Negative bantering over the tax-inversion laws sent stocks lower… at least that is what the analyst and headlines want us to believe. The reality is any reason will do as investors worry about the lack of clarity relative to growth and interest rates. The real problem for the markets overall is not knowing where interest rates are going or when, and the outlook for global economic growth is stalling again. The US economic picture is impacted by the international community as well and that puts additional pressure on the US markets. Thus, any reason will work to take money out of stocks short term. We have experienced modest selling to start the trading week, but enough to push the worry button. Below we look at the worries as they relate to the sectors.
Chinese government responded to the economic data on Monday and Tuesday with the retort they would not provide any additional stimulus. That sent the stock market lower in China as it fell below the $39.80 (FXI) support level. The 8% test lower has the attention of investors and money flow out of the sector accelerated. FXP is the short ETF for the sector and one to watch if this selling continues.
Home sales were down 1.8% for August and reinforces the concerns about the sector. ITB remains in a downtrend longer term, and has broken lower from the four week trading range. The negative data has served as a catalyst and for now the downside remains in play. SHW is one of the few bright spots in the sector, but the relative strength has faltered in the stock the last month and is a negative contrary indicator to the trend. Watch for the sector to find support and then act accordingly.
Emerging markets continue to struggle on the stronger dollar and weaker commodity prices. EEM broke support at $43.25 short term and opened the downside opportunity. The 200 DMA is near by and could offer some support. I still believe the long term opportunity will unfold for the sector, but the short term isn’t playing out well and that keeps me on the sidelines until some clarity is gained.
Russell 2000 Small Cap index showed the “death” cross of the 50 DMA below the 200 DMA. The negative long term momentum for the sector technically added to the selling pressure. The next test of support is near the 1110 level and we are watching to see how this all unfolds. The sellers are in control and the short interest in the sector has accelerated. Look for support and then make a decision on how to capitalize on the opportunities.
The NASDAQ composite index is testing support from the recent low at 4500. The candlestick close today shows a possible reversal depending on how we move on Wednesday. This will be one index of interest tomorrow on the open. The technology sector (XLK) held up well in the face of selling today off only 0.2% and also showing a reversal possibility on the low. Watch for the semiconductors to offer some leadership if the low is to establish at the current level of support.
The choppy move continues to keep traders on the sideline as the test of support and resistance continues to keep the broad indexes range bound or trading sideways. The goal is to take what the market gives, but for now it is chopping around looking for the clarity and direction. Until that unfolds we expect more of the same. Be patient and remain focused going forward.