Friday – Notes & Research
Last Friday we were worried about the downside issues relative to the jobs report and this week we are discussing new highs on the S&P 500 and Dow indexes. What a difference a week makes. The move was a result of buyers wanting into the market more than the market makes economic sense. That said, we focus on taking what the market gives and protecting the downside risk as it grows ever bigger.
The news from JP Morgan and Wells Fargo was positive, but both stocks sold lower following their pre-market earnings release. The ripple effect to KBE pushed the bank ETF down 1.3%. XLF was off 0.75% as the broader financials sector fared better. From my view there were those analyst who didn’t like the sector and regardless of the numbers were willing to sell. Then there are the optimist who longer term believe the upside opportunity in the sector remains positive looking forward and these numbers didn’t really change any of that outlook. Thus, I am still looking for the buying opportunity in the sector more than the downside opportunity.
Same store sales gave a boost the retail stocks on Thursday, but today the March Sales fell 0.4% well below estimates for the month. The news prompted some mild selling, but for the most part the sector was holding up. The Consumer Discretionary sector actually posted a small gain on the day.
Moves to know for next week:
- Oil heads lower on weaker demand views from the IEA and OPEC. While this is a new announcement from them, it is old news to investors… or at least I thought it was old. If you read the weekly supply reports the inventory and production data has been stating this for awhile. Regardless oil react moving near $91 per barrel on the day. Hit our stops on the position added earlier in the week and now looking at the downside as the pressure is mounting to sell crude lower.
- The leadership from telecom (IYZ) went vertical this week and is still in good shape to push higher. How does this play out moving forward? Good question as the sector has not done well of late hanging onto and advancing gains. We play it one day at time and manage our stop accordingly.
- Utilities continue to advance and they do look extended short term. With the defensive sectors taking on a primary leadership role the sector remains positive. Manage your stops and let it progress. There are other utility ETFs to consider as well. PHO – Water Resources ETF is consolidating after a positive move higher and is on my watch list as a candidate to add to our models with a longer term time frame. CWG is the global water index ETF which broke higher this week and of interest as well. IPU is the international utilities ETF (low volume) which broke to a new high this week.
- The S&P 500 index is dependent upon the leadership to keep the trend moving higher. As we see below energy and basic materials are the only real question marks on the week and that leaves the other eight sectors moving higher.
- The NASDAQ index remains above 3270, but the technology sector put some pressure on the index towards the end of the week. If we hold above this level all is good, a break lower is another test of support at the 3200 level. Not much relative to bigger picture, but enough to catch investors attention.
- VIX index remains asleep. Some intraday movement on Thursday and Friday, but nothing worthy of worry. The upside momentum remains in control for now. The worries are more in the media than the market currently.
The activity today was higher with some intraday ups and downs closing near the high of the day. Still below average volume, but the bounce is in play and that is what we are trading for now. Watch the earnings news and any potential swings to the downside. Friday is setting up as a big day with the banks setting the earnings pace and retail sales reports for March. Same store sales in the morning as well.
The Retail Sales were down 0.4% and well off expectations. PPI showed less inflation due to gasoline prices, Consumer sentiment 72.3 and well below expectations. All combined sent the indexes lower early, but has been the pattern of late, they pushed higher throughout the day.
1) US Equities:
Take it away Johnny! The upside resume this week and that is that. We can all debate the issues facing the market relative to earnings, revenue, jobs, the economy overall, global issues, etc. etc. etc. If the trend is higher you go with the trend. If I had a dime for every time I said, that doesn’t make sense or, that isn’t right, I would be wealthy from that alone. The key is to be on the right side of the trade. With that in mind we toast the uptrend and wish it a speedy journey higher.
Volatility index – What volatility. Each time we get a bump in volatility the buyers step in to take advantage of what they believe is a buying opportunity. But, as with all good things they eventually come to an end. Until then we go with the upside and a trade in SVXY.
Sector Rotation Strategy:
The February 25th low pivot point remains in play. We added the March 14th (Cypress and budget) high as the next potential pivot point on the downside, but the market has continued sideways more than down. The move last week pulled the index back below the close on the 14th keeping the upside in play and both the S&P 500 and Dow indexes hit new highs again. Healthcare (XLV) remains the leader off this low. Consumer Discretionary (XLY), Utilties (XLU) and Consumer Staples (XLP) were on a positive trek to the upside as well. The Telecom (IYZ) sector has accelerated to upside. Technology (XLK) add to the upside momentum, but put it in check mode following the computer sales data. Basic Material (XLB) and Energy (XLE) are struggling to maintain an uptrend as the commodities take a toll on the sectors. Stay focused and protect the downside risk.
