Europe continues to be a drag on stocks

Thursday – Notes & Research

Plenty of correction talk again today! The open to the downside was caused by_______ you can fill in the blank today. Let’s say it was the economic data just for kicks and grins… or profit taking is a good one that seems popular with the media. I am not attempting to cute about this, but I am attempting to make a point. The¬†consensus¬†is building towards the need for a correction. Somebodies are on the other side of that noise who are short the market or they want to buy at a better price. That comment is pure speculation on my part, but whatever the motivation the noise is getting louder. As I stated this morning in my notes if you bang loud enough eventually you will get the attention of investors and the downside will materialize.

The NASDAQ was off more than 1% in the first hours of trading and spent the balance of the day working to close off 3 points on the day. I read one analyst that stated the profits were too good to ignore and investors were selling technology to buy other assets short term. The hits just keep coming, but XLK did sell down 1% and closed up one penny on the day.

I don’t want to beat this horse to death, but the¬†volatility¬†and speculation are picking up and we have to manage the risk of the current environment until the direction is declared up or down.

What other data was helpful on the day?

Draghi attempts to be realist about the current situation in Europe financially and economically. Of course that did not sit well with the global markets as they reacted with some selling. Watch Europe, covered below.

Inventory data for natural gas was disappointing with supply higher than expected and UNG fell more than 4% on the day. FCG tested the breakout from yesterday and we will watch how that unfolds as well.

The early reports for the US retailers showed strong than expected results for January. Costco was up 4% without gasoline sales and Limited Brands were up 9% versus the 3.6% increase expected. Thomson Reuters retailer tracker is expected to show a 3.5% increase for January when reported next week. The retail sector has picked up in volatility, but is holding above the $67 mark on XRT which a a positive short term.

Currency issues remain, but the dollar was up against the euro today on the news from Europe.

Plenty of news on the horizon and tomorrow will close out a volatile week. We will update in the morning notes any changes heading into the trading day.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index remained above the 1500 level to 1509 on the close. The uptrend remains in play, but today the volatility returned to cause more discussion relative to the coming correction. The renewed volatility has kept my attention near term as the direction defines itself relative to the current trend. We have to step back and re-evaluate the volatility range on the index and within the sectors of the S&P 500 index.

The  leadership shifted in the sectors of the S&P 500  index. Energy (XLE) remains the leader, but moving sideways over the last week. Consumer Services (XLY), Industrials (XLI), Financials (XLF), Basic Materials (XLB), Utilities (XLU) and Healthcare (XLV) are shifting to sideways movement currently.Technology (XLK) is struggling period on mixed earnings data. Telecom (IYZ) has attempted to break higher, but remains in a sideways trend. The bottom line for the broad market is the short term  trend is being challenged and we have to be patient to see how it unfolds.

The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. The testing of the upside is in play as the markets find a way to move sideways. The upside outlook is for a move towards the target of 1550-1575 short term.

SP500Scatter

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. The last week you can see the uncertainty building along with renewed volatility. Sit tight for now and let’s see how the week progresses.

SP500Scatter

The VIX index jump around much like the broad index itself. Thus, the short term uncertainty seems to be in play 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¬†–¬†The NASDAQ was off more than 1% in the first hours of trading and spent the balance of the day working to close off 3 points on the day. I read one analyst that stated the profits were too good to ignore and investors were selling technology to buy other assets short term. The hits just keep coming, but XLK did sell down 1% and closed up one penny on the day.

Dow Jones 30 Index РRemained below the 14,000 mark after making another attempt to break lower. Failed to confirm a move higher and the index is back on watch relative to the downside. Need some direction either way.

Small Caps¬†– IWM cleared the $90 mark Friday only to retrace it’s steps and challenge support on Monday. Support is $87.50 and if you are unwilling to hold to that level you may not want to stay if the downside follows through. Moved back above the $90 mark on Tuesday.

Midcap Index РTested lower losing 1% on the day. The index continues to hold up well in the face of opposition. Weigh out the risk factor at these levels currently and continuing to hold or exiting positions. A break higher is no guarantee at these levels and the downside risk has to be protected.

