The US Equities markets traded lower on Friday, coming into what we had pointed out would likely be a complicated area of support around 1,065 (S&P Cash). At the end of the session it was clear that support had held and the market traded up to close well off the lows. It is human nature to see the recent weakness and to expect follow-through to the downside this week, but the correct course of action is to be on guard for a potential bounce at the bottom of the range. In other words, resist the temptation to become extremely bearish at the bottom of clearly defined ranges.
In terms of sectors, the market has responded to the recent weakness with textbook strength in traditionally defensive sectors: Staples, Utilities and some Technology. One of the current tensions in the market that may be resolved this week is the persistent strength in Basic Materials stocks. This sector dramatically led off the July lows; widespread weakness in these names would likely lead to a major selloff in the broad market. One other interesting aspect to recent market action is the slight strength in some Consumer Discretionary names. Sector indexes may be distorted by large moves in individual names, but, on a whole, this sector is showing a bit more strength than we would expect given the recent bearish tone to the overall market. We will be carefully monitoring both of these sectors (Materials and Discretionary) this week, but generally are managing positions with broad stops to avoid being caught in the late-summer noise.
Our baseline play for today will be for a sideways day with an upward bias. Short-term traders should remember that these last weeks of August usually have even lower volume, less intraday following and generally more difficult trading than the rest of the month. However, seeing the market holding new lows and lower highs below 1,060 (S&P Cash) would be a setup for a potentially very strong and clean downtrend day. If and only if this scenario is in play, short-term traders should be prepared to step up and trade with conviction. Otherwise, the vast majority of short-term traders will be best served by avoiding real risk today.
For longer-term players our advice is unchanged. You should be holding positions in individual names in which you have a particular interest and only small allocations to broad indexes. We do not yet have the clarity that would justify increasing exposure at this time, so remain in defensive information-gathering mode until we see more signs of strength from the broad market.
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