Close Week Positive for Stocks

Friday – Notes & Research

I have been paying for my ski trip today with a cold. The update will be done progressively over the weekend as I hopefully get better. The indexes drifted higher on the day and pushed back towards the September highs. The jobs report was 155,000 new jobs versus the 160,000 expected. That is pretty much in line, but far from where we need to be for economic growth. ISM Services data was better than expected and is expanding at 56.1%. The expectation was for now change and the bump higher was a positive for the sector.

Last night I outlined some sectors below that where of interest going forward. I wanted to update them in relationship to today and discuss any actions taken.

What about Technology? The sector jumped more than 3% on Wednesday and remains an upside opportunity as XLK broke above resistance at $29.35. The semiconductors (SMH) tested support and gapped higher as well on Wednesday above $33.25. Networking (IGN) is attempting to break to a new high and Software (IGV) made a move above the December high. Internet (FDN) hit a new high and is setting the upside pace short term. Overall this remains one of the more positive sectors to own. Today however, we got cuts in forecasts for the sector overall. Analyst cuts of more than 10% for growth in the fourth quarter caught some off guard and the sector declined 0.4% on the day. Semiconductors and large cap tech stocks were the downside leaders. Software, Networking and Internet were positive. Google is leading the upside overall. We can still play the parts here as the whole mends from the downgrade.

What about Apple? The merry-go-round that are Apple analyst continue to beat on the stock relative to the outlook for earnings. The consensus remains negative on margins as competition heats up in the smart phone and tablet markets. The need for a lower end smart phone is one issue facing the company as well as the non-launch of Apple TV in 2012. Today the stock fell 2.8% as investors get nervous over earnings. I am looking for a test of the $505 level and then a move higher into earnings, but overall the downside is still the challenge based on sentiment towards the stock. A good earnings period would go a long way to fix what is impacting the stock.

What about Bonds? Range bound or do we see the bottom fall out? First you have to consider that the Fed is¬†suppressing¬†rates by buying bonds in the open market as part of QE3+. Thus, the recent rally in yields back above 3% on the 30 year Treasury bond could be a buying opportunity. The yield over the last three days has jumped back to the September high of 3.1%. That equates to TLT testing the September low at $118.45. This could be an interesting time to buy bonds. We tested higher on the yield on Friday. The move to 3.15% couldn’t hold. This is playing out for a upside play in TLT. Be patient and let this develop.

Can financials continue higher? The upside may be limited in the sector based on the Fed activity. While the Fed is still buying Treasury and Mortgage bonds in the open market the expectation is for that to taper off this year. Unless interest rates start to tick higher that will put pressure on the bottom line of banks. Thus, the short term outlook is for more upside, but the downside risk will rise and the year moves forward. Today the sector got the same downgrade on growth for the fourth quarter as technology, but the  sector rose 1.2%? Go figure. Banks were the leader with KBE up 1.6%.

Retail sales for December feel the pinch from consumers. The psyche impact on the consumer from the fiscal cliff, threat of higher taxes, Hurricane Sandy, etc. all played a role. Those reporting today were mixed as Coscto showed promise beating expectations, Limited Brands missed for one of the few time in recent history and Target was flat, just to review few. The outlook isn’t overly positive, but then it isn’t negative either. XRT, SPDR Retail ETF was up 1.1% on Thursday. This remains a sector to watch going forward. Earnings will shed some light on the outlook for 2013. Today it moved to top end of the range and is poised to move higher. Reviewing the sales reports from Thursday… they weren’t as bad as they sounded, but the real test will be in the earnings reports. If they held margins and made money it will prove to be a positive for the sector going forward.

Overall positive start to the new year and the opportunities continue to emerge.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index moved near the 1400 level last Friday and held the key level of support. Monday the index bounced back to the 1426 and ended the week at 1466.  The move negates the break of the trendline following a lower-low that took out the 1413 low on 12/14. Now comes the proof of direction as we head into the first full week of trading and earnings.

The chart below has a starting point of 11/15 which was the pivot point for the uptrend. The first vertical line drawn on the chart shows the starting point of the drop relative to the fiscal cliff issues. The second is the rebound start on Monday. Thus, you can see the drop of 3.2% was met with a bounce of 4.5% or we have erased the downside movement between the vertical lines.

Manage the risk short term the party is far from over.

The VIX index jumped above 22.7 as expected last Friday, but fell to 13.8 as the fear factor subsided to end the week of trading. The uncertainty from the 18th through the 28th of December pushed the fear factor up… and the confidence of the fiscal deal pulled the fear out of the markets over the last few days. Watch for a test of the low going forward.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РStalled in a trading range of 3030 on the upside and 2960 on the downside. The index closed right on 2960 at the bottom of the current range and support on Friday. Bounced on Monday to close at  3019. Wednesday the index closed above the range at 3090 on positive trading. 3107 is the next level to clear on the upside and would be our entry point based on the confirmation of the move higher.

