Sellers Push Indexes Towards Support

The warnings about earnings from analyst over the last couple of weeks are now coming true. Alcoa and Chevron start the Dow off on the downside as they revised guidance relative future growth. The slowing economic picture will impact demand. Sounds familiar to what the economic data has been telling us for th last three quarters. So far this week the markets have responded by moving down two percent. It doesn’t sound like much, but it is enough to catch the attention of investors and raise the anxiety level towards stocks. The VIX index has move up to 16.3 and is showing some signs of heating up short term. Bond yields have drop as money flows back towards safe haven investments. This is another test of the uptrend as the S&P 500 index closed on support at 1430. The downside risk is alive and well, but there is still plenty of news to come before we can say the sellers are in control. Thus, watch, listen and manage your positions according to the risk you are willing to accept near term.

Global markets have been weakening as well with the EAFE index moving below support. EFA, iShares EAFE Index ETF closed on the 50 day moving average and is showing indications of moving lower short term. The downgrade by Standard and Poors on the Spanish sovereign debt to just above junk, may push Europe lower today. Europe has been the primary weakness, but the last two weeks downgrades and growth revisions in Asia have put more pressure on the index. The downside play may develop short term if the weakness continues.

The financial sector continues to hold above support ant has acted well this week despite the selling. XLF, SPDR Financial ETF has given up ground, but it still looks positive overall. The uptrend is still in play and the short term moving averages remain positive as well. Breaking down the sector the banks (KBE) have held up as they remain above the 10 day moving average. Banks like Bank of America have set the pace. The suit filed against Wells Fargo on Tuesday took some air out of the sector, but it held up well on Wednesday. Citigroup has looked equally strong holding near its high. The regional banks (KRE) have struggled more and closed near support at $28.50. The earnings outlook is putting pressure on the sector relative to where the increase in revenue will come from. The primary concern is the current zero percent interest rate environment we are currently facing. The brokers (IAI) have been the weakest link relative to future growth. Each step taken on the upside has been met with selling to keep the sector in check. $21.70 is the next support level for IAI going forward. The insurance sector has help up the best as KIE remains near the September high. Bottom line is the sector remains the primary leader for the broader index and has remained solid even during the modest selling this week.

The headlines remain full of Apple comments both good and bad. The challenge for a stock like Apple is expectations. They have done so well for so long that the expectations are out of skew with reality. Fundamentally the stock remains cheap on a relative basis. If all things are equal the sellers are creating opportunity for the believers. The question is when and where will the buyers believe the value exists? On Tuesday the test of the $623 support set the¬†pivot point and¬†now we watch… hold the¬†support and move higher, more buyers should be willing to step in add shares. Break support and the selling may accelerate in earnest. Technically the chart is a mess with the break of support at $656. The accelerated selling below that market has created all the doom-and-gloom comments. The trendline has held for now and the pivot off the Tuesday low is what to watch near term. Expect the volatility to remain in the stock through earnings.

Looking for additional leadership has been a tall task. Healthcare was leading along with financials until the last two days erased more than 2% from the sector. Consumer services and telecom were pushing higher as well before testing lower. The challenge for the leadership this week has been obvious, and that is where the downside risk comes into play short term. If enough sellers join together and the sentiment shifts to negative, the downside will accelerate. For now the selling remains on the modest side, but the potential risk of more selling is clearly in play.