Where Do We Go from Here?

05/18/2009 10:20 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, evaluates risk of the broad markets and importance of protecting your profits.

Ten weeks of upward momentum is being challenged. The sentiment is slipping from bullish to neutral. Why the shift? From my view, we are rethinking the fundamentals relative to the current prices. The move lower this week on the NASDAQ snapped a nine-week win streak. The S&P 500 index gave back the 5% gain from the previous week, ending lower and at support near the 870 mark.

Not much data this week on the economy, and that could lead to more downside. Without some reinforcement of things getting better, the market may drift sideways or down. In fact, I think the consolidation of the move higher is what we work on next. The absence of news is good, in some ways, for the consolidation phase to solidify itself.

April sales data didn’t support the outlook that many were hoping for concerning the consumer. In fact, the data leaned more towards no growth in the current (second) quarter. Not surprising when you look at second quarter GDP projections (negative 3.2%). The reality pill is hard to swallow, especially after the climb off of the March lows. Investors are facing the reality that an economic turnaround will be slower in coming than what has been pricing into stocks.

There is still plenty of cash on the sidelines to supply the needed lift for equities, but it is also tempered by healthy skepticism. Earnings are going to play an important role in the continuation of the uptrend as well. Holding support (875 on S&P 500 index) and consolidating would be the best course for the current uptrend. More upside at this point would only fuel the worrywarts and lead to a larger pullback when it does occur.

In scanning the winners and losers from last week, there wasn’t much of a shift as it relates to the trend. However, the weekly results were almost the reverse of the previous week. Financials lost more than 11% on the week after gaining 22% last week. Energy and industrials both lost 7.2%. Materials were down 6.7%, consumer services and utilities lost 5.7%, telecom was down 2.2%, technology lost 1.6%, and consumer durables and healthcare were down 1.1%. That makes the losses unanimous among the ten major sectors.

Where does this leave us? The trend lines are in question along with support. We need to be clear on our objectives with each of our positions within our portfolio. Determine what risk we have relative to the current market conditions and how much we are willing to accept in the near term. This permits you to set your stops accordingly.

What are we watching this week? I want to see how we handle the first levels of support. The selling last Thursday took many of the sectors to their first level of support. On Friday, they bounced slightly, but the test is still on and this week could hold some answers about whether we hold and some realities if we break below support. If we hold, money could be put to work, pushing stocks higher. Sell and the pressure to the downside could accelerate the selling towards the next level of support. This is one of those times when watching the market makes more sense than playing the market. I want to see how this plays out near term. My stops have been tightened in the event we trade lower. Be patient, protect your principle, and let the short term play out.

Here is the ETF Watch List for the week of May 18, 2009:

As you can see by reviewing the ETFs on the list, there are some opportunities to the upside, but it is also important to use stops to protect your principle. 

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.

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