The test of 1040 support on the S&P 500 index holds again. The catalyst was the economic data globally and domestically. It wasn’t stellar news, but then it wasn’t falling of the cliff news either. Each piece of data gave some hope of survival for the recovery. It was enough to bring buyers back to the table and push stock prices higher. We are not out of the woods yet by a long shot and there is plenty to digest and work through on the horizon, but for now we can take a deep breath and enjoy the long weekend.

Last week I discussed the economic data coming into the week being the catalyst to short term direction and it has been just that. However, it has gone the opposite direction of many projections to the downside. This is why I am constantly saying to take this market one day at a time and one data point at a time. Even with the bounce this week the same approach needs to be taken heading into next week. Growth is still not accelerating, in fact it is contracting and that continues to put pressure on stocks.

As we head towards the fourth quarter the markets could be creating a value proposition for investors. It could materialize into a fall rally if the data starts to shift moving towards the October-November timeline. Finding value when the sentiment is negative takes focused money management. Has anything changed in our outlook for stocks? Not really, they remain challenged and the outlook remains uncertain. Scanning across the sectors we find some leadership and it got somewhat better after this week, but heading into the infamous week after the Labor Day Holiday, be patient and let this pan out before putting too much money to work. We see more trading opportunities than longer term investments. theETFexchange.com is where the majority of the trades will be posted. SectorExchange.com will have the longer and broader plays posted. Watch and Play according to your risk tolerance.  

What to watch:

• Quantitative easing from the Fed? This was a topic relative to the FOMC minutes. Is the Fed going to offer more help to the economy. The answer short term is no. As we move into the fourth quarter if the job picture doesn’t improve it is more likely. Watch this topic looking forward as the action would be a negative for the equity markets.
• Volatility. VIX versus the day-to-day version. When looking at the VIX the volatility is under control, but the day-to-day veriety has been very active. I would look for this to subside if the a trend starts to establish in the broader market. For now it is alive and well.
• Risk assets will remain under pressure. What is perceived as risky assets would be the better statement, but stocks will remain under pressure based on data relevant to future growth. No growth in the data points, equals not growth in these stocks.
• August started with a 3% rally? Remember this when everyone is talking about the 5% move over the first three days of September.
• Banks – value or bear trap? The sector sold below key support and bounced back with the current rally. This is not a healthy sector fundamentally. The pressure on banks continues to grow. The lack of lending and the zero percent interest rates are taking a toll on the balance sheet relative to revenue. Watch – take what it gives but be very patient on adding positions.
• Homebuilders – opportunity or hope. This is opportunity despite the housing sector being under pressure. The new home market is a supply and demand issue. If the builders keep inventory under control and prices in check they can and will compete against the existing home market. I like the outlook for the builders.
• Made in China? Can we make money there? Yes, longer term growth of China remains in play and is well worth tracking and investing. We added a play in FXI on Wednesday and we continue to look for the next wave of growth in Asia.
• Is Retail for Real? Is the consumer spending or is it just the year over year comps are bad? Some of both. The key will be margins. If the retailers can maintain margins and the bottom line pays off the sector will perform. I think they gave away plenty during the back-to-school sales period and the top line will not be reflected in the bottom line. Watch take the short term trade, but not much more near term.
• Are bonds heading lower? The bounce in yield is correspondent to the rise in equities this week. I have been warning about this for awhile. That said the demise of bonds is over stated. TLT which is the ETF for the 30 year Treasury bond fell to support this morning at $102.60 and bounced. I would expect to hold near this level short term. The outlook for growth in the economy is not convincing at this point manage the risk accordingly, but look for opportunities in the oversold swing to the downside on the rally in stocks.
• The broad market indexes found support. The next issue on tap is resistance. Watch next week to run into resistance and what catalyst will break the indexes higher. S&P 500 index is 1100 which was hit on Friday. The next would be 1130.
• Global markets led the bounce this week and they continue to look solid. Take the opportunities as they arise and maintain stops relative to the risk.

Next week I would expect the broad markets to pullback and digest this move higher. We will look for the opportunities in the move.  It is important to remain patient and let this all play out. Take what the market gives one day at a time.