European Headlines Keep Investors Guessing

Monday, September 24th

The market ends lower on day after opening on the downside in response to Europe. Worry? Not really a big worry if you put in weight behind the VIX index. Sentiment? Yes, but not dramatic. We are seeing some rotation of assets to “safe” asset classes, but nothing dramatic. Thus, what is the plan? Patience is my plan. I want to see how this plays out short term and if the sellers ever can gain the upper hand. Today was a good example after a push to the downside, the buyers stepped in each time the index sold off. There are still plenty of interested buyers short term.

The commodities continued to sell on the day. Gold, oil and agriculture all move lower. The stimulus effect has already worn off it seems and investors are looking elsewhere to put money. The Treasury bonds, consumer staples, healthcare and utilities have benefited directly from the move. This is what we will be watching as the week progresses.

Below we address the sectors looking forward:

1)  US Equities:

S&P 500 Sectors-to-Watch – The index is holding above the 1420 level, but has been moving sideways. The impact of the stimulus amounted to a one day event thus far. The chart below of the 10 sectors shows the last pivot point on August 30th and the current leadership. Telecom remains the clear leader for the index with all other sectors drifting lower. the last couple of days. Healthcare and Consumer Staples are still moving higher.

The S&P 500 index (bold white line) shows the lateral movement. This has not changed for more than a week currently. There isn’t a clear direction for the broad market index and thus we continue the current course. Financials, Basic Materials, Energy, Industrials and Consumer Services all have a negative bias building and those are the sectors to watch in this week of trading.

The worry factor is growing and thus we are going to raise our stops on all the position in the S&P 500 Model. I have added an entry point SH as a short position or hedge in the Model. I don’t see the negative sentiment that I am reading about in the charts yet, but they are reflecting a warning or concern. Thus, don’t over think what you hear, adjust your stops and keep looking forward.

WATCH: SPY – Entry $142.50 – Stop $145.35 (Raise Stop)

Basic Materials – The sector has been testing the vertical run higher. The start of the move came from China’s stimulus and infrastructure build out. However, that enthusiasm is wearing off due to the economic picture globally. Doesn’t mean the thesis was wrong, just that the worry towards the economic picture is strong in the short term. Support is sitting on $37.35 with $36.85 the next level of support. Manage your stops for now and see how this plays out.

WATCH: XLB – Entry $37 – Stop $37

Financials – The sector is testing the recent move higher. $15.70 is our stop support. The trend higher remains in play despite the give back on the week. Banks and brokers have been leading the move higher as they were seen as a benefactor of stimulus. Investors have moved on to the next topic at hand… Europe and earnings. We hit our stop on KBE, but still hold XLF. I am raising the stop and protecting the gains as the downside remains off the high. What has changed? Sentiment towards the banks. The are the cause of the current situation once again and the media continues to bang the bad guy drum. Thus, protect against the downside and keep looking for what works.

WATCH – XLF – Entry @ 14.55 – Stop 15.65

Energy –  Testing the move higher as oil takes a move to the downside. $73 is key support on the downside. Oil is the talk of the sector for now. Step back and take a look at what the driver is on the upside… Higher oil prices. If the price of crude breaks below $90 the downside of the overall sector accelerates. Thus, prepare to exit if that happens. for now I am willing to hold and see how it plays out short term.

WATCH: HES – Entry $51 – Stop $54.25

Telecom – The leadership of the market with a weighting of under 4% to the S&P 500 index! It still makes us money as long as it is going up… Hit a new high and that is all that matters. Ride the wave and raise your stops.

WATCH: IYZ – Entry $24.40 – Stop $25.59

Healthcare – The sector continues to push gradually higher. We moved above $39 (top of the trading range) and the current leg higher remains in play.  IHF and IHI have both provided the leadership as they hit new highs. Obama leading in the polls is having some influence on the sector. The laggard has been pharma stocks and we are watching as the weighting is near 50% of the index. Hold positions and manage the stops.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $39.60

Biotech – The sector the upside trend off the August low. We hit a new high on Friday with a solid 1% gain. The upside continues as buyers continue to step in and we ride the upside. Adjust your stops and manage the risk overall. Break above $94 was a obvious positive for the sector.

