The stock market roller coaster continued last week, and it’s nearly certain that similar dashes and dips are just ahead.
Our positions remain mostly positive as we head toward the Thanksgiving holiday, and for that we are thankful because being “long” in this sea of worrisome news is. . .well, worrisome, at best. However, the one lesson I’ve learned in all these years is that one has to stick with one’s system and have the discipline to do that no matter what your gut might be telling you.
The Technical Picture
Click to EnlargeThe chart of the S&P 500 (NYSE:SPY) clearly depicts the intensity of the recent roller-coaster ride and shows how the market is making another attempt at breaking higher out of the current trading range.
For a year-end rally to happen, the markets need to decisively reclaim the 200-day moving average and break higher. If stocks can go past the 1,290 level, a quick ride to recent highs at 1,340 would not be unexpected as everyone jumps aboard this year’s “Santa Rally.” If the bulls should fail here and roll over, a quick drop to 1,220 or lower is probably in the cards.
The Fundamental Picture
Hot sectors last week were health care (NYSE:XLV) and consumers (NYSE:XLY) as investors sought safety from the volatility along with hopes for gains. This week, Europe will remain the wild card in the deck, and news you need to be watching will come from Italy. Plus, we’ll have important economic data at home, including retail sales on Tuesday, industrial production Wednesday, weekly employment and Philly Fed on Thursday and October’s leading indicators on Friday.
The Profit Picture
The profit picture indicates that we’re due for the traditional Santa Rally from now through the end of January, even as Europe burns and economic uncertainty abounds. In spite of all of the negative news, technical indicators say there’s more upside ahead, and seasonality would support this view.
Unknowns are the situation in Europe and the results of the congressional “super committee” deliberations due to be complete by Nov. 23. Longer term, however, the skies grow considerably darker as this game of musical prime ministers in Europe does nothing to solve the region’s real problems. And domestically we continue to face significant economic headwinds with high unemployment and a moribund housing market.
Leading sectors to consider if the Santa Rally comes on strong would be Energy (NYSEARCA:IYE), Healthcare (NYSEARCA:XLV), Financials (NYSEARCA:XLF) — if we can assume that Europe will dodge its “Lehman 2.0” event — and, of course, one can never forget technology (NASDAQ:QQQ) as Santa brings bags of iPhones to good little boys and girls around the world.
This weekend I was in Honolulu where prime ministers and presidents from the U.S., Japan, China, Russia, Philippines, Brunei, Chile and other Pacific Rim countries gathered for the annual APEC (Asian Pacific Economic Cooperation) convention. The city was filled with dignitaries, motorcades, police, Secret Service men talking into their wristwatches and SWAT teams on the rooftop of my hotel, along with closed roads and amazing traffic jams. Let’s hope the officials made progress because the Pacific Basin is becoming increasingly more important in economic and geopolitical terms.
A number of Veteran Day’s ceremonies were held in Honolulu by visiting dignitaries at “Punchbowl,” the National Memorial Cemetery of the Pacific. Nov. 11 was originally the day of the Armistice agreement that ended World War I — on the 11th hour of the 11th day of the 11th month in 1918. As we go about our busy week and get ready for Thanksgiving, please take a moment to acknowledge the long line of Americans who have given their lives to preserve our freedom.
Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time. Wall Street Sector Selector currently holds positions in IYR, XLF and QQQ.