Sentiment Shifts for Investors

What will the market do following the worst week in thus far in 2012? As we scan the landscape we see some analyst saying, “I told you so!” Other are saying, “It is normal and growth will continue!” Who or what we believe comes down to our own analysis. The numbers have slowed relative to the economy, the election result are in for France, Greece, well it’s Greece, and all together the market lacks clarity. The theme of 2011 has returned. Our challenge is to manage our money through the confusion and disorientation of the markets successfully.

The question remains, what will investors do as encore to last week? The worries are turning to fear and that creates selling. How much selling is a matter of interpretation of how bad we believe it will be collectively. Investors have a tendency to think independently, but act collectively when fear or greed gains momentum. Looking at the charts of the major indexes we see the indecision as the chart move sideways. Should they accelerate on the downside, break support and establish a downtrend fear would gain momentum and accelerate the selling. That is the what we have to manage starting the new trading week.

Energy stocks led the downside last week tumbling more than 6% the last three trading days. Crude oil fell from $105.95 on Tuesday to $98.65 on Friday or 6.9%. Why the implosion? The understanding or acceptance that consumption would remain low as the global economies continue to struggle? The increased supply helping from Saudi Arabia? The less likelihood of an Iran/Israel conflict? The European elections? Refinery demand falling due to scheduled maintenance? New margin and speculation requirements from the futures exchanges? All of these were headlines from posts over the weekend explaining the decline in prices. All have a degree of truth. When what investors thought to be true… wasn’t, they sold, and they sold quickly in this case. Is there a buying opportunity in the decline? Some will say yes, but we have all heard the saying about catching a falling knife. It is definitely a sector to watch and see how far it will fall. Does support near $97.50 hold? The established uptrend off the break above $90 is broken and some analyst are stating the price returns to the $90 support level. It has our attention for now and we will see how it plays out from short term.

The S&P 500 is poised to test 1360 support again and the key level is 1340 short term to hold. The NASDAQ is testing 2950 as it leads the downside move, and the Dow support is 13,00 with 12,730 being the key support. Breaks below these levels could spell trouble short term for the bulls. However, the sellers/bears have not really exerted themselves to this point enough to gain control of the momentum. Watch the sentiment or conviction of the selling if we continue down that path. Uncertainty is still the key driver from our view and that has led to timidity and caution for the investor. If that shifts to fear we know the results.

Financials, technology and the consumer services sectors hold the answer short term for direction. The consumer is the stronger of three. Technology gapped lower on Friday to lead the selling. Financials are near support again and the consumer services have held up nicely to this point, but look unstable heading into some key earnings for the sector. The technical indicators are turning negative in technology sector as weaker earnings have led to some selling and lost confidence. Watch how these sectors handle their respective support levels.

Expect emotions to rule the day on Monday with the European elections in and the negative headlines pushing stocks lower to start. How the indexes respond as the day progresses will give some indication of investor sentiment. The VIX index moved back towards the 20 level and if it continues towards 30 it is a bad sign for the markets in the near term. Evaluate your positions based on time horizon and risk tolerance. Manage them based on your goals and objectives.