Worry has always been a problem for investors and this week has shown signs of them coming to the forefront. The small dip in stock prices are bringing the worries into the media again. They are predominately in the commodities as energy, agriculture and metals all move lower on the week. From an economic perspective that is a good thing, but for the short term impact on stocks it has given reason for a pause.
The energy sector has broken support short term and the chart shows a negative turn lower. The move lower in crude oil prices has been one catalyst to the downside. The fear of a global slowdown is playing into the prices and concerns as well. The news from China on slowing industrial production is adding fire to the worry factor and thus XLE has declined 4.9% over the last three days. The support at $72.50 was taken out and the short term downside is in play. Watch the price of crude oil which has pulled back near the $105 mark with support at $104.30. The worry in the energy sector has impacted the S&P 500 index as it pulled back below the 1400 mark on Thursday. If energy continues to move lower, confirming the break, I would look for the buy opportunity more than the short side play in this sector as the longer term outlook remains positive.
Along with the concerns in the energy sector both the precious metals and the base metals have been under pressure. The rational is the same as the energy stocks… demand from the global markets. China continues to play heavily into the equation on demand. If the growth in China is seen as slowing the demand for the base metals will be impacted as well. The support for DBB, PowerShares Base Metals ETF is $20 with the downside clearly in play short term. The precious metals are moving lower as well, but for different reasons. The positive outlook for the US economy is pushing the price of gold and silver lower. As the economic outlook improves, the fear trade and the alternative dollar play evaporates. How long this holds true has become a matter of speculation itself. For now the trend in gold is lower short term and intermediate to long term perspective is sideways. A break below $1540 on gold would be a trend changing move longer term for the commodity. For now it is a trade up or down depending on the week. For me there are other opportunities with less volatility to own.
The key to any reversal or change in direction for the broad market indexes will come from the leadership. Financials, technology and the consumer services have been the heart of this rally. Taking a quick look at the charts of each shows the uptrend still in play short and intermediate term. The pullback, if you could call it that, this week has been normal and well within the range of the uptrend lines. In the case of retail the 10 day moving average has not even been broken on the downside. The technology sectors are holding up nicely with semiconductors, software and internet stocks leading overall. The financials were off on Thursday, but continue to show solid money flow and support. The leaders will tell the story if the upside move is over or if the pullback gains momentum.
The bottom line for now is the commodities and global markets. The outlook remains one of slowing growth and concerns about sovereign stability. The issues in Europe improving, but are far from over. The cuts in spending will continue to impact the growth outlook for continent. The emerging markets are struggling and putting additional pressure on the global picture short term. If they break short term support it could be a catalyst on the downside for the sector. Thus, from an investing perspective the field narrowing on where you want exposure for assets. Take the time to address the concerns in your portfolio and shift assets away from the areas of concern. Cash is a sector and raising your allocation now is prudent based on the short term shift in some asset classes.