On Monday the S&P 500 index closed at 1525 up 7 points on the day. The index touched a low of 1512 on the day before making a slow climb back to the high of the day at the close. The importance of that move was the “fear” posted by China overnight. The Shanghai index dropped 3.7% on the government changes to mortgage lending to curb the hot real estate market yet again. The projected ripple effect to the US was to be negative when you add it to the much talked about budget cuts of $85 billion on Friday. Neither at the end of the day mattered to investors as they put money back to work in stocks. Why doesn’t it matter? Simply put… the fear of missing a continued move to the upside in stocks, outweighed the fear of what could happen in China or the US later in the year as a result of government actions. Thus, the uptrend remains in play, despite what anyone thinks about valuations or the ‘wall-of-worry’.
Crude oil has dropped nearly 10% over the last four weeks. The majority of this drop has transpired over the last two weeks since the FOMC minutes eluded to the shortening the duration of quantitative easing. The issues in Europe added to the downside, along with the recent events in China. Simply put, the demand is not seen to be as robust as some analyst had hoped during a global economic recovery. The latter part of that statement is truly the bigger concern from my view. The lack of a global economic recovery is the biggest hindrance to the price of crude as it points to lower demand. Thus, oil now stands at $90.29, and hit $89.33 intraday on Monday. $89.23 is the next level of support for crude and now we watch to see if this level holds or is there more downside to come. Watch for OIL to find support at the $20.90 level. That would offer an upside opportunity if support hold and prices bounce off support.
The next part of the issue relative to crude is gasoline. Why, if crude is down 10%, does gasoline remain near the high at the pump? The answer is focused on the refineries as they do winter maintenance and changes. The outlook is for prices to drop going forward towards spring, but there isn’t any guarantee. The shortage of supply has been a result of the refiner repairs and taking production off line. Either way it is back to the supply/demand issue and gasoline has created it’s own shortage. As this shifts with production coming back online, look for prices to retreat at the pump. This is an additional concern for the consumer. Watch UGA on the downside, the drop to $60.50 support is in light of the belief that prices will drop at the pump as supply rises in the coming months. $59.25 is my short term target on UGA.
Despite the concern surrounding the consumer the data remains positive. XRT, SPDR Retail ETF moved above the resistance at $67.62 on Monday. What is driving the sector higher? AEO, American Eagle broke above the consolidation at $21.25 gaining 4.2% on the Monday. BKS, Barnes and Nobel gained 5.3% to move back to the top of the current trading range and ready to push higher. TGT, Target cleared the $64.35 resistance gaining 3.6% on the day. Scanning the sector ETF you find the leadership on the day was positive and the breakout moves from stocks was a good sign for the sector overall. Why the optimism? the consumer is spending money, but it is in select areas and judiciously. As I have discussed many times this a stock picking sector. The SPDR Consumer Discretionary ETF (XLY) also made a solid move above the previous high at $51.10 on Monday. The consumer isn’t dead yet, and this remains a sector to watch going forward.
Financials also made a move back towards the previous high ($17.93) on Monday. The volume was on the low side for the move, but we have to watch to see how this plays out short term. The banks remain in focus with mixed reviews from analyst. KBE is within 1% of the previous highs currently, but more importantly is the consolidation among the the leading stocks. Huntington Bancshares (HBAN) moved back to the high at $7.20 on Monday and looks ready to move higher. Citigroup (C) and Wells Fargo (WFC) both made equal moves back towards the previous highs. I continue to like the sector as well as the sum of the parts. Watch KBE, KRE, IAI, KIE and others to lead the broad sector higher.
Apple continued to move lower on Monday. After breaking support on Friday, the move lower near the $416 mark on Monday had the headlines buzzing with antidotes to the stocks future. The downtrend is clearly still in play. Until there is a clear building of a bottom the downside remains the play short term. The current price activity gives new meaning to, ‘trying to catch a falling knife. The jury is still out on where the stock settles and what is a good entry point, if you want to own the stock. For now… stay clear unless you want to capture short term trading opportunities.
Plenty of activity taking place in the broad markets. The challenge is to capitalize on the parts that make sense and abandon the rest. Discipline is the key going forward along with a well defined strategy.
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