Selling returned to the broad market indexes and the schizophrenic tendencies of the short term trading continues. The Russell 2000 Small Cap index was the talk of the town as it continues to trade below both the 50 and 200 DMA. Today it tested support at the 1110 level again confirming the downtrend off the July high. The sector never could regain the upside momentum and analyst have been negative on the index for some time. I have commented on the need for the growth sectors to find interest from buyers, but that has not materialized and the downside remains in play. A break of the current support level opens the way to 1090 and then it would get ugly short term. Investors are shedding growth and looking for shelter from the storm. The rotation is in process and tonight we look at where the money trail is heading.
Bonds are in favor again today as the yield on the thirty-year bond dropped to 3.22% from the 3.37% last week. This shows some of the money exiting stocks is headed towards the safe haven of bonds. How safe will they be if the Fed acts on hiking interest rates going forward? That is a good question and one to track as this rotation has money looking for a near term home. The ten-year bond fell to 2.51% down from 2.62%. If you are looking to put money into bonds… make sure it is short term and you have to trade the equity part of the trade and not the dividend. Be patient on jumping into this type of trade short term.
The dollar (UUP) is in favor and has been since July. The rotation to currency has been on the heels of the weaker economic data, geopolitical worries globally, and the weakness in Europe and Japan. This has hurt the emerging markets and commodities, but it has been a safe haven for money short term.
There is a question in reference to gold being a benefactor near term? The chart of GLD is not overly convincing at this point, but stranger things have happened. As you can see on the chart below some support has been attempting to build at the $116.50 level. If it holds and manages to reverse it is worth watching near term. A rally back to the $123 level would worth our attention.
Another speculation destination is large cap dividend stocks. I don’t see any real bases for that argument, but I can see the logic behind it as the dividends would offer some buffer to the volatility of stock prices short term. The S&P 5oo index broke support on Thursday and gives some insight into the thought. SCHD, Schwab Dividend Equity ETF fell 1.3% today equaling the decline of the broader market indexes. Avoid speculation and hypothetical reasoning that is not valid.
Cash is the best source of waiting out a rotation from growth to safety. Many struggle with this choice as they feel the need to hold stocks or some type of investment in the event the upside resumes. I will still go with the fact that cash is the best sector to hold money as the uncertainty plays out. This is a sector and one to be used in time of stress and distress.
Tomorrow will give us further insight into the sentiment and thinking process of investors. The downside risk is now in play as we broke key support levels and moving averages. If for whatever reason we find buyers willing to step into the market and buy the dip to end the week, patience is the best course of action. There will be plenty of opportunities as this unfolds, unwinds and plays out. No need to chase or prognosticate what is going to transpire in the next week… the market will lay it out for you plain and simple.