This was a week of trading in place and watching how the energy sector unfolded. When it was said and done the worries about the price of crude ended the week with more speculation on what OPEC will or will not do relative to production. That is the new twist on the same old fable that has been in play since July. Oil prices fell near the $73 mark intraday on Thursday and then reversed to close back above the $74 mark. The rally on Friday back above $76 was on the belief that OPEC would cut production levels to let the price stabilize relative to the supply. All I can say is it made me dizzy just talking about it. If the speculation on OPEC isn’t true the downside will be back. Makes for a tough trading or holding position in the sector. Stops have to be wide enough to get whipped in and out of positions.
Retail showed both positive earnings on the week and the October sales were better than estimates. Albeit they were only up 0.3% they were still positive enough to give hope. Throw in falling gasoline prices just in time for the holidays and sector picked up optimism with the Retail (XRT) and Consumer (XLY) ETFs push to higher ground. Still offer positive upside looking forward.
The major indexes were predominately flat to slightly higher on the week. The positive move in the Russell 2000 small cap index was undone on Thursday with a 1% decline. There is still doubt about the upside being able to sustain based on the fundamental data from the economy. Patience is the name of the game and we will continue to take one day at a time with an eye on the longer term outlook as well.
Below I outline some charts with a focus on where we are and what we are watching going forward:
The first chart below is the scatter graph of the 7 Asset Classes. As you can see the US equity markets remain the clear leaders off the bottom pivot point on October 15th. No big changes over last week. We can point to the slight downturn in the REITs (IYR) as a potential warning sign for the asset class going forward. Small bounce on Friday in commodities as oil changed directions. The EAFE, Emerging markets, Emerging market bonds and Treasury bonds are all moving sideways without much in terms of change. Overall boring week when you look at the broad benchmarks.
The next chart is the Russell 2000 Small Cap index and you can see the break higher on Wednesday and the reversal on Thursday. Testing and some short term signs of a test, pullback or correction on the horizon. I recommend patience versus speculation as this defines itself. We were looking from leadership to start the and that thought process applies to next week as well. This sector needs to step up and lead.
The last chart to look at as we end the week is the NASDAQ index ends with two doji candles as well? It is all about direction and catalyst heading into next week. Tech showed a nice move on Friday with the internet (FDN), semiconductors (SOXX), networking (IGN) and social media (SOCL) producing nice moves to end the week. Need leadership from somewhere so why not the NASDAQ. Watch to see how this unfolds next week.
This was a week of digestion for the broad markets and some rotation in the sectors. All of this will unfold clearer in the coming week of trading. I covered this in more detail on the Friday Video Update… watch it to dig into this topic further.
Watch and trade according to your risk tolerance. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your risk will manage the downside losses.