The current sentiment is the market needs to correct, test, pullback, etc. Why? Simply put the technical data is showing the broad indexes are overbought short term. However that warning has not gotten the attention of investors, and now the doom-and-gloom prognosticators are starting to sound off concerning the economy, earnings, Europe, debt ceiling, balanced budget, budget cuts, etc. They are all true and in there purest form a big concern for the markets going forward. The challenge lies with the sentiment, belief, conviction, etc. of the investor. The shift to buying stocks and holding them versus selling them for alternative assets is now in vogue. Until there is enough fear to drive or shift the sentiment back towards fear, the buyers will remain in control of market direction. Thus, follow the trend, it is your friend. When the horse dies… dismount.
Technically the break above resistance is key for a continued move to the upside. A follow through on the move higher last Friday will be key going forward.
- S&P 500 Index = 1500 level (closed above on Thursday)
- NASDAQ Composite Index = 3190 level (closed below on Thursday)
- Dow Jones Industrial Avg = 14,090 level (closed below on Thursday)
The primary question facing investors… is there enough gas left in the tank to make another run higher? That is what all the speculating and fussing is about currently. Fundamental data doesn’t support the rate of growth currently taking place in stocks, and that is becoming a bigger concern.
The short term trend is still up and that is what we have to go with until it breaks support. If and when that takes place we will have to make model adjustments as well as understand the downside risk going forward. Thus, remain patient and let this play out one day at a time.
What are we watching today?
- The US dollar (UUP) is moving higher on the issues in Europe. Watch for the ETF to clear resistance near the $22 level on the upside. On the opposite side of the dollar is the euro (FXE) on the downside.
- Apple is getting plenty of press about being ‘oversold’. Fundamentally the data isn’t bad and the move from $700 to $426 was quick. There is a potential for a bounce back near the $500 level near term. If all the analyst put their money where their mouth is the stock could rise. Solid move above $460 on Thursday.
- The NASDAQ 100 index has been trading sideways and has made several attempts to break above resistance. A move above 2770 on above average volume would be a plus for putting money to work on the upside move.
- Treasury bonds have sold as the bump higher in interest rates has hurt the value of the bonds. There is little movement in terms of fear of volatility. That could change with Europe, the debt ceiling, budget issues, etc. Watch for a bounce to materialize in the bond short term.
- Japan is breaking through top-line resistance and continuing the uptrend established in December as the yen started to move lower. The upside is in play, but you have to watch the yen. How much lower does it go? The answer will determine the upside in the stocks.
- Natural Gas moved lower on the inventory data Thursday losing 4.2%. The miss relative to the draw-down was minimal, but the sellers are in control for now. Watch the short plays in the commodity.
- EUO is the leveraged short euro ETF to watch if the dollar play above materializes to move higher short term.
- Europe is having challenges with the sovereign debt perception. If the issues continues watch for IEV and other country specific ETFs, Spain, Italy, France, Germany, etc. to break lower. This is setting up as a downside trade only.
- China broke from the trading range near the high this week and is now near the next support level. The downside is already in play, but the downside trade opportunity is there short term. FXP is the leveraged short ETF, but make sure you understand the leverage and risk of the trade.
- Gold continues to struggle to make the move higher and it continues to trade in the range without much in terms of conviction. Don’t speculate, but watch the downside if it plays out.
The market has picked up volatility short term, but is still moving in an upward direction. Stay disciplined, define your entry, stop and target, prior to putting your money to work in the market. If all the prophets are right about the downside, knowing what you will do in advance is better than making decisions in the height of emotions. Stay focused and disciplined in your strategy.