Markets Treading Water

Wednesday, September 19th

Existing home sales surge in August! At least that is what the headlines say. The gains were 4.82 million homes sold in August versus 4.47 million in July. That was 4.6 million more than estimates. The market bounced early on the news, but that was the extend of the move for the day. The good news… homes have put in bottom for now. How far we go from here only time will tell.

Some interesting data¬†from¬†the existing home sales was that only 22% of the transactions (12% foreclosures and 10% short sales) were distressed sales. By the way, that is the lowest since October 2008. All cash deals accounted for 27%. First time home buyers were 31% of transactions, compared with 40-45% being normal. Investors accounted for 18% of transactions. Bottom line… improving, but plenty of room for improvement.

Oil dumped more than 3.5% to $91.90 on the larger than expected supply data announced¬†today. The combination of today’s data, the White House weighing strategic oil reserve release, and Saudi Arabia offering more supply stating prices were too high, the price has dropped more than 8% this week. We have exited all oil positions on the move.

The major indexes remain in a holding pattern. Today’s leaders were consumer discretionary, telecom, basic materials and consumer staples. Utilities bounced back to support and technology was flat on the day. Energy was the biggest loser on the day. We continue to watch, manage our risk and keep going forward one day at a time.¬†Oil was the only¬†major change on the day.

Below we review the moves in the sectors and the outlook.

1)  US Equities:

S&P 500 Sectors-to-Watch – The index continues to hold above the 1420 level as the index looks for more direction. Investors stepped in despite the economic picture and trusted the Fed would do the right things to take the markets higher. Stimulus was the driver and now investors are looking for the next catalyst and they are hoping it will be to the upside.

Telecom pointing higher, energy lower, financial sideways and basic materials up again. Watch consumer discretionary bounce for opportunity.

WATCH: SPY – Entry $142.50 – Stop $144.40

The leadership is rotating from energy on decline in oil… Watch the rotation for opportunities:

Basic Materials – The sector has been testing the vertical run higher. Watch the downside risk as China has a argument with Japan. Remember the move started based on the stimulus in China was a positive for the materials sector. Watch and look for the opportunities in XLB. Manage your stops for now. Bounced on Wednesday, but still a concerns near term.

WATCH: XLB – Entry $37 – Stop $37 (Watch Stop)

Financials – The sector is testing the move higher looking for support at the $16 mark. The trend higher remains in play with the move accelerating. The FOMC meeting was the driver for the sector short term and with that out of the way we are in need of a catalyst. Banks and brokers have been leading the move higher, but they are testing as well. We hit the stop on KBE on Monday. Still looking at the upside for the sector longer term.

WATCH – XLF – Entry @ 14.55 – Stop 15.50 (on the close)

Energy –¬† Testing the move higher as oil takes a move to the downside. $73 is support on the downside if crude continues lower watch and take the exits. Watch for a opportunity in the pullback test.

WATCH: HES – Entry $51 – Stop $54.25

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

WATCH: IYZ – Entry $24.40 – Stop $25

Healthcare РThe sector continues to find buyers and pushes gradually higher. Moved above $39 and remains near recent highs.  IHF moved up nicely off the lows and hit new highs and is testing the move. XPH moved off the lows as well, and moved to new highs. IHI medical devices ETF hit new highs last week. Only question mark for the sector is earnings looking forward.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $39.30 (Raise Stop)

Biotech – The sector broke from the consolidation and was worth a 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. Break above $94 would be a positive for the sector.

WATCH РXBI РEntry at $89  РStop $93.40 (Raise Stop)

Consumer Services – The consumer services sector has the retail stocks support relative to the trend higher. XLY and XRT have both moving higher short term with some testing of late. 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 – Entry 44.50 – Stop 46.50 / JCP – Entry 25.50 – Stop 28

Technology – The sector overall has performed well and continues to push higher. Watching the weakness in Semiconductors (see below). The networking (IGN), software (IGV) and internet (FDN) have all moved higher to support the rise in the overall sector. Watching FFIV, F5 Networks to break above resistance at $105.

WATCH: FFIV РEntry $105 РOpened higher and added at $107.48 Tuesday РStop $106.10 (Raise Stop)

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 adjusted 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 68.40

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 key is to protect the gains we have and see how this plays out short term.

