Stimulus or Not? That is the Question…

The rumors and headlines will all get the answer today. What will the Fed do? Whatever it is, it will not please everyone, and the ones that want to pleased are all on Wall Street. If the answers are not according to the script investors have laid out the market will react. That is just the simple version of what I see happening today. The minimum is twisting or continuing the exercise of selling short term bond and buying longer term maturities. The euphoria would come from enacting quantitative easing part three. We will get our answer at 2:15 pm followed by an explanation from Mr. Bernanke that will put most people to sleep as he attempts to tell us how a rainbow is made. Our concern/interest in this event is the potential fallout from too little stimulus to keep the buyers interested in owning stocks. Thus, we have raise our stops accordingly and we will manage our positions into the announcement. Hope for the best, but always expect or plan for the worse.

The assumption is the markets will continue higher if the Fed gives investors what they want. There in lies the problem, investors don’t really know what they want. Thus, we have to project based on our assumptions and then let the charts activity tell us whether those assumptions are correct. The S&P 500 index has closed above resistance of 1330 and 1345ish the last two trading days. The next resistance is 1367 and then 1395 up to 1405 range. I would expect the index to move towards this level if the news is positive. However, the downside remains a possibility and a retest of the lows near the 1280 mark. The index rallied on Tuesday showing the faith from the buyers and short covering from the sellers. Watch the key levels and set your stops accordingly. $134.30 is reasonable for short term or trading positions in the index.

Financials (XLF), technology (XLK) and consumer services (XLY) all made solid moves through resistance point mirroring, but outpacing the move on the broader index. This shows that leadership is in place for the move and positioned for an upside move in the broad markets as a result. Digging into the sub-sectors of we find banks (KBE), semiconductors (SMH) and retail (RTH) are driving the sectors respectively. The leading stocks in the sub-sectors are large cap dividend paying stocks. Investors are willing to step in, but they want a downside buffer to go with their risk.

Our scan on the close shows healthcare, REITs, large cap dividend ETFs and value ETFs rotating into a leadership role. The growth stocks are still lagging as the assumption is the economic growth is too weak to drive those stocks higher. This rotation or move higher in these components are still maturing in relationship to the breakouts. Thus, watch how they react today to a key piece of data looking forward.

As you can see it takes trend and reversals time to set up and follow through. The challenge is being patient and letting it develop. We want to make assumptions or jump in too soon in the process for fear we will miss out on something. The reality is the best trader/investors have an abundance of patience and discipline. The reversal off the June 4th low is in play. The validation of the move is next. A test would be in order, but today’s news is not the kind to test the move it will define it historically. Disappointment produces a failed breakout. Positive produces a follow through and test of the downtrend line off the April 2nd high. Focus, discipline and patience are the keys to the trading day and the news from the Fed.