Choppy trading range developing short term

Weekend – Notes & Research

The week ended on a whimper as the manufacturing data was better that the budget cuts. That was  a case of now versus later. The manufacturing data shows current growth versus the budget cuts being a longer term impact item. Market are emotional, but they do like orderly reactions to the data as it is presented. The bigger question now is… where does this leave us as we move into the final month of the quarter?

Market Drivers: Speculation or Reality Check?

  • FOMC or the Fed outlook relative to QE infinity. This is the reason for the stall. The treat of taking away the stimulus sent the markets lower. The market will need reassurance on this front heading into the March FOMC meeting. 
  • Positive economic data on the week helped to offset the budget cut worries.
  • Watching the Jobs Report will come into play on the week.
  • Volatility jumped more than 30% on Monday last week and now is fully engaged. Chart below show the index and the recent spike higher. This is caused by the worries below as well.


Market Worries: Climbing the Wall!

This is not the kind of market I like, nor do I like the risk of this environment.

  1. How do investors accept the budget cuts? The hype was leaning towards selling, and as I stated all week, I am not convinced that is the case after the initial reaction. Thursday saw a reversal intraday with a 1% reaction down. Friday started lower, but manufacturing data offset and closed higher. End effect… neutral thus far.
  2. What will the Fed do at the March FOMC meeting (speculation). No real changes expected to QE infinity, but will they shorten the timeline or adjust any method of delivery. Any changes will prompt a reaction. On the radar as we move towards the event.
  3. Can the economy really recover? Earnings grow? Revenue increase? Simple things that make the market more palatable to investors. Bottom line will there be enough momentum to carry the markets to new highs and sustain the move?
  4. Will Europe be a problem for global markets as they unwind the issues in Italy, Ireland, Spain, etc? This is going to be a touchy subject across Europe short term. Moved to the back burner for now, but it is still simmering.
  5. Put/Call Ratio shifted this week to the PUTS. That would indicate worry looking forward for stock prices overall.

Technical Outlook:

  • The S&P 500 index has gone from calm and melting higher to increased volatility and struggling to hold the uptrend. The index moved back above the 1515 level and held into the close on Friday, but still looks to be prepared for more of a test before any move higher.
  • Value has been better than growth during  the recent trend off the November 15th low.
  • Indexes are choppy and building a short term trading range. Watch to see how it unfolds.

Market Leadership:

  • Leadership is struggling and show some weariness relative to the short term action. The financials have shown of late a divergence in RSI and MACD from price. The top is in short term, but we have to be patient to determine how long this shift will last.
  • Look at a chart of SPLV versus SPY. The lower volatility/value stocks have outperformed. The rotation to defensive value stocks has been the trend for the new year.

Economic Data:

The focus is on the budget cuts of $85 billion and the potential impact going forward. Analyst agree the cuts will have an impact on the economy over the longer term and could cost up to 1 million jobs. In the end only time will tell, and more is made of these issues than ever really materializes over time.

Data Summary:

  • ISM Manufacturing rose to 54.2% from the 53.1% in January. Solid improvement in the underlying data. The only concern was the rise in cost. This may signal higher PPI data or inflation at the producer level. That eventually moves to the consumer. Worth watching this further.
  • Personal income was a drag, down 3.6% and worse than expected.
  • Consumer spending rose 0.2% and in line with expectations. Michigan Consumer Sentiment was up to 77.6. The consumer continues to show positive signs despite the negative data around them.
  • Construction spending unexpected fell 2.1%. Big miss sent the housing sector lower on Friday.
  • Auto sales were better than expected giving the sector a boost.
  • Weekly jobless claims were down 18,000 which continues to show improvement.
  • GDP was revised to a positive 0.1% versus the -0.1%… at least it is positive.
  • Chicago PMI was up to 56.8 versus the 55.6 announced last month.
  • Durable goods orders drop 5.2%, but without transportation they actually grew by 1.9%. That news helped push the broad markets higher on Wednesday.
  • Pending home sales rose 4.5% versus the decline of 1.9% last month. That helped the homebuilder stocks move up 2.1% on the day. On Tuesday New Home Sales were 437,000… 53,000 ahead of expectation. Two positive reports for the housing sector after a disappointing January.
  • Consumer confidence jumped to 69.2 following a 58.4 reading in January. Nice jump for the consumer.

Economy is steadily treading water with little to no growth as the GDP report bears witness to. The short term outlook for the economy is positive, but just barely. Keep your focus and remain disciplined relative to your stops and exit points. Correction anyone? Famous last works from last week.

1) US Equities:

Market Summary:

  • Headlines Trumpet fourth month of gains as February closes. Watch out for the “Winds of March”!
  • Is the Dow setting up investors for a drop? The index came within 15 points of the high on Thursday before closing lower? Watch the trap that the index is setting up.
  • S&P 500 index held on barely to the 1515 level on Thursday and the worries begin over no deal on budget cuts. We will continue to take this one day at a time.

Sector Rotation Strategy: 

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. Watch the bounce of the newly minted low on 2/25.

10 Sectors

November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play.

10 Sectors

Tracking Sectors of Interest:

Telecom – The DJ US Telecom index has pulled back, but the defensive nature of the stocks offers some opportunities at the stock level. We have been tracking both AT&T and Verizon as a dividend/growth idea.

  • 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. The stock has broken above resistance at the $44.80 level and moved higher.
  • Both stocks have moved higher with VZ showing the strongest move. Watch the risk of the trade.

