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Is Now a Good Time for Investors to Take Profits?

While stocks received a nice jolt last week on the Fed's decision to maintain its stimulus program for now, the gains were very quckly given back. Short-term spikes aside, the market may need

While stocks received a nice jolt last week on the Fed's decision to maintain its stimulus program for now, the gains were very quckly given back. Short-term spikes aside, the market may need to finally brace for the Fed's taper. In this week's interview with Toni Turner of TrendStar Trading Group, we discuss whether profit taking is a good strategy right now. 

EQ: The market got a nice spike last week after the Fed announced that it would not start the taper just yet, but stocks have given back all those gains in just the last few days. What’s the mood of the market right now based on what you’re seeing?

Turner: I would describe the mood of the market right now as reticent and skeptical. Those are two words that I think most investors are feeling, and that’s certainly true for me. I believe the market may experience a little rougher transition here than we thought with the Fed moving toward tapering. The market made great gains on the year—we all know that—and investors don’t want to give them back. As of this past Wednesday, the Dow is up 20 percent on the year. It just looks to me that with everything we have ahead of us, the market is saying, it’s time to pocket some of these profits and hunker down.

EQ: Given that, by now, investors and traders should already be expecting a taper in the near future, are you surprised that comments like that from the mixed messages of individual Fed officials can still sway the market in such significant ways?

Turner: I believe it’s been confusing, and I think many others feel the same way. The market doesn’t like to be unsettled. It doesn’t like confusion, so I was not surprised by what I saw from the market, which had baked in that the Fed would taper by $10 to $15 billion a month and decided it was OK with that. But now, everything is getting murky and investors aren’t sure how much of the Fed’s comments to believe on when the taper will start and how much.

On Oct. 4, we have employment numbers again, and we are facing the looming fight between Congress and the President over the debt ceiling. That, of course, could influence or affect the U.S. debt rating, so that doesn’t look like a very positive event—based on what we’ve seen in the past. Also, we’re going into third quarter earnings season, so it makes perfect sense here for people to take profits and for the market to take a breather.

EQ: Last time we spoke, you said the S&P 500 could be trading in a range of 1630 to 1709 for a while. Seeing that we spiked through to a new all-time high of 1725, how has that affected the support and resistance levels?

Turner: Last Wednesday, the S&P 500 actually made a closing high of 1725 and went up to as high as 1729 and change, establishing near-term resistance at that level.  We do have a dandy uptrend going on despite what’s happening. The S&P 500 is moving between an uptrend line and a channel line on a daily chart. If we extend the trend line, we see that it comes in at 1650, as a major trend line.  Therefore, 1650 represents potentially  strong support, and below that we have the August lows of 1627. I really don’t want to see the market break that 1627 on the S&P 500, because if it does, that would break an important trend line.

EQ: What sectors or industry groups are you watching right now?

Turner: Many of the sectors and groups are in very nice uptrends still. Recently, they have shot up in almost parabolic moves higher, and they’re in the process of retracing some of the gains from last week. So I’m watching to see just how much of those gains they’re going to retrace and where they find support. If the economic environment and market supports that, they can move higher. One example of this is the Consumer Discretionary Select Sector SPDR ($XLY), which is in a very healthy uptrend. It shot higher and now I want to see what retracement takes place.  Like many investors, I have mostly gone to cash over the last week.

And, of course, if you know me, then you know I’m watching Utilities. The Utilities Select Sector SPDR ($XLU) is down and near support here. I’m going to observe and see if it can hold the $36 to $37 level. If it can hold that level and then start higher, there are some attractive Utilities companies to get into.

The wisest action  now is to let the market make a move and then respond to that move. Guessing the future and trading on it will be a risky move.

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