Hopefully everyone enjoyed yesterday off, but now it’s time to get back to trading. Last week, we had some interesting action. There was Bernanke’s testimony on Wednesday and also (on the same day) the release of the FOMC minutes from their last meeting. Overall, we finished down for the week and it was the first negative week for the market in five weeks.
In our Monday Morning Outlook, our Senior VP of Research, Todd Salamone, noted how the 1.2% sell-off last week probably felt worse than it actually was. Sometimes, the release of the FOMC minutes can just be “noise”, as investors perhaps acted irrationally to Bernanke’s comments about possible tapering of QE. Then again, it could be a sign of the selling to come if the committee does indeed decide to taper QE before 2014. Only time will tell, but don’t lose too much sleep over this kind of stuff.
So, what to watch for with this short week? Well, last week certainly had some volatile action. As mentioned, the S&P sold off 1.2%. In case you haven’t been following the Japanese markets, and their extreme monetary policy, the Nikkei 225 Index sold off over 7% in one trading day! That’s a big drop—and the index had nearly posted a ridiculous 40% gain (or somewhere around there) before that 7% drop. Why do I mention the Nikkei 225? As Todd Salamone notes in our market outlook, perhaps increased volatility overseas could translate into a spike in volatility in U.S. markets. Something to consider.
If we do indeed encounter more selling this week, bulls are going to want to see another strong, “V-shaped bounce”—like the one we saw in April. To illustrate my point, I have the chart of the S&P 500 below. In April, we saw a 2-3% pullback—and it was a rather sharp one that occurred over several days. Right as we broke the previous all-time highs that were set back in October, 2007 (~1,576), the market churned towards 1,600. Rejection was then met at this round number level, and we quickly sold-off. We may be at another critical juncture—and even if we have some more selling from where the market closed last Friday (1,649) a strong demand from buyers, and a continued surge higher, would be the most bullish thing that could happen in the near-term. We’ll see how this plays out, but be aware of round number levels on the major indices (1,000 on the Russell, 15,000 &16,000 on Dow, 1600 & 1700 on S&P).
Sector rotation has been at the forefront of nearly every market conversation. We all know that Consumer Staples, HealthCare, and Utilities were the leaders for the first quarter of 2013. Now, everyone wants to see a rotation into Technology, Industrials, Consumer Discretionary, Energy, and Financials. Thus far, it appears we are slowly getting that rotation. Below is a snapshot of sector performance over the past month. Utilities, Staples, HealthCare are all lagging relative to the other sectors in the past month. I’m going to continue to watch this development closely. Sector strength always gives me new trading ideas.
Finally, I’ll be watching the market’s reaction to some of the economic data this week. A lot of the time, the market’s reaction to the data is more important than the data itself. For example, we have an estimate for GDP that will be released on Thursday, 5/30. Will a good number be a sign of increased confidence in the economy, and thus bring strong buyers to the table? Or, will a good number be a sign that the Fed is seeing an improvement in the economy, and thus will be shutting down QE sooner-than-expected? There’s no telling what kind of reaction we are going to see from the market based on any single data point—but paying attention to people’s behavior is important.
As always, thanks for reading and good luck trading out there. It should be another fun week.