Several weeks ago I wrote that headlines and news were driving the markets and making it neurotic, we are back to the same issues with the rebirth of Spain, Italy and Greece in the news. Speculation on which will be the first to default and the argument the euro will fold, etc. etc. etc. News driven markets give you indigestion and lead to speculation by investors of guessing who will win and who will lose. Not a game worth playing from my view. We continue to look for the opportunities that make financial sense and offer the sound risk/reward relationships, and they are not easy to come by these days.
The news isn’t limited to Europe, China officials warned the economy could cool further and stocks dropped nearly 2% on Monday. FXI, iShares FTSE?Xinhua China 25 Index is pushing back towards the $32.40 support level and lows for the ETF. The downside play opportunities are back as an opportunity based on the continued erosion in the economic picture. FXP, Proshares UltraShort China 25 Index is worth our attention as this unfolds. A move lower and break of support is the trigger for the opportunity.
The news headlines have stocks moving up and moving down depending on what the twist or objective. The rumored cut off of Greece by the IMF along with Spain in need of financial help is hurting Europe (IEV). The short interest are rising again along with the yields on the Spanish bonds. Analyst are predicting a similar fate for the US markets based on the fiscal cliff we face in our deficit spending habits. The news is negative, but the indexes still want to fight back and up. The hope of the Federal Reserve doing something to help is still out there. As long as there is some hope buyers continue to step in. Watch the 1330 mark on the S&P 500 index as support near term, but a test of the 200 day moving average is in play near the 1314 level.
The NASDAQ is showing different action as it failed to put in a higher high and tested the previous low intraday. The large cap stocks have been struggling to maintain any leadership. Microsoft, Intel, CSCO, QCOM and others have failed to maintain their respective leadership. The rally in EBAY, AMZN, GOOG and ORCL have not offset the downside of others. The index has diverged from the S&P 500 index and shows the challenge between growth and dividend stocks. The failure to make a higher high is what I am watching relative to this index and if it makes a lower low, it could set a new trend for the index.
Small Cap stocks were the leader on the downside Monday and the index shows signs of moving lower. The S&P 600 Small Cap Index tested support at 434 and is near the 200 day moving average after closing at the 50 day. Double top formation as the index failed to make a higher high is also in play. The pattern set up has a bias to the downside and the index could provide the leadership lower if it breaks support. This is an index to watch on the downside overall.
Apple reports today and it could set the tone for the NASDAQ as well as the overall market outlook. Some analyst have stated they revenue will be weaker due to delayed purchases of iPhones as buyers await the new release expected in the fall. We will see after the close what Apple has in store for investors.
Homebuilders posted a positive day despite the selling on Monday. This sector continues to provide some optimism for the broader markets. KB Homes and Toll Brothers both provided positive upside to the sector. Watch as the sector remains an opportunity on the upside.
This is still an emotional market driven by news and rumors. Find the winning sectors and don’t be afraid to hold cash as all of this settles out short term.