Pullback, Correction or Opportunity?

I love Wall Street and the talking heads. They have all shifted gears towards selling the last two days and they haveĀ dividedĀ into two camps… First, the opportunist. They believe this is a pullback and a buying opportunity because the markets are going higher and this is just a bump in the road as we move towards higher ground. Second, the pessimist. They believe the economic world as we know it is coming to an end. Sell everything, and buy gold at these depressed levels. Who is right?

Your guess is as good as mine on that front, but I do believe the truth lies somewhere in the middle or a little of both may come true depending on how the story unfolds. That story is related to the economy, both domestically and globally. Thus, take a deep breath… exhale… and start looking for the sectors and indexes that make the most sense looking forward. There will be winners and losers as always. The best research wins. That is the reason we spend so much time on research versus scanning ourselves into oblivion for the perfect stock. Look for the developing stories that will come from this event over time.

Is this a pullback? Yes! Is this a correction? Maybe! Is this an opportunity? Absolutely! Look for the right sectors as this all unfolds. Be patient, implement a disciplined strategy and be disciplined.

Chart of the Day: The NASDAQ Composite Index

NASDAQ

The break of support at 3160 and 3130 puts 3100 in play on the downside. You can see on the chart Ā above the 50 day moving average (red) and the uptrend line (yellow) off the November 15th low are the key support levels for the index. Thus, a break below the 3100 mark would be a big negative overall for the NASDAQ. The index has been a laggard compared with the other indexes since the first of the year. Thus, the downside liability is greater from my perspective. If you are looking for a short opportunity this would be the more aggressive index to short. But, until you have some clarity in that vein you have to be patient and let it develop.

Current Drivers:

Inside the Market – Low growth, plain and simple. The lack of increase in earnings, revenue and optimism from corporations is a drag on the outlook for US markets. Earnings were lack luster for the fourth quarter. The consumer is stalled along with corporate spending. Not a bright picture looking forward simply put.

Technical data leaning towards a correction or pullback had become a major distraction for investors, but with the test of nearly 3% over the last two days, maybe, just maybe, we can move forward. I am not talking about the uptrend, but putting things back on a fundamental premise of growth or no growth driving stock prices up or down.

Outside the Market – The Federal Reserve comments relative to the future of quantitative easing remain a thorn in the side of investors. Remember the market doesn’t like uncertainty looking forward and this puts plenty of doubt on what to expect. The surprise of the FOMC minutes on Tuesday will take time to digest and consider what actions if any the Fed will take at the March 20th FOMC meeting.

The other outside event building is the lack of a deal on budget cuts. In fact, Congress is still on break! This has the potential to add to the current questions being raised about the future growth of the economy.

From Our Overnight Scans:

The sellers have had an impact on the small caps (IWM), NASDAQ 100 (QQQ), S&P 500 (SPY) Basic Materials (XLB), Commodities (GSG) and Energy (XLE). This of course is looking at the major sectors of the market and determining who is leading the move lower. These are the indexes or sectors to watch as this reaction to the Fed continues to unfold.

Gold (GLD) has dropped 5.7% since breaking from the consolidation on February 11th. In reference to that it is time to look for a bounce. The inside trading day on Thursday would lead to me watch for some consolidation or a bounce and then a continuation of the downside move. Unless demand for gold shifts higher, there isn’t enough momentum from the buyers to stem the turn lower short term.

Curde (OIL) has moved down to the next level of support near the $93 level. Look for some support or the next level at $90 comes into play. The move higher in oil was on the speculation of Europe and China improving and demand rising. That may still be the case, but if the US stock markets correct oil is heading lower with them short term. A stronger dollar will play against the price of crude as well short term.

Thought of the day – The Volatility Index (VIX) jumped to the 16 level over two days of trading after hitting a low of 12.08 on Tuesday. Is investors fear a growing issue or just a reaction to the FOMC minutes catching everyone off guard? I am leaning towards the latter for now, but if the data, like that from the Philly Fed Thursday, continues to miss expectations, the combination of uncertainty and poor economic data could be enough to extend the downside short term.

The traders are back in control of direction for now. Watch to see whatĀ opportunitiesĀ are created when the dust settles.