Stimulus is Still in the Drivers Seat

The third quarter comes to an end and the data isn’t impressive Thursday the downward revisions to the third quarter GDP was eye opening. Even though we track the economic numbers, to see a revision downward to 1.3% from the previous estimate of 1.7% is nothing short of ugly. As my mom always said to me, “it’s water under the bridge.” There is nothing we can do about the numbers now, but looking forward where is the improvement going to come from? Stimulus? Quantitative easing? Color me skeptical on the outlook for growth. The primary driver is stimulus and it is not just coming from the US. There are new headlines almost daily from a different country attempting to put growth into their economy through some form of stimulus. This has turned into a global effort and it is holding up stocks prices globally… for now.

Spain’s budget announcement pushed the IBEX higher on Thursday. The DAX was helped by the news from Germany. China is pushing infrastructure stimulus and the Shanghai index climbs. The list goes on, but you get the point. The global markets have pushed stimulus efforts to jump start growth again. Each has done its part to help, but in the end it has not been enough for growth to ignite. With all the money being pumped into the system growth is still not evident. However, the money has to find a home, and more times than not, that is the market. Thus, the rally continues to be fed by free money and fighting the trend has been a costly event for many. Just look at the short interest in stocks… this remains one of the most hated rallies in history.

All that said, what are we doing? The same thing we always do, look for the rotation of money, it always moves to where it is treated the best. The last two weeks it has been moving to the defensive sectors. Treasury bonds, healthcare, utilities and consumer staples. Thursday the buyers stepped back into the growth sectors, which raises the question, are investors ready to buy on the dip? Volume on the S&P 500 index wasn’t exactly record setting, in fact, it was below average. The NASDAQ was better, but short of average. Some type of follow through on the day would be the next step and what we will be watching on Friday.

Financials bounced off support on Thursday and we are looking for some kind of follow through on the upside. KBE, SPDR Bank ETF held at $23.35 support. IAI, iShares Broke-Dealer ETF held support above $21.93 and bounced. Both components of the financial sector are key to a bounce or resumption of the uptrend. Discover Financial bounced bounced back to the previous high on Thursday as one of the leaders up more than 7%. This is one sector to watch for leadership if the upside is to resume.

Telecom remains one of the key leaders. RIMM was up on good news Thursday helping the sector bounce off the modest test from the recent high. Scanning the stocks in this space shows the solid leadership in place. We are looking to add to the sector if we break back above the previous highs.

Precious metals led by gold bounced back from the beating on Thursday. Silver was up as well, and mining stocks were the big winners on the bounce. The sector follows the sentiment. If investors are positive towards outlook for growth the metals rally, If the outlook for Europe suggests problems or some other issues arises, the metals pullback. This has been a good trading sector of late and one to continue to watch for opportunities.

The test lower is still in play and the bounce on Thursday remains just that until the charts validate a reversal back to the upside. We raised cash on the selling and we look for the opportunities in the current events to add positions as this unfolds and the opportunities present themselves.