Early Selling on Italy, Late Rally on Money Supply

Wednesday – Notes & Research

Italy and Cyprus pushed stocks lower at the open, but equities fought back to even on the day with the NASDAQ making it back to the green numbers. Pending home sales were down 0.4% and put addition selling pressure on the broad indexes early. Italian politician comments relative to the future of the Italian government rattled investors, taking the euro lower  along with IEV, Europe S&P 350 Index ETF. Plenty of concerns voiced about the situation in Europe, but the money supply being accommodating has kept equities pushing higher.

Scanning the sectors for rotation we continue to see developments in the making.

  1. S&P 500¬†index remains just 2 points from the record high! Didn’t happen today as opening lower was enough to fight back from.
  2. Pullback, Correction or Trend Higher? That remains the big question. The Dow hit another new high on Tuesday, but retracted today. JPM was one of the big reasons down near 2% in trading. The stock moved below it’s 50 DMA as the large banks continue to struggle relative to Europe. Watch KBE and the holding here to see how this plays out short term.
  3. Europe (IEV) moved below the uptrend line from July. Support remain near the $38.40 to 38.75 level. A break below that would open the way to a short play. EPV is the leveraged short play on Europe. We will look to post this the watch list for the ONLY ETF Model. Cyprus effects are in play, but the wild card introduced today was Italy. Politically they are heading the way of Greece.
  4. As Europe goes so goes the euro? Big drop early, but managed some recovery during the day. FXE broke support of the 200 DMA and today it tested support at the November low of of $126.20. The emotions/sentiment towards the currency remains weak as the headlines continue to bang on the issues of the banks. Watch for the downside to continue unless some miraculous event occurs.
  5. Oil moved to $96.53 as the upside stretches it to four days on the upside. The breakout move from the consolidation on Monday has followed through on the upside. We will raise our stops to protect the gains. If the challenges in Europe continue this will not stay at these levels short term and we have to manage the potential downside risk.
  6. Volatility index closed at 13.1, but the early push was near the 14 level. Some early worries on Italy, but the US markets turned their blind eye to it and kept on moving back towards even after the initial move lower. Still a concern short term.
  7. Interest rates dropped more than 4 basis point on the day showing the fear factor still in play as money finds safety. The 30 year bond is at 3.09% and doesn’t seem to buying into the markets optimism. This is an area to watch for clues on how investors really feel about stocks.

The focus remains on Europe and the ripple effect globally. There is no real way of predicting the outcome to this mess. Remember that outside market events are controlled by speculation not facts that have trend developing results attached to them. We have to 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.

Economic Data:

Big week for data in store. Durable goods orders (good on Tuesday), home prices (best increase in years reported on Tuesday), home sales, pending home sales (fell on Wednesday), GDP 4th quarter, personal income and consumer spending. The data should make it interesting.

Economic Events & Calendar 

1) US Equities:

The yo-yo syndrome continues as investors want to buy stocks without the fear of Europe. That they did again on Wednesday after they fell more than 0.5% at the open. New game new attitude and hopefully a different result going forward. All eyes are on the 1565 level for the S&P 500 index to hit a new high. The real challenge will come on the other side of that move. Is there enough momentum for the index to travel higher?

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. The move Tuesday pulled the index even with the close on the 14th keeping the downside at bay short term. Wednesday we closed down 0.5 points and that is the close on March 14th. Thus the trend remain sideways short term. The early selling turned to gradual grind back to even on the day. The consumer discretionary (XLY) and Healthcare (XLV) are the leadership short term. Stay focused and protect the downside risk.

Scatter 225

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:

Healthcare –¬†Continued to a new high above the $45 mark on XLV. Good point to add to position if you don’t own the sector already. This was the post in this mornings notes to break the sector down and look for the opportunities. March 18th was the pivot point off the recent pullback and XLV is leading all the sub-sectors! that is very unusual. IHF has had strong push the last two days breaking above the previous high at $76.

Small and Mid Cap –¬†IJR and IJH have both failed to make new highs or provide any leadership in the move since March 14th. If they fail to gain an momentum the push higher is going to face a tough road to move higher.

2) Currency:

Sector Watch:

  • Dollar was back to a new high on euro news. Rallied on fear from Cyprus and Italy tody. UUP closed at $22.66. 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. However, it is testing lower this week. Watching to see how it does near the $149 level. 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. $98.50 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. Big test today? Watch to see if it recovers or take your profit on the position at $104.25. 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:

Sector Summary:

  • 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 = 3.09% -down4 basis points — ¬†TLT = $118.36 up 99 cents
  • 10 Year Yield =1.85% – down 5 basis point — IEF = $107.54 up 46 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe volatility in the bond sector has risen short term and it is causing grief for investors. Watch and manage your positions as the fear rises about Europe. 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 РHYG = 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. Big jump today on the fund, but still not making progress short term.

Municipal Bonds РMUB = 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 РCWB = 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.

4) Commodities:

Sector Summary:

  • The commodity sub-sectors are flat lining and no real progress overall. Still watching and waiting to see if anything other than the energy commodities will pick up momentum.
  • UNG (natural gas) made the big move higher breaking out and following through on the upside. Hit resistance and has been testing the move. Gained 2.3% on¬†Wednesday¬†and back near the previous high¬†currently. SEE¬†ONLYETF Model Portfolio
  • Crude tested support at $89.30 last week and closed at $96.69 for the day.¬†ONLYETF Model Portfolio¬†The upside is still in play. Cleared the $22 resistance on OIL – watch and manage the risk of 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 and now at $155.36.

Commodities Rotation Chart:   


5) Global Markets:  

Global markets tested lower on the new in Europe and volatility is yawning, as the global markets bounce up and down. We are a long way from being out of the woods on this issue. Take the positive today for what is… a move higher following some selling. Patience as this all plays out short term.¬†

Global Mkt

Country Watch:

  • FXI¬†– China continues to lead the downside relative to the global markets. Watch the base that is building short term. 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 broke today. Watch the ripple effect of Europe short term as this plays out.
  • EEM¬†– emerging markets continue to struggle. Small bounce of the lows on Tuesday and Wednesday, but still questionable on any move to the upside.

6) Real Estate (REITS):

Real Estate Index (REITS) РSettling into a trading range near the high of $68.50-69.25. Sector Rotation Model

Sector Summary:

  • 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:

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.
  • 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.