As day three of the Cyprus catalyst begins we have to take a commercial break for the FOMC meeting and be enlightened by Mr. Bernanke and the twelve dwarfs on what is happening in the US economy. The only missing piece of information for this meeting is when does the Fed intend to stop QE infinity? The minutes from the last meeting created a disruption that bottomed on February 25th. Many inquiring minds want to know exactly what the Fed believes relative to additional stimulus, and for how long? If we can gain some clarity around that topic, and it is favorable relative to what analyst believe is needed we can get past the Cyprus issue for now. If the two combine for the double whammy, stocks move lower. How is that, for my ten cents worth.
The key issue currently is to remain focused, understand what hand you are dealt and let the chips fall where they may. Remember, you can always fold and wait for the next hand. Too often as investors we feel we have to play every hand the market deals. Believe it our not, that is why they created money markets or cash equivalent positions. You can reign in the risk at whatever point you feel it no longer makes sense. The are no prizes for being a market martyr.
NASDAQ Index – 3200 level is the first key level of support for the major index and thus far we have held. The 20 DMA and the up trendline off the November 15th low correspond with the 3200 level. That makes it an important level to hold initially if the this pullback is to be nothing more than a pullback. The NASDAQ 100 index has been drifting sideways with an upward bias, but it has struggled to maintain any upside movement. 2750 is the key level to watch as a move lower would be a negative short term.
S&P 500 Index – 1525 is the first level of support that will make a difference short term. 1530 was the break out following the February 25th low and could offer some support along with the 20 DMA. The big question is will the index test lower. 1500 ish is the bottom of the uptrending channel for the index and would be the next level of support. However, remember the post of the four potential outcomes for the S&P 500 relative to the new high. Testing lower and then move through the 1565 mark is a possibility. No real indications of a big test lower, just enough to get everyone’s attention.
Consumer Discretionary (XLY) and Energy (XLE) have led the downside the last three days. Both have been volatile leaders and they remain in an uptrend. The 50 DMA is the key support levels for both sectors short term. There is still plenty of room on the upside and the leadership isn’t over based on the current pullback. Look for support and then the upside follow through. If the downside accelerates in these sectors the broad indexes will establish a key reversal on the trend. Both sectors are worth scanning the holdings to find the leadership and look for the next opportunity on a reversal from the current “selling”. Obviously 2.3% on the downside currently isn’t a big sell off, but it is approaching the 3-7% pullback many have predicted.
Financials (XLF) have been a mixed bag of leadership for the broad indexes, but they have provided assistance on the upside. 17.90 is the first key level of support for the sector and it corresponds with the 20 day moving average. The 50 day is the level we would look to absolutely hold if the upside is to remain in play. The current issue with Cyprus are weighing on the sector relative to what dangers the sector has with the government and confiscating money. Watch the regional banks (KRE) to take on some additional leadership as this unfolds short term. Insurance (KIE) remains the steady part of the sector with the large banks (KBE) and brokers (IAI) the media challenge (they seem to find their way to the headlines all too often).
The defensive sectors held up well on Tuesday and we could see rotation in that direction if investors feel the downside risk to growth stocks is rising. Consumer Staples (XLP), Healthcare (XLV), Telecom (IYZ) and Utilities (XLU) held up well on in the face of the selling and volatility. If the selling accelerates these sectors will sell off as well. But, if the method to the madness is slower and more methodical type selling these sectors will outperform.
All said, we are still in the uptrend. We are dealing with a media event led by Cyprus. The fear level is still currently manageable. An additional catalyst to counteract the concerns about Europe and the euro is needed. The FOMC could provide the necessary ‘stimulus’ for stocks. Remain focused, disciplined and objective. The market doesn’t care what you think, and you have to have the same mindset. It doesn’t matter what the market does, it only matters how you act, respond and navigate the events.