Economy, Earnings and Apple Lead the Headlines

Wednesday – Notes & Research

News from every corner today, but the broad market still managed to tread water. When the day was over and we scan through the charts not much changed in a broad since, but plenty changed in specific stocks on the day. The NASDAQ was the only major index to close in the green thanks to our friends at Apple, which gained 4.1% on the day. After spending two days on the do-not-buy list, the bounce off support finally¬†occurred. The bigger question is now… which way does the stock go short term? I am still of the opinion there is a rally into earnings and then more selling down the road. $550 is a reasonable target on the bounce for now. My favorite part of the Apple story today was the analyst all downgrading the stock… really, what a bunch of poop!

Boeing is on the hot-seat for the 787 issues grounding the planes. The stock fell more than 3% on the day as a Japanese airline grounded all their planes for research the issues. Despite the problems with BA the Airline ETF (FAA) climbed to a new high again today. The sector remains one of the keys to Transports (IYT) moving to the upside of late.

Technology regained the 200 day moving average on the back of the move in Apple. XLK closed at $29.33. Semiconductors were up 1% and continue to move back towards the September highs. Networking (IGN) was higher on the day as well. The technology sector remains a positive going forward for the broad markets. EBAY beat by a penny earnings and revenue was better than expected. This could be interesting for the trading day tomorrow.

Financials led the headlines as Goldman Sachs beat expectations helped by M&A, compensation cuts and asset values moving higher. Those were the areas we discussed in the notes that the brokerage arms had over the pure bank plays like Wells Fargo. The stock closed higher by 4% on the day. JP Morgan beat expectations as well on there loan portfolio increasing profits by cuts in bad loan costs. The stock gained 1% on the day. Bank of America and Citigroup will announce tomorrow. Thus, the financials remain in the spot light the balance of the week.

The Fed’s Beige Book was release today and it showed little growth. The blame… yes, the delay in dealing with the fiscal cliff in December. Be that as it may, the issue remains slow growth in the US economy across the board. There are plenty of issues as the debt ceiling debate continues. The democrats are preparing a bill to do away with the ceiling¬†altogether. Big surprise! Lower gas prices are keeping inflation in check, industrial output rose 0.3%, home-builder¬†confidence¬†remains at a six-year high, and Bernanke believes there is no risk in the Fed’s bond-buying. Throw in Mr. Obama’s comments of sweeping gun-controls today and it was the perfect day for news.

News is flying fast throughout the day, and despite all the news and data  investors have still not found that key catalyst at this point. That has allowed for the rumors to fly about being overbought and all the downside worries are starting to get press and attention. Stay focused and watch the downside risk if it builds. Manage your positions accordingly.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index made another solid close at 1472. The index still cannot find any¬†catalyst¬†worthy of follow through on the move higher. Equally any test lower has not materialized. Filtering¬†through the sectors of the index we find Financials (XLF) holding above $17 level to lead the sectors. Healthcare (XLV) broke to a new high closing above the $41.60, but failing to advance from there. Industrials (XLI) pushed back to a new high and is testing those levels. Basic Materials (XLB) closed at a new high, but likewise is testing the move. Technology (XLK) moved back to support at the 200 day moving average on Apple’s gains. Bottom line… uptrend remains in play, but plenty of test in the mix. This is the reason for all the comments from analyst on downside risk.

The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. Still moving sideways with an upside bias on the chart and still attempting to find a catalyst on the upside is the goal.

SP500Scatter

The chart below is the 28th of December starting point looking for current leadership on the renewed push higher. Materials, financials, healthcare, consumer services and industrials are the leaders for the broad index. XLP, consumer staples has made a nice move since January 8th on the upside. Tech, Telecom and Utilities are the laggards.

SP500Scatter

The VIX index remains at the lows near 13.50. No signs of anxiety yet.

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 index cleared 3110 and holding. The test is holding above this level for now with the upside in play. Still potential for a test of the 3030 level. Apple is putting pressure on the index as the stock sold off more than 6% this week, but rallied back 4% today. Be patient to see who this plays out short term.

Dow Jones 30 Index Р13,440 level on the upside was a positive. 13,200 support may come into play short term. Watch for confirmation of the move higher. This week has continued the upside to 13,511 on the close Wednesday. DIA is worth a trade if the index continues to gain momentum.

Small and Midcap Indexes showed equal moves to the upside after holding support similar to the other major indexes. Small caps are above the previous highs already and holding as well as mid caps? Weigh out the risk factor of buying at these levels currently.

