While investors enjoyed a euphoric run from the November 2012 lows, the party may finally be ready to die down for a prolonged break. Whether this is a lull before stocks prepare to move higher or the beginning of the long-awaited pullback remains to be seen. In either case, investors and traders may be wise to wait for a confirmation for the market's next move. In this week's interview with Toni Turner of TrendStar Trading Group, we discuss key levels to watch and what her read on the market is right now.
EQ: The market has fallen about 3.6 percent since about mid-May, and you noticed that the market’s mood seems to have shifted. Has that investor exuberance come to an end
Turner: I really think it has, at least for the time being. It looks like our new mantra is going to be, “Sell in June and miss this swoon.” Right now, investors are worried that the Fed’s stimulus may be coming to an end. We had the Kansas City Fed President Esther George say Tuesday that she supports the slowing the bond purchases as the appropriate next step. We also had the Atlanta Fed President Dennis Lockhart say that he thought the Fed could begin to dial back the bond purchases and mortgage back securities by September.
I think investors are worried that this is going to happen on an economy that is not as strong as it has appeared over the last month. This is on top of this month’s ISM numbers, which were disappointing, and the ADP report on Wednesday was disappointing as well.
The stock market is a forward looking vehicle and if there are any signs of a pullback or of a market meltdown, especially after what we endured in 2008, everybody will want to be the first out of the potentially burning building if they smell even just a little bit of smoke.
EQ: With the market threatening the 1600 level on the S&P 500 and already breaking below 15,000 on the Dow, are we approaching any key support levels here?
Turner: Yes, we certainly are . On Wednesday, the Dow broke a major uptrend line when it broke below 15,082. Of course, it also broke below 15,000, which is a major psychological point . Now, support is at 14,914, which is the 50-day moving average. South of that price support, potential support also resides at 14,838 established in April.
For the S&P 500, 1600 is certainly support. We have the 50-day moving average coming in here, and again, another major trendline. If the index falls to 1600 and that trendline, even in the next couple of days, that would be about a 5-percent retracement. Now, if it moves below that, we have some potentially good support levels at 1575 to 1580. If it moves below that, we have support at 1540, which was a major level earlier in the year. If it breaks below that point, we can consider the uptrend broken. Then 1519 would represent a 10-percent correction.
EQ: Back in April, we discussed establishing watch lists or stocks investors would want to own at better prices. Is now the time to start putting those lists to work or would you hold off until the market has found its footing?
Turner: I am definitely establishing lists of stocks or sectors that I want to own, but it is too soon now to get in. I think we have more excitement ahead. Some stocks that I had on my watch list were technically damaged on Wednesday. Fastenal Co. (FAST) was one of those stocks. It really took a hit, and many of the cyclicals got pounded, especially with the Dow’s big drop. With the market moving down as dramatically as it is, it’s time to stand aside and just observe. We had a lot of warnings that a top may be put in place soon, so now it’s time to stand back and observe. I certainly don’t want to get involved in a street fight between the bulls and the bears.
EQ: What sectors or industry groups are you watching right now?
Turner: A lot of sectors that I look at took a big hit over the last couple of days. One that is kind of interesting, though it’s not ready for entry yet, is the PowerShares DB Base Metals (DBB). It is a commodities ETF focused on base metals. We discussed before how its profits will be taxed differently. Although it’s a positive way of calculating, some traders may not be interested in getting into taxcomplications. So it may be best to trade it in an IRA.
The DBB has copper, aluminum, and zinc as its top components. We’re seeing signs recently of a resurgence in base metals in some of the BRIC countries. I’m watching the DBB here for a potential pullback, though I’m not eager to get in until I’m reasonably sure that it can sustain its uptrend. If it moves back down toward $17, area and doesn’t return all the way back down to $16.50, then I’ll be interested in possibly entering that ETF on the long side.
Other then that, I don’t really see anything else with the exception of possibly some of the gold mine ETFs, but even so, that would be forcing the issue and I’m not really ready to force anything right now.
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