Monday – Notes & Research
I have been reading articles about the price of gold being propped up and that it should be trading much lower. Well maybe those writing the article were right. However, unless they were short gold to gain monetarily it was a great prediction and nothing more. Our short play on gold obviously did well on the day, in fact, it has done well period. The question now is how much farther can it fall. Raise the stops on GLL and let’s find out without attempting to guess.
The commodities remain the weakness factor in the media, but the economic data has been bad for March and it didn’t improve today. The homebuilders and the Empire State index both missed their mark adding to the string of misses over the last month. Eventually investors will believe the weakness and that is only going to ignite the downside further. That puts on the defensive as we go forward. I am looking for the exits and we will take it one day at a time for now.
Tomorrow the big question will be can the market bounce or does it sell further? Stay focused and let this unfold.
Sector Moves of Note:
- Oil falls to test below $88 on the day. As we noted in the weekend update the the weaker demand views from the IEA and OPEC have weighed on the commodity. The news from China on Monday didn’t help matters as we test $87.70 as the next support for oil. The short side of oil is in play and the hit to the stocks took it’s toll today as well. XLE fell 4%, IEZ down 4.5% and XOP off 5%. Now we look for a bounce in response to the big drop.
- Telecom and Utilities held up well in Monday’s selling. With the defensive sectors taking on a primary leadership role the sector remains positive, but we have to be on guard relative to the downside risk. Manage your stops and let it progress.
- The S&P 500 index pulled back to the the 1560 ish support level today. What does this signal if anything for the index? Energy has been the catalyst to the downside, but there is other weakness in the basic materials and industrials. Not looking for a huge sell off, but a short position to hedge the portfolio at this point is a good idea. We added SH to several models today.
- The NASDAQ index moved back to the next test of support at the 3200 level. Not much relative to bigger picture, but enough to catch investors attention. The SOX index was down 3% on the day
- VIX index woke up today jumping to 17.2. If the current unrest around commodities, global markets and the explosion in Boston on Monday continues, look for further selling. What has been worrying some crept into the markets today and this is something we have to watch how it plays out short term.
This was a day where the early trading was a gap open lower, but held for the most part and kind of worked its way through the news on China versus Citigroup’s earnings. Then the drift lower accelerated and by the end of the day it got ugly. After many days where the buyers step in and erase the early losses, today the selling just kept going and volume accelerated with the selling. The key will be how investors respond tomorrow. There were trendlines broken today along with other technical damage that we will be sifting through further tonight. For now protect your positions and let this play out.
The Empire State Index was well below expectations and posting yet another missed data point. The Homebuilders Index fell to 42 versus the 46 expected adding to the missed numbers. Homebuilders have been selling of late and today’s market along with the news took the index down 4.8%. If you still own the sector, watch the downside risk building in the sector.
1) US Equities:
For all of those who have been worried about the downside risk of the market overall, welcome to the dance. I know it is too soon to draw any conclusions from today’s activity, but the move did establish a new high or pivot point on the chart. As you can see below we have marked the April 11th high as the point to watch going forward.
Energy and basic materials both lead the downside of more than 5%, industrials off 3%, with technology and financials each giving up 2.5%. Watch how this unfolds, the leadership on the downside is in alignment with the commodities on the downside, but if financials and tech continue to push lower it may start a downside trend or pullback short term.
Volatility index – Volatility returned with a jump to 17.2 in the VIX index on Monday. Is this just a short term reaction similar to the one in February or December? Remember those were brought on by outside market events… today’s was a direct result of inside market events… economic data, commodity demand, China’s slowing economic data, etc. These events tend to last and ramp up versus getting a short term reaction of worry from investors. Jury is still out on the move, but for now we will treat it as a serious issue on the downside.
Sector Rotation Strategy:
The February 25th low pivot point remains in play. The last two days has established a new potential pivot point on the downside to join the March 14th (Cypress and budget) high as potential pivot point on the downside. Now we take a deep breath, exhale slowly and focus on what we know and plan accordingly. As stated above watch the downside catalyst and the impact on the sectors as well as the broad market index. This puts the trend back to a sideways trek, with a downward bias.
December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher after the February 25th test. With today’s developments we have to protect against the downside and look to lock in gains if our positions are short term. Longer term holdings will be managed accordingly.
November 15th Pivot Point is the start of the current uptrend. Target 1550-1575 was attained and now there is pressure to test the move. The trend has overcome two attempted moves lower to maintain the uptrend. The move on Monday now makes it four attempts to break lower. Watch the trendline as the support on the current pullback. A break of the uptrend brings downside options back into play for the short term.
