FOMC Overhang and Greece Trouble Investors

27 January, 2012, 6:10 am

Weaker than expected economic data Thursday left investors questioning the current move higher for the broad markets. It is hard to say that one month of data is trend changing, but it does play havoc with the confidence investors display towards owning stocks. The housing sector is a sector we have tracked on the upside since last fall. The improving data relative to the balance sheets of these companies have been steadily improving and attracting buyers. If your view a chart of the Homebuilders ETF (XHB) you can see the move off the low in October to the recent high posting a gain of better than 40% during the move. When the new home sales data was reported Thursday morning and missed the estimated growth, investors reacted. This is a case of investor optimism in a sector being disappointed by the data which should have confirmed the upside move. This is how confidence is shaken and investor start to react to news.

On Wednesday the FOMC meeting concluded and to the surprise of many the Federal Reserve Chairman, Mr. Bernanke, disclosed the Fed would keep interest rates at zero through 2014. This extended the initial freeze on rates by nearly 18 months. Some have called this QE 2.5, and others think it is needed to keep housing and economic conditions in growth mode. The initial reaction was for the yield on the 30 year Treasury bond to drop to 3.03% pushing the price of the bonds up more than 1.5%. The price of gold jumped more than 2.2% as the action was deemed by many to inflationary. Stocks moved higher on the thought of more money supply in need of a home and what better place than stocks. Bottom line the message sent by the Fed rattled the confidence of the financial markets overall.

Thursday brought more reactions to the Fed announcement as the financial stocks sold. The regional banks were down 2.7% and large banks were down 1.7%. The impact to the overall financial sector was a loss of only 0.7%, but it caught investors attention. Why the reaction towards the banks? They can’t make money in a zero percent interest rate environment on deposits. Thus, the news was taken as a negative for the longer term outlook for banks. Throw in the housing data on Thursday and the threat was extending to home lending. Do we assume that the banks head lower from here? No, but we do have to watch how they respond. When there is a reaction, there is an equal opportunity for action. Watch the outcome from a short term perspective of a buying opportunity. If the downside accelerates be patient and wait for the bottom or support to be reached. Financials have been struggling since May 2010, thus the negative is nothing new, but the hope that was in the sector was. Now we have to see how it plays out.

The positive reaction to the Fed announcement came from gold and commodities overall. Gold jumped more than $55 to $1720 since the announcement. Precious metals are back in favor as inflation is deemed to be in play. Base metals have moved up as well. How high does gold move on the speculation of inflation? From my perspective it has already gone to high. Be patient with gold, if you own it, manage the risk. If you don’t, measure the risk before you jump in too high.

The dollar has reacted as well on the downside. The greenback was already being challenged by improving outlook towards Europe… silence is improvement… right? The weaker dollar could impact the price oil if the speculation gains traction. We are looking at the commodities closely as this unfolds.

Today ends the trading week and it will be watched closely for clues relative to the outlook or optimism from investors. Markets never go in a straight line and that puts up squarely in a position of deciding pullback/test of the move with a continuation to the upside, or a reversal of the trend back towards previous lows. We have to be patient and take it one day at a time.

Sectors on the Move:
NASDAQ 100 index remains the leader for the broad market. The news from Apple only help the trend continue. What does the index do for on encore? Test the move higher would be my first response, but nothing is standing in the way of a clear path higher. Manage your stops and let it ride.

Technology is hitting against the high going back to January of 2011. The attempt to break above this level and continue the uptrend has been a year long process. Watching the parts currently for insight of how it will play out shows similar resistance for semiconductors and networking sectors. Software is leading currently, but not enough to break higher. Watch the parts to lead the sector higher or test the move.

Pharmaceuticals continue to pull back off the near term high. This move has stalled the healthcare stocsk, but the medical devices sector is running higher. Providers have stalled as well putting additional pressure on the broader sector. Again the parts will determine the direction of the whole. Adjust your stops accordingly and manage the risk of the move higher.

Commodities (DBC) made a move off the December lows, but have faced resistance in an attempt to move above the top end of the range. Watch for a clear break higher before putting money to work. The sub-sectors are moving better than the whole and this is a sector you have to dig down to find the leadership. Precious and base metals have two parts leading the way higher. Oil, coal, agriculture, etc. have stalled near term. Focused approach is the best approach to the sector.

Financials (DJUSFN) are stalling on their move above the 200 day EMA and the October high. The regional banks fell 2.7% on the Fed announcement Wednesday to zero percent interest rates. Banks were off 1.5%. Low interest rates hurt the margins for banks. You have to portect against the sentiment as well as the reality short term. Tighten stops and see how this plays going forward.

Basic material (DJUSBM) made a solid move higher on the week above the 200 day moving average, but stalled on the Fed news. Still on our watch list to add to positions, but willing to watch and see how it progresses near term.

Energy (DJUSEN) attempted to move higher on optimism, but has stalled on stalled oil prices. A break above the resistance line of is the key to progressing higher. For now be patient and let this play out. If oil prices move higher watch for a move towards the target of 653 short term.

Gold made a solid move higher through the resistance at the $1665 mark and thanks to the Fed has clear the $1700 level. The downtrend line off the August high is in play as the metal faces plenty of technical obstacles. Europe/Greece could have some influence relative to the move higher near term. As the Fed euphoria wears off watch for a test of the move.

The global markets made a move that mirrors the US stocks. The silence relative to Europe has helped the upside, but as the US markets go short term the global markets will surely follow. The emerging markets are breaking through short term resistance and setting up a longer term opportunity worth watching. Asia is improving as result of China’s better economic data. Scanning the country ETFs gives a good picture of what is taking place in global markets.

Overall the market is overbought. The phrase alone bothers me realtive to understanding it can remain in that condition for an extended period of time. It is a warning sign to manage your stops, but not necessarily a sell signal. There is the potential for a pullback short term, but we have to remain diligent in the process of money management not speculation.

What I am watching today:
Time to push earnings to the side and watch what Greece has to say? Wow, this is like watching a horror moving and waiting for the next sceen that will scare you. Default is in the picture, but at what cost? Welcome back to the Rocky Greece Horror Show!

FOMC hangover? Watch Financials, i.e. regional banks. Treasury bond yields. Gold prices and other commodities.

Economic data is focused on fourth quarter GDP, estimate are 3% growth? Watch the reaction if it is lower. Consumer sentiment is out after the open.

Watch for some profit taking globally as fear factor rises.

Earnings offering today from Chevron, DR Horton, F, T. Rowe Price and Amgen for sector insight.

End of the week and month movement .

Watch and play according to your risk tolerance. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your downside risk determines your long term results. Trade smart.