Markets More Defensive in Week Ahead

This week I felt like Henny Penny in the classic story, Chicken Little, the nervous chicken that ran around warning, “the sky is falling, the sky is falling.”

But with revolution in the Middle East, Europe slipping farther into insolvency and the devastating earthquake, tsunami and nuclear meltdown in Japan, truly the sky does seem to be falling.

At Wall Street Sector Selector, our portfolios remain in the defensive mode and we continue our work of seeking profits in both up and down markets.

On My Radar

This week’s fundamentals were horrific, of course, and the technical indicators were no better.  However, as we navigate this difficult terrain, our problems are small and so let’s take a moment to remember the people of Japan and do what we can to help them through these trying days.

On the S&P 500 (NYSE:SPY) Point and Figure Chart above, we get the best picture of the current situation, in my opinion, with the index in a column of Os, showing supply in control, and the columns resting right at the 1304 level which, if broken, would be a double bottom breakdown, or “sell” signal.

Most tellingly on this chart, a break below 1304 leads to a vacuum until the 1220, 1210, 1200, and 1180 levels before any support is found.  1304 to 1220 is approximately 80 points or 6% from current levels.

So, all in all, we see a market breaking down, and with just a little more downside action, we will find ourselves with little downside support in what could be a significant correction.

However, perhaps what is most impressive is how well this market has held up in the face of a series of events that could only be described as a Chicken Little world.

The View From 35,000 Feet

As we touched on earlier, the “Facebook Revolutions” continue in the Middle East, and in the fast moving Libyan civil war, it looks like the government is regaining the upper hand while the Arab world now calls on NATO to establish a “no fly zone.”

However this turns out, it seems clear that oil supplies and production will be impacted for quite sometime to come and that this will be particularly difficult for Europe as much of their oil comes from the now damaged Libyan petroleum infrastructure.

Closer to home, the U.S. Congress works on extending the budget ceiling a week at a time, it seems, in almost comical efforts to keep the doors of the Federal Government open, while one of its biggest creditors, Bill Gross of bond giant PIMCO, has cashed in his chips and now owns no, zero, U.S. Treasuries.

This is huge vote of no confidence as wily old Bill has at various times has owned in excess of $150 billion of U.S. Treasuries.  His shedding of Timmy Geithner’s debt can only be interpreted as a bet that interest rates will be rising and that bond prices will be falling, quite likely because Big Ben and his Merry Band of Feds won’t be able to sell “QE3” when their latest round of asset purchases end in June, just  three short months from now.

The demonstrations in Wisconsin made for good television news, but receiving less notice were the startling facts revealed by TrimTabs that one third of wages and income in the United States comes from some form of government largesse in the form of Social Security, Medicare, Medicaid and unemployment insurance, while the Financial Times reported that a full 20% of Americans can now qualify for food stamps. This is a shocking statistic because to qualify for the $130 a month food stamp allotment, you have to be below the federal poverty line, have less than $2,000 in assets and not own a home.

Truly we are becoming the United States of Zimbabwe.

What It All Means

We live in interesting, nay dangerous times, indeed, and those of us fortunate enough to still have investable assets need to protect them, of course.  However, current volatility also offers enormous opportunities, and so at Wall Street Sector Selector, we’ll be pursuing a two track process of wealth protection and wealth creation through these exciting days.

The Week Ahead

It’s a relatively quiet week of economic reports which probably is a good thing given the drama unfolding around the world.

Tuesday: March Empire Manufacturing, March NAHB Housing Index, March FOMC rate decision.

Wednesday: February Housing Starts, February Building Permits, February PPI/CPI

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, February Industrial Production, February Capacity Utilization, February Leading Economic Indicators, March Philadelphia Fed Report

Disclosure: No positions in ETFs or stocks discussed in this article.

John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs.