Technology Leads Market Lower – What’s Next?

Investors set a new course for the broad market as the technology sector set the pace on the downside. The selling in Apple started the move lower for tech, but then the others jump on board to take the Semiconductors down more than 2% on Tuesday. Funny thing is Apple bounced back to close flat on the day. What does all this mean looking forward? Good question and one that will be answered in the coming days as earnings announcements start and investors react.

One key sector that has helped the indexes hold up over the last three weeks is financials. The banks have pushed higher and set the pace. However, the latest development from the New York Attorney General is law suits over the practices for mortgage solicitation and packaging of loans. It has been more than four years and now we decide this is the course of action to take? The bigger question is what will the fall out be on the stocks. More importantly how will it impact the balance sheet of the banks being sued? This bring the element of the unknown into the sector and it will likely weigh on the stocks over time. For the now JP Morgan and Wells Fargo have dropped slightly in the initial response to the action. This is an area we will have to watch and determine if the downside risk grows. For now KBE, SPDR Bank ETF has held the current uptrend with the selling on Tuesday in line with the broader index.

Growth sectors have struggled in this rally as evidenced by the decline in the technology sector. We discussed small cap stocks and there lack of participation in the bounce off the September 26th low. On Tuesday they failed to hold support at the 465 level on the S&P 600 Small Cap index. Negative cross of the 10 day moving average below the 30 day, and the uptrend off the June low is now being challenged. This is another important sector to watch in the current test of the overall uptrend in play.

Another rally in question on Tuesday is crude oil jumping 3% on the stimulus new from China, Syria’s fight with Turkey and issues in the Middle East with Iran and Israel. This was produced by speculation and nothing more. Demand is still not rising nor is it really expected to near term. Another issue was a stronger dollar not influencing the price of crude oil? Too much focus on speculation and not enough emphasis on demand. I would look to the downside still on oil, not the upside.

As the negative sentiment rises the housing stocks have been rising. On Tuesday XHB, SPDR Homebuilders fell 2.4% as the sector consolidates near the highs. The bigger question is does the housing market still have room on the upside? Is the growth in the housing market strong enough to overcome the current slump in GDP and growth looking forward? All indications are yes, but we have to watch the near term move towards support at $24.60. If the sector holds support look for a possible play off the bounce. Plenty to like in the sector, but as with most investments the entry point is the key.

The NASDAQ 100 Index is one to watch near term. The leadership on the downside has come from the technology stocks, and not the least of which has been Apple. The short term outlook is the index will go the direction of Apple. However, Intel, Microsoft, Qualcomm, EBay and others have pushed lower as well. If the index breaks 2736 the next support is 2660. The negative move below support on Tuesday is the point to watch. Can we bounce back or does the downside continue? Short plays in the index have been the winners over the last week.

Precious metals rallied off the Fed’s stimulus offering of QE3. Gold has pulled back to support near $170 on GLD. Silver, likewise has pulled back to support at $32.40 on SLV. The test is worth watching for new opportunities at support. The upside bias is still in the metals and money flow could jump on the opportunity to buy into the metals at a lower price.

The move on Tuesday raises plenty of questions we will want to see answered in the short term. There appears to be a big community of negative views about stocks going forward. Don’t be surprised if the short side expands on this dip as money seems eager to bet on the downside more than the upside currently. Stay focused, be disciplined and don’t make any assumptions on direction. Be patient and let this all play out short term.