Big test for the broad indexes on the downside

Wednesday – Notes & Research

What happened to the good mood investors were in yesterday? It is call the FOMC minutes! Just because they made some simple comments about the economy not changing despite the billions and trillions of dollars being pumped into the system. That news was a little unsettling it trumped the optimism over M&A activity. Why does this bother investors now? This is not new news by any stretch of the imagination. It just happen to rock the boat today. This puts us on guard going forward and we are raising stops to account for this move and we will determine how to deal with the outcome.

Apple fell 2.4% on the day and that sent the NASDAQ lower as well. Of course there were others adding to the downside, but the impact of Apple is significant as it has now spent the last six days retracing the bounce off the lows. There were plenty of big drops with 38 of the 100 hundred stocks dropping more than 2% on the day.

The uptrend remains intact, but the test is on… Watch, Manage and Act.

Economic data remained on the disappointing side today. The housing starts adds to the builders index on Tuesday. That sent the homebuilders ETF, XBH down 4.5% on the day one sector to watch on the downside short term.

The FOMC minutes was the most fun on the day as the disagreement among the Fed Presidents was evident in the notes. The general idea is they think the Fed should slow or stop the rate of purchases of Treasury and mortgage backed securities. That was a shock to the market and the selling ensued. If you take away the punch bowl the party will stock quick enough. The next meeting is March 20th and there will be plenty of discussion on alternative methods to handle the existing problem. This has to be watched going forward for the simple reason it will impact the markets overall.

Data Summary

  • Producer Price Index (PPI) rises 0.2% and below the 0.4% expected. The core was up 0.2% and in line with expectations. Inflation remains under control at the producer level for now.
  • House starts fell short of the 914,000 expected with 890,000 report. Apartments were the difference in the data reported for January.
  • Home Builders Index fell to 46 from January’s 47 level. Estimates were for a rise to 49. Disappointing number for the sector. XHB fell 0.4% on the news Tuesday, but declined 4.5% on Wednesday.

Economy is steadily treading water with little to no growth. The short term outlook remains positive, but just barely. Keep your focus and remain disciplined relative to your stops and exit points. Correction anyone?

1) US Equities:

Market Summary:

  • S&P 500 index pulls back below the 1515 support closing at 15411 – negative event short term.
  • NASDAQ index testing the 3160 level again, closing at 3164 on the day – negative event short term.
  • Crude Fell 2% to $94.77 as reaction to the markets today. Watch
  • The NASDAQ 100 moved back below the 2760 mark on the day – negative event for the large caps.

Leaders:

  • Big test today for the market leadership with pullback.
  • Energy has been the leader, the volatility has risen in the sector and fell 2.1%. Support XLE $77.30
  • Small caps (IWM) were the strength early and fell 1.8% today – negative to watch.
  • Consumer Services (XLY) fell 1.5% today and put the market on warning.
  • The leaders took a gut bunch today, but we have to watch how this unfolds moving forward.

Laggards:

  • Technology was hitting against resistance, but reversed on the day dropping 1.3%.
  • Emerging Markets (EEM) have stalled and remain in a consolidation pattern short term. Big move lower relative to support on the chart. Watch the downside risk.

Short Opportunities:

  • Downside established ¬†in gold (GLD). Hit entry on GLL and it has accelerated lower. manage your stops.
  • Treasury bond yields continue to rise putting TBT in play. This could reverse Raise stops and watch TLT on the upside today
  • Euro weakening on concerns. This is the TWO EGG play… short euro, long dollar.

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test.

Scatter1228

November 15th Pivot Point for current uptrend. Target 1550-1575 short term.

SP500Scatter

VIX Index: Spiking higher on the FOMC prompted selling to 14.55 – ADDED VXX to S&P 500 model today.

Tracking Sectors of Interest:

Telecom РiShares Telecom ETF (IYZ) fell week on news the news from Century Link (CTL) to provide the downside leadership for the sector. They cut their dividend 25% and the sellers took over. The test of support at $24.10 is what I am watching now? Closed at $24.08 on Wednesday? Downside risk in play short term.

