Buyers Back or Just More Trading for Position?

Thursday – Notes & Research

Yesterday we asked where did the buyers go? They’re… back… This is almost like watching a tennis match. Despite the selling in Japan overnight, GDP was less than expected on the revisions, pending home sales were weaker and a rise in jobless claims the buyers stepped up their buy side again.  Tomorrow is another full slate of data for the economy and we will see if the buyers stay engaged.

I will spare the details on today’s activity as it will likely reverse tomorrow? Financials, healthcare, telecom, technology and industrials were the upside leaders.

Utilities tried to bounce, but the reversal in bond yields back to the upside erased most of the gains. Consumer stocks struggled as well with both the staples and the discretionary sectors lower on the day.

Not much to really cheer about in either direction.

Sector Moves of Note:

  1. Gold was up 1.9% on the day, but the big benefactor was the gold miners GDX and GDXJ both up more than 5.5%. Is this the reversal for gold? Needs to break above resistance at $137 on GLD to at least change the micro trend higher. Silver was up as well, but it lagged the yellow metal. SIL gained 5.5% as well. They are all worth watching short term.
  2. Small caps was a sector we have discussed needing leadership from short term if the upside is to remain in play. The break above $99.50 is what we are looking for short term.
  3. Bond yields jump on the 30 year to 3.28% and the 10 year is at 2.12%. Looking for some breathing room on the selling short term and then the yields to continue higher with a target of 3.6% on the long bond.
  4. Natural gas dropped 3.3% on the day and the short side is gain some momentum again. Watch the downside.
  5. Semiconductors (SOXX) broke to a new high today. Look for follow through.
  6. Solar (TAN) moved back to the highs, up 3% on the day.
  7. Selling has reversed on some of the sectors as noted. Watch for upside follow through on the current consolidation.

Sit back, protect your downside and let the direction work itself out.

Economic Data:

Pending home sales were lower, but the growth is higher. The housing market continues to push out gains.  GDP revisions for Q1 were lower as well, but not enough to derail any activity overall. Weekly jobless claims were higher by 10k jobs. The data wasn’t very impressive, but all eyes are no next weeks data. The economic data has been improving enough to keep the confidence high for stocks.

Economic Events & Calendar

1) US Equities:

Major market indexes open higher and drift lower in to the close. Whatever happened yesterday reverse it for today. As stated above now is a good time to watch, listen and then act. No need to speculate, just let it play out one day at a time.

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. Added line on the high for April 21st to track as the current high or pivot point if the downside continues as it has four of the last five trading days.

Losers & Laggards: Utilities, Consumer Staples, Telecom, Healthcare

Leaders: Financials, Energy, Industrials, Basic Materials, Technology, Consumer Discretionary.

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 remains in play, but the extended move has brought equal concern to the current highs as seen in Trading the last week.

SP500Scatter

Sector Rotation of Interest:

Technology (XLK) – The pullback from the move higher tested $31.40 as support and held for now. If support holds $31.45 looking for a trade on the upside. Otherwise the shorts will be looking for the opportunity. Developing a wedge consolidation pattern.

Consumer Staples (XLP) – Moved to new high and tested support or breakout point for the trading range. Watch to see if holds or prompts more selling. $40.75 is the short term… as we saw today. The stop remains a break of support at the $40.75 level. Patience as this plays out.

Healthcare (XLV) – The sector broke from the consolidation or trading range to the upside. The test remains in play and a break below the support at $48.75 is the exit point for short term positions. Track to see how this plays out short term and mange your stops.

Energy (XLE) – Moved above the $80 level and has now tested the breakout level. All positive for now, but watching the downside risk in the current consolidation moves. Still in uptrend and still in play. Manage your risk and let this play out.

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. Today the buck reversed lower to join the selling. The chart below shows the path of the dollar against the other currencies.

Currency

Sector Watch:

  • UUP –  The dollar has been trading sideways and looking for an upside catalyst to continue the current move. Got the opposite with a break on the downside and the short play setting up. The other currencies continue to struggle. The yen, the aussie dollar, Brazil, etc. are trending lower. Not a place to put money to work currently.

3)  Tracking Bond Sectors of Interest:

Sector Summary:

  • 30 Year Yield = 3.28% – up 1 basis point —  TLT = $114.84 down 28 cents.
  • 10 Year Yield = 2.12% –  unchanged  — IEF = $105.61 up 1 cent.

Treasury Bonds – Complete reversal on the yield has pushed the bond lower and broke below the previous low. Not a place to be other than short the bond. TBT. Hitting against March highs again. Watch and be patient as this plays out. Raise your stops on the TBT or TBF position.

High Yield Bonds – HYG = 6.5% yield. No positions currently as it plays out.

Corporate Bonds – LQD = 3.6% yield. No positions currently. Downside risk in play.

Municipal Bonds – MUB = 2.8% tax-free yield. No positions currently. Downside risk in play.

Convertible Bonds – CWB = 3.6% yield. No positions currently. Starting to trade sideways.

4) Commodities – Sector Summary:

  • Commodity Index (DBC) – Developed into a trading range and just need to practice patience short term.
  • Natural Gas – (UNG) Testing the $21.15 support level short term. No plays currently
  • Crude Oil – (OIL)  Reversed testing support again at the $21.60 level. Weaker dollar didn’t help. No direction as the worries globally and domestically for demand have weighed down price and direction short term.
  • Gold – (GLD) Cooked in a squat. Can make up its mind up or down. Sitting near the low.
  • Palladium – PALL – Move above $73.70 is worth a trade on the continuation of the upside. $72.65 stop, $$77 target. Patience for the metal to break higher.

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. CORN since May 21st has been trekking higher and one to watch. (CORN break above $41 positive.) Watch for $42.25 to hold on CORN. Be patient and let the winners define themselves before going into sector. Thursday added positive move in gold, silver and base metals.

Commodity

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

5) Global Markets: 

Global markets have shifted to the downside over global economic slowing. The Asian connection is hurting the overall index. The chart below shows the shift over the last week plus on the downside. We don’t own any positions in the global markets and for now I am still willing to sit on the sidelines.

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:

  • EWA – watching for a bottom or base to establish following the selling.

6) Real Estate (REITS):

Real Estate Index (REITS) – The sector broke the uptrend and signaled exits. Moved to Cash versus holding the sector short term.

Sector Summary:

  • IYR – Hit our stop at $73.50 and has continued to move lower. Out for now.
  • RWO – SPDR Global Real Estate ETF hit stop and watching for now.
  • 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. Watch the downside currently in play with rising rates.

7) Global Fixed Income:

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

  • Watching these funds for a bottom.
  • PAFCX – Spike to the downside.
  • PICB – Breaking aggressively lower short term. 3.1% dividend.
  • EMB – Breaking lower still no support. 4.3% dividend yield.
  • PCY – Big downside move and break of support. 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.