Another Positive Day with Low Volume

Tuesday – Notes & Research

Volume was on the low side, but stocks were on the upside. Is this activity attempting to lull us into a bull trap? Some seem to think so when you scan the headlines. The challenge remaining alert to the issues surrounding the markets and understanding that the data isn’t exactly robust. But, as long at the Fed remain¬†accommodating¬†relative to money, it has to flow somewhere. Bottom line… stay alert, adjust your stops and manage the risk short term.

Yesterday we discussed the development of a buy the dip pattern, and the answer is validating to be yes. There are too many people looking for the opportunity for a dip to actually materialize. It is akin to the saying a watched pot never boils. The buying shows a continued interest in stocks and on Tuesday we hit a new high intraday. Buyers continue to find things they like and that is all that matters… the trend remains to the upside.

There are plenty of reasons not to like this market, but the reality remains the upside is intact. The little boy who cried wolf with the Fiscal Cliff, the debt ceiling debate (sequestration – new word), the Italian elections, bankrupt Cypress money grab, and the infamous rotation of money from bonds to stocks (still hasn’t happened). These were all valid reasons to worry, yet each has passed with the market pushing to new highs.

Tracking the sector moves to know today:

  1. The defensive stocks continue to lead with XLP, XLU and XLV all trading back near the their recent highs. This trend is not likely to stop anytime soon.
  2. Gasoline prices are dropping along with crude oil and for investors that is not pleasing, but for drivers it is a welcome break at the pump. After spiking higher in January, the move has reversed in March falling nearly 30 cents per gallon at the pump. This helps the consumer who is already stretched monthly on expenses. That said, watch UGA at $56.80 support. It could produce a trade-able bounce higher as it finds support. Worked higher today and at the previous uptrend line. Break above would be interesting.
  3. Crude oil hit support at $21.57 on OIL on Friday. Like gasoline the commodity is set up for a short term bounce higher. Be patient and look for a move above the $22 mark short term. Moved above the entry at $22 today.
  4. Updating our Weekend Sectors to Watch:
  5. Basic Materials РXLB broke support at $38.15 and has established a micro downtrend. The acceleration lower in the sector is purely due to the struggles in the mining stocks. They are all attempting to put in a low, but for now the pressure remains. I am not ready to short the sector, but it is on my watchlist for possible move lower. Held above the next support at $37.65. Tuesday moved back to the 50 DMA, could set up a short term trade.
  6. Industrials – The rolling top has established a micro downtrend and the break of the 50 DMA on Friday addeds to the negative sentiment. Support for XLI is $40.85 currently and this is another sector I am not willing to short at this point. Watch see how it plays out, but the risk of the downside trade currently is too high. Held support at $40.85 and moved back above the 50 DMA for now.
  7. Financials – XLF broke support at $18.05 and flirted with breaking the 50 DMA. The weakness in the banks has been documented and discussed below. We have posted a short play opportunity on the ONLY ETF Model and gapped above the entry price. (voided any entry on the short play with the bounce Monday & Tuesday) This is one to watch as we move forward. The downside risk is in play and we will monitor the entry point on the short play. Held support at $17.93 and moved back to the 10 day moving average. Tuesday followed through on the upside bounce with long entry play on S&P 500 Model.
  8. Technology – The sector has remained in a trading range for the last five weeks and Friday it broke lower. This is a negative for the sector along with moving below the 200 DMA. $29.20 is now support on XLK and the short opportunity is too much risk for too little reward if the support level holds. Looking for rally back to the $30 level would be of interest on the downside play if it materializes. Monday we held the 200 DMA without much in terms of change or movement. Tuesday bounced above the 430 level and entry on the S&P 500 Model.
  9. Energy – Crude is falling back towards the $90 support level and the stocks are selling in response. The four week move from $89.50 to $97.50 on crude has been essentially erased in three days. Opportunity or more downside? Look for a bottom is crude to build and then determine if the upside is still in the cards. XLE tested the $76 level of support and held, but it left plenty of question marks along the way. Too much risk to get short at this level, but watch to see how it will play our going forward. Monday provided a nice bounce off the low, but getting above $77.80 is the trick. Tuesday produced the magic to get above the $78 level and entry on the S&P 500 Model.

The activity today was one of higher at the open and selling into the close. The gains in materials, industrials, technology, financials and energy helped the upside bounce. Still no volume to speak of, 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.

Economic Data:

Meaningless data today as everyone awaits the FOMC minutes tomorrow. Hopefully not big surprises relative to when the Fed will stop the QE bleeding.  March Sales Report on Friday morning and plenty of earnings the balance of the week.

