The bullish momentum that investors and traders have enjoyed in recent weeks has faded, but with the fourth quarter quickly approaching, and major market moving developments set to ramp up, Wall Street could be getting much busier in a hurry. Investors that don’t want to get caught off guard may need to start looking ahead to prepare for the volatility.
This week, we asked Toni Turner of TrendStar Trading Group for her thoughts on whether investors and traders should consider getting defensive, or if the market still has room to run.
EQ: As we discussed last week, stocks could be susceptible to a pullback. Given the performance over the past few days, would now be a good time for investors to seriously consider getting defensive?
Turner: I don’t know if we need to get defensive as much as we do need to get cautious—although maybe that’s close to the same idea. That topping candle or long shadow that we discussed last week is still ruling. The market consolidated all last week and we had more of the same on Monday, but the good news is that the average true range (ATR) on the daily chart of the S&P 500, we can see that the bulls and bears are not fighting each other. The market appears to actually be napping. If we want to look for more worrisome news, we can see that risk is off. When people go risk-off they go into Utilities and the Utilities Select Sector SPDR (XLU) has a big green candle on it even though it’s in a downtrend. That’s the third high-volume green candle it’s had in about as many weeks. When I see more action coming into the Utilities, I know that investors are getting more anxious. So I don’t see a huge pullback here, but I would recommend putting trailing stops on profits that you don’t want to give back.
EQ: Now that the stimulus build up is no longer there, is the market at a bit of a loss on what to focus on?
Turner: This week we are going to be finishing up the third quarter and we will be focusing on earnings as soon as Alcoa (AA) announces officially in the second week of October. So we are going to look into earnings season, which is going to be important, and of course, the market is looking toward to the election. Barring any unexpected news, we could just chop through earnings season. I suspect the S&P 500 could move in a range between 1430 and 1480 into the election.
EQ: So looking out on a more longer-term timeline, could market activity accelerated much more rapidly given that we have earnings coming up, the election, then the fiscal cliff being addressed, should investors begin to embrace for a steep ramp up in activity?
Turner: I think so. This complacency is the market taking a nap before the fireworks begin. I do believe after the election, I expect fireworks. I could see a little pullback here because a lot of very risk-averse money managers and strict asset allocators right now may be wondering why they shouldn’t take profits here with the market overextended . The Dow is up 16 percent this year and stocks have outperformed bonds going into the end of this quarter, so we could see strict asset allocators selling off some of their stocks and buying bonds, because bonds have underperformed stocks. So in the near term, I could see top stocks dwindling a little bit, but I definitely think that after the election, it’s going to get very volatile.
EQ: Are there any particular sectors or groups that you are watching closely this week?
Turner: I still like the healthcare sector. It’s doing well and isn’t showing any signs of turning back, as of yet. The Health Care Select Sector SPDR (XLV) has broken out beautifully and it looks strong. I’m also watching the Consumer Staples Select Sector SPDR (XLP) and it’s remaining strong right now because people are still in stocks like Proctor & Gamble (PG), Coca Cola (KO), and Phillip Morris (PM). So that will be interesting as we get closer and closer to earnings, the election and the tussle with the fiscal cliff. I’m also watching an ETF called the First Trust Global Wind Energy (FAN). I missed the bottom on it, but I’m watching it for a pullback. I see more volume coming into it, and I see it in a nice uptrend here, so I might be interested in looking at it on a pullback.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer