Economic Data Sparks Rally to End the Week

Friday – Notes & Research

Good news from the economic data pushed the broad indexes back towards new highs. The major indexes gained more than 1% on Friday to end the week on a positive note. The Dow closed above 14,000, S&P 500 above 1500 and the NASDAQ above 3160 and taking out the current resistance level. This puts the upside back on the table for investors to ponder. The buyers remain in control and any attempt to change that has not ended well for the sellers.

I stated on Thursday that the cracks in the uptrend were starting to show and we had to protect against the downside risk of the markets. Then the jobs report, ISM Manufacturing, Chicago PMI and the Consumer Confidence reports turn the cracks into opportunities as the broad markets moved higher on the positive news.

Jobs Report showed 157,000 new jobs added in January. However, the revisions for November and December added another 127,000 jobs turning the data positive despite the move to 7.9% in the overall rate of unemployed. In the report personal in come move up  2.6% as well boosting the positive sentiment the report provided to investor psyche.

ISM Manufacturing showed a push to 53.1 versus the 50.2 reported in December. It was the highest increase in nine months. GM and Ford both posted better sales in January and thus, stepped up production helping the the overall number for manufacturing. The upbeat reports helped spark the rally on Friday.

What other news was was helpful on the day?

Financials led the S&P 500 index gaining 1.3% which in turn pushed XLF above the $17.50 resistance and headed higher. Banks (KBE) gained 1.4% with the same break and continuation of the upside. Regional banks were up 1.4% as well and broke to a new high.

Small caps recovered to the upside and set new high. Transports attempted to post a new high, but failed to close above the $104.50 mark. Both were part of the downside pressure earlier in the week. We continue to watch for indications of where the market is heading.

The Fed is still willing to do whatever it takes to create a recovery, including QE forever. The reality is if they would stop trying to save the economic market from a correction, it would recover faster. Nobody likes to see bad economic times, but they are a part of keeping balance. When we over indulge in one area it has to have  way of balancing itself out. When you interfere with the process it prolongs the correction process. Thus, saving the banks that over indulged in the housing market has resulted in slow painful correction process versus allowing foreclosures and bank failures. Without getting into the right and wrong of such events the pure economics of it have been a painfully slow recovery. Thus, we still have the Fed actively engaged in saving the economy.

Bottom line for the week if came down to the economic data to push the indexes higher. Now comes the challenge of the follow through next week. The gains on Friday were positive, but there upside confirmation relative to the 1575 target is in play. Break of 14,000 on the Dow will need to hold and the NASDAQ index will need technology to step up again to some form of leadership.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index remains cleared the 1500 level as the index gained 15 points to 1513. The uptrend remains in play and the number of analyst calling for a test grew quiet on Friday. Yes, technically the index remains overbought. However, we cannot assume anything and must allow the move to take place without our negative bias. Stops should be managed to the level we are willing to risk on the pullback and be patient as it plays out.

The  leadership shifted in the sectors of the S&P 500  index. Energy took the lead along with Healthcare on the bounce off the December 28th low. Rotation is healthy for the broad index and keeps the uptrend in play. Consumer Services (XLY), Industrials (XLI), Financials (XLF), Basic Materials (XLB), Utilities (XLU) and Healthcare (XLV) are providing the longer term upside currently.  Technology (XLK) is struggling period on mixed earnings data. Telecom (IYZ) gained 1.1% on Friday and broke higher. The bottom line for the broad market is the uptrend remains in play and we go with the trend.

The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. Still drifting or melting to the upside on the chart and still attempting to make a move towards the target of 1550-1575 short term.

10 Sectors

The chart below is the 28th of December starting point. The leadership is similar to the chart above but, you can see the acceleration of the Energy and Healthcare sector clearly over the last week plus. Financials finally made a move on Friday. The Consumer Services moved lower on the week. Utilities have become an upside leader as well since January 16th. Telecom retreated lower, but has bounced back the last two trading days.  Technology is the one sector that remains negative or sideways, but managed to push higher on Friday as well. Basic Materials has moved down and sideways was positive on Friday also.  The key is a continuation of the uptrend short term overall and that remains in play.

10 Sectors

The VIX index back below 14 on the rally Friday at 12.9. Thus, the short term uncertainty seems to have faded away again. Still worth watching as this unfolds.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РThe NASDAQ 100 index made the break above the 2750 resistance. I still like the upside for the index short term. Added the play Friday on QQQ.

WATCH: QQQ – clear $67.30 resistance on the close. Entry $67.50 (Added on Friday) Stop = $66.75.

Dow Jones 30 Index¬†– 14,000 on the close Friday and the question begs… what’s next. Look for confirmation on the move as positive indicator for the broad markets.

Small Caps РIWM cleared the $90 mark and showed some renewed buying in the sector. Support is $87.50 and if you are unwilling to hold to the level you may not want to stay if the downside follows through.

Midcap Index showed equal moves above the $109.50 level on IJH.  Weigh out the risk factor at these levels currently and continuing to hold existing positions. The break higher is no guarantee at these levels and the downside risk has to be protected.

Financials РXLF moved above $17.50 resistance finally and showed renewed leadership for the sectors. Banks (KBE) and regional banks (KRE) both made moves higher as well to set the pace on the upside. Hold for now and watch the downside risk of the sector if the broad markets shift momentum.

WATCH: Entry $17.20 XLF. Stop @ $17.20 (Raise Stop)

Basic Materials РXLB  hit a new high and is still in a strong uptrend. This remains one of the leading sectors on the upside, but we are seeing some consolidation near the high. Watch for any adjustments short term. We could see a test of support short term before any move higher.

