Market Remains on a Knife’s Edge

06/15/2009 10:58 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, says the market is poised to break either up or down, and economics and the dollar may determine which way it moves.

The Standard & Poor's 500 index remains in a tight trading range as investors deal with the potential impact of a weak dollar, higher crude prices, higher interest rates, and the threat of inflation. Just when you thought it was safe to go back into the water..

The markets have come a long way from their March 9 lows, but they are facing an uphill climb to get back to their highs of October 2007. Last week's choppy ride came as a result of a disappointing ten-year Treasury auction, the weak dollar, and a G8 meeting at which finance ministers discussed reduction or elimination of fiscal stimulus packages in their respective countries.

We are in a tight two-week trading range with below-average volume. This is likely to end in a sharp breakout up or down, and I would give equal probability to either. 

Last week, utilities took on an unusual leadership role. The Dow Jones Utility Index gained 3.7%, breaking above resistance at 131. Energy gained 2.4% on the heels of crude rising above $72 on the week. The Dow Jones Energy Index, up 10.3% the last two weeks, is attempting to break above the 472 resistance. A break higher would shift the target to 550, with support at 420.

The previous leadership of technology, commodities, and financials took a break again last week. Each sector has formed tight consolidation patterns over the last two weeks and could break out up or down this week.

Much of what I outlined last week: as facing the markets is still in play and unresolved. The hike in interest rates continued, with the ten-year Treasury note moving above 4% before retracing to 3.78%. The volatility in the Treasury bond market is putting pressure on mortgage rates, and that spills over into the housing sector.

The dollar remains weak, but it did manage to bounce off of recent lows. The attempted rally could push the US Dollar Index to the 83.50 mark. The bounce put some pressure on commodity prices, with gold pulling back to the $932 level and crude at $72.19. This week could see consolidation in the sector if the dollar index continues to hold above 80. That would create an opportunity longer term for commodities.

All of this adds up to volatility coming back into the market as future growth appears less certain. There is plenty of economic data this week, which in my view is likely to break the consolidation logjam one way or the other.

The consolidation in the S&P 500 is the primary focus. Based on the last two weeks, it could go either way. However, the tight consolidation plus lower-than-average volume equals a sharp break in direction. Watch for the resulting opportunities.  

The table below has changed to reflect where I think the opportunities in exchange traded funds (ETFs) are in light of the current data.

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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