Bernanke Rattles Investors and Prompts Selling

Wednesday – Notes & Research

Markets trade volatile during the first hour as Bernanke’s comments sent everything higher, then if settled lower. The lack of clarity relative to the future is hurting near term, but investors have been more than willing to buy in on any pullback. The question from Wednesday is will they do it again. The S&P 500 index hit a high of 1685 intraday and closed at 1655 or a 1.8% swing peak to close. The support at 1648 came into play intraday as we hit that level and held…. Tomorrow is another story line we will have to watch and investors digest the intraday volatility.

The primary sectors all moved lower today shifting the sentiment temporarily. We can’t jump to any conclusions, but we can see if the buyers step back into the markets tomorrow.

The existing home sales were the best they have been since 2009. Home Construction (ITB) fell 1% on Tuesday as Beazer Homes (BZR) was downgraded. The selling turned to buying today on the data and pushed up 2.4% in the morning, but like everything reversed and end lower on the day. Tomorrow is the New Home sales data and it will impact the sector as well.

Sector Moves of Note:

  1. Commodities jumped early on Bernanke’s comments as the dollar fell. That lasted all of 20 minutes and then the dollar rallied and commodities fell. Crude, Gold, Natural Gas, Gasoline, etc. not a good day on the commodities front as the dollar gained and the outlook for demand was unchanged.
  2. Financials reversed and tested lower. We had adjusted stops on KRE (EGG Model) which hit later in the day and we are now out of the bank ETF. We will keep this on our watch list as the sector is still in a confirmed uptrend.
  3. VIX index picked up and stayed at the top end of the range today. Still looking at the VXX play tomorrow if it follows through on the upside. See Watch List, ETF ONLY Model or S&P 500 Model.
  4. Telecom was one of the bigger reversals on the day closing down 2.2%. IYZ was down across the board with only IDT ending the day in the green.
  5. Utilities fell again dropping 1.7% and testing the low from last week. Stops were hit on the positions and we will see how it recovers going forward.
  6. Real Estate dropped 2.5% on three times the average volume.
  7. HPQ beat expectations and the stock is up more than 10% after hours. That should help technology tomorrow as well as the broad markets.

The move today showed where the excess values are as investors were quick to run for the exits. We have plenty of work to do tonight to dig through the outcome and what it will mean to the outlook. Remember, we are looking at this one day at a time and I expect volatility to pick up if the fear levels rise relative to the Federal Reserve and what expectations are with the stimulus.

The notes below are not updated completely and will be done as we progress through the evening. The tables are updated on the portfolios and we will adjust accordingly heading into tomorrows trading day.

Economic Data:

Housing data was positive for the existing homes sales. The push higher in the housing sector was lost in the Bernanke testimony and uncertainty of his comments. Markets don’t like uncertainty and that generally leads to selling as we saw today. Tomorrow is the new home sales and they will have an impact on the housing sector as well.

Economic Events & Calendar

1) US Equities:

The down day doesn’t completely change the outlook for stocks, but it is a warning for investors relative to the risk currently in the market as it pertains to the Fed. Mixed words that lacked clarity was enough to cause a 2% plus intraday swing in prices. Thus, we have to be aware of the impact the Fed is having on the broad markets and manage the risk as appropriately as possible.

The volatility index jumps on the worries created by the Fed. There has been a rise in the volatility intraday over the last week and maybe that was a warning leading into today. The move above the 13.5 level got our attention, now it is a matter of reversal or continuation. I am not assuming anything here, but if it goes higher short term and selling picks up, I would see it as a buying opportunity.

The April 18th chart below is the last low in the test off the April 11th high. You can see the selling impact at the end of the chart and who the biggest losers were. We have to be patient and let this play out going forward.

Scatter 418

The current trend started on November 15th and has been tested by the the ‘fiscal cliff” issue bottoming on December 28th, The February 25th low pivot point was prompted by FOMC rumor of withdrawing stimulus, Cyprus on March 14th and the April test on economic worries. ¬†The¬†original¬†target for the move was 1550-1575 which has been obtained.The uptrend remain in play, but the extended move has brought equal concern to the current highs as seen in Trading on Wednesday.

SP500Scatter

Sector Rotation of Interest:

Technology (XLK) –¬†Break above the $30 level was the entry point and it has followed through nicely on the upside. Getting extended and we need to protect the downside. Target remains $31.65. Hit the target. Holding for now and tightened our stop in response to $31.60. (Moved right to the stop and bounced. Watch the short term movement going forward for opportunities.)

Consumer Staples (XLP) РMoved to new high and is now testing the break through resistance of the trading range. The move back to the breakout level of $41.35 was key today.  Watch to see if holds or prompts more selling. $40.75 is the short term (trading) stop. Some give back on the selling. Watch to see how this unfolds looking forward.

Healthcare (XLV) РThe sector broke from the consolidation or trading range to the upside this week. The test is just that for now. After hitting new highs in early trading and gaining more than 2% the sector reversed and gave up all the gains closing flat on the day. Track to see how this plays out short term and mange your stops.

Energy (XLE) РMoved above the $80 level and held. All positive for now, but watching the downside risk. Watch to see if there is any upside follow through as it seems to be happy to consolidate near the $80 level. Moved to $83.30 as positive bias returns to the sector. Gave back some of the big gains and is testing the $81.50 level short term. XOP and IEZ  both tested the recent breaks higher and if they hold the upside play will remain.

Telecom (IYZ) РMoving higher, but consolidating near the high. Still like the uptrend here and we moved above the $26.90 level and now looking for a move on the upside going forward. $26.10 remains the exit point. Big test lower losing 2.4% on the day. We approach this change with caution and see if there are any opportunities that are a result of the change.