December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher after the February 25th test. See above.
November 15th Pivot Point is the start of the current uptrend. Target 1550-1575 was attained and now there is pressure to test the move. The trend has overcome two attempted moves lower to maintain the uptrend. The move on Wednesday now makes it three attempts to break lower. Telecom and Technology are both making moves within the trend and showing some rotation in the short term leadership. Watch the trendline as the support on the current pullback.
Sector Rotation of Interest:
Financials – (4/12 post) – Banks are rolling over on the Wells Fargo and JP Morgan earnings announcements. OR are they really going to sell off? The chart of KBE shows the current pullback and test of the support at $26.50 and the 50 DMA. Wait, isn’t this the level we broke last time? Yes, but this time we take the exit if it breaks lower. Watch XLF, KBE, KRE, KIE, and IAI as we progress into next week. I like the longer term outlook for the sector, but we will treat it as a trading sector for now.
Transports – (4/12 post) – IYT sold off tested support and bounced. Looking for the leadership as an indicator on the economic outlook. You have to transport goods to sell them… thus leading indicator. Not looking to own near term.
Energy – (4/12 post) – Crude oil falls on demand expectations from the IEA and OPEC. Thus, the sector drops 1.7% Friday as a result of the news. I am still of the opinion that the improved outlook for production in the US will benefit the sector as well as the pipeline business for transporting the commodities. We will look at the best course of action to take relative to hedging and protecting the positions as we find the best opportunities.
Healthcare – (4/12 post) – Hit a new high on XLV and held to end the week. We raised the stop in the models, but want to still give it some room for volatility. The outlook remains positive and the news relative to reimbursement helps the bottom line fundamentals as the technical data deals with the volatility. IHF, XPH, XBI and IHI all remain in a positive uptrend for the sector near term. Holding near the highs currently.
Small Cap – (4/12 post) – IJR tested lower and rallied back near the previous highs. However, the weakness in the sector remains a concern. Watching more for a leading indicator than investing.
Midcap – (4/12 post) – IJH is in better shape than the small cap sector. Watching to hold near the current highs and then move higher short term. This is another position we will look at holding longer term and deal with the volatility as it arises.
Telecom – (4/12 post) – What is up with Telecom? The sector has been awful over the last four months. Every attempt to break higher has been met with selling. The last two weeks it is acting as if it really wants to move higher? We added it to the S&P 500 Model and has accelerate this week. Watch maintain your stops and let it run.
Technology – The sector was in a trading range for the last five weeks and managed to reverse and move higher. The move above the $30 level was the entry for the position in the model and we are looking for that level to hold in the current move higher near term. Semiconductors and Computers were a drag on the sector, but if that can reverse short term the upside remains a positive opportunity. Manage your stops accordingly.
- UUP – The Dollar remains in a consolidating phase relative to the move higher. UUP closed at $22.34. Breaking support at the $22.35 mark on the downside. Manage your stops. More selling in the buck could develop near term.
- FXB – the British Pound jumped two weeks ago, held the move at the $149 level. The currency is now in an uptrend off the low and moving through the current resistance at $151.50. For now we just have to be patient and let the pound work through the directional challenge it was facing. Took the entry on the move and the target is $152.50. $149 stop in place on the trade.
- FXC – the Canadian Dollar is establishing an uptrend off the March low. The entry was $97.50 and the target is $99.50 short term. Be patient and let the upside play out short term.
- FXY – Bank of Japan offers big easing to fight deflation and get their economy running. The two fold impact on stocks and the yen were immediate following the announcement over a week ago. YCS is the short yen play and we will watch to see if that continues higher following a small bounce on Friday. Current stop is at the $63 mark.
- FXE – The euro made gains on the week against the dollar and is in position to break higher. $130 mark is the entry on the upside. This trade can be paired with a short dollar trade as well.
3) Fixed Income:
- The volatility we are all looking for in stocks has found its way to bonds. The yield moved higher after the selling last week and the bonds gave up some of the gains. This is why we said to hedge your gain or sell the position short term. We recommended taking the profit on Tuesday and we will continue to watch the opportunity near term. The bounce in the bond on Friday was the result of some anxiety in the markets, but not likely to stay.
