With so much hanging in the balance, every week has been a big one for the market. Last week, Mario Draghi, President of the European Central Bank, made a major splash for bulls with a big statement backing the euro. Of course, Wall Street will watch closely to see if the ECB will follow through with Draghi’s statement, as well as what Federal Reserve Chief Ben Bernanke will announce on Wednesday.
We asked Toni Turner of TrendStar Trading Group for her thoughts on these major developments and how traders and investors may want to approach these uncertain times.
EQ: European Central Bank President Mario Draghi made huge statement Thursday, saying that the central bank is ready to do “whatever it takes to preserve the euro.” The markets responded positively, at least initially. What are your thoughts on what this means heading into this week?
Turner: Mr. Draghi is certainly talking the talk, and has sent the strongest message I’ve heard so far, that the ECB will use its power to essentially print money. That gave the market hope, and of course, any message of rescue will cause bullishness. The markets gave a big sigh of relief because the guys in white hats are serious about coming to the rescue. Let’s not forget, though, that Mr. Draghi will have to find support among the ECB’s 23-member governing council. While I do think this will carry through into this week, especially with the Fed meeting on Wednesday, one thing that surprised me is oil doesn’t seem that enthusiastic about Mr. Draghi’s statements as the rest of the market.
EQ: Investors also received good news from the U.S. economy Friday, with GDP growing 1.5 percent and beating expectations. Does this at least help to curb the growing bearish sentiment in the market?
Turner: I think it did. The GDP growing 1.5 percent is not too hot but we’re so used to ugly economic news that we’ll happily latch on to anything that’s better than awful. Of course, the market is relying on the Fed and ECB to make some magic, and if you watched the big the cyclical ETFs last week, you’ll see that Industrials, Energy, and Basic Materials–including the Dow components–all thought Mr. Draghi’s announcement was fantastic. Also, the Dow Jones Industrial Average and the S&P 500 jumped above their June-July resistance. So if this isn’t just talk and something does come out of it, we’ll see if the indices can continue the enthusiasm to the March high. Of course, if members of the ECB come out and object–and some might–then it will put a damper on it. So don’t forget your safety net.
EQ: Consumer sentiment for July fell to the lowest level this year, but still came in slightly above expectations. We also saw housing numbers earlier this week come in pretty week for June. How have the consumer-oriented groups like SPDR S&P Retail (XRT), iShares Dow Jones US Home Construction (ITB), and SPDR S&P Homebuilders (XHB) responded?
Turner: The XRT pulled back with the rest of the market over the past couple of weeks, but definitely responded, which is a good thing. I hope that it made a higher low. Now, we just have to see if this momentum can continue. The XHB, which has quite a few industrial construction suppliers in it, it did better than the ITB, which is more strictly homebuilders. As you noted, new home sales came out weak. However, we have to remember that is this the summer time, and the market is fond of making wide price swings. . Just last week, analysts were talking about recession, and now all of a sudden everything is fine. I hope that’s true, but we have to wonder if it really is. So we have to keep in mind that this is the rollercoaster called the summer, and while can certainly take advantage of it, we also have to put our safety nets underneath our trades.
EQ: What are some areas that you are watching now?
Turner: We’re having the worst drought in recent history, and parts of China have had this go on for years. So I am watching water right now, and I think it’s something everybody’s kind of forgetting about. I’m montoring the PowerShares Water Resources (PHO) as well as the PowerShares Global Water (PIO). The PHO has quite a mix of sectors. It’s not only utilities, but it also has healthcare and technology. So it does move up and down with the S&P 500. I’ve said this for a long time now– I do believe that someday water will become a commodity just like oil.