Bounce Finds Legs on News

Thursday, September 27th

Welcome back to the buyers today. Spain announces tough buget plan for 2013 which is focused on cutting spending versus raising taxes. Investors this to be another step towards Spain requesting bailout money from the IMF and ECB soon. Thus, one stress point in the market relieved and stocks rally. The NFL settlement with the Refs is more likely to be a rally point than Spain proposing a preliminary budget for 2013.

Jobs data got credit as we well for the being the upside catalyst as revised government numbers for jobs showed 386,000 additional jobs were created from March 2011 to March 2012.  In addtion the jobless claims fell 26,000 to 359,000. Thus, data that is six months old shows more jobs rallies the market? Okay, but I am still going with the end of the NFL strike with the refs.

There was some other numbers released today relative to¬†durable goods orders down 13.1%¬†and GDP¬†for third quarter revised lower to 1.3%. Throw in that pending home sales missed estimates as well and you have some bad news for the economy. Those data points are aweful! Some how they didn’t matter as much as the NFL settlement of the refs strike.

Bottom line… buyers still wanted in to the market and the recent selling gave them an opportunity. Does this mean the S&P 500 is heading higher from here? Some believe yes, but the jury is still out on the overall direction. We remains cautious and we continue to look for the key entry points if the market does find reason to move back to the upside.

Below we address the sectors looking forward:

1)  US Equities:

S&P 500 Sectors-to-Watch РThe index shifted direction today on a reversal off the Wednesday low near 1430. The close today at 1448 gives some breathing room off support.  The chart below of the 10 sectors shows the last pivot point on August 30th and the current mess. Telecom is still leading overall with the others trading near the index itself. Utilities continue to be the laggard.

The worry factor is growing and we hit somr of our stops as a result.¬†The random rally¬†on Spain? Jobs from more¬†than 18 months ago? Ref settlement? None of the above… the stimulus is still working its way through the markets and the liquidity is helping.¬†The liquidity from the Fed will have some effect¬†if the emotions¬†and worry¬†get out of the way short term. Patience is the key as this all upfolds short term.

Financials – Bounced off support at $15.45 Wednesday and followed through today gaining 1% for the day to close at $15.64. Watch to see if it holds this level near term. If we hold a trade on the upside is what we are watching for on a bounce effect in the broad markets.

WATCH: XLF – $15.75 Entry

Energy –¬† Broke below $73 support and the 30 day moving average, but bounced along with crude oil prices on Wednesday. Does energy have more upside or is the downtrend ready to take hold. The trend off the June low is still in play short term. Watch and trade the upside if it follows through.

WATCH: XLE – $73.98 Entry

Telecom – The leadership of the market tested lower again on the day, but the uptrend is still in effect. Watch for the opportunity to put the play back on with a reversal back to the upside. Modest gain on the day… patience.

Healthcare РThe sector continues to push gradually higher, but is testing the move higher. We moved above $39 (top of the previous trading range) and the current leg higher remains in play.  IHF and IHI have both provided the leadership as they hit new highs, but are in the process of testing as well. Pharma is still struggling and XPH is at key support near $59. Hold positions and manage the stops.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $39.60

Semiconductors РThe sector bounced today with the rest of the market. That hit our stops on both short plays. We now look for a move back above the resistance at 388 on the SOX index.

WATCH: Short Intel (INTC) – 24.55 – Stop – 22.85 (HIT STOP) / WATCH: SSG – Entry 40.65 – Stop – $42.25 (HIT STOP THURSDAY)

NASDAQ Index – The index has been under pressure from the large cap technology stocks selling. the bounce was enough to off set any short opportunities for now.

WATCH: – QQQ – $69.50 is next resistance.

Transportation Index – This remains a troubling chart for me. If stocks are going higher short term why is this sector moving lower. If stocks are to move higher this indicator needs to track with it eventually. Support on IYT was broken on Friday. $86.75 is the number to watch short term to confirm a move below support. If we break below this level watch for stocks to react overall.

2)  Currency:

Dollar РThe dollar bounce is back in play as worry over Europe and global growth moves to the front of the list.  We got the bounce off support and now we watch to see if the dollar resumes selling. Be patient and see how this plays out.

