Watching For Cracks in the Advance

The market shows some signs of worry as investors were quick to react to the housing data on Tuesday. The early drop had the markets spending the day slowing creeping back towards the even mark. However, the challenge lies with the buyers. Are they willing to step into the market at these levels and carry the market higher? The answer will come in the balance of the week. As I stated last night in the video update there are plenty of reasons to state the market is overbought, but those conditions can remain longer than many believe. The key issue is a catalyst to turn stocks lower. Thus far that has not materialized. The housing data sent an early ripple through the broad market indexes, but it didn’t damage the outcome or the leadership we discussed in Tuesday’s notes. As we begin another day the key is how investors follow through today and the balance of the week. The following are some takeaways from Tusday’s trading day.

First, the leadership of the market remained in place and in some cases closed positive. The most notable of the those was Apple. Why look at an individual stock as if it were a sector? Simply put the dominance of the stock in the NASDAQ 100 index has to be recognized and the impact on both the technology sector and retail would bear noting. The buyers stepped into the early selling and took the stock higher. Technology overall attempted the same fate closing down fractionally. The sector held up, but the laggard, networking continued to struggle and shows weakness relative to the other components. We maintain our allocation to the technology sector and manage the stops accordingly.

The retail sector closed higher and showed solid strength on the bounce off the morning lows. This remains one of the stronger sectors to watch.  Amazon (AMZN), a stock we mentioned as a laggard starting to gain some momentum technically speaking, gained 3.7% on the day to assert some leadership in the sector. Scanning the retail sector has turned up some opportunities for stocks that are starting to move out of consolidation patterns and gain some upside momentum. Digging into the sector is worth the effort.

Energy took a shot from oil declining 2.4% on the day. All the sub-sectors fell in unison, but I am not counting this move to the upside as dead just yet. The demand side of oil will get interesting if the economic picture continues to improve. Watch for the services, exploration, transport and refiners to remain in the uptrend for now. Worth digging into the decline to find opportunities.

Financials were higher on the day after selling early, and they broke through resistance at the $15.75 mark on XLF. There was some resistance potentially at that level, but the push from banks (KBE) continues to aid the push higher. The brokers (IAI) were the key on Tuesday. If there is an argument for being overbought the financials are the first many will mention. For that reason you have to manage your downside risk relative to profit taking and your outlook or time horizon. The longer term is positive the short term may see some selling as those with big profits look to take some off the table.

The key for now is to respect the trend, but manage the risk. That statement is a mouth full when you consider the emotions that accompany the task of doing so. Step back, look at your positions and remind yourself of why you bought them, what you goal or target was, how much risk you are willing to accept at the current time relative to each position, and then set your stops. You have to move towards your objective with steady hand and a willingness to be disciplined. Money management is never easy. You would think that making money would make us happy and more disciplined, but the reality is we are quicker to sell winning positions than losing ones. Ride your winners and manage the risk based on your goal and discipline.