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Breakfast with Brodsky

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By the end of the week, the S&P was able to retrace 50% of its losses thus capping off one of the most volatile weeks in the month of April. Corporate earnings, strong retail numbers and a gain in jobless claims all contributed to the ongoing debate as to when we may see the first Fed rate hike. REITs and housing stocks continued to feel the heat from an 'imminent' rate hike and although the overall market was able to claw back, the financial names clearly lagged creating an important divergence.

The volatility will certainly continue into this week as we ready ourselves for another onslaught of earnings and a slew of economic numbers. With interest rates on the top of everyone's mind it seems as if any long equity money (which was looking to enter the market) may be a bit more hesitant now as the bond market continues to figure out how to price in a possible rate hike.

Like anything that has major psychological impact on the market (looming int. rate hikes/cuts, geo-political concern, etc.) it takes time to get used to what may happen. This is what is happening now in my opinion. It is no secret that the Fed will have to raise rates at some point, but that doesn't mean we have to like it! The evidence of this was seen when the market sold off on the strongest retail numbers we have had in quite some time. Currently, the theme has been to sell "good" news, or in this case, any news that validates how strong the economy is growing. A strong economy equals a rate hike at this point in the game.

One source of confusion was Thursday's jobless claim numbers. They were a bit above expectations which added fuel to the "waiting longer for the rate hike" argument and while the market was not able to rally off it, the point was still made. We saw oil service and energy names continue to act fantastic on Friday and pharma was able to hold onto its recent strong gains. The consumer staple names continued their ascent as well, as they are almost trading back at their 52-week highs. Taking a look at what has been acting well we can clearly see that people have shifted into a more defensive view and the big question is whether this a new change in sentiment or just a natural reaction to some uncertainty?

Looking at the NDX we can see that it filled its gap made at the beginning of April. This index spent much of April flirting with the 1500 level as people seemed to be pricing in strong earnings within the tech sector. The theme has been "selling" the news and when we start to see tech names being bought on bad and good news a red flag should go up that sentiment is changing and the "worst" may be priced in for the time being.

My primary concern, as always, is how news is being absorbed. Recently, we see news being sold and when this abates we could see demand enter back into the marketplace. Since it is on the forefront of everyone's mind, any tells about the ensuing rate hike should be looked at carefully as that genre of news will certainly impact trading. We are still in the heart of earnings season so headline risk and numbers will be of the utmost importance.

From a trading and technical standpoint I think we need to pay attention to NDX 1450: can it hold? Will defensive sectors (Oils, energy, consumer staple, pharma) continue to see positive money flows? Does a bid present itself in the financials and housing names? All of these factors will certainly have a huge impact and should be observed carefully.

Good luck.

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No positions in stocks mentioned.

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