Comments From Fed President Rattles Investors

Tuesday, September 25th

Positive housing data helped push the indexes higher early, but the selling returned as the day progressed. Throw in the comments from Fed President Plosser relative QE3 rocked the confidence and markets sold off. The market is in a position of uncertainty looking forward, and negative comments relative to what drove the markets higher, gave the sellers the upper hand on the day.

The NASDAQ led the downside losing 1.3% with the S&P 500 index off 1%. Today’s action brings out the bears and allows them to tell their stories of doom-and-gloom. From my view the economic outlook is a weight on the markets and adding negative comments adds to the pressure being exerted on the downside. Too soon to tell if this move will gain momentum from the sellers or if the buyers will step up to once again rescue stocks from the downside.

Today’s activity brings exit points for some sectors and poses the question of opportunities on the short side of the trades. The short trades for the EGG Model and the S&P 500 Model hit the entry points today. These are trades on the short term pullback. Watch your stops and manage the expected volatility.

First step towards some selling and profit taking from the broad markets. We hit plenty of stops today on the selling. Watch, honor your stops and let this anxiety play out short term.

Below we address the sectors looking forward:

1)  US Equities:

S&P 500 Sectors-to-Watch – The index been slowing eroding with modest selling. Today’s drop of 1% got everyone’s attention. The impact of the stimulus amounted to a one day event¬† and all the comments since have been on the negative side. The chart below of the 10 sectors shows the last pivot point on August 30th and the current reversal. Telecom is the leader, but has clearly turned lower, but then so have all the sectors.

The S&P 500 index (bold white line) shows the move lower following the¬†lateral movement.¬†There isn’t a clear direction for the broad market index, but the downside is starting to exert itself. Since the 9/14 high we have seen gradual weakness across the sectors. The sectors holding up the best are Healthcare, Telecom, Consumer Staples and Utilities. The worst performers are Basic Materials, Industrials, Financials and Energy.

The worry factor is growing and we raised our stops on all the position in the S&P 500 Model and as a result we took several exits today on the move. I added an entry point SH as a short position or hedge in the Model which we also hit today and added to Model. We are starting to see the negative sentiment¬†I¬†have been¬†reading about in the charts, and they are beginning to reflect some warning signs.¬†Thus, don’t over think what you hear, adjust your stops and keep looking forward.

WATCH: SPY – Entry $142.50 – Stop $145.35 (HIT STOP)

Basic Materials – The sector broke support, hit the stop and we exited the play today. The start of the move came from China’s stimulus and infrastructure build out. However, that enthusiasm wore off due to the economic picture globally. Doesn’t mean the thesis was wrong, just that the worry towards the economic picture is strong in the short term.

WATCH: XLB – Entry $37 – Stop $37 (HIT STOP)

Financials РThe sector sold from the recent move higher. $15.70 was our stop support and we hit it today. The uptrend remains in play despite the give back of late. Banks are still holding near support, but the broker broke lower along with insurance stocks to lead the sector to the stop overall. The challenge is uncertainty once again globally. Watch to see how this plays out.

WATCH – XLF – Entry @ 14.55 – Stop 15.65 (HIT STOP)

Energy –¬† Oil tested lower and the sector is testing support near the $73 mark. Still watching to see if we hold support and create a new opportunity.

WATCH: HES – Entry $51 – Stop $54.25 (HIT STOP)

Telecom – The leadership of the market tested lower losing 1.6% on the day and hitting our stop. Still like the sector, but willing to sit on the sidelines and see how this unfolds.

WATCH: IYZ – Entry $24.40 – Stop $25.59 (HIT STOP)

Healthcare РThe sector continues to push gradually higher. We moved above $39 (top of the trading range) and the current leg higher remains in play.  IHF and IHI have both provided the leadership as they hit new highs. Obama leading in the polls is having some influence on the sector. The laggard has been pharma stocks and we are watching as the weighting is near 50% of the index. XPH is testing support at the $59.75 mark. Hold positions and manage the stops.

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

Biotech – The sector the upside trend off the August low. We adjusted our stop based on the selling in play and we hit that stop today. The exit doesn’t mean the opportunity is gone, but we will sit on the sidelines and look for the next opportunity in the sector.

WATCH РXBI РEntry at $89  РStop $94 (HIT STOP) / WATCH РTHRX Р26.60 Entry, 25.50 Stop, 32 Target

Consumer Discretionary РThe consumer has been spending, but the news in the sector has been weaker sales. We have to watch the earnings as they report and determine who the winners and loser are. I am still focused on the parts versus the whole in the retail sector. XLY hit our stop on Tuesday and we move that to the sidelines. Looking for the next opportunity in the sector.

WATCH: XLY – Entry 44.50 – Stop 46.85 (HIT STOP) / DLTR – 49.25 Entry, 46.84 Stop, 62.70 Target (watch for trade opp)

Technology РThe sector overall has performed well, but the negative sentiment is hitting technology harder than the other sector for now.  Watching the weakness in Semiconductors (see below) as they act as drag on the sector. The networking (IGN), software (IGV) and internet (FDN) have all moved lower to support of late and thus the downside overall in the sector.

