Positive open and Fed minutes set the tone

Today’s Notes:¬†

One of the greatest challenges to managing money is attempting to apply logic to an emotional environment. While long term the market defines logically how it progressed. Hindsight being 20/20, but it is the day to day movement of the market where we struggle with understanding what takes place logically. This week has been a great example of who emotions win short term. The buying on Monday, selling on Tuesday and buying on Wednesday all make perfect sense when you step back and look at where the charts are longer term. They are in an uptrend. Thus, any selling will have do be defined by a clear and present danger! Since that does not exist the bias goes to the trend. What does exist is a belief that the markets are overbought, the economy is growing too slow to support the current valuations, geopolitics could and will impact the value of the dollar, and on goes the story. At issue is the conviction of a clear and present danger. The danger is on the horizon… if things don’t improve. That view or mindset leaves room for the upside bias to win in the short term. And for now that looks to be what is happening. Thus, we have to be patient, be willing to take what the market gives, and remain focused own where we are going.

That leads me to my next point or challenge for managing money… Patience! In an instant gratification world, waiting on anything is not our strength. We are afraid of missing out on the next big run in stocks, plain and simple. That is otherwise known as greed. Today’s market jumping higher from the start and then working back towards the recent highs only adds to the anxiety that this is the turn on the upside and we are going to run higher… I need to get invested. That mindset will get you in trouble and put you at risk you don’t really want to take on. I believe one of the greatest disciplines we can develop is that of being patient and letting the trends unfold and the catalyst develop that will put us in a great position to make money defined by a risk allowance that makes sense to our situation.

Wednesday was positive day in nervous market environment and news driven cycle. The opportunities will unfold and the upside will be clear. Energy is a current example of a sector that remains in an uptrend and continues to provide clear opportunities for investing money at reasonable risk/rewards. One day at a time, focused on what fits you and your style of money management is what matters, not what others think or the media wants to push today. It’s your money… manage it.

Chart to Note:

The Russell 2000 small cap index is what we looked all week to show the¬†current crazy activity of the markets at work. Up Monday, Down Tuesday and Up Wednesday… end result near the close from last Friday. The sector still is not taking on any leadership and has tested key support levels of late, but has managed to hang on for now.¬†Visually this chart depict what we have been discussing… look at the ¬†trade higher following the April 11th low, only to retreat and test that low again on¬†April 28th. The entire trip lower from the reversal off the February high the index has done the same thing… run lower, test, bounce higher and then start the cycle over again. The index has fallen 10% and continues to test the support level near the 1085 mark. I would like to say a break lower will open the downside trades, but that failed last week when it broke lower and bounced. Patience is the best course of action as it all works out short term, but small caps are going to be an indicator for overall direction.


We posted the chart of the¬†homebuilders last week¬†showing the downtrend in play from the March high. The homebuilders index didn’t help the cause on the upside, but it did stick with our evaluation of the downside being in play. Tested below support at $30.50 level of support and held, but the damage is done as the sellers believe they can press the downside.¬†¬†Plenty of pressure on the stocks relative to cost of materials and availability of land. The downside is in play, but holding support at the $30.50 still… see how it plays out.

Japan – EWJ remains in trading range… from post last week.

NASDAQ 100 – QQQ moved to top of the consolidation pattern Monday… break above $88.50 gets interesting. (That happened on Wednesday!)¬†The question is opportunity or now? See our notes on daily Trading Notes for Wednesday on the current direction we have taken.

Notes to Note:

  • VIX index back to the lows again. No worries, be happy, keep buying… at least today.
  • Small caps (IWM)¬†as shown above, did not post the gains to show a reversal in growth stocks.
  • Interest rates have calmed and are testing the move lower. Watching to see how this impacts the bond market as it unfolds short term.
  • Oil is¬†back$104 and remains on the upside trek short term. $37.74 target on USO short term (hit today with a new high). Upside in play, not good for the consumer and something to watch as well.
  • Fed minutes today show the indecision on how to put an end to the easy money of QE and lending to banks. This may go on longer than some believe, but either way it is a stumbling block to the financial markets. The Fed just needs to rip the band-aide off and let the healing begin. Otherwise more of what we have experienced the last nine weeks.
  • News driven markets make for choppy events. Not willing to trade myself broke at this point… let it unfold and go play some golf, fish, take nap, but let this work through the constant up and down movement.

The markets remain uncertain in direction as we have discussed for the last nine weeks. The dividend and large cap stocks are leading the current bounce, but growth is still a lagging sector. The uncertainty remains in play and keeps the market in check for now. Bonds have stalled with slight bump in rates as the fear has been withdrawn for the time being. The near term shows little in terms of clarity from either side. No one wants to get caught on the wrong side, and that has muted volume. Stay focused and remember that cash is a sector and sometimes the best trade relative to market risk.