The worries are putting pressure on the current uptrend

Cyprus will keep banks closed until next Tuesday and that prompts a concern of a run on the banks in other European countries with sovereign debt issues. The latest developments show that a tax levied on deposits is likely to take place as the only other option is to default on debt. How are the markets around the world going to react today? When you look at default versus a tax… the tax doesn’t seem so bad? Only time will tell how this plays out.

The US markets on Thursday reacted more to Europe as a whole than Cyprus as a country. The worries from last summer are creeping back into the markets. The futures for Friday are flat currently, but the markets are in reaction mode and the sentiment is shifting towards the negative side with each day this unfolds. We started on Monday with a reaction to the idea and it has been five days of volatility and growing concern. Remember the more uncertainty this stirs up the more investors react. Psychologically we want some clarity about the future or what we believe will happen is positive.

There is plenty to discuss as the sector impact is now getting to a level where we have to fish or cut bait. Scanning the sectors we continue to see developments that are warnings in the making.

  • Volatility index jumps back above 13 as worries build. VXX is setting up to move above $21.10 level again. Watch the futures this morning for possible move higher on volatility.
  • Oil drops 1.1% in response to the global issues building. OIL remains at support and we watch to see how this story unfolds looking forward. We will have to see if this develops into a downside opportunity with the $89.50 support coming into play again.
  • Interest rates rose last week on the 30 year bond to 3.25% as markets pushed towards new highs. This week they have pushed lower on the fear issue in Europe. There is some flight to quality here or alternative to stocks. The volatility is picking up again in the long bonds as fear rises. Watching TLT to rise if this issue continues.
  • China bounced 2.5% on Wednesday and fell 1.1% on Thursday. The downtrend remains in play, but watching to see if support holds near the current lows. This is another area of global concern as the economic picture for growth slows.
  • The Emerging Markets (EEM) ETF shows a continuation of the downtrend as well. The break of support has accelerated and with the current developments in Europe the outlook isn’t positive. The drop in commodity prices has not help this outlook either. Downside definitely remains in play for now.
  • Gold started the trek higher again as the Cyprus catalyst is in play. Watch for the upside to break through $156.40 for possible upside trade. I have been looking for the downside to continue, but the fear influence is creeping back into the price of the metal. We will add this to the ONLY ETF Watch List for tracking… up or down.
  • Technology (XLK) is moving up and down 1% a day the last week. Still in the consolidation range for now, but setting up for a trade whichever direction momentum decides to go. SOXX fell back to the bottom side of the uptrend channel again to test the uptrend. Watch how this unfolds short term.

There are plenty of others sectors where we are moving down to the trendline established off the November 15th low. A break of that short term trend would be a negative and an indicator to start taking some profits off the table. This trend has had two such events that the markets have bounced back from, but they didn’t include concerns about the global economic picture. As we have experienced all to many times since 2007, fear drives markets lower without reason or remorse.

The option that is playing out currently from the S&P 500 index high breaking above 1565 post, is never, or at least delayed. Unless there is a solution soon, and one that is palatable to investors, the negative sentiment will push markets lower and the new high will have to wait for another day. Throw in all the negative talk about the US markets being overbought and you have the making of good old fashion correction in place.

The trend is your friend… the hard thing for many investors is the emotions of admitting the trend is breaking down. Let it unfold going forward, but have your stops in place based on your time horizon and risk you are willing to accept based on the current scenario in play.