Financials РXLF moved above $17.50 resistance, retraced, and back above it again today. Banks (KBE) and regional banks (KRE) both made moves higher again to set the pace. 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

2) Currency:

US Dollar РThe dollar remains in a downtrend, but got a big bounce today on the worries about Europe (IEV). The close near $21.90 is at the downtrend line? Watch to see how this plays going forward and the support now becomes $21.70 level. Watch the bounce for evidence of a continued move higher.

WATCH: UDN – Entry $27.45 (SOLD today small loss)

Euro¬†– The euro was testing lower on the rally in the dollar, but the downside accelerated today on Draghi’s comments. Is this a trend reversal relative to the dollar. Hit stops today and banked a small gain.

WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $133.30 (HIT Stop – small gain)

Japanese Yen¬†– Has the yen found the near term low… yet? FXY moved to a new low at $104.78. I am not convinced the bottom is in yet for the yen. The devaluation is an attempt to stimulate exports for Japan. Short Yen (YCS) exit if the bounce finds reason.

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year fell to 1.95% and the 30 year to 3.16%. 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. Watch if the sentiment change continues. There may be a bounce in the price of the bonds short term as the market sentiment shifts on stocks.

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$119.30 (HIT STOP TODAY small gain)

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 РDropped 4.2% on the inventory data. This has been the challenge for the commodity for the last three months. The only way to read it is demand being lower than expected which pushing prices lower.

OIL¬†– Crude fell 1% on the day after the comments from Europe. The close at $95.79 was down on the day. We continue to watch the downside risk relative to an emotional reaction from investors and the speculation on demand… the risk is still in play short term and you have to manage your stop. Europe could rock the boat for oil prices short term. The speculation was higher demand from Europe going forward.

WATCH: ENTRY OIL is $21.70. Raise stop to 22.70. (Hit STOP and exited with a 4.6% profit.)

UGA РThe commodity tested lower again today after the inventory data on Wednesday. Today was a general nervousness over the US markets and comment from ECBs Mr. Draghi. The intraday low was below the stop posted and we exited the trade with a nice gain today. We continue to monitor the outlook on the test lower.

WATCH: ENTRY: $58 UGA – Stop = $62.75 (SOLD 8.2% gain)

GLD РStill in a consolidation wedge and downtrend off the October high. Watch and play accordingly. Watch for a short term move above $163. The comments from Europe sparked a rally in the metal near the $163 mark only to close back at $161.84. Still too volatile for my taste at this point and no conviction on direction.

DBB РBase Metals broke support, tested $18.60 low and is attempting to break higher on the upside. Some volatility showing in the chart, but the upside is still in play. Need to clear the $19.70 level currently.  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. The selling today was in sympathy with the other metals watch the $73 mark short term as support.

Platinum (PPLT) remain the better bet on the precious metal side. Platinum was testing the consolidation pattern on the upside, but this week has pushed higher and hit a new high at $170.45 and is filling the gap left behind on the move.

5) Global Markets:

Europe was tops on the list today with Mr. Draghi’s comments and they were not well received. His reference to the euro being held in check or moving lower relative to Spain were enough to rock the boat on the day in the US markets. As you can see below others were impacted around the globe as well.

WATCH: EFA – Dropped 1.8% on Monday and another 0.8% today. The uptrend is being tested, but more importantly the support levels are key and it close right on the $58.15 mark tonight. Strong volume on the last two days on selling. Keep your stops in place and prepare to deal with the downside short term.

WATCH: IEV РDropped 2.7% Monday and fell another 1.2% on Thursday. The $40.20 support was broken on the selling today short term. This now brings the $39.50 support into play and then the treat to the trend. Our upside target was $45.50, but the upside is in jeopardy now. One day at a time is all we can do at this point.

WATCH: FXI – China had established the uptrend off the November low. However, the volatility of the move has picked up on economic data developing a sideways trading range. The move below $40.75 was a big negative short term and the confirmation on the downside this week hit the stop and today it accelerated lower to drop 2.3% today. Out for now as this unfolds.

ENTRY: $42 FXI – Stop = $40.25 (Exit loss of 4.7% on Wednesday)

WATCH: EEM – $43.65 is the current support level which was taken out today. The downside is in play short term and you should have hit stops on any positions taken in the sector.

6) Real Estate (REITS):

WATCH: IYR – The break above $66.12 was the entry point of the move above resistance. Still in position to move higher short term. Watch for potential test of support in the move. 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.