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Is the Market a Raging Bull or Stubborn Mule?

While Congress allowed the sequestration deadline to pass and China's attempt to curb its real estate bubble are two major economic developments that could threaten the overall recovery effort,

While Congress allowed the sequestration deadline to pass and China’s attempt to curb its real estate bubble are two major economic developments that could threaten the overall recovery effort, Wall Street and investors have shown a remarkable amount of indifference, shrugging off the news as stocks reach for new historic highs.

To get a grasp of what’s going on, we asked Toni Turner of TrendStar Trading Group for her thoughts in this week’s interview.

EQ: Despite Congress electing to allow the sequestration deadline to pass, the markets still held up pretty well. Why were investors and traders able to shrug this off so easily this time around?

Turner: I think Wall Street has faced one melodrama too many out of Washington. We’ve simply seen this picture too many times. This time, more than a few voices chimed that this crisis would not take down the economy in the immediate future. As well, the spending cuts should not affect the gross domestic product more than 0.5 percent At the end of the day, I think many folks wants to get on with business. We’re in a bull market here, and hopefully it holds.

EQ: The possibility of increasing volatility is something we’ve been discussing a lot lately, and so far the market has been relatively calm on that front. Do you see it picking up this weekly, particularly with some significant economic announcements on the schedule?

Turner: I do see volatility picking up this week. We have a lot of economic reports coming out, including the jobs report and unemployment numbers on Friday. On a daily chart, the average true range was still elevated on the S&P 500, indicating a tug-of-war between the bulls and bears.   If we look at a monthly chart of the S&P 500 or the SPDR S&P 500 (SPY), it is actually forming a rising wedge, which can many times produce a negative outcome . So I am keeping an eye on that  rising wedge formation. Right now, I think traders are wise to be defensive and to keep some powder dry.
EQ: China’s decision to curb its real estate bubble had a major impact on stock markets around the globe, primarily cyclical sectors like industrials, materials and energy. How bad was this news for those sectors going forward?

Turner: On Sunday, 60 Minutes did a segment on the Chinese real estate bubble, showing “miles and miles” of newly constructed cities complete with huge office skyscrapers and thousands upon thousands of apartments—all vacant. That certainly cast a jaundiced eye on the Chinese real estate market. So indeed, China’s new leaders certainly need to curb its real estate bubble before it gets anymore out of hand. Still, while that may pressure our indices in the short term such as Materials, Energy and Industrials, it’s important to remember that U.S. manufacturing is doing better than many of our competitors around the world. Also, increased spending by U.S. businesses will help drive demand for products and services in these sectors.

On Friday, the Institute of Supply Management said that U.S. factory activity expanded for the third straight months to 54.2 (a reading of 50.0 or over is positive), and that produced the biggest leap in manufacturing since the economic recovery started in 2009. On top of that, U.S. exports are up. So increased spending by U.S. businesses and consumers, coupled by the housing recovery and the uptick in global trade, are going to help create a manufacturing renaissance in the U.S. As a result, at least here in the U.S., the sectors you mentioned in your question  should benefit.

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

Turner: I still like Utilities and the Utilities Select Sector SPDR (XLU) here. However, while Utilities are looking good here, we have to remember that it tells us traders and investors are getting more defensive.

I’m also watching biotechs and the SPDR S&P Biotech (XBI). If you buy individual companies in the biotech space, it can be a very volatile ride. However, if you look at the ETF itself, it is diversified and that helps to reduce the risk. Much of the time, biotech stocks don’t follow the broader market like most of the other sectors. They move more based on clinical trials.  The biotech industry is where healthcare innovation begins.  Plus, big biotech companies sport strong balance sheets.  I’m going to keep an eye here on the XBI at above $97. I will  do that with the knowledge that it may have to pullback a little before it heads into blue sky territory.

Any change significant enough to matter draws vigorous opposition from those who depend on the status quo.
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