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Trading Through a Sleepy Market

The market has been mostly quiet for the past week, but whether it’s just the calm before the storm, or Wall Street finally finding some stable ground remains to be seen. While investors and

The market has been mostly quiet for the past week, but whether it’s just the calm before the storm, or Wall Street finally finding some stable ground remains to be seen. While investors and traders probably don’t expect too much excitement for this week, the anticipation could already be building for next week’s major central bank meeting at Jackson Hole, Wyoming.

This week, we asked Toni Turner of TrendStar Trading Group for her thoughts on this sleepy market, and whether or not it may be in for a rude awakening.

EQ: Last week, Wal-Mart (WMT) announced that its second quarter results came in better than expected, but also said that it expects Q3 to come in lower than analyst estimates. As the largest retailer in the world, the company serves as a bellwether for the consumer group. What did their earnings tell you?

Turner: Wal-Mart recorded both higher sales and profit, but they’re also noticing in international sales a dynamic called the paycheck cycle. It’s been seen in the U.S. and in the U.K. The paycheck cycle can be described as when customers come in and buy products immediately after they receive their paychecks, but then make smaller and smaller purchases as the money runs out. It’s like we used to say, “We’ve got too much month left at the end of the money.” So the continuing economic pressures and unemployment are causing the paycheck cycle to remain as a constant. Wal-Mart also noted that international operations make up more than 25 percent of their revenue. They see growth continuing but at a slower pace, and they’re going to slow store expansion in China, Brazil and Mexico. So that tells you that the international customer is definitely having a big impact on their plans.

EQ: You noted that large caps have still been outperforming small and mid caps. Does that suggest that investors are still approaching this rally with caution?

Turner: I think it does. Of course, large caps have definitely outperformed. If you look at Apple (AAPL) and Exxon (XOM), these companies are at or near new highs. If you look at Cisco (CSCO), it made a huge dividend payout. So the big caps right now are definitely in charge if you look at the S&P 500. The small caps and mid caps have lagged behind, and we can look at them through the iShares Russell 2000 Index (IWM) or SPDR S&P MidCap 400 (MDY). Volume, of course, shows us that in the month of August, investors have basically been happy to stay on the sidelines. I’ve been watching the 14-day average true range (ATR), and if you look at that, that volatility indicator is still heading down on the SPDR Dow Jones Industrial Average (DIA), SPDR S&P 500 (SPY), and PowerShares QQQ (QQQ).

When the ATR is heading lower, it shows very little disagreement between the bulls and the bears. So the market goes in its natural direction, which is up. That’s the good news. The bad news is that we are at resistance levels from April. So even though big caps are strong right now, that could change in a New York minute. I suggest everybody start raising their stops, especially on large caps. We’ll now see at these resistance points if these indices can climb above these highs or if they have to back off a little bit seeing the headwinds that we have coming in.

EQ: The Jackson Hole central bank meeting isn’t set to start until the end of the month, but you expect that speculation of what will happen at the gathering may be a major driver to this week’s price action. Can you tell us why?

Turner: I thought it would have come in sooner, but obvious the market is still sound asleep. It’s pretty much continuing the nap that it’s been enjoying all the way through August. I suspect that with so many traders still on vacation, and the obvious lack of news out there and no major economic reports due this week, that possibly this snooze will last through all the way until the end of the week. Of course, on Aug. 31, if Fed Chairman Bernanke makes a speech at the Jackson Hole meeting that disappoints and indicates there will be no QE3, then the market could definitely go through a correction at that time. So we have to see what he says, and it’s possible that the market sidesteps through the end of this week.

EQ: What groups or sectors are you watching for this week?

Turner: A lot of groups and sectors I have looked at are really overbought right now and I’m just very hesitant to put in new positions. There is one place that I can see that holds some promise depending what Bernanke says. If he does crank up the printing press again , or even intimates that he’s going to in the near future, we can look for metals to rise. If the S&P 500 starts rising, which I believe it will if there’s a promise of QE3 (and if China adds more stimulus), then we can look for gold, silver, and platinum through the SPDR S&P Metals & Mining (XME). People who like to trade commodities can look at iShares Silver Trust (SLV). Some of these Basic Materials plays are among the few right now that aren’t overbought, and depending on what Bernanke says, they could breakout under the right conditions.

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