Monday – Notes & Research
Day 6 – I feel like the scene from Poltergeist, “theirrrrrrr back!” Cyprus is becoming the gift that keeps on giving. As I stated in my notes this morning that the deal rumored was worse than the one last week and the market was poised to open higher? Well the balance has been restored as the markets sold off as the day progressed and investors decided they didn’t like the impact of the excise tax or confiscation of money from depositors to pay for the excess spending that caused the mess to begin with. The S&P 500 index gave up 0.3% on the day at 1552. The intraday swing is what was the most disturbing in the end. The key is to be patient and see how this plays out going forward.
Scanning the sectors for rotation we continue to see developments that are warnings in the making.
- Small caps remain on the weak side and they are a concern if the rally higher is to continue.
- Consumer Staples was basically flat on Monday, but I expect the defensive stocks to hold up barring any major selling in the broad markets near term.
- Oil moved to $94.60 up 0.9%. The breakout move from the consolidation is a positive for our position, but if the challenges in Europe continue this will not stay at these levels short term. Adjust stop to the risk.
- Volatility index fell to 12.6 on the early buying and rose to 14.6 on the mid day selling. Now that is volatility. Some big swings intraday over the last week as traders look for some clarity to the outlook.
- Speaking of volatility… Technology (XLK) is moving up and down 1% a day the last week. Still in the consolidation range for now, but setting up for a trade whichever direction momentum decides to go. Earnings have been disappointing from several of the large cap stocks and that is keeping the sector in check.
- SOXX fell back to the bottom side of the uptrend channel again to test the uptrend. Still on watch for move higher. This could set up a short term short trade if the downside accelerates. SSG is the ETF for the short.
- Gold started the trek higher on the Cyprus catalyst. Resistance came into play at the $156.50 level and we retreated today with the supposed resolution to the Cyprus default risk. The downside risk is back in play as this unfolds with a retest of $152 low.
- Interest rates fell this week on the 30 year bond to 3.13%. Volatility picking up again in the bonds as fear rises. Watching TLT and TBT to define the trade that unfolds from the current up and down action.
The focus remains on Europe and the ripple effect of Cyprus. There is no real way of predicting the outcome to this mess. We have to take it one day at a time and stay focused. The rotation of money towards the other sectors has not materialized to this point. Watch the downside risk as it is in play should things not pan out the way everyone wants.
Big week for data in store. Durable goods orders, home prices, home sales, pending home sales, GDP 4th quarter, personal income and consumer spending. That should make it interesting.
1) US Equities:
Back to the downside as the worries globally return. Wasn’t as bad as it could have been, but then the upside hasn’t been stellar either. This is going to have to work itself out short term before any good comes of the current activity.
Sector Rotation Strategy:
The February 25th low pivot point remains in play. We added the March 14th high as the next potential pivot point on the downside. I moved the line to today making it clear the sideways activity since the peak. The current trend is slightly down (0.7%). The early bounce turned selling today leaves us unchanged on the trend. The consumer discretionary (XLY) and financials (XLF) remain the leadership short term. Stay focused and protect the downside risk.
December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. The trend has continued to push higher after the February 25th test. See above.
November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend.
Sector Rotation of Interest:
Technology – Becoming volatile short term and the downside pressure is building. Watch support at $30 on XLK. Closed at $29.97 and the 30 DMA.
- Semiconductors (SOXX) Tested the bottom end of the up trending channel. Watch $58.80 as trade on upside and $57.50-57.25 on the downside.
Financials – The Cyprus initiative is pushing the sector back towards support at $17.90. Watch the outcome short term and manage your stops accordingly.
Energy – The sector hit resistance at the $80 level and tested lower. Watch for support to hold at 50 DMA. Volatility in play, but the uptrend is holding for now.
Consumer Discretionary – Broke above the $51 resistance on XLY. Made a nice move on the upside and has stalled off the $53 high. The stall is in concert with the broad markets, patience short term.
- Dollar was back near the high on euro news. Rallied on fear from Cyprus deal. UUP closed at $22.58. Still watching support at the $22.35 mark on the downside. Manage your stops.
