Some Interesting Thoughts to Ponder

Tuesday was a follow through on Monday’s push higher to continue the uptrend in play off the November 15th low. How long and how high does the market go? That is a guessing game I don’t want to play, but as the saying goes… “The trend is your friend.” And if anything has been true this year, that along with, “don’t fight the Fed!” have been at the top of the list. The S&P 500 index closes above the 1430 level to break higher. The NASDAQ eclipses 3030 and the Dow Jones Industrial Average closed above 13,300. The proverbial trifecta of major indexes moving through resistance. The trend is up for now with the only thing standing in the way being the “fiscal cliff”.

There was one headline that caught my attention on Tuesday worthy of some thought. “The Recession is Coming Regardless of the ‘cliff'”. This is an issue that I have been pondering since September. The economic data is not improving and any growth or anticipation of growth is purely due to the Federal Reserves continued influx of capital into the system through every possible source. Consider that in the third quarter imports were down 8.4% after a 2% decline in the second quarter. The last time the deficit went lower two quarters in row was the 2009 recession. I am not saying were are heading into a recession or that we are not already in one, but the data isn’t as rosy as the direction of stocks would have us believe.

To continue the theme further… what about gold breaking support at the $1674 mark on Tuesday? I wrote several weeks ago that gold was setting up to trade lower. I am not claiming to be a prophet, but that is the direction it headed after trading sideways and drifting lower for the last few weeks. It did hold the 200 day moving average at $1663, but the downside is definitely in play. We were short gold (GLL) in October believing the downside was in play. We hit stops on a rally bounce, but here we are again with the downside in play and the potential drop to $1625 support. Doesn’t sound like much, but the target is $1540 going forward.

Crude oil is another one of the areas under attack short term. The downtrend remains in play off the September high when oil hit $100 per barrel. The close on Tuesday was $88.40. The decline has been steady and the support at $84.50 was tested in November. A test of the low at $77.50 isn’t out of the question based on the current supply and demand outlook. We continue to watch the downside in oil as a potential to short the commodity near term, but it is also a positive for the consumer. The refineries are the benefactor of cheaper oil prices and the stocks have continued to move higher. Both opportunities are on my watch list as trading opportunities.

The housing sector has been a positive picture growing more than 100% over the last 14 months based on the homebuilders (XHB). The homebuilders confidence report on Tuesday showed the highest confidence since 2006. The question… does construction ramp up to meet the confidence levels? Not convinced that is true, but it is positive for the housing sector overall. There is still some upside room in the sector as XHB pushes towards the resistance at the $27 level. Watch to see if the momentum carries the sector higher or we remain in the current trading range.

The dollar is testing near term lows at 79.35 on the dollar index. The downside may be here to stay for awhile as the Fed continues to pump money in the system. The euro has been a benefactor moving back above the $1.30 level. The most interesting story in currency of late has been the Japanese yen. The decline below the $1.17 level has produced  a rally in Japanese stocks. The Nikki rose above 10,000 for the first time in many moons. EWJ is breaking through the top end of the trading range at $9.50. DXJ has gone vertical on dividend stocks. How long does this continue? Time will tell, but the upside has been worth trading.

We can all see the trend of the broad market indexes, but some of the sectors above are reasons the broad markets are heading higher. This is a market of trends and events, and I don’t see that changing anytime soon. Watch for the opportunities as they unfold. Define a strategy to capture the moves and make the most of the trend while it is in play.