Retail РXRT had pushed to the $67 resistance or new high. We continue to watch the leadership and protect against the downside risk. The broad sector is looking tired as it consolidates near the recent high. Keep your stops at levels that match the risk you are willing to accept.

2) Currency:

US Dollar РThe dollar remains in a downtrend. The buck retreated to support at $21.70 on UUP again, and is testing the low at $21.61. The test lower is a negative short term and the short trade with UDN is back in play.

WATCH: UDN – Entry $27.45

Euro РThe euro was testing lower on the rally in the dollar, but that reversed on the dollar weakness and is now above the previous high. Let this play out on the upside. Nice move to new high at $134.59 today.

WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $133 Raise Stop

Japanese Yen¬†– Has the yen found the near term low… yet? FXY moved to a new low at $107.80, but has now continued the downside move. I am not convinced the bottom is in yet for the yen. The devaluation is an attempt to stimulate exports for Japan. Still volatile, but the downside still wants to continue based on this move? Short Yen anyone? (YCS) The short play remains the winner.

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year jumped Friday to 2.01% and the 30 year to 3.21%. The downside risk in Treasury bonds is in play as the talk shifts to rising rates with the Fed stepping out of the way as unemployment data improves along with the housing market. TBT is in the model currently to take advantage of the move lower.

High Yield Bonds РBig drop in the bonds this week and hit our stop at $93.75 (HYG). Hit the stop levels on Thursday and the next level of support is at $92.75. Manage your exit points if you have not already done so.

Corporate Bonds РLQD, iShares Investment Corporate Bond ETF was struggling to hold support near the $120.40 level. Broke support and the 200 day moving average. The downtrend started in October and has not settled yet at support. Short play on LQD hit entry and we have continued to push lower to close at $118.74 on Friday. Downside pressure is building on fixed income.

WATCH: LQD РShort @ 120.25 Entry.  Stop Р$120.40

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. There are sub-sectors attempting to make moves to the upside, but you have to manage your risk. This remains a traders sector for now.

UNG РNice bounce of 2.2% after some big selling the last four days on Wednesday. Inventory data helped to hold support for now at $18.25 on UNG. The bottom line for natural gas is volatility based on news and speculation. Not willing to own or trade currently.

OIL¬†– Crude broke from the short term consolidation and continued to hold the upside. The close at $97.77 ¬†is positive for the commodity. Watch the downside risk relative to an emotional reaction from investors and the speculation on demand… I like the current follow through on the upside, but the risk is still in play short term. Manage your stop. Watch as the inventory data as it showed more build up in supply.

WATCH: ENTRY OIL is $21.70. Raise stop to 22.70.

UGA РGasoline tested support $56.80 held and has moved higher and breaking above resistance  at the $59.35. The inventory data fell unexpectedly pushing the price higher. Wednesday the data showed another draw down in supply pushing the price higher again. As we stated the news could spark a move toward the $62 target short term. It did just that with the close at $64.06 on Friday.

WATCH: ENTRY: $58 UGA – Stop = $62 Raise stop.

GLD РDowngraded from Goldman Sachs sent the metal lower. Hit support at $160.20 Monday and small bounce, but no upside conviction. The downside looks more likely near term. The short side is still attractive if we move below $160. Be patient here and see how it plays out.

WATCH: GLD – Entry $163 – Stop $160.

DBB РBase Metals broke support, tested $18.60 low and now is attempting to move to the upside. Wednesday it did finally break higher from the consolidation with a gap higher of nearly 2%. The driver was copper and Nickle gaining upside momentum. Held and followed through on the week. Watch for the continuation of the play higher.

Palladium (PALL) broke above the $69.50 high and heading higher. Cleared the $71.80 resistance and now at new high of $73,64.

Platinum (PPLT) remain the better bet on the precious metal side. Platinum is testing the consolidation pattern on the upside. Need to break above $167.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above 970 on the index and has moved to 1025. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain.

WATCH: EFA РThe uptrend short term continues, following a small test short term the fund has moved back above the previous high. Stick with the uptrend play for now as it holds support. $58.25 support for now. Still tracking higher.

WATCH: IEV – Europe continues to rally as investors believe the worst is over. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance and the trend higher remains in play. Upside target is $45.50 going forward.

WATCH: FXI – China has firmly established the uptrend off the November low. However, the volatility of the move has picked up on economic data from China. Watch as a consolidation pattern is building on the chart. Test of support at $40.85 is in play and bounced back to the upside short term.

ENTRY: $42 FXI – Stop = $40.

WATCH: EEM – Emerging markets have been doing well. The chart shows a consolidation pattern that is still in play and may shift back to an upside bias if the news improves in the US. $43.50 is the support level, and upside breakout would be a move above $44.80.

6) Real Estate (REITS):

WATCH: IYR – The break above $66.12 was the entry point of the move above resistance. Still moving higher short term. Watch for potential test of support in the move. Started Wednesday and bounced some on Friday. Be patient as this plays out short term.

ENTRY Р$66.15,  РStop $67

WATCH: REM, NLY & SJT – all three are in a position to break higher.

7) Global Fixed Income:

The sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – Exited play on Monday’s break of support.

WATCH: Emerging market Sovereign Debt (PCY) – Exited play on Monday on break of support.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high and still moving up. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding within the trading range for now. HOLD.

WATCH: PICB – International Corporate bonds are testing the support at $29.20. HOLD.

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.