Will Worries Set the Tone for Trading This Week?

Many thought that Spain would be the headline of the week relative to bailouts in Europe. However, Greece once again finds a way to make things worse. The budget gap is now expected to be nearly double estimates. The news will weigh on the European markets heading into the trading week. I stated in our weekend research notes that Europe was a big question mark moving forward. The issues relative to the sovereign debt, plus the slowing economic picture are still major concerns for investors. The financial challenges and potential solutions in Europe remain tenuous at best. The opportunities in these sectors come with risk and have to managed accordingly.

We are inching closer to earnings season once again and the news so far has not been good. Federal Express, UPS, Norfolk Southern, and others have warned of a slowing economy impacting revenue and earnings. Just how much of an impact is the question looking forward. We are in the period where warnings will be announced and some analyst are expecting it to be a busy period. Thus, we have to be aware of the potential speed bumps as we move forwad. Use stops and protect against the unexpected. Earnings-growth estimates for the S&P 500 for the third quarter is -2.7% versus the estimate at the beginning of the quarter being +1.9% according to FactSet. The decline in estimates sets the tone for the quarter. Lennar Homes and Nike are two earnings announcements to watch this week for insight into what may lie ahead.

The quantitative easing by the Fed gave a one day adrineline rush to stocks. The move higher in anticipation of the move by the Fed was the bigger benefactor for the broad markets. September 13th was the one day response by the market to the stimulus and pushed the major indexes through the March highs. The last six trading days have been consolidation. The speculation has centered on the ineffectiveness of the stimulus on the economy going forward. In other words, analyst and investors are not convinced this round of quantitative easing will be any more effective than the last two. We have had more than three years of effectively zero percent interest rates and the economic recovery is still sputtering. If the worries surrounding this issue and the European bailouts escalate the broad markets may see a round of selling and profit taking.

Economic data due out this week could help if it manages to produce some positive results. The consumer confidence numbers are due on Tuesday, and improvement could offer some positive news for the broad markets. Also due out are home-prices, new home sales, consumer spending, Chicago PMI and GDP estimates for Q3. The economic data has not been impressive to say the least of late. Watch and see how investors respond.

The shift in sentiment last week is seen in our scans for leadership. Using the 9/13 pivot point for the scans, the result showed short interest growing. Our scan result of ETF leadership this weekend produced SKF (short financials), SSG (short semiconductors), SRS (short real estate) and DUG (short energy). Investors were willing to take on short positions to either hedge their portfolio or play the downside potential of the market. I will be watching to see if this trend continues during the trading week. This is a shift of confidence shown prior to the stimulus decision by the Fed. Other leadership came from TLT (Tresury bonds), XLV (healthcare), XBI (biotech) and IYZ (telecom). This adds to the worry action being taken by investors as these are defensive sectors.

We start the week with our stops in place and our defenses up. Watch, listen and digest the result as we progress through the week. Honor your trading plans and act according to your risk tolerance.