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Sector Detector: Global Teamwork Injects A Dose Of Optimism

 September 14, 2011 08:50 PM

Investors dumped equities late last week ahead of the weekend – largely due to the tenuous situation with Greece's debt and the associated fall in the euro (and a commensurate rise in the dollar). But I also think there was a flight-to-safety ahead of the 9/11 anniversary, especially among Wall Street traders given the terror threats and heavy security in NYC.

This week, however, has brought a glimmer of optimism. Equities are up nicely through Wednesday, with the S&P 500 advancing about 3% since last Friday's close, led by Industrials, Technology, and Consumer Services sectors, while gold, Treasuries, and the dollar are all slightly down.

Nevertheless, the S&P 500 is still down about 5% year-to-date through Wednesday. But the more optimistic market commentators suggest that U.S. stocks look cheap at 12x earnings projections and with an S&P 500 dividend yield of 2.1%. With cash and bonds yielding almost nothing, stocks look attractive by comparison.

[Related -Is The S&P 500 Triple Top Actually A Bullish Sign?]

As I mentioned last week, Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, believes the U.S. will avert another recession. And Wharton professor Jeremy Siegel thinks that stocks are 25-30% below his fair market value, while Warren Buffett has been buying up value stocks, including Financials. Corporations still boast strong balance sheets and can generate good profits even with lackluster demand.

The biggest risk is what is happening in Europe, but a sort of "global teamwork" is in the works to prop up the weaklings. After reports on Monday that China was considering investing in Italy, reports surfaced on Tuesday that Brazil, Russia, India, China, and South Africa (BRICS) are looking into bond purchases to help strengthen the situation. Of course, these exporting nations have a huge vested interest in keeping the economies of Europe and the U.S. healthy enough to keep buying products and commodities from them.

[Related -Centurylink, Inc. (NYSE:CTL): How Centurylink Could Boost Topline?]

The purchase of European sovereign debt likely would be limited to the bonds of the more stable nations like Germany and Great Britain, and they also might consider providing aid through the International Monetary Fund. Apparently, September 22 is the date when the big "planning meeting" will take place in Washington D.C. between finance ministers and central bank governors of the BRICS nations.

With the Greek 1-year yielding over 100%, things could hardly be more urgent. Nevertheless, both French President Nicolas Sarkozy and German Chancellor Angela Merkel have said that they are convinced Greece will remain in the euro zone.

Looking at the SPY chart, the channel between support at 112 and resistance at 121 got an upside resolution at the end of August, but then September turned it into a false breakout. After rallying nicely back to the top of the channel intraday last Thursday, weakness set in, but now price is again testing the top of the channel. RSI and MACD continue to search for direction. Bollinger Bands have pretty much done their "mean reversion" after becoming quite wide, and they are also searching for new direction. Resistance is at the 50-day moving average (converging with upper BB) and then at 126.

The VIX (CBOE Market Volatility Index – a.k.a. "fear index") remains comfortably in the mid-30s and closed Wednesday at 34.60 – after reaching above 43 intraday on Monday. This is quite a bit higher than the teens it fluctuated in just months ago and reflects investor uncertainty.

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