bigger issue at hand. As the markets find traction on the downside the confidence level drops and the mind starts to believe what it thinks is true. We have to guard against our emotions taking control of our discipline process for managing our risk. The trading range is still in place, telecom and utilities are the closest to breaking downside support, but the technology sector and others have experienced their share of selling short term. Exercise patience one day at a time.

Energy opened higher as oil prices pushed higher, but the sector forfeited the gains to turn negative during morning trading. The sector is struggling between the price of oil and the status of the economic picture. The move higher has stalled despite the price of crude breaking above the $60 level on crude. Not making any assumptions near term, but we are tightening our stops to protect the gains, but also to lessen our downside exposure should the selling accelerate.

The NASDAQ 100 index (QQQ) is leading the downside charge. Tuesday it fell below the $109 support and today broke the $106.75 support, and the March low of $104.40 could be the next test. It is down nearly 4% off the recent closing high. Large cap internet stocks have been hit the hardest with Facebook, LinkedIn and Twitter doing their fair share of the damage. Apple has declined nearly 7% despite the solid earnings announcement. Biotech (IBB) held the $334 support level after leading the index initial push lower. Semiconductors (SOXX) were sitting on support at $92.50 and a break lower would likely add fuel to the downside momentum.

The VIX index moved above resistance, the 200 day moving average and the 15.5 mark. A follow through tomorrow is a negative sign for the broader indexes and the confidence level drops. If it inches towards the fear levels the downside will accelerate as well. All the negatives discussed are tipping the scales towards the sellers and the more confidence they gain the more selling they generate. Don’t assume anything, manage the risk and watch for the resulting opportunities as it all unfolds. Until the trendlines break the force is assumed to be with the buyers. The point being, give it all time to validate before tossing out what the trends represent. One day at at time without bias or prejudice is key short term.