WATCH: FFIV – Entry $105 – Opened higher and added at $107.48 – Stop $106.10 (Gap down open on Monday – Take stop off and let the noise filter out held and reestablished stop.) Held up on Tuesday, but watch the downside and manage your stop.

Semiconductors РThe sector has been testing lower and the downside leadership has been from Intel. The sector remains weak, but has been consolidating and looking for direction. Today that direction showed up in selling. If we break support we have to watch the downside play with SSG.  Watch the Intel play as it is attempting to bounce off the low/support. We adjusted the stop to protect the gain on the trade.

WATCH: Short Intel (INTC) – 24.55 – Stop – 23.25 (Stop on the close) / WATCH: SSG – Entry 40.65 –¬†Stop – $41.50

NASDAQ Index – The upside momentum has been as a result of the technology sector, but the downside risk in in the semiconductor sector. The trend is up, and we have to manage our risk. Large cap stocks are struggling to maintain the upside movement. Raised the stop to protect the gains as sentiment shifted. Apple didn’t help the situation on the downside on Monday. Took the exit and looking for the next opportunity.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 69.50 (HIT STOP MONDAY)

Small Cap Russell 2000 Index – Selling on Monday hit our stops and we have stated from the entry this sector wasn’t stable, but it was worth the trade short term.

WATCH: IWM -Entry 79.60 – Stop – 84.60 (HIT STOP MONDAY)

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. 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 continue to look for a bounce off support and then a resumption of selling, if the markets return to the uptrend. Be patient and see how this plays out.

WATCH: UDN – Entry $26.40. – Stop $27.20 (manage the exit if the bounce continues.)

3)  Fixed Income:

Treasury Bonds – TLT 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 are willing to take a small position if TLT moves above $122.45.

WATCH: TLT – Entry $122.50 Hit Entry Monday. Stop – $122

4)¬† Commodities: Volatility has picked up in the sector short term and we don’t hold or recommend holding any positions short term. This will work out and the opportunities will present themselves again. Gold attempted to move higher along with silver, but they reversed course. The closed as support is the key to watch for the metals.

Agriculture and Energy are both still lagging as the market attempts to read the tea leaveson direction.

5)  Global Markets: The global markets bounced back on Friday following the selling on Thursday. This week the selling has returned and a test of support near $54 is in play. Watching how this plays out short term. The concern remains Europe and the bailout/stimulus. Spain made progress, according to the reports Friday, on dealing with the ECB and IMF on a bailout package of nearly 350 billion euros. Watching the EAFE index and raised our current stop.

WATCH: EFA – Entry 52 – Stop – $53.80

Brazil Small Cap – The country ETF has continued to progress in the uptrend off the July lows. We continue to monitor the play and have tightened our stops as sentiment globally shifts.

WATCH: BRF – Entry 37.60 – Stop – 40.40

6)  Real Estate (REITS) РThe sector moved to new highs, but has sold in reaction to the stimulus. I like the outlook long term, but the short term is experiencing volatility and selling. The sector is breaking down further and now is at $64.20 support? Watch your downside risk if you still own this sector.

REM continues to move higher as the Fed stimulus is directed at the mortgages. The test was an opportunity to enter or add to positions, but the risk was too high for our taste. We will see how this plays our near term.

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.

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. To make any money trading the position you have to be willing to take your position the night before and bet on the direction for the day. Not our focus. However, this story will unfold into a upside play if the stimulus works or a downside play if the sentiment shifts.

Commodities should have been¬†the benefactor from the Fed stimulus activity. However, that has not materialized for the sector overall. ETFs to watch relative to this move… 1) DBA, PowerShares Agriculture ETF – fell to the bottom of the trading range and testing support at $29.50. A bounce off this support level could offer a upside play short term. Look for potential entry near the 29.70 mark.¬†2) Oil has been volatile as well testing support currently at $90.85. The upside could be¬†trade if we hold support. Watch and see¬†how this develops. 3) Base metals are testing the move higher and looking for the next catalyst. 4) DBP –¬†shows the test in the precious metals of late, with the upside still in play.

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).

They show the mixed emotions currently in the market since 9/14. However, they are worth watching as we start this week of trading. There may be some short term trading opportunities.

1)  BAC РBank of America to move towards the target of $10 short term. Holding support near the $9.10 level for now. Pullback is likely an opportunity as well on the upside to add to positions.  2) Oil to bounce off support at $90. If breaks short play gets interesting. Held support today and we continue to watch.  3) Downside sentiment shift. If this plays out the risk to the overall market grows. The short term shift this week is in play and we need to watch how it plays out next week. 4) IP is breaking higher and worth watching on the upside. 5) SIVB is breaking higher in regional banks and worth watching. 6) ZMH in the medical devices is leading. 7) DRI broke out as a leader in the restaurant sector. 8) CERN in the software space is at the top side of a trading range attempting to break higher.

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.