Nerves Settle, but Markets Still Look Rattled

Investor sentiment is very high according to several investor surveys, that prompted some analyst to forecast a year-end pull-back. Contrast that to other studies that show the ‘average’ American is pessimistic about the state of the economy and employment. That has been reflected of late in the retail sales data. Throw in the renewed worries about the “affordable” healthcare act and you have the wall-of-worry being constructed again. None of this guarantees the downside will accelerate for the markets overall, but we all have to be cautious and disciplined.

The Dow Jones Industrial Average lost in the triple digits for the second consecutive day closing at 15,738. The break of the 30 DMA was confirmed and worked lower on the day. Next up is the 50 DMA and 15,670 support level. If it fails to hold the downside is likely to accelerate. Why? Worries above stimulus cuts taking stocks lower with Coke, Johnson and Johnson and Proctor and Gamble all dropping more than 2% to lead the move. The interesting part of that move is with the markets moving lower the defensive stocks, like consumer staples, generally outperform.  XLP, SPDRs Consumer Staples ETF fell 1.3% on Thursday leading the downside as the S&P 500 index only declined 0.35% on the day. This downside leadership is discouraging from an investor viewpoint. Watch how this unfolds going forward.

The S&P 500 index worked lower to the 1775 level of support we discussed last night. A break lower is a big negative for the index overall and puts the short term trend in question. Consumer Staples, Healthcare, Real Estate and Technology were the downside leading sectors. Watch how it plays out and then take the necessary action to take advantage of the opportunities created.

The NASDAQ index closed at 3998 and sitting near the first level of support. Still holding the uptrend, but watching to see how the technology and large cap stocks hold up for the sector near term. Semiconductors were off 0.6% and back within the previously defined trading range. The NASDAQ 100 was down 0.2% showing the large caps slightly outpacing the major index. Still holding up better than the other indexes currently.

The Small Cap index actually gained 0.2% after leading the downside on Wednesday. That puts the support at the 50 DMA as the key level to watch currently. The index has had the honor of being the leader on the downside and one that has raised the most concern. The biotech stocks have been the catalyst to the move lower. Watching the trendline and the outlook for the stocks going forward. Overbought is the word being used to describe the index, but I would be cautious from both the technical and fundamental outlook for the sector.

Gold down $32 to $1226 on the day. This puts GLD back near the $117.50 support level again after the bounce to $122 resistance. Miners (GDX) were down 0.8% and bounced off the $20.50 support intraday. Still not a fan of the metal and the volatility remains in play.

Cold weather continues to send natural gas higher hitting a two year high today. Crude oil held the $97.40 level on the day after making a run at breaking higher last week.

The Volatility Index crept higher closing at 15.5 after hitting 16.1 intraday. The premise is that fear is rising short term. Thus far the indexes would bear that out, but we have not confirmed a short trade at this point and that means we have to be willing to ride out the storm and look for what unfolds. Tomorrow is Friday and not a great day for establishing new positions during a potential transition. However, if the selling continues and confirms the opportunities to be short, we will add the trades based on the discipline deployed. Remember we have to take this one day at a time.