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Investors Should Beware of Falling Knives from Recent Selloff

The market has experienced somewhat of a slide from its all-time high just a couple of weeks ago. While stocks are showing a bounce at the moment, investors and traders would be wise to proceed

The market has experienced somewhat of a slide from its all-time high just a couple of weeks ago. While stocks are showing a bounce at the moment, investors and traders would be wise to proceed with cautious, lest they be caught in a sucker's rally ahead of what could be a volatile earnings reporting period in the next several weeks. In our latest interview with Toni Turner of TrendStar Trading Group, we discuss this and areas of the market to watch.

EQ: On a closing basis, the market is trying to find its footing right now, blowing past its previous near-term support, but there’s still the 1909 level that you pointed out previously. Do you see the bulls regaining the momentum here anytime soon?

Turner: The bulls started to regain a little bit of momentum Thursday afternoon. Interestingly enough, it was right when the European markets closed. Friday, of course, the market rallied nicely, albeit on low volume. One and one-half days of the bulls coming back in could be either short covering ahead of the weekend or it could be real buyers of the dip. I suspect that it may be a short-term rally preceding another downmove. And please understand, I want to be wrong. I’d like the move to continue.  We won’t know, however, whether the bulls or bears will be in charge until the first of next week.

EQ: There has been a lot of investors waiting for that big pullback to jump into stocks they’ve been tracking. Could this be the opportunity they’ve been waiting for?

Turner: It could be, but at the moment, a lot of the sectors and indices that I’m looking at are in falling-knife mode. I would be cautious here entering new positions. I would only enter stocks that have good strong levels of price support. We also have the weekend ahead of us, and as most investors know, the globe is in turmoil right now, and anything could startle the market and send it lower.

This to me is a dicey time to assume the market will pivot or reverse from here and start higher. I need to see more proof before I’m convinced. So I’d recommend to look for confirmation before making any moves, and I would put in protective stops. You don’t want to run into a burning room without knowing where the exit is.

EQ: We’re heading into earnings season next week, and considering all these headwinds and volatile days the market has been dealing with, do you anticipate a bit more turbulence than traders and investors have been used to in recent years?

Turner: I certainly do think that earnings season could add to the turbulence. Despite the good jobs numbers on Friday,  we are starting to see more layoffs now. We’re starting to see industrial manufacturing numbers shrink, and we’re starting to see home sales numbers start to lose some of their shine. If we add all those things together and then we compound it with the geopolitical problems, and then add  the ongoing European recession and Germany’s weakness right now, then I suspect third-quarter earnings season may be anything but boring.

October is also known to be a volatile month, and we’re certainly off to that kind of start. We may also see the Fed cut bond buying as scheduled during the FOMC meeting on Oct. 29, and if the market is sure that’s going to happen, that may add more volatility as well.

EQ: Are there any sectors or industry groups that you’re interested in right now?

Turner: One of my favorites on my list is the Health Care Select Sector SPDR ETF (XLV) . I’m watching it but not entering yet. I want to see if it can hold above its 50-day moving average. I still like regional banks and the SPDR S&P Regional Banking ETF (KRE) , although they’ve taken quite a pullback. I’m watching to see if it can hold above $37. I also like insurers and watching the SPDR S&P Insurance ETF (KIE) to see if it can hold above $62.25. I’m watching the internet index and the First Trust Dow Jones Internet ETF (FDN) to see if it can hold above $59.75.

And of course, with all of this, I’m especially watching the Russell 2000 and the iShares Russell 2000 (IWM) as an indicator. If that rolls below $107, then I’m going to put my hands back in my pocket. The IWM acts as a decent leading indicator for the broader market.

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