Housing Data Positive, But Market Remains Subdued

Tuesday, August 28th

Boring day number two! The good news for the day was the Case-Shiller housing index showed prices rising 2.3% in June. That is back-to-back gains for housing prices! At least housing is doing better… finally. New home sales have shown a 21% increase compared with the same period one year ago. The focus has been on the homebuilders which hit a new high on Monday.

The biggest headlines were on the Jackson Hole gathering of Central Bank leaders. The focus is on Mr. Bernanke who will speak on Friday. The debate on action relative to the stimulus is leaning more towards nothing than him taking any action near term. Thus we sleep walk through the next few days until the comments are delivered.

China has struggled and the outlook for growth continues to slow. FXI has fallen 4.9% since the high on August 10th, but has caught some intermediate term support near the $33.50 mark. Still watch the downside risk and if China will be able to offers some stimulus to spark renewed growth in the country.

Sectors experienced a slow day, but we updated the data below based on the forward looking opportunities.

1)  US Equities:

S&P 500 Sectors-to-Watch – The index did little and no significant changes to the outlook. The 1395 level remains our first level of support to watch short term. The uptrend remains in play, thus the selling is a test of the move higher off the June 4th low. Uptrends don’t die easily and we will need more issues and worries to kick in before the bottom falls out of the current trend.

The market leadership has been technology, energy, consumer discretionary and healthcare. The last seven trading days have tested the move higher and is holding up so far. We have adjusted our stops, sold some positions and we are being patient to see how this plays out short term. There is plenty of news and data swirling around the world.

Energy – Uptrend remains in play off the June lows and resistance is in play at $73 on XLE.  Oil services (OIH) is moved above short term resistance at $41.15. Crude tested the trend by moving down to $95.45 on Monday, but bounced back to $96 on Tuesday. UGA hit resistance at the March highs near $60. The hurricane in the Gulf of Mexico is playing a role with the wells shut down! This could have further impact based on how long it takes to bring everything back on line with refiners and wells.

WATCH: XLE – Entry @ 69.25. Stop 71.30 —– OIH – Entry $41.50 Stop – $40.20

Financials – The sector pulled back from the move higher and in position to test support at $15. Still looking for some upside leadership from the sector going forward. Raised stop to break even on the trade. Any concerns with the sovereign debt issues will weigh on the sector.

WATCH – XLF – Entry @ 14.55 – Stop 14.80

Healthcare – The sector continues to trade sideways. We dropped to support at $38.40 and held. Hold positions and manage the risk.  IHF moved up nicely off the lows and and back to the previous highs. XPH moved off the lows as well, but stalled near the $59 mark. Looking to add to our positions if the support holds and the upside continues.

WATCH – XLV – Entry @ 38.10. Stop $38.20 (Add to position at $39)

Consumer Services – The consumer services stocks have been fragmented to winners and losers. Dig into the ETF for the leaders. The retail stocks remains a stock picking sector. Break above $45.50 would positive for the uptrend.

WATCH: XLY – Entry 44.50 – Stop 44.50

Basic Materials – broke above $35.75 resistance to continue the uptrend off the June bottom. Watch the miners and metals as they remain under pressure. Watch and manage the trade short term.

WATCH: XLB – Entry 35.80 – Stop 35.45 (HIT STOP)

NASDAQ Index – Moved above the 3065 level again and holding. The upside momentum has been as a result of the technology stocks. However, the accelerated run higher has been slowing, watch the trendline and the current valuation. The play continues up for now, but manage your risk.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 67.40

Small Cap Russell 2000 Index – The upside move off the July 30th bottom was positive, but we starting to give the move back as the downside gains momentum for small caps.

WATCH: IWM -Entry 79.60 – Stop – 80.30

Volatility Index – The index is establishing a short term trading range. A move above the 16.50 mark brings VXX into play short term. The lower volatility has been a question mark looking forward. Watch for ECB or the Fed to be the tie breaker for the VIX. It may be by lack of follow through versus any action taken.

WATCH: SVXY – Reversing on the volatility.  VXX – $11.85 Entry if rally continues in the VIX.