WATCH: IWM -Entry 79.60 – Stop – 84.60

Volatility Index РThe index is back near the lows at 14 and testing the sentiment from investors. The VIX as we stated did move lower 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. Looking for a small bounce off support and then a resumption of selling.

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

3)  Fixed Income:

Treasury Bonds – The bonds are heading the other direction again on fear factor about the economy. Hit stop and starting over again on the opportunity. TLT moved back above $121.50 could run up 2-3%.

WATCH: TBF – 29.30 Entry – Stop – $30.10 (HIT STOP TUESDAY)

4)  Commodities:

Crude Oil РThe inventory data today was a wreck! Oil fell to $91.90 on the day.

WATCH: OIL – Entry 20.75 – Stop 22.95 (HIT STOP TUESDAY)

Gasoline – Can’t decide as it trades near the high… up or down? The upside is still in play, but watch oil prices on the rumors relative to the reserves being released. This is the test we were looking for, but more than expected. Watch and manage your stops.

WATCH: UGA – Entry at 52.75 – Stop 58.50 (HIT STOP TUESDAY)

5)¬† Global Markets: The global markets responded to the ECB stimulus, Germany’s approval of bonds, and 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 move higher.

WATCH: BRF – Entry 37.60 – Stop – 40.40 (Raise Stop)

6)  Real Estate (REITS) РThe sector moved to new highs, but has sold on the recent data and stimulus. I like the outlook long term, and short term is experiencing volatility. Hit our stops and took the exit today. Watch for the support at $66.20 to step in.  Mortgage REITs (REM) bounced off the selling and headed back towards the highs. Benefactor of the Fed stimulus. Watching the short term selling with interest. The uptrend remains in play.

WATCH: IYR – Entry $65.30 – Stop $66.60 (HIT STOP)

7)  Global Fixed Income РThe issues with sovereign debt in Europe keeps us out of the asset class currently, but we are seeing some changes in confidence with the ECB stepping into the picture near term. Global bonds have been in rally mode since the June lows. PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity in the sector. Emerging market bonds (EMB) tested lower and bounced off support to move higher. International Corporate Bonds (PICB) and International High Yield Bonds (IHY) remain in a long term uptrend and moved higher on Friday. Manage your downside risk. Not willing to jump into the asset class at these levels.

Ideas and Beliefs On The Horizon:

How much negative influence will Spain have on the current uptrend in the European markets? The answer will depend on the time line and details released or how long it will take to cut a deal with the IMF. Nothing has developed thus far and EWP continues to trade above the 10 day moving average. Still watching and waiting on this

China was moving on infrastructure stimulus, but the spat with Japan has derailed the progress. Watch FXI as the up and down impact of news creates some short term volatility. 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 – fell to the bottom of the trading range as corn dropped price. Still watching as this unfolds. An entry point of $30 would be a play to the top end of¬†the range short term.¬† 2)¬† MOO, Market Vectors Agribusiness ETF – broke higher at $51.10 as stocks in the sector broke higher. Look for reasonable entry point. testing the $52.40 level or the downtrend line broken on Friday? Watch to see if it holds and give an opportunity for a upside trade.¬†Look for entry at the $52.60 level.¬†3)¬† OIH – HOLDRs Oil Services ETF – Broke above $41.80 to continue the uptrend. Inventory data and other issues derailed the¬† breakout into a break down in crude. OIL is at support 22.30, look for the bounce higher from here.¬† 4)¬† IYT, iShares Transportation ETF – The rails and shipping will be needed to transport the products internationally. Pipelines will benefit here as well. Thus far we have tested support again and remain in the trading range.¬†¬†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. Thus, far we have not seen very much in the way of confirmation and we remain cautious for now and continue to monitor the outcome.

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 last week, 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 data is reported we have to prepared for a correction or pullback in prices.

What am I watching now:   1)  BAC РBank of America to move towards the target of $10 short term. 2) Oil to bounce off support at $90. If breaks short play gets interesting.  3)  Utilities are building a base near support at $36.20 on XLU. Watch to see if we bounce back towards the highs. Not looking good short term. Each time stimulus is offered by the Fed this sector pulls back, tests support and then move higher. Be patient and let this play develop.

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.