In this week’s conversation with Toni Turner of TrendStar Trading Group, we discuss the market’s upward momentum and whether treading into overbought territory means a pullback in the near future for traders and investors.
EQ: Most investors think that the market is currently overbought, but there seems to be more retail money coming in. Are stocks setting up for a pullback here?
Turner: Some days it indicates new money coming in and it also suggests institutional investors are fully invested. In this kind of scenario, the market only needs a pinch of negative news to justify profit taking. We received that news on Monday when Europe and the euro sell from their respective nosebleed territories with Spain and Italy fueling the retreat. Of course, if the euro falls dramatically, the U.S. dollar rises, which can pressure the U.S. indices, particularly the Dow Jones Industrial Average. Certainly, that was one of the reasons for the market pullback on Monday. The relative strength index (RSI) on both the Dow and the S&P 500 did move into overbought territory and now moved lower. So I suspect we’ll see a pullback shortly, although, I imagine it will be fairly shallow.
EQ: The Dow closed above 14,000 on Friday for the first time in over five years but has since retreated a bit. Is this just a normal dip when trying to establish new highs?
Turner: Yes, it is. That’s called resistance in technical analysis. It just means that people are taking profits or have tight stops at those levels. So any pullback at all will trigger sell orders. The S&P 500 moved above 1500 and then back down, and the Dow did the same with 14,000. Indices can see a lot of action around large whole numbers like 14,000 and 1500. What I would pay attention to is the price pattern that is forming because that could be indicative of what the future move will be.
As of Monday’s trading activity, we observed a complete reversal pattern and that could suggest a further move to the downside for the short term. Again, the RSI indicator and other similar indicators are pointing south right now, which tells me that we may have a retracement here. It would be healthy and it would not necessarily be a bad thing because it would introduce new opportunities.
EQ: Do you expect volatility to ramp up here as the market melts higher? Should investors and traders put in tighter stops?
Turner: The VIX pretty much slept through most of January. When it rises, it means that market volatility is rising. So now it does seem to be waking up and moving more erratically. In terms of the market’s direction and volatility, they tend to go in opposite directions. So I expect to see more volatility coming into the market sometime this week, and the VIX is rising right now. If we see more potential profit taking, then I suspect that we will see the VIX rise higher. If the market simply pulls back 2 percent or so and then resumes its upward track, then volatility may back off again. If volatility and the market rises higher, then that would suggest we tighten our stops
EQ: Are there any sectors or industry groups that you’re watching closely right now?
Turner: I’m watching one particular industry group that doesn’t look overbought– most groups are overbought now–and that industry is the iShares Dow Jones US Telecom (IYZ). It popped out of its consolidation on Friday and then fell back into it on Monday, but not decidedly so. Verizon (VZ), AT&T (T), and CenturyLink (CTL) are still trading positively , and these are the leaders in the Telecom industry. So I’m watching the IYZ to see if it can use $25 as a floor for support to move higher.
I’m also watching the ProShares Short 20 Year Treasury (TBF). It touched a low in July, and then another low in November. Since then it has generally moved higher. If the TBF tracks higher, it’s indicates higher interest rates ahead. One way to profit from that is consider ETFs like TBF. So I’m keeping an eye on that, and although I’m not a metals trader, I’m watching the Sprott Physical Gold Trust ETV (PHYS) for a potential entry as a longer-term trade. Everyone is down on gold right now, and I think that’s a great reason to be watching it. If PHYS can break above 14.70, I may become interested.