Wednesday, August 8th
There are plenty of uncertainties and what ifs facing investors today. The ability to gain any foresight and clarity relative to the broad markets is becoming harder with each piece of news or economic data. In normal market environments it isn’t easy to look forward with confidence, add all the issues in Europe and the global economies and you see why the outlook is so cloudy.
Some questions the markets face through the balance of the year are, Fed stimulus or not? Election results, Obama or Romney? Fiscal cliff or hill? Europe, doom or just gloom? Policy issues in Washington, less is more? China’s economy up or down? These are simple questions, but the answers will be complex and take time.
The bullish tone is a warning signal to itself as investor sentiment has turned higher. This is a market level where we have to consider taking profit short term. The longer term outlook is still a guessing game, but the sentiment has shifted positive on the longer term perspective. Too many questions, not enough answers and an inability to measure with any degree of accuracy the risk factor says profit taking is a good idea.
1) US Equities:
S&P 500 Sectors-to-Watch – The S&P 500 index continues to hold above at the 1400 level… barely. The attempts to move to the previous highs near the 1420 mark are still in play, but there is room for a pause. The volume has been dragging all week and the chart looks tired. That doesn’t mean the move higher is done, just at a resting point. Watch how this unfolds short term. Watch 1420 on the S&P 500 and the newly broken 1390 level below or 1375 as support.
I still believe we will need a correction in the broad indexes to justify the Fed stepping into the markets with any type of aggressive stimulus. Europe on the other hand will have to act soon to keep the wolves at bay, after all Draghi promised to do everything possible! By the way that means some action versus just talk.
The leadership continues currently is coming from the energy, technology and consumer services sectors. Financials have attempted to put in a push higher, but they have struggled to follow through. The volatility has been subdued and the sentiment has shifted to the upside near term. The following sectors are showing worthy actions to trade or invest.
Telecom – The sector accelerated higher off the test lower at $22.10 on IYZ. Watch $23.60 support short term. The uptrend remains in play of the June 4th low, and there is a pennant pattern forming over the last week. Watch for a break higher from the pattern as you manage your stops.
WATCH: IYZ – Entry – 22.40 – Hold and keep your stops at 23.40
Energy – holding the move higher and uptrend remains in play. Hold and manage the risk to see how this plays out short term. Oil services (OIH) remains in an uptrend leading the sector higher. Production and exploration (XOP) are breaking from consolidation and crude held above $92.30 resistance per barrel. All remains positive for now.
WATCH: XLE – Entry @ 69.25. Stop 69.70
Financials – Holding above $14.80 move on Monday. We still have to accept the volatility in owning the sector. Hitting against resistance at $15 with lower volume. Watch for follow through and acceleration on the upside if we are going. Raised stop to break even on the trade.
WATCH – XLF – Entry @ 14.55 – Stop 14.60
Healthcare – Volatility remains in play more than usual. Hold positions and manage the risk. 50 day moving average is a good stop for now. The healthcare providers are struggling on news and pharma on earnings. Still hitting against the resistance at the $38.90 mark.
WATCH – XLV – Entry @ 38.10. Stop 50 DMA
Consumer Staples – The sector has been leading to the upside for the broad index. Uptrend in play and looking for a steady move higher for now. Dean Foods (DF) spiked up 40% on better than expected earnings.
WATCH – XLP – Entry 35.31 – Stop 35.90
Consumer Services – The consumer has been spending less, but the retail data showed growth last week. This is still a stock picking sector overall. Watch the impact of Priceline after hours on Tuesday. The leaders remain WMT, TGT, KSS, etc. XRT broke above the downtrend line and followed through today.
WATCH: XLY – Entry $44.50 today on the test of the breakout on Tuesday.
NASDAQ Index – Broke through the 3000 mark on Tuesday and holding. The upside momentum has been as a result of the technology stocks. The NASDAQ 100 index broke above resistance at the 2660 mark and found the upside move easy. The play continues to pan out for now – manage your risk.
WATCH: – QQQ Entry @ 65.25 Friday. Stop 65.20 (raised stop)
Small Cap Russell 2000 Index – Attempting to hold the move off the July 30 low. The selling as given way to buying again and the upside is building some short term momentum. Got the move above $79.20 and through the downtrend line for the entry Tuesday.
WATCH: IWM -Entry 79.60 – Stop – 78.30
Volatility Index – The index below 16 testing the lows again today. With the calm in Europe and the willingness of investor to push money into stocks, there is little to no fear facing stocks. Unless some news shifts short term the trend should be higher for stocks currently.