WATCH: T – Break above resistance at $35.65 is attractive on the upside, plus the 5.1% dividend.

WATCH: VZ – Looks just like T on the consolidation and resistance $42.85, plus the 4.6% dividend.

Oil Services РiShares Oil Equipment & Services (IEZ) gave up 2% on Wednesday and testing support at $58.

Alternative Energy РTAN has been moving to the upside as the sector sees solar companies gaining traction. I am not a fan of the ETF as the exposure to China is too high for my taste. However, the two leaders here are WFR and FSLR. I like the idea of a longer term position with some money management around the positions. Big pullback on Wednesday is worth our attention going forward.

Financials РXLF continues to move to the upside short term. The downside today pushed the sector lower, but still one to watch longer term. Adjust your stops and manage the risk of any positions near term.

WATCH: Entry $17.20 XLF. Stop @ $17.50 Raise stop on the pullback and test of the uptrend.

2) Currency:

Sector Summary:

  • The currency discussion is still being researched by investors relative to the outlook short term.
  • Yen retesting the lows and the bounce has not materialized yet. Still near the $105 level on FXY.
  • Plenty of rumbling about the devaluation process, however no real action showing up currently.
  • TWO EGG Model went long the dollar (UUP) and short the euro (EUO). Solid move higher today in the trade.

Tracking Currency of Interest:

US Dollar РThe close $22.13  (UUP) and broke above the $22.05 entry point on the day. Dollar index traded higher on the open on Wednesday. Watch the dollar/euro trade short term.

WATCH: UUP – Entry $22.05 break from consolidation

Euro РThe euro (FXE) below below support at $132.70, and moved down to $131.68 at the close today. Watch to see how this plays out.

WATCH: EUO: Entry $18.65 short euro against the dollar.

Japanese Yen¬†– Has the yen found the near term low… yet? FXY is testing lower as investors still believe the devaluation will continue.

3) Fixed Income:

Sector Summary:

  • Yields continue to creep slightly higher. The question is if the market corrects how much will it impact?
  • 30 Year Yield = 3.21% – up 3 basis points — ¬†TLT = $116.27 up 35 cents
  • 10 Year Yield = 2.02% – up .2 basis points — IEF = $106.10 up 23 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe current play is short with TBT in the model currently to take advantage of the move lower in prices. The last week the fund has bottomed and started to consolidate. The retest of the lows is a bad sign if it breaks down. Hold TBT for now. Watching TLT for a potential play.

High Yield Bonds РHYG = 6.55% yield. Support is at $92.75, which has held short term and the fund moving off the lows for now. We will watch to see if support holds and then make a determination on the upside play if it evolves.

Corporate Bonds РLQD = 3.8% yield. The price has found short term support ($118.90). Now watching to see if any upside opportunity exist in the bond. The current activity says no, but still holding support.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds continue to be volatile. Found support and bounced back, but still looking for direction. Willing to wait for the right opportunity on the bonds. Look for a test of the $111.42 mark support.

Convertible Bonds РCVRT = 2.7% yield. Price has been moving higher on the current rally in stocks. Watch for opportunity if the uptrend continues in stocks.

4) Commodities:

Sector Summary:

  • Crude losses some upside on Wednesday. Closed below support of $95.10 — Watch for downside?
  • Gold fell 2.5% and broke the downtrend trading range. Big negative influence on the metal today.

Tracking Sectors of Interest:

BAL РCotton jumped in mid January nearly 10%, but has stalled since. A trading range of $52.80-54.40 is in play. A break higher would be a continuation of the move off the November lows. One reason for the jump is rising demand from China? They are importing more than analyst expected and that provided the initial bump. Now we look to see if it a true increase going forward. Nice break higher today.

WATCH – BAL – Entry $54.60 hit on break from consolidation Monday. (Watch the low volume)

KOL РCoal ETF caught support at the trendline (ascending triangle) and moving back towards resistance at the $26 level. Big flip lower on the shift in sentiment towards markets. Watch.

WATCH: KOL – Entry $24.45 — Exit at $24.45.

GSG Р Big reversal in commodities overall and the chart shows the selling on Wednesday. Watch support at the $33.50 level.