Economic Events & Calendar 

1) US Equities:

The back and forth of the indexes continue as investors worry about the data, but they are still willing to buy on the dip for now. Taking it one day at a time with our stops in place.

Downside Pressure РAll but gone on Tuesday as the upside rebound gains some momentum relative to price.

Volatility index Р(4/5 post) РWith a jump back above the 15 level last week, the anxiety picked up from the jobs report. However, in the end the issue was set aside and the index fell back to the 14 level at the close as if nothing happened on Friday. This week it has continued the retreat back towards the previous lows. No sign of anxiety now.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play. We added the March 14th 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. However, it has struggled to hold on to that move short term. Healthcare (XLV) remains the leaders off this low. Consumer Discretionary (XLY),  Utilties (XLU) and Consumer Staples (XLP) were on a positive trek to the upside, but we have to watch for the shift currently. Utilities (XLU) is exerting upside momentum short term to take the lead. Stay focused and protect the downside risk.

10 Sectors

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.

10 Sectors

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 uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend. Watch the trendline as the support on the current pullback.

10 Sectors

Sector Rotation of Interest:

Financials¬†– (4/3 post) –¬†Banks are rolling over. The chart of KBE shows the current pullback breaking support at $26.50 and moving below the 50 DMA. This has impacted the financials overall as XLF moves¬†lower. The weakness however, is owned by the banks. The regional banks (KRE) have joined in on the downside now which adds to the downside pressure. Thursday XLF bounced back to $18 and we have to watch to see if it can recover the previous uptrend. Need to push back above $18 .05 resistance now.

post 4/8 – made move through resistance on both XLF and KBE – added the positions to the model today.

Transports¬†– (4/3 post) – Broke support on Tuesday and moved lower Wednesday. IYT has enjoyed a solid run higher, but it broke the up trendline. Now the downside is in play for a confirmation. Airlines are leading the move lower for the broad sector. $106.15 is support short term. The downside play isn’t attractive, but a bounce off support would be.

post 4/8 – made move through the resistance level on IYT and hit the entry point at $107.55.

Energy Р(4/3 post) РXLE is breaking lower, crossing below the $78.20 level was a negative short term. Broke the 50 DMA as well and $76.25 is the level to watch for some support. IEZ moved to support at $55.45 and XOP got ugly down more than 2%. The refiners are under pressure as the commencements relating to the new EPA standards on sulfur would cut margins. For now the downside is in play. If crude continues lower that would add to the downside pressure on the sector. DUG is worth watching as it breaks higher if the downside stays in play. ADDED short play DUG 4/4 (ONLY ETF Model)

post 4/8 – rallied with crude moving higher and the broad market indexes. Watch and manage the stop on the play.

post 4/9 – hit stop on the DUG play. Added XLE to the S&P 500 Model on the move higher Tuesday.

Healthcare –¬†(4/2 post) –¬†Hit a new high on XLV and held on Wednesday for the most part. We raised the stop in the models, but want to still give it some room for volatility. The outlook remains positive and the news on Tuesday relative to reimbursement helps the bottom line fundamentals as the technical data deals with the volatility. IHF, XPH and IHI all remain in a positive uptrend for the sector near term. Holding near the highs currently.

post 4/8 – sold lower at the open and struggled most of the day until a last minute rally back to positive territory for the broad index. Still have to be cautious and manage the downside risk.

Small Cap –¬†(4/2 post) –¬†IJR made a move back to the previous high, but on Tuesday the index tested the 30 DMA on the downside. With the upside in the broad market and the small cap index not participating,¬†this is a warning sign from my view short term. Without small cap participation on the upside it will be limited. As stated above on Tuesday the warning signs was right with the index losing another 0.8% on the day. This is setting up the downside play in small caps short term or at least adding a hedge against positions if you are looking longer term. Since we have no allocation currently to the sector we would look at the downside play.

4/4 post Рadding TZA as short opportunity to the ONLY ETF Watch List. 3X leverage means we will only take a 3.5% position to account for the higher volatitility of the fund. Example: $10 share with stop of 30 cents = 3% risk on 100 shares is $30. $10 Share with stop of 90 cents = 9% risk, but only 35 shares is $31 risk.  Same risk/reward by reducing the allocation relative to the leverage.

4/5 post – Gapped open and we passed to start the trading day. Still interested, but pushing lower following the open. Watch for the entry level to be hit on the upside again for a clear entry point.

4/8 post – follow through rally on the upside from the Friday intraday bounce relative to the opening sell off. Upside bounce looks to be in play short term.

Midcap Р(4/2 post) РIJH moved to a new high on a solid break higher last week. The move on Tuesday was not as poor as the small caps, but Wednesday it joined the party down 1.1%. Watch the downside risk short term, but I am more interested in a bounce play versus the short side. (4/5 post) РTested the $110.30 support level on Friday and bounce back near the 50 DMA. Still looking for a bounce play short term.