Sector Rotation of Interest:
Financials – (4/12 post) – Banks are rolling over on the Wells Fargo and JP Morgan earnings announcements. OR are they really going to sell off? The chart of KBE shows the current pullback and test of the support at $26.50 and the 50 DMA. Wait, isn’t this the level we broke last time? Yes, but this time we take the exit if it breaks lower. Watch XLF, KBE, KRE, KIE, and IAI as we progress into next week. I like the longer term outlook for the sector, but we will treat it as a trading sector for now.
4/15 post – Selling accelerated in response to the broad markets. Citigroup did it’s part to give the sector a boost from better than expected earnings. There will be plenty more this week, but the threat of the downside is in play. We erased last week’s gains today and now look for some clarity in direction. Stop is $18 on XLF… watch the open on how to treat the trade.
Transports – (4/15 post) – IYT sold off tested support and bounced. Resumed selling on Monday and is now below the trendline. You have to transport goods to sell them… thus leading indicator. Not looking to own near term, but more as an indicator of direction short term.
Energy – (4/12 post) – Crude oil falls on demand expectations from the IEA and OPEC. Thus, the sector drops 1.7% Friday as a result of the news. I am still of the opinion that the improved outlook for production in the US will benefit the sector as well as the pipeline business for transporting the commodities. We will look at the best course of action to take relative to hedging and protecting the positions as we find the best opportunities.
4/15 post – Day from hell for the sector as it drops more than 4% on the day. I will stick with the comments above, but I don’t want to own the sector currently. Watching for a better opportunity going forward. Hit stop today on the position.
Healthcare – (4/12 post) – Hit a new high on XLV and held to end the week. We raised the stop in the models, but want to still give it some room for volatility. The outlook remains positive and the news relative to reimbursement helps the bottom line fundamentals as the technical data deals with the volatility. IHF, XPH, XBI and IHI all remain in a positive uptrend for the sector near term. Holding near the highs currently.
4/15 post – Watch the stop and let it play out short term. Evidence of the fact that defensive sectors still go down when the market moves down.
Small Cap – (4/15 post) – IJR tested lower and rallied back near the previous highs. However, the weakness in the sector remains a concern. Watching more for a leading indicator than investing.
4/15 – it is leading the downside. This was a weak link over the last month.
Midcap – (4/12 post) – IJH is in better shape than the small cap sector. Watching to hold near the current highs and then move higher short term. This is another position we will look at holding longer term and deal with the volatility as it arises.
4/15 post – did better than small cap, but not by much… still showing markets weakness towards the growth sectors.
Telecom – (4/12 post) – What is up with Telecom? The sector has been awful over the last four months. Every attempt to break higher has been met with selling. The last two weeks it is acting as if it really wants to move higher? We added it to the S&P 500 Model and has accelerate this week. Watch maintain your stops and let it run.
4/15 post – held up better than most as a current leader. Watch to see how it unfolds, maintain your stop going forward.
Technology – The sector was in a trading range for the last five weeks and managed to reverse and move higher. The move above the $30 level was the entry for the position in the model and we are looking for that level to hold in the current move higher near term. Semiconductors and Computers were a drag on the sector, but if that can reverse short term the upside remains a positive opportunity. Manage your stops accordingly.
4/15 post – hit exits and back to the drawing board.
- UUP – The Dollar remains in a consolidating phase relative to the move higher. UUP closed at $22.41. Broke support at the $22.35 mark on the downside last week. Manage your stops. More selling in the buck could develop near term.
- FXB – the British Pound jumped two weeks ago, held the move at the $149 level. The currency is now in an uptrend off the low and moving through the current resistance at $151.50. For now we just have to be patient and let the pound work through the directional challenge it was facing. Took the entry on the move and the target is $152.50. $150.40 stop in place on the trade.
- FXC – the Canadian Dollar is establishing an uptrend off the March low. The entry was $97.50 and the target is $99.50 short term. —- Selling today hit the exit at $97.50.
- FXY – Bank of Japan offers big easing to fight deflation and get their economy running. The two fold impact on stocks and the yen were immediate following the announcement over a week ago. YCS is the short yen play and we will watch to see if that continues higher following a small bounce on Friday. HIT stop is at the $63 mark Monday for the exit. Mini rally in response to all the talk about not devaluing the currency deliberately.
- FXE – The euro made gains on the week against the dollar and is in position to break higher. $130 mark is the entry on the upside. Retracted some on the trading day Monday. Watch to see if the upside resumes.
3) Fixed Income:
- The volatility we are all looking for in stocks has found its way to bonds. The yield moved higher after the selling last week, but resumed the downside today in the yield and the upside for the bond. The fear factor is back in play for the bond and puts both TLT and IEF in play again short term.
