The market made a big move below support to start trading on Thursday, but once again managed to turn it around and hold support on the close. The slow decent the last week has been methodical if nothing else. We continue to watch for buyers to step in and take the index back towards the previous highs. Why would I say that? Despite the negative sentiment and data, the technical numbers aren’t adding up to a correction or dump in stocks. You know I hate speculation relative to market direction, but this market will not rollover. Thus, the fundamental data points to the downside, but the hope of stimulus keeps the buyers close by. I have been saying for nearly four months this is a traders market and it is just that. Unfortunately we are down to a day traders market, which means the news is driving direction almost daily.
Today it will be about earnings from the big banks. JP Morgan and Wells Fargo both report prior to the open and all eyes will be on the reports. If they are positive the financials will move off the current support. Expectations are mixed and it is tough call when you throw in the news relative to the billions lost by JPM in the rough trading scandal. The financials are a key factor in direction short term, from my view. I will be looking at how this plays out and adjust any plays accordingly.
China is the other data point that is in the headlines. There economy grew at 7.6% down from 8.1%. You are probably thinking the same thing I am… that’s bad? It is the continued slowing that has everyone’s attention. The Chinese government has been slowing growth to control inflation over the year plus, thus you would assume a slowing is natural in this process. Regardless it is investors who determine market value short term, logic works long term. FXI, iShares FTSE China ETF fell below the $32.40 support again on Thursday and is in position to decline further. The short play with FXP, ProShares Short China ETF is breaking higher and worth playing if this trend continues for China relative to growth. Again this is news driving the short term chart, but the longer term outlook is still mixed based on the growth of the economy.
Europe has been out of the spotlight for a few days and Moody’s wanted to bring them back, so they downgraded Italy’s debt with a negative outlook. The news is not really a surprise, but it is always the reality of these type of actions that sets the tone for investors. The euro is struggling to hold $1.22 versus the dollar and the yield on the ten year bond is rising again. IEV, iShares S&P Europe 350 ETF has been testing support near $32.40 and this could push it below that level towards $31.40 which is the June low. EWI, iShares MSCI Italy Index ETF looks similar and is testing the $10.15 support level and a move below $10 would break the June lows. The downside is in play again, but this may bounce off support as well.
The news continues to roll in and the sectors react. The positive is we are still holding support, the negative, we are sitting on support! The trend remains sideways in a wide range, and that is the challenge for investors… no direction. The short term is being challenged by the stimulus factor from the Fed. The longer term outlook is being challenged by slowing growth. The tug-o-war is over the two opposing views. The bond yields continue to drift lower showing investors are defensive. The dividend and defensive sectors are leading. Consumer Staples, Healthcare and Utilities are trading near their respective highs. Technology is leading the downside on growth concerns and the average investor is willing to sit on the sidelines. The bottom line is they may be right! As always, take what the market gives, be disciplined and manage the risk of every position in your portfolio.