Utilities (XLU) Рbreaking down short term on some selling. The fund managed to hold support at the $39.60 and the 50 day moving average. Watch how this plays out short term. If the bounce holds looking to add some shares at this level of the test. Watch as the sector attempts to work through the challenges. Complete reversal back to the previous lows. Hit our stops today on the sector, but still interested in the sector going forward. Be patient.

2) Currency:

Since the high on March 27th the dollar has essentially moved sideways to down. Starting April 23rd the dollar steadily declined until bouncing on May 1st. It has accelerated back to the previous high and higher. Small test today following the  new high hit on Friday. The chart below shows the path of the dollar against the other currencies.

Currency

Sector Watch:

  • UUP¬†–¬† The dollar has been trading sideways and the bounce on April 8th has led to new high. The move back to the highs on Wednesday was a plus for the dollar and negative for commodities. The yen (FXY) and the aussie dollar (FXA) have been pushed lower. The dollar continues to gain upside¬†momentum.

Tracking Bond Sectors of Interest:

Sector Summary:

  • 30 Year Yield = 3.21% – up 6 basis points —¬† TLT = $116.o9 down $1.75.
  • 10 Year Yield = 2.02% –¬† up 8 ¬†basis point — IEF = $106.27 down 85 cents

Treasury Bonds РComplete reversal on the yield has pushed the bond lower and is in position to test the previous low. Not a place to be other than short the bond. TBT. Hitting against some resistance relative to the yield. Watch and be patient as this plays out. Raise your stops on the TBT or TBF position.

High Yield Bonds РHYG = 6.5% yield. Support at $94.75. Moved up to $96.25 and met with some selling today on the yield rise on Treasury bonds. Manage the position for the dividend as the growth side is uncertain short term. Use $94.75 as the stop. The last two weeks shows the risk in the bonds currently. $95.20 support? Downside risk is growing for the bonds in this sector.

Corporate Bonds РLQD = 3.6% yield.  Bonds have dumped with the rise in rates short term. Hit the stop at $120.80 as the selling accelerated. HIT STOP last week. Still moving lower and no interest for now. Is $119.30 support? Watch to see how it plays out.

Municipal Bonds РMUB = 2.8% tax-free yield. Shifting gradually lower as the risk relative rates is in play. Collect your dividends and let it ride for now. Stop at $110.50 short term.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the rally in stocks. Broke to a new high and steady as she goes. Keep and practice dividend collection. Watch for stop placement to protect the gains near the $44 mark.

4) Commodities –¬†Sector Summary:

  • Commodity Index¬†(DBC) – Moved back to resistance at $26.50, tested lower and can’t seem to regain the upside fr now. ¬†Watch and be patient. $25.90 support in play?
  • Natural Gas¬†– (UNG) Moved back to the top side of the trading range near $22 and followed through on the upside to $22.50. FCG trading near the high and looking for more movement higher. Watch and manage the risk.
  • Crude Oil¬†– (OIL) ¬†Reversed on the stronger dollar. Testing support at the $22 mark as crude moves back below the $95 level again. Supply data was in line with expectations, but didn’t help the cause.
  • Gold –¬†(GLD) Big swing early on comments from the Fed. Still testing the support near the low and remains in the trading range. Not a buyer or a seller at this point. My bias remains on the downside and would expect a move lower as the noise settles short term.
  • Palladium – PALL – Move above $73.70 is worth a trade on the continuation of the upside. $72.65 stop, $$77 target.
  • Gasoline¬†– (UGA) The volatility has returned to the commodity short term. Low volume selling, look for upside to return, potential trade on move through $57 short term. $55.70 stop, $59.75 Target.

Commodities Rotation Chart:

I have moved the starting point forward on the chart. DBC has moved sideways since April 15th start point. PALL is moving higher and leading the metals. The balance of the sector is vertically challenged. Be patient and let the winners define themselves before going into sector.

Commodity

DBC –¬†PowerShares Commodity Index ETF¬†(click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

Global markets have been trading sideways the last week. The move today was a reversal or reaction the US markets. Watch the leadership that was, Europe, Russia, China and Japan, for a reversal if the upside returns in the US. Volatility still in play for the global markets, but watch to see if this bounce has any legs higher.

Global Mkt

EFA –¬†iShares EAFE Index ETF¬†(click to view) 10 Developed Countries making up Europe (66.6%), Australia (8.9%) and Far East (24.5%). (Weighting of fund) Not most balanced, but give indication of global markets.

Country Watch:

  • Most of the country charts have trading sideways to down. EFA is a good barometer for trading the developed markets and VWO for the emerging markets. Attempting to turn higher the last few days and worth tracking for specific opportunities.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector continues in the uptrend overall. My rating is a HOLD currently. Holding above the 10 DMA for now. Let the trend run its course.

Sector Summary:

  • IYR – Support is $73.50 and our stop is at the same level. Tested that today with a 2.5% decline in value. Watch to see if the bond rotation or higher interest rates plays havoc with the sector short term.
  • RWO –¬†SPDR Global Real Estate ETF¬†is in a positive uptrend and hit a new high. Manage your stops accordingly. Same drop of 2.4% today on the selling.
  • MDIV –¬†First Trust Multi- Asset Income ETF¬†is a good alternative to picking through all the choices of income funds. This multi-assets income fund pays a 5% dividend.

7) Global Fixed Income:

Sector Summary: Complete reversal low and uninteresting in the sector currently.

  • There are some funds moving in favorable direction of late.
  • PAFCX – Broke down aggressively short term and testing support at $11.50. More selling
  • PICB – Breaking aggresively lower short term. 3.1% dividend.
  • EMB – Finding support at the $119.25 level. 4.3% dividend yield.
  • PCY – Gave up support at the $30.30 level. and heading lower. The current dividend yield is 4.8%.

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.¬†