Day Two of Reversal a Success

undoThe bottom reversal continued today with the indexes posting a solid move on the upside. Coming into the trading day I was looking for a follow through to Wednesday’s initial reversal. The futures were trading up nearly 1% at the open and they held the move throughout the day. TheĀ S&P 500 index moved back above the 50 DMA and to resistance at the 2060 mark. This isĀ the key resistance level for the currentĀ move. If we stall here it could turn into something more on the downside for the broader indexes. The defensive sectors of healthcare and consumer staples cannot be the leading sector on the move higher either as they were on Wednesday. We need the risk on trades to come back, and today Technology, Energy and Basic Materials were the leaders on the move higher. Financials are still lagging, but I won’t get greedy wanting it to all happen at once. Positive progress for the markets on the day with the next hurdle… break key resistance at the 2060 mark and continue higher.

Jobs report is out in the morning and that could provide the needed catalyst for the upside to get through the resistance and return to the previous highs and beyond. That would complete yet another ‘V’ bottom for the trend, but the key is to keep the uptrend in play and humpty-dumpty on the wall.

The material sector jumped 2.2% today as a leader for the broad index. Aluminum stocks were upgraded and put some pep in the sector that has been suffering from the energy sectors decline. The daily chart shows a consolidation wedge pattern (XLB). This is worth watching moving forward for a break up or down depending on how the supply/demand picture unfolds going forward for materials products.

The homebuilders (ITB) jumped again today gaining 2.4% and recaptured the highs from November. Digging into the sector the leaders were the supplies USG, LPX, OC, TREX, etc. The builders moved higher, but it those supplying the building materials that made the move today. The charts of these are worth some study as they do present some opportunities.

Emerging markets (EEM) jumped back to the previous high to complete the double bottom pattern, but it does need to break higher and clear resistance at the $39.50 mark on the ETF. High risk in the sector as the uncertainty pertaining to the global economic picture is on the table. However, if the US markets are in rally mode I would for this sector to tag along. Europe, China and others are moving higher the last two days as well.

Retail (XRT) jumps back to the previous highs on JC Penny showing better than expected retail sales for the holiday. The stock was up more than 20% on Wednesday and manage to hold the gains today. The ripple effect through the sector is on the premise that if Penny’s can beat expected sales Kohl’s, Macy’s and others will surely do better. The December retail sales data will be released next Wednesday and the sector is rallying in front of the news based on the release from Penny’s… I would recommend caution near term… remember buy on the rumor sell on the news. Not saying that is the case, but a reasonable stop is advisable.

Biotech (IBB) followed through on the move higher from Wednesday, but ran into resistance at the previous high. Look for a move above this level to help the rally in the broader indexes continue.

Airline stocks continue to rise as they benefit from the lower fuel costs. The interesting side effect is that ticket prices have actually continued to rise. They rose more than 3% across the board last year (2014). Some have said it is greed by the airlines not to pass on savings. The reality is the seats are full, investors want to make the money as profits rise and they are ordering new planes to replace older versions. Thus, why pass it on to the consumer? If you want to afford an airline ticket you need to invest in the airline stocks. Since October the stocks are up more than 44% for the sector. Heck with those type of returns you could fly first class.

Fed said in the minutes the greatest risk to the US economic outlook was the global economic risk! As you can see by the actions the last two days in both the US and global markets nobody is listening currently. Don’t forget this warning is looking forward and it is something to watch, track and remain aware of should it unfold and impact stock prices at a later date.

Euro is at a nine-year low? Rational or not? Doesn’t matter how rational it may be… it is reality. The dollar continues to gain strength on the global weakness. The obvious statement: at some point this will end and the opportunity presented, but until then it is on my watch list and not in my portfolio.

Ten-year treasury yield is 1.95% — worry has not gone away despite the bounce in stocks. Should we be afraid of the rally in bonds? Treasury bonds were one of the best performing asset classes as they rallied along with stocks in 2014. Why should this year be any different? The fear factor in bonds is almost non-existent as most investors believe, based on history, the Fed will rescue any stalling in the economy with more stimulus, and without the fear of inflation currently they may be right. Thus, interest rate risk in this asset class is being discounted by that belief. If or when this changes the threat of interest rate risk to the bond sector will likely return, until then it is a safety net for investors when challenges arise or a lack of clarity towards the economy are present.

As you can see there is plenty happening across the markets. I am still cautious and we continue to put money to work judiciously. Patience is key as all this noise is filtered and some clarity gained looking forward. Review the strategies for specifics on what is being added or what we would like to add Ā relative positions short term and long.