What We Are Watching This Week

New week… New attitude? We will see soon enough. There was no¬†progress¬†on the fiscal budget over the weekend, in fact, Mr. Boehner went home to relax. There were no major changes in the outlook for stocks and the longer the decisions is deferred¬†the¬†less likely we will get a decision prior to the holidays. With that in mind I am outlining the sectors of interest for the balance of the year and what we will watch in relationship to each. This remains a trading market short term without clarity looking longer term. Thus, we will continue the same theme… one day at a time with upward bias shifting to negative to start the week. If the positive returns… We will add to positions. If the downside steps up, we will exit based on stops and take the short plays outlined on the Watch List.

The NASDAQ is the biggest challenge facing the broad markets. The large cap technology stocks, which have been a significant part of the upside leadership since the June 4th low, are now heading lower with Apple as the primary leader. Scanning the index shows the downside risk in play from these stocks. How do we treat if from here? Part of the strategy is to add short positions in the broad  index to hedge our downside risk. The other is to adjust our stops and limit the downside impact to our positions and overall  portfolio. QQQ is sitting on support at $64.50. A break lower is a short term negative, and a bounce off support is a potential test of the upside resistance at $66.25. Either way the NASDAQ will play a major role in the overall direction moving forward.

The technology stocks have been the leadership in the bounce off the low on November 15th. Semiconductors broke higher and led the upside, but on Thursday and Friday they tested the break above $51.65 in SOXX. A move back below this level would be a negative for the leadership and the uptrend currently in play. If the support holds it could provide an opportunity to add to the trade in the semiconductors. If it breaks a short trade in SSG could be worth watching short term. Either way technology stocks are a key to the bounce off the November low continuing or breaking down and testing support.

Financials are another sector that lacks the upside push needed to keep the broad markets on the upside. The initial move off the November 14th low was positive, but the sector has stalled since. A test of resistance at $16.20 is playing out currently. A break back below the $15.75 mark would be a negative. Banks, regional banks and insurance stocks have all pulled back of late leading test. Watch to see if any leadership arises from this test. If not, we will look to exit any open positions short term.

Retail remains very mixed. The discount stores are getting killed… DLTR, DG, WMT and TGT shows the downside pressure currently. The big box retailers aren’t doing much better as noted by M, JWN, and KSS. The specialty stores have done better as seen in AEO, LULU and LTD. The dogs we discussed in our Thanksgiving update have been the winners JCP and BBY. Unless things turn for the better soon this isn’t a sector to own.

Transports are a mixed bag as well with the sector index attempting to break from the nine month trading range. The trucking stocks are looking good with ODFL, XPO, ABFS and JBH leading. The rails are mostly positive with the exception of CSX leading the downside. Still a key sector if the markets are going to continue the upside going forward.

China moved higher on government economic data. Money flow into the country ETFs is in hopes that the data is accurate and the turnaround in China is for real. That is a big assumption when you look at the largest trading partners current economic picture. Europe and the United States are both struggling to stay in positive territory when it comes to GDP growth. FXI, iShares China Index Fund cleared upside resistance at $38 and has continued to climb despite the doubts of many. The uptrend is in play off the September low and November test. How long it lasts and how real the move is will be determined over time, but for now the upside is in play.

There is still leadership in the market, but the shift in near term sentiment on the downside is keyas the VIX shows following the FOMC meeting on Wednesday. Patience is the key to let the trend define itself one day at a time. The end of the year is near and this is the last full week of trading. Watch to see how it develops and don’t assume anything.