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Trade What You See, Not What You Think

In our latest interview with Toni Turner of TrendStar Trading Group, we discuss key levels to watch on the S&P 500, and why traders and investors shouldn't get too caught up on trying to

In our latest interview with Toni Turner of TrendStar Trading Group, we discuss key levels to watch on the S&P 500, and why traders and investors shouldn't get too caught up on trying to predict the future.

EQ: The market received a shock from China’s comments pointing to severe economic challenges for 2014. China’s economy has been a growing concern for many investors. How vulnerable is the U.S. stock market to China’s headline risk going forward?

Turner: China’s economy and industrial production weakened sharply during the first two months of the year. In fact, China had a slowdown across the board, including retail, manufacturing, housing, and investments.

Some of the results were the weakest since the global financial crisis of 2009. What shook our markets even more is China also warned that it could see corporate default on debt, which is a definite change in strategy for the Chinese government. For years, they provided bailouts, and of course, when you say “default on debt,” that brings back some nasty memories, especially to the U.S.

Now, if China’s economy does slip and there are defaults, then that will affect most of the world because China is the second largest economy. So we’ll see many of our sectors such as Financials, Energy, Materials and others that will be touched by a Chinese slowdown.

EQ: The S&P 500 is testing the 1850 support level right now. What are some other levels that you’re looking if the index moves away from that area, one direction or another?

Turner: Right now, as we speak, the U.S. benchmark is attempting  to respect that 1850 level.  If the weekend is filled with news of worsening geopolitical headlines,however, we could see the S&P 500 fall further here. It has more support at 1830. A 5-percent pullback from the highs would take it to 1789. Still, the index has a lot of potential interim support, and although we’ve seen selling this week, we have not seen panic selling.

EQ: If we do experience a breakdown and stocks have topped, what’s your strategy to adjust to those market conditions?

Turner: If we get a real breakdown, we know that usually 20 percent of stocks will still move higher. So we’ll look into the right sectors. If global fear causes a move lower,  then we’ll  look to the defensive sectors and assets, such as gold, Utilities, and so on.

If it’s a scenario where the baby is indeed being thrown out with the bathwater, then I’d take profits on growth stocks because they usually fall from 1.5 to 2.5 times faster and harder than value stocks.. I would also be selling short very selectively, while keeping a lot of cash on the sidelines.

Now, I’m not calling for a bear market, but the more I trade, the more I think it’s important to trade what we see and not what we think will happen. Barring any extra exogenous shocks that we do not know about right now, it really depends on the situation going on in Ukraine and Russia for the near term. In the longer term, it depends on the direction of the U.S. economy and China’s economy.

EQ: Are there any sectors or industry groups that you’re watching closely right now?

Turner: The Utilities Select Sector SPDR ($XLU) has been leading higher over the last three days—as Utilities tend to do during uncertain times.

I’m also watching a quartet of international ETFs that I think will give me a good idea of where the U.S. markets are going.

  • Market Vectors Russia ETF ($RSX)

  • iShares China Large-Cap ($FXI)

  • iShares MSCI Germany (EWG)

  • WisdomTree Japan Hedged Equity ($DXJ)

Right now, they’re oversold and bounced on Friday. But generally speaking, I’m keeping my eye on these four and I believe their overall direction will help dictate which way our markets go.

As far as other sectors, I’m watching the Market Vectors Agribusiness ETF ($MOO), as well as the Market Vectors Gold Miners ETF ($GDX), and Market Vectors Junior Gold Miners ETF ($GDXJ).

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