Market Moves Higher on Stimulus

Friday, September 14th

One headline that caught my eye today, “iPhone 5 Will Be More Help Than QE3!” from former Fed governor Ken Walsh. The reality is he may be more right than many want to admit. If the mission is to create jobs we need to sell more products and services¬†domestically and internationally. The key for you an I as investors is to define what opportunities we find in the stimulus and focus on how to make money from the resulting moves.

Inflation is heating up as the PPI and CPI both rise above July numbers. The move is providing a push to precious metals. Both gold and silver have made solid moves off the recent lows and the outlook is bullish based on the inflation factor of stimulus and rising inflation.

Retail sales were higher, but the bump was attributed to gasoline prices. The consumer is going to be pinched by higher food and gasoline cost looking forward and that is not a good picture for the retail sector. The trend remains to the upside for now, but we have to be cautious and manage the risk as this unfolds.

The price of crude is rising based on the tension in the Mideast and a weaker dollar. How high do we move from here? No clear answer, but we want to play the move based on the break higher today.

Spain is becoming a hurdle for the market globally. The news/rumor today that Spain was seeking north of $300 billion euros from the ECB and the IMF was news to all. There were plenty of denials from Spain following the news. Most analyst believe that Spain is hesitant to ask for the money on fear of strings being attached. Thus, watch the outcome as this all unfolds. The bigger the speculation the more the markets will react.

Good week for the market, but plenty of news still in the market short term.

Below we review the moves in the sectors and the outlook for next week.

1)  US Equities:

S&P 500 Sectors-to-Watch РThe index held above the 1420 level and ran higher on the Fed decision on stimulus. Investors stepped in despite the economic picture and trusted the Fed would do the right things to take the markets higher. Stimulus is back in the driver seat and the only question is will efforts ever pay off over the longer term outlook.

WATCH: SPY – Entry $142.50 – Stop $144.40 (Raise Stop)

The leadership shift over the last week continues for the broad index:

Basic Materials – The sector has taken on a role of leadership of late, after a few days of flat line continued higher on the day and resumed leadership. Based on the stimulus in China it has produced a move higher in the materials sector. The question is will it last? Does China actually follow through? Watch and look for the opportunities in XLB. Resistance at the $37 mark short term and looking for the breakout to establish or add to the position.

WATCH: XLB – Entry $37 (Added Thursday) – Stop $37 (Raise Stop)

Financials – The sector tested the move higher, but is back on the upside clearing $16 resistance today. The trend higher remains in play with the move it is accelerating. The FOMC meeting was the driver for the sector short term. Banks and brokers have been leading the move higher. IAI moved above resistance $22.85 and looking for a catalyst move to continue the uptrend.

WATCH – XLF – Entry @ 14.55 – Stop 15.50 (on the close) — WATCH: KBE – Entry – 22.80 – Stop – 24.20(Raise Stop)

Energy –¬† From uncertainty to leadership of the S&P 500 index. The selling in XLE tested support at the $70.40 level and held.¬†The move higher has now accelerated pushing XLE back near the February high . UNG has found renewed strength to jump above $19.40 resistance and the 200 day moving average! Gained 12.1% this week? UGA hit a new high, but tested lower of late- tighten your stops on the play. OIL is back near the top of the short term trading range. The mixed results are all swirling around the demand versus hope of higher demand.

WATCH: HES – Entry $51 – Stop $53.95

Telecom – The test of support resulted in a continuation of the uptrend for telcom. Hit a new high and is taking on leadership to the index as seen on the chart above. This remains a key sector for investors to take advantage of short term.

WATCH: IYZ – Entry $24.40 – Stop $24.50

Healthcare РThe sector continues to find buyers and pushes gradually higher. Moved above $39 and remains in push  higher.  IHF moved up nicely off the lows and hit new highs and is testing the move. XPH moved off the lows as well, but moved to new highs as well. IHI medical devices ETF is pushing back to the March highs as well.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $38.80

Biotech – The sector broke from the consolidation and was worth the trade on the upside play. The sector is helping drive the healthcare higher as well. Solid move to the upside and we have raised our stop to protect the gains.

WATCH РXBI РEntry at $89  РStop $90.40

Consumer Services – The consumer services sector has the retail stocks support relative to the trend higher. XLY and XRT are both moving higher short term. Digging in and looking for the leaders has been the best play. JC Penny’s broke above our entry point and continues higher with the sector overall. Take the upside, but protect against the downside short term.

WATCH: XLY РEntry 44.50 РStop 46.50 / JCP РEntry 25.50 РStop 27.81

Semiconductors – The sector has been testing lower and the downside leadership has been from Intel. The sector remains weaker, but is still consolidating and looking for direction. Watch the Intel play as it is attempting to bounce off the low. We adjsuted the stop to protect the gain on the trade.

WATCH: Short Intel (INTC) – 24.55 – Stop – 23.50 (Stop on the close)

NASDAQ Index – The upside momentum has been as a result of the technology stocks, but the downside risk in in the semiconductor stocks. The trend is up for now, but manage your risk. Solid bounce back in the index.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 68.25 Held support and bounced.

Small Cap Russell 2000 Index – The upside move off the July 30th bottom struggled, but the move higher since has been a reflection of the belief in stimulus from the Fed. The new high today at $85.60 was a positive for the sector. The key is to protect the gains we have and see how this plays out short term.

WATCH: IWM -Entry 79.60 – Stop – 83.20

Volatility Index РThe index is back near the lows at 14 and testing the sentiment from investors. The VIX as we stated did move as the rally continued. Still need to watch for unexpected  events moving forward. SVXY continues to move higher on the news.

