We had no changes to our portfolio holdings this week as markets traded slightly higher following last week's weakness. The question that we will want answered this coming week will be whether the low set at 1,639 on Wednesday will hold and create the next higher low in the uptrend or will it fail and put the entire rally in jeopardy. While taper talk will likely dominate the news feeds, the Fed is attempting to give the markets some calming words as it continues to reiterate its plans to maintain its current QE course until data indicates a strong enough economy to sustain without their intervention. A new development in the "taper" soap opera this week was after the Fed Minutes were released Wednesday, the pundits and analysts are now resigned to the idea that the Fed will implement a "taper light" and only reduce QE by a small amount. It seems to me that the media doesn't want to get caught in another "fiscal cliff" fiasco and is now attempting to back peddle from its imminent taper campaign. I still believe that the taper fears are completely fabricated by the media and have no real basis to what Ben Bernanke wants to leave as his legacy. Big Ben has been a staunch advocate for aggressive stimulus measures for his entire chairmanship, why would he stop now, 4 months before he steps down? It seems quite unlikely to me.
Legendary investor George Soros has stated, "markets are constantly in a state uncertainly and flux and money is made by discounting the obvious and betting on the unexpected." At the beginning of 2013 the media's warnings were based on the fiscal cliff and all the uncertainty surrounding the event. That was the obvious fear, we would go over the fiscal cliff and markets and investment accounts would be ravaged. Their advice was to sell and protect yourself. What in fact happened? Nothing, a decision to maintain the current course of action was made and markets ripped, leaving all the fearful sheep in the dust and chasing a runaway market. Here we are again, the new obvious fear is the September Taper and Debt Ceiling debate. The media's message is to sell and protect yourself as a significant correction is imminent. Well I would rather take my cues from the market and it is still saying the long term trend is in place. As long as we have higher highs and higher lows on the longer term charts, I will maintain my current course and stick with my winners.
That being said the market is sending many mixed signals as to its next move. A few troubling developments have been the changing of the individual market leading stocks. Names like IBM, HD, WMT, XOM, these are some of the biggest players in some key sectors and have recently been showing signs of topping out. We like to take our cues from individual stocks that lead the market and when they behave in a certain way it suggests a hint to overall market health. At the same time however, bonds are breaking down badly, and defensive sectors are lagging severely. I tend to put more emphasis onto how the sector groups behave vs. a few individual names, and still the sectors that are outperforming the market are the offensive groups. Financials, Industrials, Discretionary are the top dogs along with Healthcare, and now Technology, Materials and Energy are showing positive signs.
Lets take a look at some interesting and relevant charts to act as our bell-weathers moving forward.
SPX 1-year Daily Chart
This is the last year for the SP500. What I'm showing are the significant swing high and swing lows within the uptrend. We have seen a steady rhythm of higher highs and higher lows and is the definition of an uptrend. What we need to be watching for near term is the 1,639 low to hold; the rising 20 WMA also sits at the 1,640 area. But the truly deciding low will be the current confirmed swing low at 1,560. One last item of note here is the pending retest of the support zone we were watching a couple weeks ago (yellow shaded area). We know that prior support becomes new resistance after breaking, so this will be a very interesting test for the market. If the resistance holds, that low at 1,639 is likely to fail and would also likely trigger stops on several positions that we hold.
Russell 2000 Index
Speaking of interesting decision points, the small cap index, the Russell 2000 will be testing a short term downtrend resistance after bouncing off of key trend support and the prior May highs. How this wedge pattern shakes out will also be very important for the health of the overall market. Small caps, by their nature are more economically sensitive and are a tell for investors' appetite for risk. When small caps lead (as they have all year) the market moves higher, when they lag markets falter. What is nice about this index is that its a leading indicator for market strength and should let us know ahead of time what the larger cap index's are likely to do next.
XLK
Last week we were watching how the Technology sector would handle its overhead resistance and Relative Strength decision point. Well it hasn't moved above the prior highs just yet but the relative outperformance breakout we have seen is indicative of sector rotation and strength. While Tech has lagged most of the year, it would be excellent for the market should it now assume a leadership role heading into year end. Right on cue, AAPL has shown up and could lead this sector and the market to new highs.
TLT- Long Bond
We haven't revisited Treasuries in some time, but in case you haven't heard, they are getting crushed. This is all part of the "taper" talk which has caused interest rates to rise. Remember how bonds work, when interest rates (yields) rise, prices go down. What we have seen here is a total breakdown of the Treasury market and the triggering of a 2 year topping pattern. This is a weekly bar chart, so you can really see the time and magnitude of the move. Historically when bonds go down, stocks go up. However lately that has not been the case as stocks and bonds have moved similarly as interest rates continue to cause concern on the broader economy. This move I feel is due for a little bounce, by my measure it is extended here and will need to have a relief bounce before continuing lower. The relief in the bond sell off will be triggered by falling rates and should help offer some relief for stocks as well.
HAIN
HAIN announced earnings this past Thursday and had yet again another blow out quarter. The stock spiked some 15% on the news, but has since settled up about 12% for the week. Sweet move for the stock and our portfolio! The Cup/Handle pattern is definitely confirmed with this breakout and should see upside drift as we move forward. The initial target for the move is $87.50. Again that doesn't dictate our position, but it is something we will be watching for. The new stop for our holding with this confirmed new high will be below the breakout bar at $72.50ish. But there really is a large band of support from $72.50-$70.
HD
Home Depot also reported an exceptional quarter and raised its full year guidance, yet the stock reversed the earnings pop right from the open on Tuesday and closed well below our prior trend support. This is a troubling development for the stock as the excellent news was met with selling. That is usually a signal that price has peaked and is ready for
at least a rest before continuing. We exited our HD position over a week ago and that seems to have been a good signal. For the near term future, I will be watching to see if the current trading range between $82-$72 can hold and allow HD to work off its massive run without going into full correction mode. $72 should act as STRONG support, so we will hope to see some price stability at those levels.
ENB
Here is a look at one of our lagging watch list stocks. This may offer a glimpse of what HD is about to experience. ENB has been in a long term uptrend and started to breakdown a couple months ago, only to stage a strong 10% recovery to get back into the trend channel. However it was unable to hold and has since been slammed for 3 weeks straight. It MUST hold the June lows at $39.50 to stay on our watch list.
CMI
While the market was undergoing corrective action the last couple weeks, CMI has been breaking out and retesting its breakout level (prior resistance becomes new support). On Tuesday and Wednesday of last week price came back to kiss the breakout level only to find strong buy support and Thursday it was able to rally hard. Text book breakout stuff here...Stick with this one. If we see a move above the $129 breakout high, we will be able to move our stop up to break even at the $123 swing low.
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