Moving Day for the Broad Market

Today in moving day as investors cast their collective votes on the action taken by the Federal Reserve on Wednesday. The much anticipated announcement was an attempt at appeasing the stimulus crowd and the conservative crowd. The continuation of the twist program through year end with an additional $267 billion in bond transactions was the compromise to a third round of quantitative easing. Almost predictable relative to the news leaked prior by all the Fed Presidents. In the end, Mr. Bernanke did what was expected of him, kick the can down the road, and get through the election. Thus, he accomplished his goal… or did he?

The initial reaction from the markets was selling, then some accelerated buying, followed by some more selling, and a limp into the close. Thus, investors couldn’t decide if the action was worthy of keeping the market on the current trajectory or sell and find safety. Today will show the true reaction to the Fed actions. The global markets have not responded well, but they have not seen massive selling either. The futures in the US markets are lower currently as traders jockey for the best opportunities for the day. The futures are not signaling a massive sell off, but they are pointing towards the downside on the open. The story will unfold throughout the day, but if the initial reaction is any indication, expect high intraday volatility.

Watch to hold the breakout levels from Friday and Monday. If these give way a test of the June 4th lows may be in order. The short term uncertainty is equal to the longer term outlook, no clarity in direction due to the data fundamentally and the huge challenge in Europe’s fiscal policy. The two week move off the low may be the norm as the market develops a trading range until some clarity is gained.

Our ETF scan shows another shift is momentum the last two days from investors. Money flow has picked up on the stock dividend ETFS. There is a desire to participate in the upside, but a psychological need to dampen the risk or at least the perceived risk of investing in stocks. My opinion is this is being driven by advisers and the media. Investors need and want the dividend income with some upside growth potential. I am not convinced this money lasts if the market turns lower and from my view that increases the risk of such holdings. If you are putting money to work in these sectors be aware of the rising risk factors.

Watch the activity today for clues on direction. Do we continue to the bounce off the low? If so, which sectors are going to lead the charge? Financials, technology, consumer services and energy started the charge, but energy sold on Wednesday as oil inventories rose. The big three will have to lead for the trend to establish itself and continue the upside. Technology (XLK) remains the leader with semiconductors (SMH) pushing the index higher. Software (IGV) is in position to break higher and Microsoft (MSFT) is pushing the sector on positive news. If XLK can hold support near the $28.25 level as the reaction to the Fed action plays out that is a good sign. Patience is the key short term.

Financials (XLF) need the banks (KBE) to take a leadership role short term to hold above the $14.25 support level. The sector has been in step with the upside move the last week and looks ready to participate in any upside move.

S&P 500 needs to hold above the 1345 mark and find some momentum to get through the next resistance at 1367. The push into dividend stocks has helped the index, but with the heavy weighting in technology and financials the index is dependent on the continued move of the those sectors.

The markets are never dull and we remain in a uncertain period due to the lack of clarity looking forward. The inability to see growth on the horizon keeps the markets in check and investors on edge. Be patient, take what the market gives and keep moving forward.