WATCH: SVXY – Entry $97.10 – Stop $106 (hit stop Tuesday on reversal test) – Watch for re-entry.
Dollar – The dollar looking for support. The risk in the in the dollar has stepped up relative to Europe. Watch the downside play opportunity in the dollar if the strength continues in the euro.
WATCH: UDN – watch for confirm of break above $26.40. Entry. (retreated, but still watching)
3) Fixed Income:
Treasury Bonds – The bond is moving lower as the yields start to rise. The move is back to 2.74% on the thirty year bond. TLT has moved lower with support at $124.60. The short play on bonds is working currently. The ten year bond yield rose to 1.64%. We took a short position against the bond this week and it has been volatile, but working.
WATCH: TBT – $14.80 entry. Stop $14.80 (stop on the close) Manage stop short term relative to volatility.
4) Commodities: Topping formations and a cautionary tone for the asset class short term.
Agriculture – Still consolidating near the highs. Soft commodities (DBA) are getting soft? 29.30 is support near term and good spot for a stop if you own a position.
Crude Oil – Continues to make the move higher and taking out 22.65 resistance on trading Tuesday. Manage risk of the play and let it run.
WATCH: OIL – Entry 20.75 – Stop 21.90 (stop on the close)
Gasoline – Solid move off the test the last two weeks. The upside still in play, but watch oil prices. If you want to afford to buy gasoline… you need to own the commodity. Watching for a test short term on the steep move higher.
WATCH: UGA – Entry at 52.75 – Stop 56.10 (raise stop)
Natural Gas – Big sell off as analyst make comments of weaker prices going forward? Watch for the opportunity as we find support with the commodity. Still working through the anxiety of comments.
WATCH: UNG – 20.35 entry (watch for volume buying)
5) Global Markets: The global markets continue to respond to the ECB and Draghi’s promises to save the EU. The EAFE index has moved higher on the tough talk and lack of action by the ECB. Watch and manage any opportunities short term.
WATCH: EFA – Entry $50.50 – Stop $50.50.
China -Breaking above resistance and in position to make a solid upside move short term. I expect volatility along the way as China decides to push stimulus at the economic picture.
WATCH: FXI – Entry $34.20 – Stop $34.20
Mexico – Moved against resistance again and still looking for a break out move on the index. Watch the volatility and manage the position.
WATCH: EWW – Entry $62.25 Friday. Stop $60.30
Singapore – moving back above the high at $13. I still like the country looking forward. Need a follow through to new high. Manage the risk of the trade short term.
WATCH: EWS – Entry $12.70, Stop $13.10
6) Real Eestate (REITS) – The sector remains near the near term highs. Double top (IYR) set up on the downside short term. I like the outlook long term, but short term we remain on hold. Still scanning and looking for the best opportunities.
7) Global Fixed Income – The issues with sovereign debt in Europe keeps us out of the asset class currently. Emerging market bonds (EMB) are overbought and we have put this on a wait and see list short term.
Some breakout set ups – 1) Brazil Small Cap (BRF) channel $37.50. 2) Latin America 40 index (ILF) confirmed break above $42.50 with follow through move. 3) Short 20+ Year Treasury Bond (TBT) cleared the $15.35 resistance on the upside. 4) Silver Miners (SIL) attempting to break above $19.50 resistance. 5) Homebuilders (XHB) broke above $22 resistance and March highs. 6) Semiconductors (SMH) holding break above $32.75 double bottom move. 7) Basic Materials (XLB) breaking above $35.75 resistance to continue the uptrend off the June bottom. 8) Resources and Commodities Strategy (BCX) breaking above resistance to continue higher at $13.92. 9) Russia (RSX) Break above $22.30 holding and testing the move. 10) High Yield Bonds (HYG) attempting to take out the high at $92.
If the market continues higher watch for these 10 ETFs to extend their gains on the upside.
Priceline gave up 17% on guidance in earnings relative to the impact of Europe on earnings. EXPE, KYAK, OWW & TZOO all traded lower in response to the data. Thus, impact limited to the sector.
Disney stock tested lower from earning, but ended the day with a 1.3% gain.
Correction worries remain in the headlines and the concern I have is the self-fulfilling prophecy syndrome. Watch the downside risk short term. 1375 on the S&P 500 index is the initial target if some profit taking steps up.
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.