Three Sectors to Watch for a Catalyst

The market remains n a position of waiting. They have managed to melt higher and find catalyst point along the way that have kept the trend in place. The key has been discipline and a willingness to find and take advantage of opportunities as they present themselves. Today I want to look at three sector that keep popping up on my scans or research list. Each of these are driven by some catalyst that will spark a trade (0-13 weeks) or investment opportunity (3-36 months) now or in the future. They may never pan out or find the true catalyst to permit the trade to evolve. Either way they are worth watching as they unfold.

Treasury bonds continue to hang tough following the Bernanke speech on Monday. A look at TLT shows the push to resistance and a decision point for the bond. Do yield move back below the 3.2% level and prices back above $113.50? If they do, there has to ba an additional catalyst or confirmation to the Bernanke comments. The economic data is what to watch short term to provide the catalyst. The consumer confidence data was less than expected on Tuesday, housing data was weaker on Monday, etc. A slowing or weaker outlook short term for the economy would be the added catalyst to a Fed worried about the growth of the US economy and willing to step in with more quantitative easing to help. That said, if the bonds do rally and yields fall again, don’t expect it to be long term. This is setting up for a trade and not much more. Short term target on a move in TLT would be $117.75.

Commodities continue to be at or near the top of investors wish list. The headlines are full of reasons to buy or sell commodities every day. The asset class is talked about as readily as bond or stocks today. The challenge for the sector currently is no different than others, lack of a catalyst or should we say growing demand. Oil has stalled near the $107 range as the world determines if the demand is real or speculative in nature. Future prices are trading at the biggest gap in history to present. Natural gas has dropped below $2.50 per BTU. Agriculture prices have dropped with coffee projected to fall further. Gold has traded lower, base metals are off with copper trading sideways. This sector like others has become a commodity (stock) picking sector. There are some that are doing well such as steel, while others continue to struggle. Don’t let your infatuation with the sector outweigh your discipline for investing. This is the reason we track and invest based on the concept of sector rotation, when sector are out of favor find other alternatives. The markets will rotate back in time and that is when you deploy assets into the sector. Don’t fall in love with any sector, follow the trend. SLX is worth watching short term in the commodities.

Small cap stocks made a move above resistance on Monday as the S&P 600 Small Cap Index broke above 463. Is this the catalyst for the next leg higher in stocks? Simple, but valid question for the index. The small test back on Tuesday was helpful and the move higher will be determined in the days to come. Should it test back to the breakout level all the better for an entry point. The key is to watch and plan your entry relative to the technical data. IJR, iShares S&P 600 Small Cap ETF is the simple way to play the move. $76.30 was the breakout and the point for watch relative to the entry. A stop would be a failure to hold the previous trading range or a move below $74.50. The target for the move is $80.50 short term. The sector has set up for a move and the parts are in play, we only need it to play out according to plan. The key to any investment is to know the objective, plan the trade relative to entry, stop and target. Understand the risk/reward and be disciplined through the holding period.

Every day we have to focus ourselves to manage our current holdings, look for new opportunities and maintain our discipline relative to downside risk and upside profit management. Portfolio management comes down to understanding your discipline and goals, then acting on them one day at a time. Stay focused and never fall into the trap of believing you are smarter than you are.

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