The downside risk of the market remains in play. The stress from mixed earnings reports, slower economic data and fully engaged Fed is creating renewed volatility. From my view this is a difficult market to trade and sometimes no trade is the right trade. There are times we just need to be patient and let it play out, then make our trades when some sense of normality returns. Today I want to discuss some of the items I covered in my video update from last night about the current market environment.
- The S&P 500 index is sitting on the up trendline from the November low. The line was broken intraday Wednesday after hitting a low of 1545 and then struggling to close at 1552 support. Will it hold or do we move lower from here? 1538 maybe? My point is simple, the market is at a transition point of breaking the trend and then finding its way lower or sideways. That would mean I am looking for one of those two options to play out versus a reversal and moving higher going forward. Sentiment is shifting to a lack of clarity which creates uncertainty, which creates a stressful market. Thus, for trading or short term positions I am looking to move to the sidelines, i.e. cash. Longer term positions you can read the update on the research page from last night for more details.
- Every day I run a scan of the 1370 plus ETFs looking for first, the positive trending sectors and second, the negative trending sectors. The list of negative ETFs has been essentially blank or void for five of the last eight weeks. That means we have been in a positive trending market environment. The positive list has been comprised of 65-100 ETFs. Last night when I ran the scans the negative list has grown to 24 over the last four trading days and the positive list has dropped to 35. What does that mean? Rotation is taking place sector by sector. The positive camp is comprised of short or inverse ETFs and bond or fixed income ETFs. The negative camp is commodity, country specific and basic material/energy ETFs. Five sectors (of 10) in the S&P 500 index are still leading or holding their uptrends. One is sideways with a downward bias and four are breaking down or heading into a downtrend potentially. Rotation is in play short term thus, you anf I need to be defensive towards our short term portfolio holdings. This will unfold further in the coming days and weeks. Pay attention to money flow and leadership.
- The tally for the economic reports now stands at 15 or the last 18 have disappointed or missed estimates. March is proving to be a big disappointment and confirming some of the slowing that started in February. This trend change is causing most of the uncertainty I stated above. When investors are expecting certain trends or outcome relative to the economic picture and it doesn’t materialize the lack of clarity creates uncertain, which in turn creates doubts. Those doubts will eventually turn to fear if the disappointments continue, and that leads to selling and the market trend shifting directions. That is a key factor currently and one we have to track and pay attention to short term.
- Commodities have been the weak link and catalyst to the current issues facing investors. Oil has dropped 11% over the last two weeks and gold has fallen more than 14% during the same period. That level of decline creates anxiety for investors and it acts as a trigger to sell. Watch how commodities trade in relationship to the downside moving forward. If the free fall continues that will be negative for the broad market overall. If they stabilize and start to build support, stocks will normalize and look inward versus outward.
- Earnings are playing a theme of meet or beat estimate, but disappoint on revenue. This is not new as it happened in the first quarter, but it is wearing on investor psychology as it relates to the economic reports. If the trend in earnings doesn’t improve in the coming weeks it could act as a negative catalyst for stocks. This along with other issue mentioned above is turning the current market into a news driven event daily. What is in the headlines will drive direction. This is why the stress level of the markets is high and I started my comments today by stating, no trades sometimes are the best trades. Pay attention to earnings in the big picture not just the stocks reporting.
The bottom line in my comments above and in the update video last night… rotation is in play, sentiment is shifting, investor emotions are rising and the downside risk is rising with them all. Protect your positions according to your strategy. Use your stops and trade your plan. This promises to be another fun filled day with plenty to ponder and deal with as we move forward one day at a time.