Outlook for the Trading Week

Investors are still looking at last weeks market results with some disbelief and wonder about the future of the US markets. The primary concerns remain the same, but the confidence level continues to fall relative to a bounce or resumption of the uptrend. The S&P 500 index broke support at 1340 and managed to fall to the next level of support near 1295 all in one week. Volume accelerated on the selling and the focus shifts from buying stocks to selling. 1265 is a number being tossed around as the next key support level for the index.  A move to that level would erase all the gains for the index on the year and put the investor into a psychological quandary.

With all of that said, what is the game plan for the trading week? Unfortunately the word patience comes to mind. The futures are indicating some buying to start, but it will have to last longer than the first hour to get any attention from investors. Earnings will play a role with some key data points coming from retail (Ralph Lauren), housing (Toll Brothers) and technology (Hewlett-Packard). Ralph Lauren will give additional insight relative to the European influence on the global consumer companies as Fossil showed two weeks ago. Toll Brothers will validate the boost in the housing market this year and Hewlett-Packard will offer some insight to the global challenges facing the technology sector going forward. All worth watching and digging into the results.

Does the “flight to safety” continue this week? The yield on the ten year Treasury bond fell to 1.7% testing the low from last September. The rotation of money to safer investments is another negative sign for stocks short term. The bigger shift last week was the increased spread between Treasury yields and junk bonds. The high yield bonds gained more than 20 basis points on yield as bonds declined 3.6% on average last week. The fear factor relative to credit risk is rising. The spread between the ten year Treasury and junk bonds now stands at 5.5%. The relationship is a point of interest moving forward.

Europe, Europe and more Europe remains a problem. Greece is living in denial, Spain is attempting to deal with the banking problems and Italy isn’t far behind. Everyone is aware of the problems that face the euro which explains the $1.27 level versus the dollar. The only way to play Europe has been on the short side. EPV, ProShares UltraShort Europe ETF has gained better than 30% since the first of April. Short FXE, Rydex Currency Shares Euro ETF and long UUP, PowerShares Bullish Dollar ETF has been a good investment as well. The trend is in place and barring any turn around or intervention by the central banks I expect more of the same this week.

Oil broke support with the move below the $100.50 level and it has proceeded to take out the next two levels of support closing last week at $91.48. The key level now is $89.40. The stronger dollar has been an influence along with lack of demand. This is a positive for the consumer which has seen a drop of more than sixty cents at the pump for gasoline. The calls for $5 a gallon summer driving has disappeared for now. Watch oil to base at or near these lows. It could offer some trade opportunities off support moving forward. It is worth keeping on your watch list.

The scans of the markets resulted in a huge bias towards the downside. Of the 72 ETFs meeting our criteria for uptrend or upward bias The top 35 were short ETFs. That means the investor is hedging their portfolio or just simply short the broad markets. 28 of the ETFs were bond funds showing the flight to quality/safety at work as well. The remaining ETFs were utilities, consumer staples and healthcare. The defensive sectors continue to hold up better, but they are showing topping patterns as well. If they break support and turn negative the correction is on, as they say. I am looking for a base to start building near term. Thus, expect some kind of bounce off support followed by some consolidation as investors determine the future outlook for stocks. Never assume anything, be patient and watch how this plays out short term.