The major theme in the market right now is watching the central banks and how they intend to react to the global economy’s slowdown. With the European Central Bank making arguably the strongest statement so far with its proposed unlimited bond-buying program, the stage is set for the Federal Reserve to make its move.
We asked Toni Turner of TrendStar Trading Group if traders and investors are already pricing in their expectations for additional stimulus, and how the market might react to Thursday’s announcement.
EQ: Last week, stocks broke above multi-year highs, and the S&P 500 broke above key resistance at 1422. How much room does the market have to move higher?
Turner: The next level higher for the S&P 500 is 1440, which is right around where it is now. That level is from May of 2008. After that, we can look at 1475, and then of course, the round number of 1500. Just by looking at the chart, I suspect that the market could soften in the next few days and perhaps move back down to support at 1420, and maybe even 1400, depending on what happens on Thursday with the Fed. While that could take place, right now we are in a really nice uptrend and that has to be respected.
EQ: Most of the move could be attributed to the ECB’s unlimited bond buying program. Did this announcement remove a lot of the concerns that traders and investors had toward Europe’s problems?
Turner: We call that the Draghi effect and it certainly helped immensely. It appears that expectation for a successful outcome, or at least better than expected, in the eurozone could keep the markets afloat. Now, we need to remember on Wednesday we have eight judges in Germany that will decide whether the German government will try to block the bond-buying strategy. If they do not block it, the markets will probably continue to use the Draghi effect until—or if– it gets a hitch in it. If Germany does block it, the eurozone will find itself short of authorized funds to prop up Spain and Italy, and they will need to redefine the safety net for those troubled countries.
EQ: While we didn’t get anything out of Jackson Hole, most of Wall Street expects the Fed to finally announce a new stimulus move, perhaps even QE3, at this week’s FOMC meeting. What are your thoughts on how to approach this?
Turner: The market is banking heavily that the Fed is going to add additional monetary policy on Thursday, and the market’s reaction exhibits how heavily the market has come to depend on the stimulus punch bowl. I suspect that Mr. Bernanke will have to announce a substantial plan pretty quickly or risk a broad sell-off in the market.
If he does announce a strong additional stimulus policy, we’ll probably see economic growth sectors like Materials Select Sector SPDR (XLB), Energy Select Sector SPDR (XLE), and Industrial Select Sector SPDR (XLI) move higher, as well as most other risk on sectors . However, I don’t see it as a given that the market will rise on news of an announcement. I’ve been in the market too long to just assume any market reaction. So I’m not going to buy heavily before the announcement, but I certainly will keep my core positions with my stops intact.
EQ: What sectors or groups are you watching closely this week?
Turner: If uncertainty comes into the market, then I’m keeping an eye on Utilities Select Sector SPDR (XLU) and the pullback it has seen. More uncertainty could also lead us to look at the Consumer Staples Select Sector SPDR (XLP). My favorite right now, however, is the Health Care Select Sector SPDR (XLV) and the industry group within it, the S&P Biotech SPDR (XBI). I would wait for a pullback, though, because they’ve already popped. So I think Healthcare and Telecom, which has also had a good run , are probably going to be strong going to the future, but I would wait for a pullback before I buy into them.
If we look at the Gold Shares SPDR (GLD), we can see that gold has flown, breaking out of its bottoming triangle formation over two weeks ago. It’s trading at an angle now that, technically speaking, I wouldn’t buy even if it means that I could miss out on profits. I should note that I entered just before the breakout, and I am holding a few shares. Certainly, silver and gold, and other metals could jump if more stimulus is offered, but the higher an asset flies that depends on future expectations to be filled, the more profit taking can come in if there is any disappointment at all on what will happen.
[Photo via Medill DC]