WATCH – XBI – Entry at $89  – Stop $94 (Raise Stop) / WATCH – THRX – 26.60 Entry, 25.50 Stop, 32 Target

Consumer Discretionary – The consumer has been spending, but the news in the sector has been weaker sales. We have to watch the earnings as they report and determine who the winners and loser are. I am still focused on the parts versus the whole in the retail sector. XLY remains in play and we have adjusted the stop higher.  JC Penny’s broke support on rumored CEO comments on Wednesday (hit stop) and the rest is in the chart. This type of volatility is going to pick up as we move into the fourth quarter, but there are stocks to watch in the sector.

WATCH: XLY – Entry 44.50 – Stop 46.85 (Raise Stop) / DLTR – 49.25 Entry, 46.84 Stop, 62.70 Target (watch for trade opp)

Technology – The sector overall has performed well and continues to push higher. Watching the weakness in Semiconductors (see below) as they act as drag on the sector. The networking (IGN), software (IGV) and internet (FDN) have all moved higher to support the upside in the overall sector. Watching FFIV, F5 Networks to break above resistance at $105. Pennant forming on the break higher watch for continuation of the move higher.

WATCH: FFIV – Entry $105 – Opened higher and added at $107.48 – Stop $106.10 (Gap down open on Monday – Take stop off and let the noise filter out held and reestablished stop.)

Semiconductors – The sector has been testing lower and the downside leadership has been from Intel. The sector remains weak, but is still consolidating and looking for direction. SOXX tested support at $53.80 and the 20 day moving average. If we break support we have to watch the downside play with SSG.  Watch the Intel play as it is attempting to bounce off the low/support. We adjusted the stop to protect the gain on the trade.

WATCH: Short Intel (INTC) – 24.55 – Stop – 23.25 (Stop on the close) / WATCH: SSG – Entry 40.50 (Volume) Gapped open and not volume today passed.

NASDAQ Index – The upside momentum has been as a result of the technology sector, but the downside risk in in the semiconductor sector. The trend is up, and we have to manage our risk. No reason technically to sell the index, but the sentiment shift raises my concern. Raising the stop to protect the gains.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 69.50 (HIT STOP)

Small Cap Russell 2000 Index – Bounced back from the Thursday selling. We have to protect our gains short term. Raised the stop again to deal with the downside risk. If the sentiment shift produces selling this sector is first on the list. We may sell half our position on Monday if the chart doesn’t improve.

WATCH: IWM -Entry 79.60 – Stop – 84.60 (HIT STOP)

Transportation Index – This remains a troubling chart for me. If stocks are going higher short term why is this sector moving lower. If stocks are to move higher this indicator needs to track with it eventually. Support on IYT was broken on Friday. $86.75 is the number to watch short term. If we break below this level watch for stocks to react overall.

2)  Currency:

Dollar – The dollar bounce stalled on Friday. If it doesn’t improve on Monday look for more selling in the buck. I am still looking for a small bounce off support and then a resumption of selling. The bounce will come from concerns in Europe, be patient and see how this plays out.

WATCH: UDN – Entry $26.40. – Stop $27.20

3)  Fixed Income:

Treasury Bonds – TLT sold to $118.25 on the stimulus announcement. That support level held for now and the bounce off the low is holding. The catalyst to move higher will be fear. That is definitely a potential relative to the situation in Europe and China currently. We are willing to take a small position if TLT moves above $122.45.

WATCH: TLT – Entry $122.50 Hit Entry Monday.

4)  Commodities: Volatility has picked up in the sector short term and we don’t hold or recommend holding any positions short term. This will work out and the opportunities will present themselves again. Gold attempted to move higher on Friday along with silver. The closed back in the consolidation range, but we will watch Monday how they move.

5)  Global Markets: The global markets bounced back on Friday following the selling on Thursday. Watching how this plays out short term. The concern remains Europe and the bailout/stimulus. Spain made progress, according to the reports Friday, on dealing with the ECB and IMF on a bailout package of nearly 350 billion euros. Watching the EAFE index and raised our current stop.

WATCH: EFA – Entry 52 – Stop – $53.80

Brazil Small Cap – The country ETF has continued to progress in the uptrend off the July lows. We continue to monitor the play and have tightened our stops as sentiment globally shifts.

