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Investors Get Defensive as Europe Remains in Driver’s Seat

After enduring a major decline over the first few weeks of May, the market managed to hold up relatively well last week. Could this be the break that bulls have been waiting for? Or were the bears

After enduring a major decline over the first few weeks of May, the market managed to hold up relatively well last week. Could this be the break that bulls have been waiting for? Or were the bears just taking a break before retaking control?

In this week’s interview, asked Toni Turner of TrendStar Trading Group for her thoughts on how the ongoing financial turmoil in Europe could be affecting traders and investors.

EQ: Given that Europe has such an impact on the market right now, can you discuss the importance for equities traders to pay attention to the EUR/USD and CurrencyShares Euro Trust (FXE)?

Turner: In my experience, there are times in the market, especially during times of exogenous shocks, such as the European sovereign debt crisis, when a single market component has the power to lead the market higher or lower. . I refer to these as the “boss de jour.” So…who’s the boss of the day that is leading the market around? Right now, to a great degree, the events in Greece, Spain, and the eurozone are having the greatest impact on the market, and the euro is acting as the directional “boss.” It’s dipping to relative new lows while the U.S. dollar is flying to new highs. These two currencies have had a very definite off-and-on—but mostly on—correlation for the last two years.

To your question, yes, it is important for traders to watch the FXE. Last week, the major U.S. indices were rising to new intraday highs, but the euro began to roll over. I noticed that and immediately tightened my stops on all my long positions. Sure enough, within minutes, the U.S. markets began to roll to the downside. We can even call this a bearish divergence. Therefore, it is key right now for traders to watch the direction of the FXE and PowerShares DB US Dollar Index Bullish (UUP).

EQ: By most accounts, the market has been oversold, but did hold steady last week for the most part. Are stocks finding support here or could this be a sucker’s rally in the works?

Turner: I’m watching the S&P 500 to see if it can hold above 1300 after falling to as low as about 1291 on the intraday on May 18. Last week , we experienced an oversold bounce, and yesterday appeared to experience short-covering, as many traders went home short over the weekend. We have quite a few economic reports coming out this week, including the ADP employment report and the monthly jobs report and ISM Manufacturing Index on Friday. If news out of Europe continues to move markets, that along with our economic reports and low volume will probably produce a roller coaster ride. Plus, we can no longer assume that if the U.S. market gaps down at the open on negative European news, it will then reverse to the upside at 11:30 a.m., Eastern time, when the European markets close. Yesterday, we experienced the opposite. So, at present, as far as market direction, I believe we can assume nothing. while I can evaluate charts and fundamentals, I know that the market is going to go where she wants to go, when she wants to, regardless of what technicals and fundamentals tell us.

EQ: As you mentioned, the dollar has been rising while everything else across the board–be it stocks, gold, oil, etc.–seems to be falling. Are investors piling into the dollar because of this fear and uncertainty?

Turner: Yes, they really are. I’m seeing that a lot of the world is moving into the U.S. dollar because this country, at the moment, seems to be the safest and most attractive house on the block. I’m also seeing more movement back to the Utilities sector, which has actually held up extremely well over the past two months. The Utilities Select Sector SPDR (XLU) is actually rising while many other sectors are falling. Of course, that means investors taking their capital to Utilities and some of the more defensive sectors, as a safe haven.

As the markets put the debt ceiling debacle in the rearview mirror, more than a few issues remain open.