4/8 Post – followed through on the upside and hit the entry as posted on the watch list of the sector rotation model.

Telecom¬†– (4/4 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? IYZ moved back above the $24.40 breakout level we have been watching from the current trading range. We added it to the S&P 500 Model and it has been moving sideways essentially, but now we are looking for a boost to the upside.

post 4/8 – Solid gain of 1.3% on Monday. This is a follow through to the boost on Friday above the trading range highs. S&P 500 model owns the position short term.

Ideas & Opportunities: 

You have to be ready for some downside if the sellers again attempt to take control of the trend.

  1. Use stops to protect the current positions!
  2. Look for downside opportunities in SDS (S&P 500 attempted new high on Tuesday and failed)
  3. Russell 2000 (short IWM) or S&P 400 (short IJH) are also possibilities if downside emerges.
  4. Transportation index (IYT) is vulnerable on the downside as well short term.

These are just some trading opportunities that are evolving as insurance against the portfolio. Not predicting a major downside turn, just some trades that look interesting as they develop.

2) Currency:

Sector Watch:

  • UUP¬†– The Dollar remains in a consolidating phase relative to the move higher. ¬†UUP closed at $22.41. Still watching support at the $22.35 mark on the downside. Manage your stops.
  • FXB¬†– the British Pound jumped two weeks ago, held¬†the¬†move, but is testing in another trading range. Held the $149 level and moved back near the current resistance only to test again. For now we just have to be patient and let the pound work through the directional challenge it is facing. Took the entry on the move and the target is $152.50. $149 stop in place on the trade.
  • 4/5 post – closed up nicely on Friday and we will now manage our stop as we approach the target short term.
  • FXC¬†– the Canadian Dollar held support at $95.35. Bounced nicely to breakout, retraced to the consolidation zone and heading higher again. $98.50 is the level to watch as target.
  • 4/5 post – Big test on lower but rallied back. manage your exit point near the $97 level as stop.¬†Inside day on¬†Monday… watch the upside short term
  • 4/9 post – need to push through the 50 DMA
  • FXY¬†– (4/4 post) –¬†Bank of Japan offers big easing to fight deflation and get their economy running. This was expected to some degree, but the reaction by investors in Japan was positive. The two fold impact on stocks and the yen were immediate following the announcement. EWJ open higher by more than 3%, and FXY fell nearly $3 to $102.60 at the open. Since both gapped to these levels we will have to see how the opportunity unfolds going forward. YCS is the short yen play and we will watch to see if that continues higher.
  • 4/5 post – hit entry at the $61.85 mark and moved higher on Friday. Manage the risk of the trade now.
  • 4/8 post – hit a new high again as the craziness from Japan continues to have a negative impact on the currency.
  • FXE¬†– ¬†(4/4 post) –¬†The ECB pledged to be¬†accommodating¬†for as long as needed relative to interest rates and support to the euro countries. Those comments pushed the euro lower to $1.278 against the dollar. That pushed the dollar to a new high intraday. However, by the end of the day the euro was at $1.294 and the dollar was lower on the day. IEV dropped in response, showing no upside response in stocks, but managed to close flat on the day. Still no positive buy signals from Europe.
  • 4/5 post – gaps higher and holds the move despite the issues still facing Europe. Not convinced move is higher short term.
  • 4/9 post – nice follow through on the upside move through $129.50.

3) Fixed Income:

Sector Summary:

  • The drop in yield is pushing the price of the bond higher. ¬†The question is if the market corrects how much will it impact? The rally in bonds is getting overbought at this point and if is prudent to protect the solid gains short term. Willing to take profit at today’s levels.¬†
  • 30 Year Yield = 2.93% – ¬†up 3 basis points — ¬†TLT = $121.58 down 30 cents
  • 10 Year Yield = 1.74% – up 1 basis points — IEF = $108.18 up 4 cents

Tracking Bond Sectors of Interest:

Treasury Bonds¬†–¬†Yields on the 30 year Treasury fell to 2.86% the lowest level of the year. If stocks are going higher the bond market is trading differently. Money flow has picked up in the sector and you have to¬†wonder¬†if this money from Europe? Institutions? Where? TLT moved to $122.82 the highest level since January. This exceeds are short term target on the bonds and we have to manage the risk going forward.

post 4/8 – Take the exit from TLT tomorrow if the yields continue to climb. 4/9 took the exit on the bond.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. Hit the previous highs near $95 and now testing the move. Manage the position for the dividend as the growth side is under pressure from an uncertain equity market short term. I expect the trading range to remain near term. Use $92.75 as the stop.