2)  Currency:

Dollar – The dollar got thumped on the FOMC stimulus grab. The risk for the dollar has been stimulus from the Fed and the ECB. The lack of activity from the central banks has been better for the dollar, but now they are rumbling again and sending the buck down. This is working well for our short play currently.

WATCH: UDN – Entry $26.40. – Stop $26.40 break-even.

3)  Fixed Income:

Treasury Bonds – The bond has reversed course on the stimulus from the Fed short term. The yield has moved to 2.78% on the thirty year bond, pushing prices higher on the bond. The move to 1.66% on the ten year pushed prices higher as IEF and TLT both bounced off the lows. TLT cleared $124.40 as a potential entry point.

WATCH: TLT $125 Entry.  Stop 123.50

4)  Commodities:

Crude Oil – Testing near the highs as investors worry again about global growth. Manage risk of the play and mange your stops.

WATCH: OIL – Entry 20.75 – Stop 22.95 (stop on the close)

Gasoline – Can’t decide as it trades near the high… up or down? The upside is still in play, but watch oil prices and if they stall at resistance. Watching for a test short term on the steep move higher. Held move above the $59 level today.

WATCH: UGA – Entry at 52.75 – Stop 57.95

Resources and Commodities Strategy – Turned sideways for now, watch and honor the stop.

WATCH: BCX – Entry $13.95   Stop $13.95. Manage the risk

5)  Global Markets: The global markets responded to the ECB stimulus anticipation on Tuesday. The EAFE index is attempting to hold the gains, but some negative sentiment from no action is in play. Watch and manage any opportunities short term. If there is no activity near term from the ECB the downside risk will grow for the market.

WATCH: EFA – Entry $50.50 – Stop $51.75

Sweden – Failed to hold the move higher and has dropped to support. Honor the exit point here.

WATCH: EWD – $28.35 entry. Stop – $27.30

Mexico – Moved against resistance again and still looking for a break out move on the index. Watch the volatility and manage the position.

WATCH: EWW – Entry $62.25 Friday. Stop $61.50

Brazil Small Cap (BRF) channel top $37.50 with potential move higher. Posted on last Wednesday for the opportunity in the global markets moving higher. Solid move higher on Thursday to follow through on the upside breakout. The entry was at $37.60. Manage the trade and Raise Stop to $37.60 (break-even).

6)  Real Estate (REITS) – The sector remains near the current highs. Double top (IYR) set up on the downside short term. I like the outlook long term, but short term we remain on hold. Still scanning and looking for the best opportunities.  Mortgage REITs (REM) bounced off the selling and headed back towards the previous high and remain in an uptrend test of the move.  The move above $14.80 on Monday is a new high and worth watching for entry and long term play in the ETF.  Yield on the fund is above 11% currently.

WATCH: IYR test of support at $63.60 let the opportunity develop. Entry $65.30 (HIT ENTRY TODAY)

7)  Global Fixed Income – The issues with sovereign debt in Europe keeps us out of the asset class currently. Emerging market bonds (EMB) tested lower and bounced off support to move higher. Passed on the opportunity due to risk/reward. International Corporate Bonds (PICB) and International High Yield Bonds (IHY) remain in a long term uptrend.

WEDNESDAY:

What am I watching:   1) Downside risk in the broad indexes. SH, Proshares short S&P 500 index ETF is holding lows near $34.75, and entry would be a move above $35 at $35.15. 2) Biotech (XBI) is breaking from the consolidation and worth a trade if the upside remains. Entry at $89 short term. 3) INTC is testing the low at $24.70? Short play or trade on bounce. 4)  HES – Breaking higher from the consolidation with $51 entry point.  5) BX – Blackstone Group is making a move higher $14.15 entry on move above resistance. 6) MSFT – Break above $31 would be a break from the consolidation pattern. 7) JCP – breaking through resistance at $25 with entry at same level.

From the Morning Notes: 1) TLT – looking to hold the move above $125.50 as entry play. 2) EWG – 21.50 breakout point for the ETF to move higher as the picture gains clarity. 3)  VXX – a push higher in the volatility index short term as trade. $11.80 entry.

The broad market has become fixated on the stimulus package from the Fed or the ECB. Without some type of announcement near term the market may react on the downside. Be patient as this all plays out short term.

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.