Focus on Money Management, Not the ‘Fiscal Cliff’

Friday, November 16th – WEEKEND UPDATE

Another week of selling and still no answers about the outlook for the broad markets. The downside is in control, but there is that looming bounce that everyone want to talk about. The obvious catalyst would be some resolution to the budget issues. If both parties come to a quick decision it would provide the best relief bounce. However, that isn’t likely based on the comments following the meeting on Friday. Thus, look for a small relief bounce and then resumed selling. Short week with the Thanksgiving holiday and expect low volume.

Quote of the week about the politicians in Washington D.C. dealing with the ‘fiscal cliff’ – “We’ve go to get these people to put partisanship aside. We’ve got to get them to pull together instead of pull apart. While the rest of the nation has been having a fragile economic recovery, they’ve been having an election.”

Dumbest negotiation of the week – Hostess filed to go out of business versus continuing to negotiate with the labor unions representing the 18,500 workers. They could not reach agreements relative to wage concessions and benefits. The company brands of Twinkies, Wonder Bread and other baked goods will be actioned off to the highest bidders.

Risk/reward as we discussed is the key. The risk of being long is too high currently and the short side has gained clarity with the move lower on the broad indexes.  We remain patient with the sellers firmly in control as we continue to take what the market gives.

What am I watching?

Can the market bounce? The move on Friday gave some hope relative to the fiscal issues in Washington. However, we have to be suspect. Watching for a bounce trade.

Oil remains in the current narrow range. Still looking for a move lower barring any unforeseen events happening in the Middle East with Israel.

Treasury bonds remain better fear indicator than the VIX currently.

Muni  bonds have increased volatility in correlation with the potential tax law changes from the Obama administration. Watch for opportunities as this unfolds. MUB.

Manage all the short plays cautiously if the momentum picks up from buyers on Monday.

1) US Equities:

S&P 500 Index / Sectors-to-Watch 

The index broke the 200 day moving average Tuesday and confirmed the next leg lower. Now we have to manage our downside trade as the risk rises on the oversold conditions for the index. Watch the 1355 level for some support near term. If we hold the upside play may develop for short term trade opportunity. There is technically no reason to own the index and every reason to be short with a tight stop. That is where we stand currently, but the outlook could shift short term.

The Scatter Graph below has a starting point of 10/17 which is the current pivot point off the most recent high. The move lower turned sideways for two weeks and then renewed the trek lower. The downside leadership has been in Utilities and Telecom, but technology, basic materials, energy and others have joined the party. The majority of sectors are selling lower and the downside is in play. If we move the pivot point close to 11/6 the financials are in the picture on the downside as a leader along with industrials. That reflects those two sectors catching up with the others.

ProShares Short S&P 500 index ETF is the trade to hold for now relative to the index. Entry $35.20 on the break above resistance on the chart. Stop $35.50 on a reversal short term. Took the entry 11/9. Manage the risk and expect some volatility in the trade.

Breaking the Sectors Down:

Financials – Fell below $15.50 support on XLF.

WATCH: SKF – (11/9) Entry 37.85 – Stop 39  Mange the leverage volatility.

XLU – Watch the bounce at $34 on Friday for a follow through on the upside.

XLK – No support yet. Watching the $27.20 level to hold from Friday bounce. ? Networking and Semiconductors are the key short term to this turning around.

XLV – 38.75 support level to watch. Break lower negative, bounce opportunity? (Watch for bounce trade)

XLB – 34.77 support level to watch. Global picture is adding to the impact on the sector.

IYZ – 200 day moving average support level to watch. Dividend tax rumors hitting the sector.

XLE – 68.24 support level to watch. Watch oil prices to provide a bounce if they rise.

XLI – Watch and let this play out short term.

XLP – 34.10 bounce after breaking below the 200 day moving average.

XLY – 200 day moving average support level to watch. (Retail showing some weakness? watch for trade)

See S&P 500 Model for the potential plays on these sectors for next week and looking forward.

On my Watch List looking forward:

The housing sector has turned the corner just in time to see a train coming head on. The sales have improved and inventories drawn down, not to mention the homebuilders stocks have have climbed better than 45% during the year. Why the train comment? The budget issues facing the country need income to feed the deficit. Thus, what better place to go than the interest deduction for interest on a home loan. If the rumors are true, that change could derail any continued recovery in the housing market short term.  XHB is testing support near the $24.35 level. A break lower would create some potential short opportunities, but a bounce off support equally could create some upside trades.