WATCH: UDN

3)  Fixed Income:

Treasury Bonds РTLT sold to $118.25 on the stimulus announcement. That support level held for and the bounce off the low is gaining momentum. The catalyst to move higher was be worry/fear relative to growth of the global economy. That is definitely a potential relative to the situation in Europe and China currently. We took a small position in TLT on the move above $122.45.

WATCH: TLT – Entry $122.50 Hit Entry Monday. Stop – $123.50

4)  Commodities: Gold snaps back on the new from Spain to gain 1.5% on the day. The break lower was temporary, and we have to watch and see how it play out from here. Gold miners bounced back from the selling as well. Silver held support on the bounce back.

WATCH: SLV – $33.80 Entry.

DBA – took break below the $29.50 level as agriculture sells overall. Watch the downside risk as it builds.

DBB – Base metals were selling towards support at $19.44. Watch to see if it holds?

OIL РBounced on the news in Europe back above $91 on the day. Watch support to hold at $90 and the resistance at $100. could offer some trading opportunities as a trade.

5)  Global Markets: The global markets resumed selling on the worries in Spain and Greece. Today they bounce on the assumptions relative to Spain. Hit our stop on EFA on Wednesday and we are watching to see if the momentum returns.

WATCH: EFA – Watch for upside to play out.

6)  Real Estate (REITS) РThe sector tested the recent high and support is holding at $64.20. Watch your downside risk if you still own this sector. We are looking for upside play if support holds.

WATCH: URE – watch for entry

REM moved higher over the Fed stimulus, but has been selling on risk concerns the last two days. This shows the potential volatility of the ETF and it needs to be managed accordingly.

WATCH: REM – hold $15 support

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? Last week the worries escalated on Thursday, but there was positive news on Friday? However, nothing was officially announced all rumors. The real answer will depend on the deal with the IMF and the ECB. EWP tested, but bounced on Friday. Until there is a definitive plan announced the moves are speculation. (Some answers on how much the issues can impact the market globally and domestically in the US) Still all rumor driven, as we saw in the Thursday bounce on rumors again.

China was moving on infrastructure stimulus, but the spat with Japan has derailed the progress along with economic worries. Watch FXI as the up and down impact of news creates some short term volatility. This story will unfold into a upside play if the stimulus works or a downside play if the sentiment shifts. (Wednesday saw a shift on the downside as we broke support and moved back below the 30 and 50 day moving average.) Thursday it reversed back to the upside. This explains in living color the volatilty and lack of direction for the country. Still looking for the directional trade as this all unfolds.

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. Healthcare is one sector responding currently on the upside to the news. One to watch is the tax hike on dividends (from Obama). Long term it will be neutralized by the Fed keeping rates at zero, but shorter term it could create some opportunities.

QE3 was good for stocks to move higher short term, 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 (This is what we are experiencing currently as the numbers are not impressive.)

What am I watching now:   Leadership relative to the move Thursday (9/13) following the Fed Stimulus release. Scanning this weekend the following are the trade-able leaders:

Treasury Bonds (TLT), Short Semiconductors (SSG), Short Real Estate (SRS), Short Financials (SKF), Short Oil & Gas (DUG), Healthcare (RXL), Biotech (XBI) and Telecom (IYZ).

Does the move Thursday reverse the short term selling as investors want the upside to resume.

1)  BAC РBank of America to move towards the target of $10 short term. Broke support short term, but in position to potentially play a bounce move higher.  2) Oil sitting on support at $90. Bounce back from the break lower on Wednesday. Too much noise to play for now. 3) Downside sentiment shift. That took a blow today, but it is still a challenge overall. The short term shift this week and the jury is still out. 4) IP is breaking higher and worth watching on the upside. 5) SIVB is breaking higher in regional banks and worth watching.

The list above is lagging as the week has been negative thus far. We are looking at the downside and the models do reflect several short plays for the current move. Market is in a precarious place. Watch, set in place your plan of action and let the cards be played. Don’t assume anything.

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.