‘Santa’ May Be Months Away

12/14/2011 7:30 am EST

Focus: MARKETS

Jim Farrish

Founder and CIO, Jim's Notes

The double whammy for stocks on Monday was comments from both Fitch and Moody’s disturbing the peace from Friday’s fiscal agreement among the EU members…and there’s more to come, observes Jim Farrish of SectorExchange.com.

We went from cheering to the rating services sneering at the agreement as too little, too late. The euro was under pressure as well, dropping to $1.31 against the dollar. Some analysts believe the euro will continue to erode in value.

The catalyst? There are no meetings or actions to be taken by the EU in the near term. That leaves the market to feed on itself. The rating agency comments will sting for a while, as investors ponder the risk associated with the sovereign debt of EU countries.

The concerns of Europe are front and center again for investors. This is not what we needed if the broad market indexes were to break through near-term resistance and continue higher. This remains a news-driven market in the short term.

Santa may have to wait for a better opportunity based on the response to the rating agencies and Intel’s news. The chip sector is a leading indicator for the economic outlook and based on the data from both Intel (INTC) and Altera Corp. (ALTR) the sector is struggling with growth. That doesn’t bode well for the outlook toward economic growth. The semiconductors are on my watch list of indicators for the economy short-term.

The markets are at a crossroads. A look at the chart of the S&P 500 index shows the test of the 1,230 mark again, and the downtrend line remains intact. The 200-day moving average held as resistance for the broad index, and breaking the sector down you find a similar picture for the leaders, but the laggards are in a position to break support and head lower. If one breaks, it gives the all clear for others to move lower.

Basic materials, telecom, and energy are three sectors testing support. Health care has been lagging as well, but has held up better than the others. Watch the sentiment shift short-term—if it gains momentum, that will be bad for the broad markets.

Gold took a hit on the news in Europe, dropping below $1,670. The move is through support on the long-term uptrend line, matching the November low. This is a significant move on the downside, with the 200 day moving average at 1,612.

The precious-metals sector overall has moved lower on the global data. Watch the action relative to support. A move below support would be a big negative for the metals.

The dollar watch is on, with the greenback gaining momentum again relative to safety. The dollar was up as the euro dropped on the news.

The dollar will be a good indicator of confidence towards Europe and any near-term hope they have to put the right plans in motion. If the rating-agency downgrades and warnings are heeded, the downside for the euro will continue and the dollar will move higher. Watch the outcome for indications towards equities as well.

We remain cautious and defensive to the broad markets as all of this settles and clarity is gained..

What I Am Watching
The reaction by investors to the sales reports for November and the FOMC meeting. If the news is ignored, it is a negative for the broad markets.

Rating agency sting…does it continue, or does the broad market bounce?

Financials fell through the $12.80 mark on Financial Select Sector SPDR (XLF). Confidence is falling relative to European banks, so watch the downside plays if this continues.

Small caps were poised to lead higher. Now I’m watching to see if they are an indicator on the downside.

SPDR S&P 500 (SPY) and the $127.30 resistance? Failed again, with the index testing support at 1,220. A 1,200 break is a big negative short term.

Have you ever heard the phrase, "Christmas in July?" That may be more likely than the actual Christmas.

Read more at SectorExchange.com here…

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