Some Rotation In Play As Investor Shuffle

The broad markets on Monday started lower, bounced and closed basically flat to slightly lower. The buyers are still willing to step in as the Fed’s shadow looms large for investors. However, the short term stall could result in a consolidation or short term pullback in the indexes. Scanning the major sectors we find evidence of that in play over the last two weeks. The issue now is to be patient and let this develop. If we have a pullback look for the opportunity. If we trade sideways… look for the opportunity. Unless we have some bad news near term there are still trading opportunities going forward. The “fiscal cliff” will become an issue as we approach the election, and Europe remains a fiscal mess that is showing up in the headlines again. There is always a wall-of-worry to climb, but the Fed is still in play as support for the markets currently.

Retail continues to test the recent highs and has formed somewhat of a sloppy flag pattern. Look for some support in the $63.05 range currently. If that level breaks the $61.65 mark is next for support. This remains a sector of individual stocks for me and the winners and losers are easy to spot when you filter or scan the sector overall. American Eagle (AEO) has been one of the top performing stocks fell 7.5% on Monday or $1.75 per share. Technically damaging to the chart, but it also went ex-dividend with a planned distribution of $1.61 per share. This could be a stock to watch from here. The drop may be more a matter of the dividend than the outlook. Yesterday we discussed Dollar Tree (DLTR) and its attempted break of the downtrend line. There are stocks to watch in this sector and it is worth scanning and digging into the sector to find the opportunities. Within the retail and leisure sector is the restaurant stocks which have bounced off their September 5th lows. Darden (DRI) broke out last week showing the current momentum in the sector. Keep digging in the sector to find the winners.

The news from the homebuilders has been been improving over the last three quarters and the chart of either IHB or XHB reflect the good news. As with all good things, they must consolidate. I am not convinced, as some analyst, that the run higher in these stocks is over. The recent downgrades in the builders is expected following the run over the last twelve months. The upside longer term remains, but there is room for some consolidation or even a pullback of 3-7%. If this takes place it will offer an opportunity if you have missed out on the initial moves off the lows. We have seen two legs up in the current trend off the October 2011 lows and our outlook is for more upside following some type of consolidation. However, if the housing data continues to improve we may see only minor adjustments in the trend short term. Home price index is out today and the new home sales are due tomorrow, both will give more clarity short term on expectations. Keep the sector on your watch list to add or establish positions on a pullback.

Semiconductors continue to be one of the weaker sectors. A looks at the chart of the SOX index reflects a close below support at 390 support and the 50 day moving average. This is one sector to watch on the downside as the potential influence on the technology sector and the NASDAQ as a negative. Intel (INTC) broke support to continue the move lower on Monday leading the downside. Cree, Inc. (CREE) broke support as well reflecting the current downside push overall in the sector. If this accelrates look for the short interest to climb, and selling overall within the sector.

What happened to the “fiscal cliff”? The election has happened. First some clarity of what will happen relative to the White House is the first concern, but it will really come down to the elections in Congress and the Senate. If Congress remains dominated by the republican party the cliff will be more likely a reality. If by some miracle the republicans control the Senate as well, some compromise will have to forged with economic picture and reality. However the election plays out, it will put seven weeks of pressure on both houses and the president to determine how to address the issues by December 31st. Thus, as the election approaches I would expect Wall Street and investors to put some pressure on the financial markets relative to what they perceive the outcome will be. We will have to monitor the progress and the potential outcome going forward.

Another day of fun for all in store. Watch, listen, plan your entries and exits accordingly. Patience is the key short term.