- 30 Year Yield = 2.88% – down 3 basis points — TLT = $122.99 up $1.06
- 10 Year Yield = 1.70% – down 2 basis points — IEF = $108.69 up 24 cents
Tracking Bond Sectors of Interest:
Treasury Bonds – Yields on the 30 year Treasury is back to 2.88% as the pressure on stocks fueled the rally in bonds. Economic data, some need for safety, you state the reason, but the great rotation from bonds has not occurred At each sign of trouble money tends to flow back into the sector versus out. Expect more volatility in the price of the bonds a the worries and the optimist duke it out.
High Yield Bonds – HYG = 6.5% yield. Support remains at $92.75. fell from the previous highs near the $95 level. Manage the position for the dividend as the growth side is uncertain short term. I expect the trading range to remain near term. Use $92.75 as the stop. OR TBF to hedge your position when volatility picks up on the downside.
Corporate Bonds – LQD = 3.6% yield. The jump higher was in response to the rotation of assets towards safety or defensive to the stock market. This is not likely a new trend for the bond, but it starting to act like one. Use stop at the $120.50 level to protect the upside gains.
Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds found a bottom built a small base and produced a upside trade opportunity. Watch the current resistance at the $110 level. Moving back towards the resistance at the $111.50 mark. This is a tax-free dividend play with limited upside from growth.
Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the rally in stocks. Testing the highs again near the $42.50 level. Watch stops and protect your gains.
4) Commodities – Sector Summary:
- The commodity index continued lower with the move lower in both gold and oil setting the markets on edge. It has not looked back and with the acceleration of the decline on Friday and Monday with gold dropping to the to $1361. DBC broke support at $26.80 and continued to track lower closing at 25.63. Without any good news… the downside remained in play.
- Natural Gas – UNG made the big move higher, but then moved sideways the last three weeks and now a follow through on the upside to end the week. After testing the move higher it is resuming the trek higher currently. Part of the consolidating came from the seasonal transition. For now the commodity continues to drift higher and we will stay with the trade for now with our stops in place. Dropped 2.25% on Monday in response to the other commodities and the broad markets.
- Crude Oil – Crude tested lower Thursday and broke below the $91 level on Friday, not to be outdone it fell below $88 on Monday. What does this mean looking forward? Downside in play on lack of demand. Not short or long currently, but watching to see who offers the best alternative looking forward.
- Gold – The metal has continued to struggle and despite the bounce we have maintained our short position. Friday showed why we have stayed short the pressure is on the downside… right or wrong the trend is holding firm. Monday added icing on the cake of the short trade. Watch you stops and see how low it goes. We will continue to monitor the progress, but short remains the play.
Commodities Rotation Chart:
Natural gas still leading despite the test of the upside. Looking at the chart below you will note that the other nine ETFs of commodities have all turned lower the last week.
5) Global Markets:
Global markets drop on slower economic data in China, Europe and the US. They tested lower on the news in Europe and Ching keep the markets in check. Monday reversed the upside momentum and now we have to watch how the downside unfolds short term. One day at a time.
- FXI – Wanted to move higher on the week, faded into the weekend. Downtrend is still in play off the February highs and that is to be respected if the bounce off the low fails to produce a reversal. FXP play remains strong.
- EFA – Faded and then tested the breakout level. The volatility in the global markets isn’t going away. Watch the downside risk going forward.
- Willing to watch for now to see if any leadership evolves from the global markets.
6) Real Estate (REITS):
Real Estate Index (REITS) – IYR broke through the trading range near the high of $68.50-69.50 and continues to climb to new highs. Down 2.5% on Monday takes some hype out of the sector. Watch your stops and take the exit if the selling progresses.
- REM – Mortgage REIT has been testing lower as pressure on the sector has risen of late. Hit Stop $15.30.
- NLY- Annaly Capital Management – continues the upside trek with some daily volatility. Watch the test lower with stop at $15.50
- RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Watch for test of the move if markets struggle.
7) Global Fixed Income:
Sector Summary: Tested lower on Monday with the rest of the world markets.
- The sovereign debt issues are fading again and opening the upside potential as the issues find relief. This offers some short term trading opportunities, but you still have to be aggressive in managing your exposure.
- There are some funds moving in favorable direction of late.
- PAFCX – Bounced off low with the movement in yields going lower. Holds $11.60 worth owning short term.
- PICB – hit support traded sideways and now breaking higher.
- EMB & PCY – Big recovery the last four trading days and interesting in watching.
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.