Ready, Set, SELL? The response to China, US economic data and the melting of gold sent markets lower on Monday. It accelerated as the day progressed and to top it off we had an explosion in Boston at the Marathon. Talk about a day filled with issues, events and emotions. The VIX index jumped above 17 showing the emotions of traders on the sell side. The big question… What now? Does the selling continue? Do we see some buying? Is this the final straw to push the markets lower and test the overbought conditions so many have expounded upon? All good questions, and all will be answered in time. Since I don’t have a crystal ball to tell the future, I will do what I always do, set my stops in place and move forward one day at a time with eyes fixed on the goal.
Monday was a good day to understand your focus or discipline relative to making decision with your portfolio. Whether you act or react is what you want to know about yourself. If you are reacting to the events learn from the day and make the necessary changes. If you are acting in accordance with your strategy congratulate yourself, don’t criticize your actions. We will all learn from the process of days like Monday, but the key is to learn and move forward. The process of being prepared mentally for a day like Monday is the the key. If you hit your stops and exited positions, good for you. If had mental stops and held for one more day to see how the market will open today, that is a dangerous game of emotional investing. Taking action in your portfolio is the goal, not reacting to the events of the day.
The track record of this trend has been to buy the dips or the selling. Today is setting up to see some buying at the open with the futures higher by 0.5% as I write this. Will they hold into the open or throughout the day? Therein lies the goal of the day. Determine how investors will respond to the events and adjust your plan of action accordingly moving forward.
The first place to look is where the worst damage was done… commodities. The temptation is to want to buy them on the belief that investors overreacted on Monday. Again, that is a dangerous game. I want to see if the worst is over, and is the repair process beginning? That will put less pressure on other sectors of the market where we still have positions. I am more interested in adding to what is or was leading, if the obstacle(s) are out of the way. Gold is higher by $7 currently, not much relative to the freefall the last two trading days. But, if it does stabilize for now that is a start, and what we are looking for. Oil is at $87.72 down 1% from the close on the exchange. I am look for support to hold near this level at least for now. The healing process is the goal for the commodities. Once prices stabilize again it allows the balance of the markets to return to normal activity. Watch both as the trading day advances for support to hold.
Second, look for the areas that sold lower in reaction to the ongoing events. The one that sticks out to me was banks and financials. The sector fell only 2.1% and KBE was off 2.6% with both in line with the broader market indexes. But, Citigroup announced solid earnings prior to the open and gave back all of the upside from the positive news. I would look for this sector to respond if the upside holds into trading today. Look for XLF to hold $18 support and KBE to hold $25.87. KRE is at $30.15 support and holding this level would be a positive after the sector was off 3.2% Monday, and the worst in the financials. We have discussed the unloved nature of the sector following the earnings from WFC and JPM on Friday. This is a sector we continue to track for a reversal or further upside with a longer term perspective.
Last night was the time to evaluate and plan. Today is the time to observe in light of those evaluations and plans. Act where you need to act and let this play out. The hardest thing to deal with day to day is your emotions relative to the market events. Acting in accordance with your goals and objectives is the primary focus. Avoiding reactions to the days events or future events is a process of building and executing a strategy or plan.