As earnings season chugs along, a look at the over equities market shows that stocks may be a bit stretched for the time being. Whether operating results can give investors that extra boost to push the market over key territory remains to be seen. We asked Toni Turner of TrendStar Trading Group for her thoughts in this week's interview.
EQ: It’s still early in the second quarter earnings season, but so far we’ve somewhat of a mixed bag. Financials, however, have had a very strong showing. Does this bode well for the market?
Turner: Yes. In fact, if it weren’t for the companies in Financials, corporate earnings would be negative. That’s how well they’ve done. If you look at the monthly chart of the Financial Select Sector SPDR ($XLF), we can see that the XLF made an all-time high on May 2007 at $38.15. As you know, it moved in a downtrend from that high down to its March low at $5.88. It closed at $20.64 on Wednesday, so it definitely has a ways to go to reach 2007 highs. Still, the XLF has definitely been in a nice uptrend since July 2012.
If we go from the monthly chart, to a daily chart, then we see more detail. We see that the leaders of the Financials and top components of the XLF, such as JPMorgan Chase ($JPM), Wells Fargo ($WFC), Bank of America ($BAC), and Berkshire Hathaway ($BRK-A), got ahead of themselves in the short term. Now, I suspect the financial sector is due for a dip. The housing recovery has certainly given momentum to the the regional banks in the SPDR S&P Regional Banking ETF ($KRE). Regional banks are still moving higher, closing on their highs, and appearing unstoppable—but of course, we know better than that.
I suspect that the KRE will succumb to a little profit taking pretty soon because nothing goes up forever. From a big picture perspective though, we want strong banks and for them to continue to be strong because that’s good for the economy.
EQ: You’ve been watching the PowerShares QQQ ($QQQ) for a while now and observed that it was a bit overstretched. Now that Microsoft ($MSFT), Google ($GOOG), and Apple ($AAPL) have reported, do you think the investors may be looking to take profits out of Tech?
Turner: Apple certainly held up the QQQ on Wednesday. But Microsoft, Google, and Intel are losing some altitude here, and in general, Tech has come out with some disappointing earnings. The QQQ is trading above $74, but there’s an open price gap from earlier in July, and it’s a gap that needs to be filled between $75 and $73.
Since Wednesday was not an up day, and we’ve had two days to the downside, meaning two red candles in a row. Usually, it tells us that even though they’re trading within the same price range, it may indicate that people are taking profits here. While I can’t project what will happen, I wouldn’t be surprised to see the QQQ come down to at least $73 in the near future.
And if the QQQ can’t hold support there, then it may take another leg down to the 71.50 level.
EQ: The S&P 500 walked up to the 1700 level and pulled back this week. What are your thoughts of the likelihood of it breaking through? What are the implications if it fails to do so?
Turner: It did pull up to almost 1700, and I think a lot of it had to do with expectations that it would, and so it did. That’s a good thing, but markets usually get softer in the summer. We have seen very little of that happening this year, except for the small dip we experienced in mid-June.
Now if we look at the 14-day relative strength indicator (RSI), it is pointing lower. . I think the market is tired here and a lot of people are gone for the summer. If interest rates begin to climb here—and certainly, it looks like that may happen again as the 10-year bond has fallen off—it may remind us of the upcoming Fed’s tapering.
I went through hundreds of daily stock charts on Monday, looking through the components from many of the major indices, and a hgh percentage of those stocks were extremely overbought, and trading in nosebleed territory. And, of course, valuations are rising.. I wouldn’t be surprised, and I certainly wouldn’t be upset if we took a breather, here. It would provide promising opportunities to enter new positions.
EQ: Are there any sectors or industry groups you’re watching right now?
Turner: I’ve gone through a lot of the sectors and other things that I normally watch, and except for maybe a few stocks, I’m really not really excited about going long on much of anything right now. That doesn’t happen to me very often. That said, if we see an orderly dip in the regional banks and the KRE, I will be watching for entry opportunities in that part of the financial sector.
EQ: What are your thoughts on adopting a short strategy right now?
Turner: Despite its warts, the market is in a textbook uptrend right now, and while you might be able to short an individual stock, you would be going against the prevailing direction of the trend. So the odds of success can be less than selling short in a downtrend, or substantial market weakness. less. You can short the pullback in day trades , but if you are not nimble, you can get stopped out quickly. It just takes one talking head on TV or in an article to make one comment to spark the market to move back up–and you end up getting caught in a short squeeze that can result in an unnecessary loss. .