Follow Through on Positive Upside In Earnings

Tuesday, October 16th

The S&P 500 Index rallies back to gain 1% on the day. The leadership came from Basic Materials and Energy. It is interesting to note that the rally in those sectors came on the heels of the “rumor” that Spain was ready to establish a credit line with the ECB relative to a bailout if needed. The news helped energy and materials based on “speculation” that this would increase demand. Bottom line… rumor and speculation day stimulated the broad markets.

Earnings were the key driver throughout the day as JNJ, UNH, KO and MUR added to the upside with stronger than expected earnings. The Healthcare sector was up more than 1%, pharmaceuticals were up 1% and healthcare providers were flat. Energy gained 1.6% and Consumer Services were up 1%. Earnings remain in the forefront of the market short term.

Banks started out stronger on the day as Goldman Sachs beat earnings estimates. However, the rally didn’t last for the sector and ended lower by nearly 1% on the day. What gives? There is still a undercurrent towards the banks and the downside is still in control. Watch as BIX, S&P Bank Index is breaking key support. If there were a short ETF for the banks it would be worth watching short term. A short on KBE or a look at the January $23 puts could play out on a break of support.

Semiconductors continued their bounce on the day with a 2.2% bounce added to the 1.5% on Monday. Look for SMH to move above the $30.95 mark as a positive bounce off the lows was yesterday’s note, and today we are looking at a potential play at $31.65 if Intel provides some tolerable news after hours. They did beat street estimates, but they showed additional weakness in the PC market. The stock was down 1.4% after hours, but still worth watching the move tomorrow. See the ONLYETF model watch list.

Economic news was positive overall with the CPI up 0.6% showing the inflation influence of food and energy. The core was up 0.1% as expected… good thing no one eats or uses gasoline or petroleum based products. Thus, the market took the news as positive. Industrial production was better than expected up 0.4% and homebuilders index was at 41. The strain on the homebuilders is the credit market. The availability of lending for buyers is strict and limiting the recovery at this point.

Pundit resigned from Citigroup causing more questino of why, than how it would impact the stock looking forward. Overall positive day for the indexes and more room for support. Watch, be patient and take what the market gives.

What am I watching?

Semiconductors bounced 3.7% to start the week… can they follow through and provide a trade opportunity?

Treasury Bonds – TLT pushed towards resistance at $124.50 on the worries building last week. Now it has pulled back again and $121.40 is support to watch on the downside. We are establishing a trading range short term and we will watch to see how this plays relative to direction for the broad markets.

Natural Gas fell 4.2% last two days. The test of support is the next course of action at $21.40 on UNG. If FCG moves above $17.95 would be of interest as trade opportunity also.

China broke out despite all the talk. Buyers are putting money to work. FXI cleared $35.70 look for entry on confirmation of the break higher. GXC is more diversified play, but the volume is much lower.

Banks are turning lower. Watch for a break of support on KBE or the S&P BIX Index.

Nice bounce today for the NASDAQ 100 index as Apple finds interest from buyers up 2.3%. Watch both for follow through on Wednesday.

Gasoline – UGA – Hit against resistance again $61.40 and is testing lower. $58.75 is support. Watch to see if it holds going forwards? Short play if we break lower.

Apple – (AAPL) Can the stock hold support at the $623 level? Yes, is the answer for now. The 2.3% gain on Tuesday puts the upside opportunity in play. Earnings are next week on the 24th.

Telecom has selling from the large cap stocks. This is pushing the index lower overall, but the Verizon and AT&T charts reflect the primary weakness in the sector. Monitor the opportunities. American Tower (AMT) broke higher and from consolidation and consolidated on Tuesday from the Softbank purchase of majority interest in Sprint? Scanning the sector to find the winners… VMED, CCI, FTR and S are the ones that jump off the charts.

Housing (XHB) bounced off support at the $24.50 mark and looks ready to move back towards the high. Downgrades in the sector have not helped, but the upside is still well within grasp for those showing improving earnings. Still strong outlook if we can find some financing for interested and qualified buyers.

Below we address the sectors looking forward:

1) US Equities:

S&P 500 Sectors-to-Watch – The index bounced back above the 1430 support on the close hitting 1454 on the day. 1420 is the key level for the index to hold support. The challenge or test of support last week has held and we are in the process of establishing another pivot point for the index. Basic Materials, Healthcare and Energy are the leaders off the 10/12 low.

The Scatter Graph below is run from a starting point off the high on 9/14 following the FOMC meeting rally and the current high. As you can see we drifted lower and tested support again. The leaders turned lower last week, but as seen on the chart they have turned up again. Utilities, Healthcare and Consumer Staples are holding steady currently. The next pivot point we are watching is the high on October 4th and that is showing Basic Materials, Healthcare and Energy as the leaders. Solid bounce by technology off the lows two days ago are worth watching here to see the move develops.

