As major global economic headwinds begin to gain traction once again, investors and traders may be bracing for a pullback in the broader markets. In this week's interview with Toni Turner of TrendStar Trading Group, we discuss which key levels need to be monitored as the market decides what direction it wants to go.
EQ: The major indices continue to move upward, getting within striking distance of their all-time highs now. Do you see anything from a technical perspective that might stand in their way at this point?
Turner: The Dow Jones Industrial Average has an all-time high of 14,198, and that was in October 2007, which was pretty much the high for most of the indices. So that is definitely resistance. That’s one level I’m watching, and we have a little ways to go before we get there. I think it will pause somewhat as people take notice, and perhaps there will be a little selling too.
The S&P 500 has a closing high of 1549, which also was from October 2007. We closed at 1530 on Tuesday, so if it keeps going at the pace it’s been going, we might reach that pretty soon unless we see a pullback. The all-time high was actually from November 2007 when it hit 1576, and that’s really the big gorilla that everybody is staring at.
If we look at the Nasdaq Composite, we have a prior high of 3196, which we’re approaching here. If we get above that, it would be a 13-year high. But it remains to be seen if we get through those levels.
EQ: Have you been surprised by how indifferent the market has been toward the March 1 deadline for the major federal spending cuts to kick in?
Turner: Yes, I have been surprised by the market’s indifference to the looming spending cuts. Until yesterday, when the FOMC minutes indicated a more hawkish stance may be in the offing, investors were in party mode. It has been tons of fun and nobody wants to relinquish their champagne glasses and leave the celebration. This is especially true for those investors who just came to the party in January. They came in a little late and they want to think that the spending cuts are just one more example of Washington drama, and that the politicos will ride in wearing white hats in the 11th hour and save the day. As of Wednesday afternoon, many stocks were overbought. . As a result, I have been taking profits on positions I have that moved straight up price-wise recently and have gotten ahead of themselves.
EQ: Is there any particular area that investors and traders should pay closer attention to for signs of the market maintaining this upward momentum or if a direction change is on the horizon?
Turner: There are several things that are easy to watch. There have been spotlights on the two indices that have led in this bull market, and that has been the small caps index, represented by the iShares Russell 2000 Index (IWM), and the midcaps, represented by the SPDR S&P MidCap 400 (MDY). The MDY, especially, never seems to receive any accolades, but it certainly deserves some. So when the MDY and the IWM start to retrace —and they have already started to—I pay attention because they have been definite leaders in this bull market.
I also pay attention to the PowerShares DB US Dollar Index Bullish (UUP), which we discussed last week in terms of how it moves in a generally inverse direction to the SPDR Dow Jones Industrial Average (DIA). The UUP has hit its extreme, so we see a rising dollar, but until Wedndesday,the Dow refused to blink. With the UUP moving higher yet again today, the Dow has broken down from its former consolidation. Now we will see if the UUP will continue its path upward, and if so, if that will cause the Dow to weaken even more, or if the reverse takes place. I’m also watching the iShares Dow Jones Transportation Average (IYT), which also hit its all-time highs recently, but has also pulled back during the last two days.
If weakness in these indices and ETFs continue, then we’ll know that we’re in for a pullback—hopefully not a 10 percent correction. Investors and traders may want to watch the market’s action on this Friday afternoon. We don’t want to see the market close on its lows on Friday afternoon. That can act as a negative signal
EQ: Which sectors or industry groups are you eyeing right now?
Turner: Last week we discussed the ETF, Guggenheim Solar (TAN). It has done well lately, but people need to know that if oil prices pullback, which they did this week along with most other commodities, then solar shares can fall along with it. I wouldn’t want people to give back all their profits on that, so they may want to be careful if they’re in solar shares.
As of right now, I’m not looking at anything to go long on. The Materials Select Sector SPDR (XLB) looks especially ugly right now, and it follows so that there may be some shorting opportunities in that particular arena. Another one is the iShares Dow Jones US Home Construction (ITB), which is looking pretty puny right now. It follows because those industry groups work together. Obviously, if homebuilders don’t need as many materials, it helps put a dent in the materials industry group. Of course, we’ve had other events in motion that have given a belly punch to materials, but that may be part of its current retracement.
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