Dow leads way to new high

Tuesday – Notes & Research

Dow closes at a ¬†new high and instead of fanfare… questions of how long it will last. The broad market indexes were higher across the board today leaving the bigger question on sustainability versus breaking out. Technically the Dow broke from the current consolidation and looks to climb higher. The S&P 500 index likewise broke above 1530 and is set to move higher. The NASDAQ composite index move above the February high as well. Lower volume and questions surround the move. Thus, one day at a time as we move forward. Updates are below.

Market Drivers: Speculation or Reality Check?

  • Tuesday was focused on the Dow Jones Industrial Average breaking to an all time high. The push higher comes on lower volume, but higher nonetheless.
  • Consumer still driving higher with XRT back at the February highs.
  • Hope springs eternal! There is plenty of hope driving stocks as the data remains lack-luster.
  • FOMC or the Fed outlook¬†relative¬†to QE infinity. This was the reason for the stall. The treat of taking away the stimulus sent the markets lower. Plenty of pandering from the Fed since to assure investors they are still fully engaged. The market will need reassurance on this heading into the March FOMC meeting.
  • Positive economic data is pushing investors to own stocks. ISM Manufacturing and Services data better than expected for February.
  • Watching the Jobs Report as reports start on Wednesday.
  • Volatility jumped to 19 last week pushing stocks lower. However, we are on sequential move back below 14 ¬†on the VIX Tuesday. Showing signs buying more than selling for now. Watch the volatility.

Market Worries: Climbing the Wall!

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

  1. Budget cuts came and went without fanfare, but they are still a looming issue relative to the cuts and the true impact over time. Thus, this has turned into a longer term impact item than a current one.
  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? Starting to get some positive data points for February and if it continues with the jobs report on Friday… could offer a upside catalyst for stocks.
  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 last week to the PUTS. The ratio has declined the first two trading days of the week, but this is till a key issue relative to the forward looking progress. relative to the VIX this is unwinding short term, but remain on our radar.

Technical Outlook:

  • The S&P 500 index dealt with the recent volatility with a breakout move today above the consolidation. Watch for follow through and target of 1570 short term.
  • Dow and NASDAQ both break higher as well setting the tone for the broad markets overall.
  • Value has been better than growth during ¬†the recent trend off the November 15th low.

Market Leadership:

  • Leadership is shifting yet again after two weeks of struggling. ¬†The financials made a move back to the February highs. Industrials are in a similar position moving back to the previous high.
  • Breaking higher is Technology, ¬†Healthcare, Consumer Staples & Discretionary and Utilities short term. Watch for their leadership to carry the markets higher.
  • Rotation is back towards the previous leaders for now.

Economic Data:

Maybe now the focus will shift to the positive data from the economy versus the negative? If the trend continues the market will get the catalyst it has needed to continue the upside move.

Data Summary:

  • ISM Services rose to 56% February from 55.2% the previous month. 18 industries produced gains versus 8 prior. New orders rose to 58.2% up 3.8%! Production edged higher to 56.9%, but employment fell slightly to 57.2%. Overall a very positive data point for the economy to match the ISM Manufacturing data.
  • 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:

  • China was the headline for all of 3-4 hours on Monday and then the US buyers stepped in to take stocks higher for now.
  • New highs — see above.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play this week. The chart below shows the leadership from XLY accelerating to lead the move. XLB playing catch-up after some selling the last two weeks. , XLF regaining some leadership poise. XLU still accelerating higher XLK played into the leadership move on Tuesday. Looking for the upside to regain momentum if the uptrend is to hold short term.

SP500Scatter

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. Watch the bounce of the newly minted low on 2/25. The index moved above the previous high in February erasing the downside move. See chart above for the leadership on this move.

Scatter1228

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.

SP500Scatter

Tracking Sectors of Interest:

Telecom РThe 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 РThe trading range remains in play and holding support.

  • WATCH: GOOG – some consolidation at the high. Watch for move higher short term. Got the move Monday to break higher and has continued to do so. Raise your stops to $810.
  • WATCH: HPQ – in our model and moved higher on earnings. Raise stop and manage the risk of the trade short term. 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. Solid gains on Tuesday… look for follow through.

Financials РStruggled 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. Last three days has seen some confidence return to the sector and leading higher.

  • 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 РThe 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. Got small move on Tuesday and continue to track for the upside opportunity.

2) Currency:

Sector Summary:

  • The currency landscape is shifting short term to dollar strength. Watch UUP as it tests support near the $22.35 mark currently.
  • FXB – the British Pound dropped to $150.50 support level and failed Friday to hold. Small bounce on Monday and Tuesday… could offer some upside play.
  • FXC – the Canadian Dollar continued lower as well heading towards support at $95.35.
  • FXY – yen is still in bottoming mode.

Tracking Currency of Interest:

US Dollar РThe buck rallied back and closed at $22.36. Watch support at $22.20 level, if it breaks look at a downside play.

Euro РThe 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. Still looking for some support.

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 = 3.1% – up 2 basis points — ¬†TLT = $117.93 down 34 cents
  • 10 Year Yield = 1.89% – up 2 basis points — IEF = $106.94 down 11 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РBounce 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 РHYG = 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 РLQD = 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 РMUB = 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 РCVRT = 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.
  • UGA bounced today – Watch for follow through on the upside as potential trade opportunity.
  • UNG (natural gas) taking on a role of leadership the since the 21st of February. Watch the upside.
  • PALL – big bounce on Tuesday off the recent low. Watch for a trade on the move.
  • 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 and bounce. Some bounce on Tuesday and we need to track for follow through.
  • 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. Watch those components with a bounce as trade opportunity short term.

Commodity

Tracking Commodities Sectors of Interest:

BAL РA 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. Confirmation to the break from consolidation last week. Keeps moving higher for now.

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.

WATCH: Testing support at $60.50. Holds look for trade at $61 (volume has dried up use limit orders only/AON) Got the trade opportunity on Tuesday on the upside.

5) Global Markets:

Sector Summary:

  • China bounced with the rest of the world today, but the risk remains and puts this on trade status only.
  • Europe bounced and held today – 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 РWatch $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. Nice move on Tuesday as the global markets follow the US lead higher.

IEV РLong 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. gained 1.1% on Tuesday as the US markets help the upside.

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. Broke above the entry price today.
  • REM – Mortgage REIT held $14.80 support. At the $15.23 resistance to move higher currently.¬†Attempted to break higher on Monday.
  • 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) РThe pullback test is in play for IYR and $67.25 is support. Moving back towards the high at $68.50 resistance. Followed through on the upside on Tuesday. ADDED: Sector Rotation Model & S&P 500 Model.

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.