Corporate Bonds¬†– LQD = 3.8% yield. The price has found short term support ($118.90)… again. 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 we will take what the market gives. Use stop at the $120.50 level to protect the upside gains.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds broke support and the chart is attempting to bottom or build a base. The bounce is is from money rotating towards safety? We will see how it moves from here. Moving back towards the resistance at the $111.50 mark. Nice bounce on Tuesday to $94.42.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the rally in stocks. Starting to see some selling off the highs and testing the 50 day moving average as support. Watch stops and protect your gains. Bounce to $42.20 worth keeping an eye on short term.

4) Commodities –¬†Sector Summary:

  • The¬†commodity index¬†continued lower with the move on March 28th. It has not looked back and with the acceleration of the decline in oil prices it has only accelerated the downside. DBC broke support at $26.80 and continued to track lower. ¬†Without any good news… the downside remained in play. Corn supplies added to the downside last week and for now I don’t see any reason to invested in the sector.
  • 4/8 post – Watch for a bottom or support to build at this level currently.
  • 4/9 post – bounced off the low and it is important to watch for some improvement before any interest.
  • Natural Gas¬†– (4/3 post) – UNG made the big move higher, but has moved sideways since. $21.20 is support for now, let it play out relative to short term direction. The end of winter is spring, and the consumption or inventory data will shift towards building versus consuming as usage lessens. That could keep the upside in check until summer consumption begins. Set your stops and manage the downside. (ONLYETF Model)
  • (4/5 post) – up 4.5% on Friday and back near at the recent highs. inventory data showing consumption still running higher. Manage your stops relative to the position risk.
  • 4/8 post – holding the upside, but gave up some gains on the day. Profit taking or just selling? Watch the downside stops and keep going forward.
  • Crude Oil¬†– (4/3 post) – Rallied back to close at the $97 level. As we stated in our notes the downside was building momentum on the selling tests. How low does it go down? It closed at support at $91.75 and could hold there for now. Watching to see if it continues lower or settles into a narrow trading range.
  • 4/8 post – the bounce off lows in play with a move above the $22 mark a potential upside trade. ONLY ETF model.
  • 4/9 post – cleared $22 for the entry on Tuesday.
  • Gold –¬†(4/3 post) – The metal¬†dumped $50 in two trading days last week showing the weakness towards the metal currently.¬†This is what I have been warning about relative to gold and the downside pressure remaining in play short term. Watch to see how it plays from here and manage the stops on GLL. (ONLYETF Model)
  • (4/5 post) – the bounce of 1.6% helps the metal maintain the base and reverse the break lower. Not a buyer here, but still we have to manage the downside play. Set your stop and let this unfold.
  • 4/8 post – downside back in play on Monday, but still have to watch the risk relative to the short side play.
  • 4/9 post – bounced back o $1586, but still under pressure short term. Watch for a move above $1615 if the upside is to gain any momentum.

Commodities Rotation Chart:      

Natural gas still leading despite the test of the upside. Watch for possible move higher in gasoline.

10 Commodities

5) Global Markets:  

Global markets tested lower on the news in Europe and continue to trade slightly lower since the high on August 15th. We have moved the graph below to that as the start date to gain some insight into what is leading or rotating currently. As you can see Mexico (EWW) has taken the leadership role currently.  Japan (EWJ) had moved lower, but that bounced back. The balance is status quo for now and not much to like or dislike at this point in time.    

10 Country

Country Watch:

  • FXP¬†– China continues to move in a confirmed downtrend from early February. The move confirms the next leg lower for FXI. Watch for a move to $23.25 on FXP. *The rally in FXI didn’t help matters today. Watch and tighten your stops on the downside play.
  • EFA¬†– The shift is to a down trending channel off the March 15th high. Looking for a move down near the $58 level currently. *that happened on Tuesday and now look for a follow through on the move.
  • EWW¬†– Mexico confirmed the move higher, but is now testing the move above the $72.25 mark. Watch for the upside opportunity to follow through of the test. * Nice move above the $75 level on Tuesday.

6) Real Estate (REITS):

Real Estate Index (REITS) РIYR broke through the trading range near the high of $68.50-69.50. Sector Rotation Model Followed through on the upside, tested one day, and now on the upside again. 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.

(4/4 post) –¬†Real Estate REITs have been working higher, but the international REITs are looking even better in some ways short term. RWX broke to a new high on Thursday and remains positive.

post 4/8 – IYR continued higher to accelerate the upside move. Adjust stops and keep focused on the direction.

Sector Summary:

  • 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:

Sector Summary:

  • 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.