Financials –  We want to watch this during the current rally and let the leadership be defined. KIE, SPDR Insurance ETF is taking the lead within the sector as it hits a new high on Tuesday. Banks struggled on the day and moved lower as the balance of the sector moved higher.

WATCH: XLF – Entry $16.10

Energy – The sector has been churning on the up and down movement in crude. The support at $72.50 is in play and a move lower invites the downside play as a trade opportunity. Moved back to the top end of the range on Tuesday. Patience as this plays out near term.

WATCH: XLE – Trading range $72.50 – 74.50 for now. / DUG – Short play on the sector $21.20 entry.

Telecom – Weakness in the big cap stocks continues to drag the sector lower. Looking for a bounce off support near term.

WATCH: IYZ – $25.75 Entry Added – Stop $25 / WATCH: VZ & T weakness as a buying opportunity.

Healthcare – Big day for the sector as it moves back to the previous high. Looking for some new leadership in the sector. The pharma companies were the leader today.

WATCH – IHE – moved back near the current high? Leadership? Breakout and play opportunity at $91.70.

NASDAQ Index – The index has been under pressure from the large cap technology stocks selling. Raised stop on the downside play to protect some gain. Watch the open in the AM if positive take the profit and watch.

WATCH: – QID – Entry $28.15 – Stop – $28.40  (Sold at the open on buying premarket – sold at $28.55)

Transportation Index – The transports bounced off support last week at the $86.75 mark on IYT. They were chugging along nicely, but hit some resistance as the broad indexes have been selling. Still looking for this to be an indicator on the upside or downside for the economic picture short term.

WATCH: IYT – Entry $90 – retest of support near the $86.80 mark and bounce. Added at $90 on Tuesday.

2) Currency:

Dollar – The dollar, like stocks, is being pushed up and down based on the daily sentiment towards Europe and the global economic picture. The downside pressure on the dollar has met support currently and bounced. Looking for a clear direction on the buck.

WATCH: UDN – Entry: $27.40 Added on Tuesday.

3) Fixed Income:

Treasury Bonds – Bond outlook shifted lower again today on the buying in stocks. Be patient here and let the trade set up short term.

WATCH: TLT – Moving lower again TBF opportunity?

High Yield Bonds – Question: Is there are bubble in the High Yield Bond Sector? HYG recently tumbled from $94 to support at $91.60. While the decline was only 2.5%, the show of volatility and risk relative to the price of these bonds was made abundantly clear. Is the party over in the sector or is this a buying opportunity? A break of the near term support would be a exit now and ask questions later event. We have bounced, but there is still a concern for the bond class. $91 Stop is good.

Looks like another run to the upside is developing. The break above $92.70 today was a positive for the bonds.

WATCH: HYG breaking higher as investors put the risk trade on again.

4) Commodities: Tough sector to own currently with the rise in volatility across the sub-sectors. Watch for shift in direction short term. Small bounce on Tuesday – watch to see how the price moves.

WATCH: GLD – Broke support and bounced slightly. / SLV – Broke support and found some support?

WATCH: DBB – Tested lower again as the selling accelerated. No support yet — $18.20?

WATCH: OIL – up/down??? Watch to see if we gain any short term clarity.

WATCH: UNG – Fell 4.2% last two days – Watch the test of support near $21.50.

5) Global Markets: The global markets bounced last week off the low at $53 on EFA. It has been testing the support level again along with the 50 day moving average. Bounced off support and followed through higher on the news from Spain on Tuesday. 1.6% gain and looks ready to follow through.

WATCH: EFA – Moving higher again. $54.75 Entry

WATCH: EEM – Emerging markets ready to break higher? $42.10 Entry on EEM.

6) Real Estate (REITS) – The sector tested the recent high and support at $64 (IYR). Watch your downside risk if you still own this sector. We are looking for upside play if support holds, watch the $64.80 level for entry on upside. Testing without any conviction for now.

WATCH: IYR – Entry $64.10

WATCH: REM – Shift in sentiment and broke support at $15 as the downside is gaining momentum. Watch a move above $14.50 as possible entry. NLY is acting the same short term as money rotates from the sector. Watch for support? rumored dividend cuts on horizon.

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.

WATCH: PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity if we move above the $11.80.

WATCH: Emerging market bonds (EMB) – they continue to move steadily higher. Testing the highs.

WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch how it plays out short term.

Watch: International High Yield Bonds (IHY) – Testing near term support on minor pullback.

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 downside risk determines your long term results. Trade Smart!