Financials РXLF fell slightly on Monday in preparation for earnings and in response to the Wells Fargo earnings. It remains above $16.80 as the first support level for now. One day at a time as we move through earnings on the financials. Closed at $17.14 on Wednesday basically unchanged.

Goldman Sachs beat expectations helped by M&A, compensation cuts and asset values moving higher. Those were the areas we discussed in the notes that the brokerage arms had over the pure bank plays like Wells Fargo. The stock closed higher by 4% on the day. JP Morgan beat expectations as well on there loan portfolio increasing profits by cuts in bad loan costs. The stock gained 1% on the day.

We still have to protect against the downside if the news is bad from earnings the balance of the week, but the upside plays are setting up nicely. I would still take the selling as a opportunity to add to positions with a longer term focus.

Basic Materials РXLB  hit a new high and remains one of the leaders. This remains one of the leading sectors on the upside. The earnings forecasts for the fourth quarter were cut by as much as 14% for the sector, but it has maintained the upside. Watch for any adjustments short term.

Retail Рthis has been a mixed bag, but Tuesday the Retail Sales Data for December was better than expected and the sector made a move from the trading range finally. XRT had pulled back after threatening to break from the trading range, but reversed on the news and is now above $64. The scans from the sector last week turned up some stocks worth watching. PSUN, WAG, CVS, URBN, SVU, TSCO, ANF. We added the position in the ONLY ETF Model today.

2) Currency:

US Dollar РThe dollar made a bounce off the lows as the Fed minutes gave reason to believe that QE funding would stop. Thursday and Friday the dollar retreated to support at $21.70 on UUP. The test lower was a negative for the upside short term, but still watching to see how it plays out.

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 at $132.82. Let this play out on the upside.

WATCH: FXE – $130.80 Entry. IN PLAY

Japanese Yen РHas the yen found the near term low? FXY bounced off the $109.60 low and held for now? Watch to see if any opportunities develop in the yen.

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year held at 1.83% and the 30 year to 3.01%. The downside risk in Treasury bonds was in play, but they are regained their poise to bounce short term after holding $117.50 support on TLT. Still an upside opportunity in the bond short term. (SEE SECTOR WATCH LIST)

High Yield Bonds РTesting the highs and resistance near $94 on HYG, as the upside in stocks resume. Look for support holding at $92.75. Continued to creep higher on the week.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. Still a shot in the dark on some, but others are starting to shift and trend higher. Traders sector for now.

UNG РNatural Gas broke support and moved lower on January 2nd. On 1/10 the inventory data showed a drop in supply and the bottom was established. The good news finally pushed the price higher and it is now facing resistance again at the 200 and 50 day moving average? Winter demand remains mild which is why the downside had been in play. The follow through above $19.20 again brings the buyers out? Watch to see if this move holds as demand remains soft near term.

OIL¬†– Oil has been stuck in trading range, but moved above the top end of the range at $93.50 last week. Still looking for clarity in trading relative to the price of crude. The upside is in play, and the breakout still needs to be confirmed on the upside. ¬†The trade is there short term if you are willing to take the risk. ENTRY OIL is $21.70. (STOP $22) ¬†Dropped back to $93.45 on Tuesday… still wants to go higher?

UGA РGasoline broke support at $58 and now looks to $56.80 as the next level to hold.

GLD¬†– Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We tested $159 on GLD and the metal cannot make up its mind short term. The downtrend line was challenged today as the metal moved to $162.65. That clears the way to $165.50 and then up to $174 potentially. The entry for GLD is $163 on the close.

DBB РBase Metals broke support, bounced, and is back at that level again? No follow through on the upside for now. The downside is testing, but the upside remains the direction of choice if the metals find their way. Be patient and let this develop further.

Palladium (PALL) broke above the $69.50 high and heading higher. Platinum (PPLT) remain the better bets on the precious metal side. Platinum gapped higher on Monday and followed it again on Tuesday. The upside is running.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above 970 on the index and has moved to 1015. 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 – The 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.

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.

WATCH: EEM – Emerging markets have been doing well. The chart shows a consolidation pattern developing similar to FXI, but there are other single country ETFs doing well. EPHE, THD, EPU, EPI, TUR, EWW and others are worth watching.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading as the cliff issues are resolved short term.

WATCH: IYR – Look for reasonable entry. $64.90. 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.

ENTRY $66.15, Stop $64.75

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) – Looking for support and an entry opportunity from the selling. Looking for a move above the $122.10 level for the entry.

WATCH: Emerging market Sovereign Debt (PCY) – Testing support near the $31 mark short term. Watch to see if this breaks lower or offers and entry on the bounce. Pays a 4.6% dividend as well.

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 broke higher and they are testing the current high again. 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.