Technology – The trading range remains in play and holding support.

  • WATCH: GOOG – some consolidation at the high. Watch for move higher short term.
  • WATCH: HPQ – in our model and moved higher on earnings. Raise stop and watch for opportunity to add to the position on any pullback. The test of support at $19 held and has now continued higher.
  • WATCH: SOXX – the semiconductors need to lead the sector. $57.30 support needs to hold. Moving back towards the current high.

Financials – Struggled of late to hold support and maintain the current uptrend. May see more pullback short term, but watch for the leadership to return to the sector.

  • WATCH: KBE – banks are being driven by those with extensions into the brokerage business. BAC, C, MS, JPM and GS. Attempting to bounce back, but still have to watch how it plays out short term.
  • WATCH: IAI – sub-sector play on the brokers.

Energy – The sector remains under pressure from the decline in crude oil prices. The stronger dollar along with increases supply and storage has been the biggest detractor to the sector overall. XLE tested lower and we are looking for upside opportunity to return if the prices settle.

2) Currency:

Sector Summary:

  • The currency landscape is shifting short term to dollar strength. Watch UUP play.
  • FXB – the British Pound dropped to $150.50 support level and failed Friday to hold. Short still in play for the pound.
  • FXC – the Canadian Dollar continued lower as well heading towards support at $95.35.

Tracking Currency of Interest:

US Dollar – The buck rallied back and closed higher at $22.37. Watch support at $22.20 level, if it breaks look at a downside play.

Euro – The euro (FXE) Broke support at $129.50 and ready to move lower? This is not improving short term as the outlook for Europe remains questionable.

3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly on the turmoil in stocks.  The question is if the market corrects how much will it impact? We are in the process of finding out now. 
  • 30 Year Yield = 3.06% – down 3 basis points —  TLT = $118.90 up 39 cents
  • 10 Year Yield = 1.85% – down 3 basis points — IEF = $107.30 up 14 cents

Tracking Bond Sectors of Interest:

Treasury Bonds – Bounce on lower rates in play short term. Not something I would expect to remain in place unless the fear factor rises considerably.

High Yield Bonds – HYG = 6.55% yield. Support held at $92.75. Let it run as investors remain in love with junk bonds. I expect the trading range to remain near term.

Corporate Bonds – LQD = 3.8% yield. The price has found short term support ($118.90). Broke above resistance at the $119.50 level and the entry or pivot point. Holding the 200 day moving average.

Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds continue to move sideways. Found support and bounced back, but still looking for direction. Willing to wait for the right opportunity on the bonds.

Convertible Bonds – CVRT = 2.7% yield. Price had been moving higher on the current rally in stocks. The reversal pushed the bonds lower short term.

4) Commodities:

Sector Summary:

  • The commodity rotation chart below shows the high on January 6th to date as the index has sold lower. The drop of 5.2% has been accompanied by high volatility.
  • Bounce in gold reversed after a move to $156.17 on GLD . Downside remains and issue short term. Watch as the short set up with GLL is back on the table. Move above $70.50 is of interest.
  • Crude tested support at $90 on Friday and closed at $91.02. Looking for support to hold here.
  • Copper (JJC) broke support at $44.30 and is heading towards $43.25 support next. Nearly 10% decline in the last two weeks.
  • DBB broke lower to continue the downside run as well.
  • Commodities remain weak with the dollar adding to the pain short term.

10 Commodities

Tracking Commodities Sectors of Interest:

BAL – 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. Stalled and trading sideways. Watch and see it this can break higher. Tested lower again on Monday and back near the high on Wednesday? Thursday closed at the break out point watch for trade going forward.

UGA – Testing support at $63 … failed as it move to $61.65 on the close. Short play? Look for support and a bounce more than the short side.

5) Global Markets:

Sector Summary:

  • Europe bounced and held the lows – that is the good news. Still looking for some positive momentum to lead the indexes higher.
  • Japan (EWJ) bounced back after some more testing. Looking for a break above $10.20. Got the break higher on Thursday. upside remains in play.
  • Italy (EWI) still in the news and the downside is at support of $12. Bounce held of the break lower on Wednesday. Still interesting short term. The upside bounce may come into play?

Tracking Global Sectors of Interest:

EFA – Watch $56.90 support to hold on the recent test. The long term uptrend remains in play and support has held to this point. Patience for the trade to develop.

IEV – Long term uptrend is still in play, but testing support near the $38.75 level. Watch as this unfold there will be an opportunity off support.

FXI – Downside pressure remain on China despite the short term bounce. Look for a move below the $38 level to $35.50 support.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders bounced support at $27. Watch to see if the upside remains after disappointing news in the housing sector. The is weakening some as the trend matures.
  • REM – Mortgage REIT held $14.80 support. At the $15.23 resistance to move higher currently.
  • NLY- Annaly Capital Management finally broke above $15, and is testing the $15.20 support currently on the upside move.

Tracking Real Estate Sectors of Interest:

Real Estate Index (REITS) – The pullback test is in play for IYR and $67.25 is support. Moving back towards the high at $68.50 resistance.

7) Global Fixed Income:

Sector Summary:

  • The sovereign debt issues had faded, but with Spain in the news again, Italy facing disruptive elections this weekend, and France taxing itself out of existence, too many concerns and the safest play is to avoid the asset class for now.

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.