- FXB – the British Pound jumped last week and held the move. We progressed above the $150 level on Friday, but faded today on the news. Took the entry on the move and the target is $150.25. $149 stop in place on the trade.
- FXC – the Canadian Dollar is attempting to hold support at $95.35. Bounced nicely to breakout, retraced to the consolidation zone and heading higher again. $97.50 is the level to watch.
- FXY – yen is still in bottoming mode. Watch for a base to build short term if the direction is to switch. $104.50 is the level to watch for a upside play on the bounce.
- FXA – Australian dollar bouncing as stocks continue higher leading the way. ONLY ETF MODEL.
- FXE – The euro is testing support on the downside again? Broke support at the $128.15 level and closed below the 200 DMA. Watch the downside risk of the euro in play. EUO broke higher today.
3) Fixed Income:
- Yields continue are shifting slightly higher as stocks hold gains. The question is if the market corrects how much will it impact? Patience as the downside in bonds continues.
- 30 Year Yield = 3.13% – no change — TLT = $117.22 down 11 cents
- 10 Year Yield =1.91% – no change — IEF = $106.97 up 8 cents
Tracking Bond Sectors of Interest:
Treasury Bonds – The volatility in the bond sector has risen short term and it is causing grief for investors. Watch and protect on the downside. Estimates are for 2.75% on the 10 year bond by year end? Bounce in motion for the bond off the lows for now. Volatility is back.
High Yield Bonds – HYG = 6.55% yield. Support held at $92.75. heading to the previous highs near $95 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)… again. Downtrend line remains in play. Patience as this plays out.
Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds broke support and the chart is attempting to bottom or build a base. The downside risk remains and this is a sector of the bond market to avoid for now.
Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the current rally in stocks. Starting to see some selling off the highs. Watch stops and protect your gains.
- The commodity sub-sectors are finding some signs of life along with volatility in the sectors. Watch and play the leadership. GSG attempting to build a base on the parts moving. Hitting the 200 day moving average as short term resistance? Not for the faint of heart.
- UNG (natural gas) made the big move higher breaking out and following through on the upside. hit resistance and fell 1.8% on Monday. SEE ONLYETF Model Portfolio
- Crude tested support at $89.30 last week and closed at $94.60 for the day. ONLYETF Model Portfolio The upside is still in play. Cleared the $22 resistance on OIL – watch to see if it holds the move.
- GLD – Gold gained on the alternative asset choice relative to Cyprus, Europe, China or any other worry. The gain put the metal back near the $156.25 level. Downside is still the outlook, as it declined today. GLL added to ONLYETF Model.
Commodities Rotation Chart:
5) Global Markets:
Global markets tested lower on the Cyprus news this week and volatility has kicked in since. More downside pressure as the Europe issue is back on the table. The other shoe syndrome is still alive globally. Watch and protect is the mode of operation.
- FXI – China continues to lead the downside relative to the global markets. FXI bounced 2.5% on Wednesday and dropped 1.1% Thursday. Downtrend in play… news not enough to change direction short term.
- Japan (EWJ) broke higher, tested, and continued to move higher. Got the move above $10.60 and still moving to the upside. Getting extended, protect your gains.
- EFA – The long term uptrend remains in play and support has held, but the sideways motion remains in play. The 30 DMA is the support to watch. Watch the ripple effect of Europe short term as this plays out.
- EEM – emerging markets continue to struggle. Short is the call on the sector. (EEV breakout $22.75)
6) Real Estate (REITS):
Real Estate Index (REITS) – Settling into a trading range near the high of $68.50-69.25. Sector Rotation Model
- XHB – Homebuilders moved to new high on the housing starts Wednesday, retraced some today, but still remains a positive sector. Be patient and manage your stops if the downside resumes.
- REM – Mortgage REIT continues to push higher in the trend – let it run is the only thing to do with trailing stop.
- NLY- Annaly Capital Management – continues the upside trek with some daily volatility. gained 2.5% on Friday to clear the 200 DMA. Hold and let it run.
7) Global Fixed Income:
- 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.
- Some basing is starting to take place and we continue to scan and look for opportunities in the sector.
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.