Why isn’t the market breaking down? The question I posed in yesterday’s notes was answered as the economic data from Asia and the US showed signs of growth in the manufacturing sector. This was the catalyst to push the indexes off support and gain some confidence looking forward.

The most commonly asked question, will it last or at least hold the gain longer than a day? It will be answered quickly as today and tomorrow are full of more important economic data. Despite the jubilation of a solid move to the upside, we have to step back and look at the bigger picture. Is the US economy getting better on a forward looking bases? Will the growth in the global markets continue and take the lead relative to growth potential? It would be easy after months of bad news to want to believe in the data from yesterday, but we have to evaluate and look at where the best opportunities lie for growth.

Technically the bounce is just that, for now! I enjoyed watching the prices of stocks move higher off their respective support levels, but unless we can follow through and create some upward momentum with confidence, it is nothing more than a bounce. The day to day volatility has kept the broad market in a downtrend since the April high. Confidence will show up in the volume along with the price bars. Yesterday was a good start and we need to build on the momentum of the day to a week, and from a week to a month and more.

Fundamentally the outlook is for slower growth, but from my view, there is still growth in the 1-2% range. Based on the Armageddon outlook of late, slow growth sounds good. Earnings growth is slowing and adjustments are being made to prices. The outlook would be for modest growth and steady improvement over the next couple of years. There are plenty of challenges on the horizon and there will be ups and downs to accompany them, but things are not as dismal as the media makes it appear. If they deteriorate, stops will keep you from going down with the ship.

Bonds remain an area of concern. Distribution and volatility over the last week are signs of topping short term. If you want to protect your gains establish a tight stop. If you want to keep your bonds longer term a wider stop works better, but it is still important to protect your downside risk. Stick with your original goal of buying the positions and honor your strategy. It is easy to lose sight of what you were trying to accomplish when market events elevate prices.

Gold has benefited nicely from the fear trade, taking the metal back near the June high ($1260). However, without fear as a motivator, the move higher could be tested if stocks rally. The other motivator for gold is inflation and that is not a big concern currently. It could become a concern in the global markets, such as China and Europe accelerate growth. I would tighten my stops and protect my gains relative to the metal and see how it plays out from here.

Crude has pulled back as the economic worries are creating a picture of lower demand. The price of crude dropped from $82.50 on August 4th to $71.63 on August 24th. The fear pushed prices lower and now the question is will it rally along with equities. If yesterday (+2.1%) is any indication the answer would be yes. Crude is nothing more than a trade at this point. The outlook for higher demand is still not a realistic concern near term. Take what the market gives relative to the commodity and the energy sector, but the trading range should remain in play.

 The best place to start is with the broad market indexes and the major sectors that are leading relative to the data. The S&P 500 index has become the key indicator for the broad markets and I would key off the index for equities. The current leadership is coming from the industrials, utilities, basic materials and telecommunications sectors. Watch them to continue the upside if the broad index is to move higher in the established trading range. The time frame is 3-4 months currently which takes us through the balance of the year.

The global markets are moving higher and the EAFE index offers the best view. Start there and then look for the leaders country by country. Fixed income (bonds) as we discussed above are likely to pullback with any rally in stocks. Either hedge these positions (another discussion for another time) or set your stops accordingly. Commodities remain on an upward track with volatility, but still worthy of investing in for the short term time horizon.

All of this data is fun to compile and discuss, but it still comes down to implementing an investment strategy around the data. For now the data are in a 0-9 month time horizon.  Attempting to see any further is pure speculation. There are four time frames to consider, trading (0-13 weeks), short term (3-9 months), intermediate (9-18 months) and long term (18-36+ months). When you apply the different time horizons to the data points above, you will come out with different answers and the longer the time horizon the more speculation involved in the model. Therefore, you have to make a decision on time frame.

Risk tolerance is another key component in how you digest and implement the data as well. It is important to know your investing personality. Some are comfortable owning stocks for longer periods of time and dealing with the volatility in price over the period. Some are raging neurotics, and long term is 24 hours. Define your risk and you will be a much better investor over time.

If you have questions relative to the items discussed, feel free to send an email to info@sectorexchange.com. Last nights Market Spotlight video covers many of these points with charts and detailed commentary take time to view it for more information.