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What to Do When the Market Feels Overbought?

The S&P 500 is once again coming off a new all-time high, established earlier this week. As things become even less predictable and traders start to feel less comfortable in the nosebleed

The S&P 500 is once again coming off a new all-time high, established earlier this week. As things become even less predictable and traders start to feel less comfortable in the nosebleed areas, some profit taking may be in the cards. We asked Toni Turner of TrendStar Trading Group for her thoughts on how to play the market now.

EQ: The S&P 500 pushed into new all-time highs earlier this week but seems to be coming back down now. What are the catalysts, if any, that’s driving the momentum right now?

Turner: Interestingly enough, when the announcement of the FOMC meeting was made on Wednesday, even though the Fed’s tapering program was going to be delayed, interest rates started climbing on that day. I believe some market participants think that the Fed’s taper is going to come earlier than expected.

The yield on the 10-year note started climbing on Wednesday and is still climbing Friday, hitting about 2.60 percent. While that’s not a high by historical standards, still, rising interest rates—or even just the anticipation of them—can slow down the market’s upward momentum.

Of course, with the S&P 500 up 23 percent this year, it makes sense that we would see some sort of profit taking come in here.

EQ: The Fed didn’t announce anything new this week regarding its approach to the taper timeline. Yet, the market seems to be reacting as if they did. What is your suggestion here for traders?

Turner: I suggest traders watch the iShares Russell 2000 ETF ($IWM), which we’ve discussed before as a possible leading indicator for the broader market. On Wednesday, it created a bearish engulfing candle and those can be very negative if there’s follow through, and there was.

Since then, the IWM has fallen on three days of very bearish volume—high volume days, all to the downside. When we see higher volume on a pullback in the context of an uptrend,–such as what we’re witnessing now on the IWM—higher volume than there was on the prior move up—it indicates that there are more sellers out there on the move down than there were buyers during the move up.

So this is a very real dynamic that we need to follow, and it tells traders right now that we should perhaps raise our stops, at the very least, on our long positions. Traders might even choose to take some profits on overbought stocks or assets off the table right now.

EQ: Which earnings are you monitoring closely for the coming week?

Turner: I am watching Kellogg (K) on Monday for the food processors. On Tuesday, there’s American States Water Company (AWR) , which is a favorite trading vehicle for Toni’s Market Club. It’s a water and electric Utilities stock that obviously has to do with water delivery. I have believed for some time that water will become a very important commodity in years to come.

I’m also watching DIRECTV (DTV) on Tuesday for the media group, as well as CVS Caremark Corporation (CVS) for retail and staples. That stock has done very well recently.

Tesla (TSLA) reports Tuesday after the close, and I think a lot of people will be watching that, as that has turned into a real momentum stock. It’s definitely been in the spotlight in the market lately.

For Wednesday, I’m watching HomeAway (AWAY) because that’s an interesting stock to me. It’s an online marketplace for the vacation rental business where individual owners of vacation properties can list their vacation rentals. I’m curious to see, quite frankly, why the stock has not done better than it has, given their forward earnings estimates.

On Thursday, there’s Sotheby's (BID) , which is a  good representative for the Consumer Discretionary sector. Of course, J.C. Penney’s (JCP) earnings report, which comes out Friday morning, will give us an idea whether that stock can finally begin to repair itself.

EQ: Any sectors or industry groups that warrant additional attention right now?

Turner: The metals and mining groups have sold off with the dollar rising. So I’m still watching them to see if there’s another buying opportunity, and if they can hold above their lows and make higher lows in days to come. But as long as the dollar and the PowerShares DB US Dollar Index Bullish ($UUP) is rising, I suspect that metals will continue to suffer.

Any change significant enough to matter draws vigorous opposition from those who depend on the status quo.
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