Dow Jones 30 Index РThe support of 13,080 short term was broken Friday showing the worst results for the major indexes. The bounce on Monday and Wednesday put it back above that level for now. Again, wait and see how this plays out. Two day bounce back to the December high. Move above the next resistance level is key for the broad index.

Small and Midcap Indexes showed equal moves to the upside after holding support similar to the other major indexes. Small caps are testing the previous highs already? Investors looking to take on risk again?

Financials РXLF was one of the stronger sectors during the selling and has moved to a new high at $16.80. Look for a test near the $16.40 level and entry point if it holds the test. The gap open negated the ability to buy at $16.40 today. (SEE NOTES ABOVE)

Basic Materials РXLB made a move back to the $36.80 support. The move to a new high was similar to the financials with a gap higher and close at the new high. This is another sector to like on the upside as we got a small test of the move on higher today. Today the forecasts for the fourth quarter were cut by as much as 14%. The sector still rose 1.2% overall. Still moving up for now.

The gap on Wednesday left many of the play opportunities well above our entry levels. Thus, we wait to see how the market and investors react near term. Thursday didn’t really provide much in the terms of insight or a test of the move. And Friday was a positive day overall. This is no time for assumptions as we move forward with a cautious outlook.

2) Currency:

Dollar РThe dollar is enjoying the upside as investors like the news in the Fed minutes Thursday. Some see the need for QE3 to end this year. Watch resistance near the $22 level on UUP. Needs to make a definitive move to the upside in order to play.

Euro РThe euro is testing lower on the rally in the dollar on Thursday. The support at $129.80 is in play currently and break is the exit point for the play on the euro.

WATCH: FXE – $130.80 Entry. IN PLAY

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year jumped again to 1.89% and the 30 year to 3.1%. The downside risk in Treasury bonds remains. TLT is is testing support at $118.40 and could provide a buying opportunity. (SEE NOTES ABOVE)

High Yield Bonds РTesting the highs and resistance near $94 on HYG, as the upside in stocks resume. Look for support holding at $92.75.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. They have bounced off the December lows, but lack much in terms of upside conviction. Even the breakout move on Wednesday seems lackluster. The volatility remains very much in play off the recent lows.

UNG – Natural Gas broke support and move lower to $18.70. The bounce off the lows didn’t hold short term and the new low today was not pretty. Short natural gas seems to be the better opportunity (KOLD).

OIL РOil has been stuck in trading range, but on Monday moved above the top end of the range and today continued higher towards $93. Still looking for clarity in trading relative to the price of crude. The upside is in play, and the breakout on Monday is confirmed to the upside.  The trade is there short term if you are willing to take the risk. ENTRY OIL is $21.70. (STOP $21.45)

UGA РGasoline fell to the 200 day moving average and has bounce off support. Bounced back to the $58 resistance level and broke higher on Wednesday. Manage risk if you take any trades here. UGA at $58.50 Entry? Watch move higher today to confirm it holds.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We are in the midst of a test of $161 on GLD. The bounce back to $163.50 on Wednesday showed there are still interested buyers, allbeit they were not interested long as give the gains back on Thursday. Sold further intraday, but managed a rally into the close? Downside looks better than the upside in gold.

Silver – SLV gapped higher and is holding above $30. Filled gap and sold back to $29.25.

DBB – Base Metals failed to hold support at $19.10 last week, but resumed the move on Monday. The sector has struggled to hold the upside. Watching for opportunity on upside to continue. gapped higher on Wednesday. Watch to see if there is a pullback opportunity. Thursday did pullback to fill most of the gap. Watching for entry. ENTRY $19.25 if holds. Friday failed to hold the support we were looking for, but it is still on my watch list going into next week.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) struggling to get above the 200 day moving average. The consolidation near the high is worth watch for a direction indication short term. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain. Resumed higher today on the cliff resolution.

WATCH: EFA – Moved above $56.80 resistance and the uptrend short term continues. Stick with the uptrend play for now as it holds support.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the support of the 200 day moving average and has moved higher. The break from the trading range was a positive trade entry at $33.25. Manage your risk and raise stop to $36.75. Falling yen is driving the stocks higher. Some topping in play – manage your risk.

WATCH: FXI – China has firmly established the uptrend off the November low. Clearing the $38.10 resistance on FXI was a plus as the upside continued. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Cleared the resistance at $39.50 – 40.50 on the gap higher Wednesday.

WATCH: IEV – Europe continues to rally despite all the negative reports and sovereign debt issues. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance recently for IEV. Upside target is $45.50 going forward.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading as the cliff issues are resolved short term.

WATCH: IYR – Look for reasonable entry. $64.90 Gapped open on Wednesday, but still of interest on test of the move. No real test on Thursday… watch. Break above $66.12 is an entry point of the move above the next level of resistance.

7) Global Fixed Income:

The sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD. Watch the volume as money flow picks up in the sector and gives opportunity to add to positions.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding the uptrend line and support. HOLD.

WATCH: PICB – International Corporate bonds broke above the top end of the current range and trading higher for now. HOLD.

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.