UNG РDropped 5.2% on the inventory data last week. The inventory data once again shows less demand as inventory is higher than expected. Managed a small bounce today.

OIL РCrude is tested support and bounced as the chart shows short term volatility. Manage the position, but let it have some room to move as volatility has picked up? Manage your stop on OIL at $22.40. HIT EXIT POINTS ON SUPPORT BREAK ON WEDNESDAY.

UGA РSome volatility last week from the global concerns. The upside is still in play and is likely to continue near term. Supply is short as refineries maintenance schedules kick in. The upside is still in play. Watch as we test the highs. Dropped 1.7% to test support at $64 today.

GLD РDownside follow through on Friday with drop of more than 2% on the metal. This is the accelerated selling we discussed and we will monitor to see how low it will fall. Big follow through on Wednesday and the 2.5% decline puts the negative sentiment in control of the metal.

The world’s central banks bought 534.6 tons of gold in 2012, an increase of 17% over 2011. That was the most since 1964, and it makes the central banks net buyers of gold versus sellers. Despite this fact the price of gold rose only 4% on the year, but saw price swings of more than $200 per ounce. The overall demand fell and that has put pressure on the price of gold¬†currently.

DBB РBase Metals need to clear the $19.70 as they attempted, but failed miserably Tuesday.  Watch for the short term reversal. No reversal on Wednesday, but more downside as dropped 1.1%.

PALL РPalladium tested $73.60 on some selling last week. The upside is still in play as well as the uptrend. Adjust your stop accordingly and let it continue to run. Traded lower on gold falling protect your gains short term.

PPLT РPlatinum tested lower and is filling the gap left behind on the move to new high. Traded lower in sympathy with gold. Watch the downside risk short term. broke $163 support.

5) Global Markets:

Sector Summary:

  • Spain (EWP) still in the news relative to sovereign debt.
  • Italy (EWI) still in the news on the elections this weekend.

Tracking Sectors of Interest:

EFA РDropped last week on Spain and is still testing as the euro-zone GDP data disappointed. The support levels are key and it is holding above the first level at $58.15.

IEV¬†– Dropped last week on Spain’s sovereign debt concerns. Testing the first level of support at $40. ¬†Euro-zone GDP data on Thursday didn’t help the situation. My upside target remains $45.50, but the upside may be in¬†jeopardy. Watch and be patient.

FXI¬†– China’s news on spying and using attacks on US corporations in this country. The new impacted the Country ETF selling off 2.1%. The fund had already broke support at the $40.85 support of the trading range. The $39.30 support held short term, and is being tested again. Watch downside on this news. Broke support on Wednesday watch the downside play short term.

EEM РStill consolidating sideways and there no clear direction.

6) Real Estate (REITS):

Sector Summary:

  • REITs continue to find buyers and push the upside trend. nice move on Monday.
  • Homebuilders found some resistance near the $29.25 level and we are testing again. Index report today didn’t help the sector. Still holding move higher.
  • REM – Mortgage REIT is breaking above $15 short term play on move higher?
  • NLY- Analy Capital Management finally broke above $15 and could provide some upside.
  • SJT – San Juan Basin Royalty Trust holding move higher. Watch for test and move higher.

Tracking Sectors of Interest:

WATCH РIYR РEntry Р$66.15,  РStop $67  Risk rising on the trade.

7) Global Fixed Income:

Sector Summary:

  • The sovereign debt issues are fading as the global outlook improves. Stocks moving higher prove trouble for the sector overall. We have hit stops as yields impact the price of bonds.

Tracking Sectors of Interest:

EMB РEmerging market bonds have bounced off the low, but has reversed to test again? Dividend of 4.2% is attractive if the volatility subsides.

PCY РEmerging market Sovereign Debt is testing back towards support again. Look for some clarity first and foremost. The dividend yield is 4.7%.

IHY РInternational High Yield Bonds breaking lower similar to US high yield bonds. Watch to see if any opportunities arise in the bonds.

PICB РInternational Corporate bonds support at $29.20 and looking to move lower? Watch

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.