In this week’s interview with Toni Turner of TrendStar Trading Group, we discuss the impact of the Cyprus bailout news on U.S. financial stocks, and whether the decision by Europe’s leaders with have lasting ramifications around the world.
EQ: After the Dow ended its 10-day streak on Friday last week, the market was greeted with some concerning news coming out of Europe, particularly the Cyprus bailout. Do you think this is going to have a longer-term impact on the market’s direction?
Turner: On Sunday night, when I looked at the Dow futures, I saw that they were down 140 points. I also saw that the Asian markets were trading lower, as was the euro. The market clearly disliked European officials’ decision to impose taxes on Cypriot bank depositors—across the board– to help pay for Cyprus’ bailout. I That action makes one wonder if the euro crisis is back, and if it was going to spread more contagion. In addition, the actions that the eurozone leaders took puts into question the very core of the trust that U.S. depositors have in our own banks, and whether something like that could happen here.
If the market is reassured in the next couple of weeks that this is a one-off event, and if the eurozone leaders assure that is true, then it may not affect the market further. However, we’re going to have to be absolutely reassured by them and by our leaders that this isn’t something that could happen in the U.S. as well. The banking system is built on trust, and when that trust is gone, what do you have left?
EQ: Looking at U.S. banks, the Federal Reserve’s latest round of stress tests resulted in the approval of some buybacks and dividend hikes. Did this have any effect on your outlook of this sector?
Turner: In my weekend video The Market Now, we looked at a monthly chart four months ago of the Financial Select Sector SPDR (XLF), and we noted back then that, technically speaking, it had underperformed the other sectors but also had a great pattern and looked ready to move higher. Since the, , it has done just that. Many banks have trended higher. A lot of that momentum has been driven by their fundamental valuations, which are currently very low. Indeed, quite a few of them are trading just at or slightly below book value. So the banks have done very well recently.
However, the news from Cyprus, where banks are summarily taxing deposits across the board, caused the banking sector to fall slightly. Would I buy it now? The XLF is up 30 percent since coming off its December low, and in the short term, I think there’s a possibility that the broad market could pull back over the next week or two, and banks will pull back with it. Investors that are looking for slightly lower prices may want to wait here until after the FOMC meeting on Wednesday. In the longer term, I think the banks are probably a great investment.
EQ: Apple (AAPL) seems to be moving inversely with the market. Has this stock become sort of a risk-on/risk-off play right now?
Turner: You could be right about that. It appears to me that Apple investors are probing for the tech icon’s bottom price here, and I think people still want to be in Apple. When the stock makes a firm higher low on its daily chart, then I believe investors may have located that sweet spot. That would be especially true if the board of directors raises the dividend soon.
At the moment, it appears that Apple has broken that downtrend on the daily chart and started higher. We’ll have to see if it can make a higher low to confirm that it’s true. In regards to the risk-on, risk-off play, it definitely seems to be true for right now.
EQ: What sectors or industry groups are you watching this week?
Turner: We’re still of the opinion here that most sectors are overbought. We still like Utilities and the Utilities Select Sector SPDR (XLU), and are keeping an eye on the downtrodden Market Vectors Coal ETF (KOL). Peabody Energy Corp. (BTU) is one of the leading coal companies and it closed higher on Monday thanks to an upgrade from Nomura. On a daily chart, KOL has been consolidating around the $23 to $24 area. If it can move up and over its 200-day moving average, which is about $24.25, I think KOL has the potential to break higher here.
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