- 30 Year Yield = 2.91% – down 8 basis points — TLT = $121.93 up $1.79
- 10 Year Yield = 1.72% – down 7 basis points — IEF = $108.45 up 60 cents
Tracking Bond Sectors of Interest:
Treasury Bonds – Yields on the 30 year Treasury is back to 2.91% following a mid-week bounce back above 3%. Economic data, some need for safety, you state the reason, but the great rotation from bonds has not occurred At each sign of trouble money tends to flow back into the sector versus out. Expect more volatility in the price of the bonds a the worries and the optimist duke it out.
High Yield Bonds – HYG = 6.5% yield. Support remains at $92.75. Moving towards the previous highs at $95 short term. Manage the position for the dividend as the growth side is uncertain short term. I expect the trading range to remain near term. Use $92.75 as the stop.
Corporate Bonds – LQD = 3.6% yield. The jump higher was in response to the rotation of assets towards safety or defensive to the stock market. This is not likely a new trend for the bond, but it starting to act like one. Use stop at the $120.50 level to protect the upside gains.
Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds found a bottom built a small base and produced a upside trade opportunity. Watch the current resistance at the $110 level. Moving back towards the resistance at the $111.50 mark. This is a tax-free dividend play with limited upside from growth.
Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the rally in stocks. Testing the highs again near the $42.50 level. Watch stops and protect your gains. Breaking to new high on Thursday? Watch the upside.
4) Commodities – Sector Summary:
- The commodity index continued lower with the move lower in both gold and oil. It has not looked back and with the acceleration of the decline on Friday as gold drops to $1500. DBC broke support at $26.80 and continued to track lower. Without any good news… the downside remained in play.
- Natural Gas – UNG made the big move higher, but then moved sideways the last three weeks and now a follow through on the upside to end the week. After testing the move higher it is resuming the trek higher currently. Part of the consolidating came from the seasonal transition. For now the commodity continues to drift higher and we will stay with the trade for now with our stops in place. The stocks have not responded in kind down 2% on Friday for FCG.
- Crude Oil – Crude tested lower Thursday and broke below the $91 level on Friday. What does this mean looking forward? Broke support and the downside risk is rising, watch for the short play as we head into next week.
- Gold – The metal has continued to struggle and despite the bounce we have maintained our short position. Friday showed why we have stayed short the pressure is on the downside… right or wrong the trend is holding firm. We will continue to monitor the progress, but short remains the play.
Commodities Rotation Chart:
Natural gas still leading despite the test of the upside. Looking at the chart below you will note that the other nine ETFs of commodities have all turned lower the last week.
5) Global Markets:
Global markets tested lower on the news in Europe and continue to trade sideways. The last few trading days we have seen some renewed moves to the upside showing up in the overall index, but also some interesting country charts as well. I have added those below with new comments. The graph below has a starting point of the last low… still looking for a bounce higher short term. Mexico (EWW) has taken the leadership role currently. Japan (EWJ) had moved higher as well showing solid leadership currently. EWZ, IEV and FXI have made a push, but no clarity yet.
- FXI – Wanted to move higher on the week, faded into the weekend. Downtrend is still in play off the February highs and that is to be respected if the bounce off the low fails to produce a reversal.
- EFA – Breakout to new highs and watching to see how it plays out this go around. The volatility in the global markets isn’t going away. Looking for the trading opportunities for now.
- EWW – Mexico confirmed the move higher, tested the move above the $72.25 mark and has proceeded to a new high. However, there was some selling on Friday to watch and see how it plays out short term.
- IEV – europe is attempting to break from the consolidation pattern. Be patient to see if there is any follow through on the upside move.
6) Real Estate (REITS):
Real Estate Index (REITS) – IYR broke through the trading range near the high of $68.50-69.50 and continues to climb to new highs. The Sector is getting positive press on the creation of REITs to absorb the excess housing defaults from banks and Fannie Mae. The risk still has to be managed despite what anyone thinks day to day.
- REM – Mortgage REIT has been testing lower as pressure on the sector has risen of late. Stop $15.30.
- NLY- Annaly Capital Management – continues the upside trek with some daily volatility. Watch the test lower with stop at $15.50
- RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Watch for test of the move if markets struggle.
7) Global Fixed Income:
- The sovereign debt issues are fading again and opening the upside potential as the issues find relief. This offers some short term trading opportunities, but you still have to be aggressive in managing your exposure.
- There are some funds moving in favorable direction of late.
- PAFCX – Bounced off low with the movement in yields going lower. Holds $11.60 worth owning short term.
- PICB – hit support traded sideways and now breaking higher.
- EMB & PCY – Big recovery the last four trading days and interesting in watching.
Watch and play according to your risk tolerance on any position taken. 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 risk will limit the downside losses.