Worry and Volatility Creeping Back Into Market

Welcome back to an old friend… worry! Scanning the headlines for the last week plus has produced a renewed emphasis on worry. The European bailout of banks, sovereign debt bailouts, US debt or “fiscal cliff”, oil prices, gasoline prices, earnings, economic growth, etc. are all being bantered around as the next catalyst to break the current trend higher. On Tuesday Philly Fed President Plosser decided to take the current approval of QE3 to task, and accelerated the selling as investors reacted to his negative comments. Yes, worry is coming back and with it will be a rise in volatility. The VIX index move to the first level of resistance at 15.5 on Tuesday showing signs of life off the recent lows. If all this worry continues to feed on itself, expect the volatility to increase and the markets to test the breakouts for September 6th. For the S&P 500 index that would be 1420 and the up trendline at 1405.

We discussed in yesterday’s notes that there was rotation in play based on the current events. Semiconductors have been one of the losers in that rotation and the chart below shows the SOX index break of key support on accelerating selling. The negative turn for the sector has pulled the technology sector lower as well. The NASDAQ index is under pressure dropping more than 1.3% on Tuesday. As with any rotation, where is the money going become the question? The simple answer would be safety or defensive positions as we stated above worry is rising. A look at the chart of TLT, iShares 20+ Year Treasury Bond ETF shows the move off the lows on rising volume. The short interest in the semiconductors are rising as sellers become bolder in their belief they are gaining control of the trend.

Retail was one of the positive sectors we outlined in the notes Monday, but XRT, SPDR Retail ETF fell to support at $62.55 down 1.4% on Tuesday. This support is the breakout point from September 6th, and a move lower would be a negative short term for the sector. Watch the money flow, if the outflows accelerate further it will not help the sector outlook or leadership.

Large cap technology stocks have been struggling of late, but the turn lower in Apple the last two days has impacted the NASDAQ 100 index. 2795 was the break above the March highs and will be a key test for the index. The move below both the 10 and 20 day moving average on above average volume Tuesday was a negative as well. In fact the volume in short ETFs jumped 50% in trading on Tuesday. Apple broke the first level of support at $681 with $656 on deck. This is a key index to watch moving forward. If both the NASDAQ composite index and the NASDAQ 100 index break support, and set the tone on the downside, we may see more selling than originally anticipated.

The Transportation index has been one of the warning signs we discussed last week. IYT, iShares Transportation ETF has moved back to the bottom of the current trading range. The catalyst has been earnings warnings along with several key misses by Fedex and UPS. A move below $87 would not be a negative sign for the sector. What has been a warning sign is becoming a leading indicator short term for the broad market.

Money is rotating to the defensive sectors as we stated above with Treasury bonds. A quick scan of Consumer Durables, Utilities, Telecom and Healthcare shows some renewed interest as money flows that direction. Bond funds are seeing increased activity as well. The rise in the dollar is an early indicator of some worry creeping back into the global markets. Over the last week money has been on the move in modest volume, but that volume has picked up the last two days and we have to be aware of the short term implications.

Be aware of your surroundings, understand and be committed to your strategy. If you are trading short term all the above issues should have lead to making adjustments in your portfolio and positions. If you are looking longer term, the same is true, but it is a change to stops and where your exit points will be if the selling accelerates. As with any emotional event in the markets look where the opportunities will be based on the activity. Be patient and take it one day at a time.