2)  Currency:

Dollar – The dollar started lower on the FOMC rumors and the ECB stimulus is helping push the dollar lower as well. Throw in the Fed action on stimulus and the dollar is testing the lows from April. The short pay remains the move.

WATCH: UDN – Entry $26.40. – Stop $27.20

3)  Fixed Income:

Treasury Bonds – The bond had reversed course on the stimulus from the Fed short term. Breaking support again at the $124.50 level as entry for the TBF short play.

WATCH: TBF – 29.30 Entry – Stop – $30.10 (Raise Stop)

4)  Commodities:

Crude Oil – Testing near the move higher as the fear factor steps up on the stimulus packages not materializing. The risk trades are coming off and that is impacting the commodities. Manage risk of the play and mange your stops.

WATCH: OIL – Entry 20.75 – Stop 22.95 (stop on the close)

Gasoline – Can’t decide as it trades near the high… up or down? The upside is still in play, but watch oil prices and if they stall at resistance. Watching for a test short term on the steep move higher. Made move back above the $60 mark again… Watch and manage your stops.

WATCH: UGA – Entry at 52.75 – Stop 58.50 (Stop on the close)

5)¬† Global Markets: The global markets responded to the ECB stimulus, Germany’s approval of bonds, and now the Fed QE3. The EAFE index tested support near term and bounced back near the March highs. Risk is on as the index gains relative to the US heading higher.

WATCH: EFA – Entry 52 – Stop – $53.40 (Raise Stop)

Brazil Small Cap – Bought on the move to the channel top at $37.50 with potential move higher. Solid move and follow through on the upside breakout prompted the entry at $37.60. Manage the trade and Raise Stop to $40 on move higher.

WATCH: BRF – Entry 37.60 – Stop – 40

6)  Real Estate (REITS) РThe sector remains near the current highs. I like the outlook long term, and short term we have made a move back to the top end of the trading range. IYR made the move through the top end of the trading range and hit a new high. Still scanning and looking for the best opportunities.  Mortgage REITs (REM) bounced off the selling and headed back to a new high. The uptrend remains in play. Yield on the fund is above 11% currently.

WATCH: IYR – Entry $65.30 – Stop $66.60 (Raise Stop)

7)  Global Fixed Income РThe issues with sovereign debt in Europe keeps us out of the asset class currently. Emerging market bonds (EMB) tested lower and bounced off support to move higher. Passed on the opportunity due to risk/reward. International Corporate Bonds (PICB) and International High Yield Bonds (IHY) remain in a long term uptrend and moved higher on Friday. Hold positions and manage your downside risk.

Ideas and Beliefs On The Horizon:

How much negative influence will Spain have on the current uptrend in the European markets? The answer to that will depend on the time line and details released or how long it will take to cut a deal with the IMF. Watching for a opportunity short as this all unfolds.

China is moving on infrastructure stimulus. Watch FXI if it gets too extended and manage your stops.

Commodities should be the benefactor from the Fed stimulus activity. ETFs to watch relative to this move… 1) DBA, PowerShares Agriculture ETF – broke from consolidation on Friday on above average volume. 2)¬† MOO, Market Vectors Agribusiness ETF – broke higher at $51.10 as stocks in the sector jump on the news. Look for reasonable entry point. 3)¬† OIH – HOLDRs Oil Services ETF – Break above $41.80 is continuation of the uptrend. IXC, iShares Global Energy ETF fits into this category as well to watch. 4)¬† IYT, iShares Transportation ETF – The rails and shipping will be needed to transport the products internationally. Pipelines will benefit here as well. 5)¬† GSG, iShares Commodity Index ETF – broke above $34.85 to continue the uptrend already in play. The story in these ETFs will build if the stimulus plays out according to plan. Watch, build a strategy to capture the upside and always use stops to protect against the idea or belief not validating itself.

Attention will turn towards the election soon and certain sectors will start to react to whoever is leading. For now that is Obama and as we get closer to November investors will factor in specific policy events they believe will influence the markets. One to watch now is the tax hike on dividends. Long term it will be neutralized by the Fed keeping rates at zero, but shorter term it could create some opportunities. This is on my watch list looking forward.

QE3 was good for stocks to move higher on Thrusday, but what about the future? Inflation is one concern reflected in the precious metals prices jumping higher, and what does this action really say about the economy for two. The latter is a bigger concern from my view going forward. The Fed is essentially stating the economy is in enough trouble we need to take more action towards fixing it. This is where we have to be aware that stocks may move higher now in response to the stimulus, but as the economic dat is reported we have to prepared for a correction or pullback in prices.

What am I watching now:¬†¬† 1) MSFT –¬†Broke above¬†$31 and looking for entry point near the $31.25 mark.¬† 2)¬†Chipotle Mexican Grill gapped¬†lower on earnings in July, but has recovered off the low. $340 resistance is in play and a¬†move to fill the gap is what I am watching short term.¬†¬†3)¬† The miners are running again as both the precious and base metals are moving higher. XME broke above $43.50 and ready to jump above $49.¬†4)¬† Utilities are building a base near support at $36.20 on XLU. Watch to see if we bounce back towards the highs. 5) TBT – Short Treasury play is attempting to break higher as yields fall. If the Fed acts on the stimulus it could be an issue. Watch for possible move higher short term. (Got the break higher on Wednesday as trade opportunity)¬† 6) UNG and FCG are moving higher as natural gas continues to climb on inventory data. Watch for move back to $22.50.

Watch and play according to your risk tolerance. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your downside risk determines your long term results. Trade smart.