WATCH: BRF – Entry 37.60 – Stop – 40.40

6)  Real Estate (REITS) – The sector moved to new highs, but has sold in reaction to the stimulus. I like the outlook long term, but the short term is experiencing volatility. We hit our stops and took the exit last Wednesday. Breaking down further on Thursday but finding some support at the 30 day moving average on IYR.

REM continues to move higher as the Fed stimulus is directed at the mortgages. The test was an opportunity to enter or add to positions, but the risk was too high for our taste. We will see how this plays our near term.

7)  Global Fixed Income – The issues with sovereign debt in Europe keeps us out of the asset class currently, but we are seeing some changes in confidence with the ECB stepping into the picture near term. Global bonds have been in rally mode since the June lows. PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity in the sector. Emerging market bonds (EMB) tested lower and bounced off support to move higher. International Corporate Bonds (PICB) and International High Yield Bonds (IHY) remain in a long term uptrend and moved higher on Friday. Manage your downside risk. Not willing to jump into the asset class at these levels.

Ideas and Beliefs On The Horizon:

How much negative influence will Spain have on the current uptrend in the European markets? Last week the worries escalated on Thursday, but there was positive news on Friday? However, nothing was officially announced all rumors. The real answer will depend on the deal with the IMF and the ECB. EWP tested, but bounced on Friday. Until there is a definitive plan announced the moves are speculation.

China was moving on infrastructure stimulus, but the spat with Japan has derailed the progress. Watch FXI as the up and down impact of news creates some short term volatility. To make any money trading the position you have to be willing to take your position the night before and bet on the direction for the day. Not our focus. However, this story will unfold into a upside play if the stimulus works or a downside play if the sentiment shifts.

Commodities should be the benefactor from the Fed stimulus activity. However, that has not materialized for the sector overall. ETFs to watch relative to this move… 1) DBA, PowerShares Agriculture ETF – fell to the bottom of the trading range  and we are still watching as this unfolds. An entry point of $30 would be a play to the top end of the range short term.  2) UNG bounced on Thursday? Watch for follow through, but it has been very volatile. 3) Oil has been volatile as well breaking support on Wednesday, but still watching more for the downside than the up. 4) Base metals are testing the move higher and looking for the next catalyst.

Attention will turn towards the election soon and certain sectors will start to react to whoever is leading. For now that is Obama and as we get closer to November investors will factor in specific policy events they believe will influence the markets. Healthcare is one sector responding currently on the upside to the news. One to watch is the tax hike on dividends (from Obama). Long term it will be neutralized by the Fed keeping rates at zero, but shorter term it could create some opportunities.

QE3 was good for stocks to move higher short term, but what about the future? Inflation is one concern reflected in the precious metals prices jumping higher, and what does this action really say about the economy for two. The latter is a bigger concern from my view going forward. The Fed is essentially stating the economy is in enough trouble we need to take more action towards fixing it. This is where we have to be aware that stocks may move higher now in response to the stimulus, but as the economic data is reported we have to prepared for a correction or pullback in prices.

What am I watching now:   Leadership relative to the move Thursday (9/13) following the Fed Stimulus release. Scanning this weekend the following are the trade-able leaders:

Treasury Bonds (TLT), Short Semiconductors (SSG), Short Real Estate (SRS), Short Financials (SKF), Short Oil & Gas (DUG), Healthcare (RXL), Biotech (XBI) and Telecom (IYZ).

They show the mixed emotions currently in the market since 9/14. However, they are worth watching as we start this week of trading. There may be some short term trading opportunities.

1)  BAC – Bank of America to move towards the target of $10 short term. Holding support near the $9.10 level for now. Pullback is likely an opportunity as well on the upside to add to positions.  2) Oil to bounce off support at $90. If breaks short play gets interesting. Held support today and we continue to watch.  3) Downside sentiment shift. If this plays out the risk to the overall market grows. The short term shift this week is in play and we need to watch how it plays out next week. 4) IP is breaking higher and worth watching on the upside. 5) SIVB is breaking higher in regional banks and worth watching. 6) ZMH in the medical devices is leading. 7) DRI broke out as a leader in the restaurant sector. 8) CERN in the software space is at the top side of a trading range attempting to break higher.

Market is in a precarious place. Watch, set in place your plan of action and let the cards be played. Don’t assume anything.

Watch and play according to your risk tolerance. 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 downside risk determines your long term results. Trade smart.