As Wall Street intensifies its watchful eye over the Federal Reserves bond-purchasing strategy, the market will likely be more susceptible to reactionary movements. How should traders and investors handle this kind of market? We asked Toni Turner of TrendStar Trading Group in this week's interview.
EQ: With earnings season over, Fed Watch is back in full swing again. What were your thoughts on the most recent FOMC minutes and the eventual tapering?
Turner: It was a wild ride in the market after the FOMC minutes came out. The S&P 500 and other indices were shot higher but then plunged lower toward the close. The minutes stated that the committee will moderate the pace of its security purchase later this year. It went on to say that if economic conditions improve, that the committee will gradually reduce the pace and conclude its purchase in mid-2014. Of course there was a lot more content, but that sums up most of what concerns the market.
Naturally, the journey from where we are right now to undergoing this process is going to change almost everything, because it’s going to change interest rates. As we’ve discussed before, interest rates represent the cost of money and the cost of doing business. That’s a dynamic that rules much of the world. I don’t think this transition is necessarily going to be easy, especially considering the added headwinds including the upcoming debt ceiling limit and other policy making issues that will arise when Congress returns from vacation. I think we may have a bit of a rocky road ahead here, but we’ve certainly had a lot of warning and I think we need to be tactical in our decisions right now.
EQ: One particular industry that is especially rate sensitive is real estate investment trusts. Is this an area you’re looking at for potential plays?
Turner: Ironically, bonds are so oversold right now that they could potentially bounce, and sooner than later. If that happens, we’re looking at REITs and the iShares Dow Jones US Real Estate ($IYR), and it shows that at least there is a tradable bottom here. So we’re looking to capitalize here on a bounce. Certainly, the yields that they are paying now aresubstantial, some above 5-percent, , and if they get an oversold bounce here, we’re looking at BioMed Realty Trust Inc. (BMR) , Duke Realty Corp. (DRE) , and Camden Property Trust (CPT) . Of course, there are many more REITs people can check out.
Now, anyone that gets into these has to put enter what I call a “no kidding around” protective stop, meaning a hard stop with their broker. If you don’t want to do that, then I would suggest not entering this trade. We’re looking to trade for a short-term bounce, and by that, I mean within just a couple of days, for a quick opportunity. There is risk involved, , so the stop is very important.
EQ: There have been some murmurings about the Hindenburg Omen. Is this an indicator you pay attention to?
Turner: It’s one of the things that I pay attention to. Of course, the Hindenburg Omen was named after the 1937 disaster of a German passenger airship that exploded. The Hindenburg Omen is the combination of technical analysis and trading signs. One of its components is based on Norman Fosback's High Low Logic Index. Basically, the indicator lights up when:
- New 52-week highs and 52-week lows are equal or greater to 2.8 percent on the New York Stock Exchange,
- The NYSE index is greater in value than it was 50 trading days ago,
- The McClellan Oscillator is negative on the same day
When all these signals converge, it indicates that we could have a severe meltdown in the market. It hasn’t always been right—I don’t know of an indicator that has been—but it has predicted the 2007 financial meltdown and the 2000 tech bubble burst. So there are times when it has been right.
Now, while I certainly do pay attention to these kinds of indicators, I tend to just keep them at my elbow, so to speak. We can simply look at a chart in the last couple of weeks for the S&P 500 and see that simple indicators like the relative strength indicator (RSI) and the moving average convergence-divergence indicator (MACD) have also told us that the market is heading south. At the moment, much of the market is oversold, so a short-term bounce could take place. Still, our indicators show weakness heading into September.
EQ: Are there any sectors or industry groups that you’re watching right now?
Turner: There are pockets of strength, though I’m not necessarily looking to go long here. The iShares Dow Jones US Pharmaceuticals ($IHE) is sitting on its 50-day moving average and it is oversold based on its RSI. Because pharmas is more of a defensive industry group, I’m going to be curious to see here if it can bounce to the upside and stay above its 50-day moving average.
Also, the Guggenheim Solar ($TAN), which we’ve talked about before, seemed totally unphased by the broader market rollercoaster on Wednesday, and it moved up on that down day . It’s also sitting on its 50-day moving average. Now whether it can hold here or not, I don’t know, but just out of interest, I’ll keep an eye on it. Overall though, I’m going to be an observer for a few days and see what happens before I commit to any new long positions.