Short opportunities have been the play the last couple of weeks, but we have to respect the surrounding conditions. If there is a bounce off support how big is it and what is the catalyst for the bounce? Currently there isn’t anything other than it is oversold. The fiscal cliff issues were discussed on Friday and it gave a positive signal until December? Downside pressure remains in play with small bounce opportunities as buyers believe the problems are resolved. Thus, we have to be cautious how we manage any short positions.

The VIX index (S&P 500 Volatility Index) remains low and not showing any elevated fear from investors.  This remains interesting to me short term and we will continue to watch how this plays out .

NASDAQ Index – Have we found support? Intraday reversal on Friday gave some hope, but there is still plenty of work to do moving forward. Looking for a bounce short term as the politicians attempt to play nice and resolve the fiscal issue before year end. If we get the bounce, close out the short position and we will look to take a swing trade on the move if it develops.

WATCH: – QID – Entry $31.45 / Stop $32.65 – (11/9) Manage the volatility of the play.

2) Currency:

Dollar – The dollar bounce continues, but is rising in volatility short term. We will take the trend as the key and hold with our stop in place.

WATCH: UUP – Entry – $22.05 – Stop $22.05

Euro – Watch for a play to develop in the euro near term as support tested and the oversold conditions bring buyers in.

3) Fixed Income: Yields are dropping.. Again! There was a big shift on the 30 year bond down to 2.72% and the 10 year bond fell to 1.57%. We are moving back towards the summer lows as the fear factor jumps… money is moving to higher ground.

Treasury Bonds – TLT break above the downtrend line as bonds rally. Watch to see how this plays out short term fear driving the upside in the bonds.

WATCH: TLT – $123.60 entry (11/7) – Stop $125.50

High Yield Bonds – We discussed the downside risk several months ago, but the rally negated any entry points to be short the bonds. However, we hit the point of exit on the bonds with the break of $91.80 on HYG. Watch for a confirmation on the downside, and at $91.50 short the sector (HYG or JNK). Broke the 200 day moving average today. Set stop to break-even if we get a bounce.

WATCH: HYG – short play at $91.50 (11/9). Entry $91.50 / Stop $91.50

4) Commodities: The commodity sector continues to be a challenge without clear leadership. The attempt to bounce off support didn’t last and the only real opportunities are generated by trading. Still not interested in holding the sector.

WATCH: SLV – Entry $31.50 / Stop $31 – Looking for upside momentum through resistance. Hasn’t materialized and looking to exit if we don’t move higher on Monday.

WATCH: OIL – $21 Entry – Watch for break from consolidation as trade on the Middle East issues rising. This is a trade for 3-5 percent only.

WATCH: UGA – Entry $56.25 / Stop $54.80 – Still moving higher from our entry trade. Watch and manage the volatility. Move above $57 positive.

5) Global Markets: The NASDAQ Global Market Index (NQGM) broke below the 200 day moving average and the downside has accelerated similar to the US markets overall. The EAFE index broke support of the 200 day and tested $51.65 support, ASIA is holding up thanks in part to the rally in China and Latin America continues to trade near the low from the summer. Still no clear direction in the global markets as the risk remains high in the asset class.

WATCH: EFA – Broke $53 support – short set up for play. EFU – Entry $19.85 / Stop $$19.70 Watch the volatility in the global markets.

WATCH: EEM – Broke the 200 day moving average, set up short play. EEV – Entry is $25.80 / Stop $25.50. Emerging markets broke lower from the sideways channel for the entry. bounced Friday watch the stop and manage the risk.

6) Real Estate (REITS) – The sector broke support at $64 (IYR), and took out the 200 day moving average. The downside is in play for now. The downside accelerated in NLY and REM as well.

WATCH: Entry (broke lower added position 11/9). SRS – Entry 26.35 / Stop 26.60

7) Global Fixed Income – Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector. Greece back on the table along with Europe. Watch and protect the downside risk in the sector near term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and attempting to hold support at $121.. Broke on Friday… watch to see how it plays out early in the week.

WATCH: International Corporate Bonds (PICB) – broke below support on Thursday and confirmed Friday. Clear exit for any positions. .

Watch: International High Yield Bonds (IHY) – Testing support? Break of $25.81 exit point.

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 of your portfolio.