Tug-o-War Begins Between Reality and Hope

We started the week with hopes of more upside off the stimulus announcement from the Fed. We have spent the week struggling to hold our investment heads above water. What has changed? Simply put, the facts versus hope. The facts are showing up in the economic data that traction and growth in the US economy isn’t taking place. Throw in the global weakness in Asia and Europe and you have reality. This has spawned analyst this week to downgrade various components of the markets both domestically  and globally. Despite all that the markets have been surprisingly resilient as they have held near their current highs.

Oil managed to hold above the $90 level on Thursday closing at $92.42 after testing lower. The drop has been in response to another reality that demand isn’t rising, in fact it has declined. Thus, the intervention or verbal manipulation by the White House, offering to release strategic petroleum reserves, and Saudi Arabia offering more supply to lower oil price, resulted in the decline this week. Will it stay? There is plenty of debate on the topic and for now, I willing to watch the charts for a good entry point up or down. Support is $90-91 and resistance is $93.90. Let the news settle and then look for the opportunity.

Jobs remain an issue for the economic picture. Despite the decline in the rate of unemployment the number of unemployed continues to be high. Jobless claims rose back above the 380,000 level last week and it was attributed to the hurricane. This week the number remained above the 380,000 level and worry started anew. Bank of American announced 16,000 layoffs are being accelerated to cut rising costs from regulations, and adding to the worries. This is not a new issue for the economy. In fact, the Fed President, Bernanke stated that jobs were the reason for the QE3 stimulus. He promised to keep the stimulus in place until the unemployment rate dropped to normal. This is an issue to watch in the coming months.

Despite all the doom-and-gloom in the headlines, the market is holding up. There are sectors moving higher. In last nights video update we discussed some of the rotation taking place short term. Healthcare remains in a positive uptrend. Looking at a chart of XLV, SPDR Healthcare ETF shows a break from consolidation at $39 and a continuation of the uptrend. The healtcare providers (IHF) have followed suit with a gain of nearly 10% during the last six weeks. Medical Devices (IHI) and Pharmaceuticals (XPH) have equally move higher helping the the broad sector remain in the uptrend.

Consumer Staples (XLP) made a move above the consolidation the last two weeks keeping the uptrend in play for the sector. Filtering through the forty stocks in the ETF you can easily find the leaders as well as opportunities for investing.

Telecommunications (IYZ) has been one of the leaders as the sector continues to hit new highs. $25.92 is the high from May 2011 and the ETF closed at $25.83 on Thursday. This is another sector where filtering through the stocks offers opportunities.

Sectors like Energy (XLE), Financials (XLF), Technology (XLK) and Consumer Services (XLY) are being tested this week, but they are still in good shape technically. The challenge is for investors to determine if the economic news and worries outweigh the hope of stimulus working to build growth. That debate started this week and it may take time to determine the outcome. That means we have to weigh our options and put money to work in the sectors that are working and be proactive towards the management of our money overall.