Indexes Push Higher on Stimulus Hopes

Tuesday, September 11th

The hopes are running high for the QE3 stimulus package. The meeting starts tomorrow and concludes on Thursday with a press conference. I can hardly wait for the double-speak and explanation from Mr. Bernanke. The Apple meeting is tomorrow as well adding to the drama expected in the media. What the Fed will do at this point is nothing more than a guessing game. Likewise how the markets will respond to a lack of aggressive action taken by the Fed is another game of speculation. My expectations are on the low side for action by the Fed at this meeting. Thus, expect the worst and hope for the best is my motto.

Dow joins the indexes with a break above the 2007 highs. The intraday activity was better than the close. The NASDAQ fell 13 points after hitting an intraday high of 3118 and only managed a 1 point gain at the close. The S&P 5oo index was up 4 points to 1434. Overall just another digestion day for the broad indexes.

Moody’s warning to the US on a downgrade to the rating on sovereign debt hit the wires today! Not surprised, but the reality of anything being done are slim and none. The announcement sent gold higher as well as yields on both the 10 and 30 year bond. Short Treasury plays are on the watch list and this could add to the opportunity.

Plenty to watch and understand as this week progresses. Set your stops accordingly and keep moving forward.

Below we discuss all the moves that were made today and the impact and importance to each sector.

1)  US Equities:

S&P 500 Sectors-to-Watch – The index is holding above the 1420 level as we head into the FOMC meeting on Wednesday and Thursday. Investors remain timid towards the outcome of the current market environment. 1420 is a test of the breakout from last week, and 1395 is support. The stimulus remains the driving factor short term and everyone is watching to see how it plays out.

WATCH: SPY – Entry $142.50 – Stop $141.30

The leadership shift over the last week continues for the broad index:

Basic Materials – The sector has taken on a role of leadership of late. Based on the stimulus in China we have seen a move in the materials sector. The question is will it last? Does China actually follow through? Watch and look for the opportunities in XLB. Resistance at the $37 mark short term and looking for the breakout to establish or add to the position.

WATCH: XLB – Entry $37

Financials – The sector pulled back from the move higher Monday, but was back on the upside today. The trend higher remains in play and we are digesting the move higher. The relief relative to Europe helped push the sector higher short term. Banks and brokers have been leading the move higher. IAI is at resistance $22.85 and looking for a catalyst move to continue the uptrend.

WATCH – XLF – Entry @ 14.55 – Stop 15.35 (on the close) — WATCH: KBE – Entry – 22.80 – Stop – 22.90

Energy – Uncertainty has turned into leadership again for the sector. The selling in XLE tested support at the $70.40 level and held. The bounce on Thursday and Friday put the ETF back above the $73 resistance. The move confirmed the break on Tuesday. UNG fell 3.74% last Thursday and Friday, but finds renewed strength to jump above $19.40 resistance and the 200 day moving average! Gained 11.2% on Monday and Tuesday? UGA gained is at a new high – tighten your stops on the play. OIL is back near the top of the short term trading range. The mixed results are all swirling around the demand versus hope of higher demand.

WATCH: HES – Entry $51 – Stop $52.31 (Raised Stop)

Telecom – The test of support is over and the upside back in play. New high in play and the stocks are moving steadily higher. This remains a key sector for investors to take advantage of short term.

WATCH: IYZ – Entry $24.40 – Stop $24

Healthcare – The sector has been trading sideways. We dropped to support at $38.40 and held. Moved up to $39 and stalled, but we finally move through the resistance and pushed higher.  IHF moved up nicely off the lows and hit new highs and is testing the move. XPH moved off the lows as well, but stalled near the $61 mark.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $38.80 (Raise Stop)

Biotech – The sector broke from the consolidation and was worth the trade on the upside play. The sector is helping drive the healthcare higher as well. Solid move to the upside and we have raised our stop to protect the gains.

WATCH – XBI – Entry at $89  – Stop $90.40

Consumer Services – The consumer services sector has the retail stocks support relative to the trend higher. XLY and XRT are both moving higher short term. Digging in and looking for the leaders has been the best play. JC Penny’s broke above our entry point and continues higher with the sector overall. Take the upside, but protect against the downside short term.

WATCH: XLY – Entry 44.50 – Stop 46.20 (Raise Stop) / JCP – Entry 25.50 – Stop 27.30 (Raise Stop)

Semiconductors – The sector has been testing lower and the downside leadership has been from Intel. The sector remains weaker, and the bounce in the broad index didn’t hold and the sellers are back. Watch and manage the play short term. SMH hit our stop and we took the exit. Intel reversed again on Friday and the downside play is working. The announcement to withdraw their earnings guidance pushed the stock even lower.

WATCH: Short Intel (INTC) – 24.55 – Stop – 24

NASDAQ Index – The upside momentum has been as a result of the technology stocks, but the downside risk in in the semiconductor stocks. The momentum is shifting to the downside. The trend is up for now, but manage your risk.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 68.25 Watch the move lower on Monday.

Small Cap Russell 2000 Index – The upside move off the July 30th bottom was positive, but we struggled with resistance at the $81.75 level. The move higher is positive, but we have stalled again.  The key is to protect the gains we have and see how this plays out short term.

WATCH: IWM -Entry 79.60 – Stop – 83.20

Volatility Index – The index broke low lower last week, but returned with some attitude to start the week. The VIX should move lower if the rally is going to continue, but the recent volatility increase my have different plans short term.

WATCH: VXX – looking for a reversal.

2)  Currency:

Dollar – The dollar started lower on the FOMC rumors and the ECB stimulus is helping push the dollar lower as well. The risk for the dollar has been stimulus from the Fed and the ECB. We remain short the dollar as the downside continues to the greenback.

WATCH: UDN – Entry $26.40. – Stop $27

3)  Fixed Income:

Treasury Bonds – The bond had reversed course on the stimulus from the Fed short term. Breaking support again at the $124.50 level again. Watch TBF for a short play.

WATCH: TBF – 29.30 Entry (Tuesday)

4)  Commodities:

Crude Oil – Testing near the move higher as the fear factor steps up on the stimulus packages not materializing. The risk trades are coming off and that is impacting the commodities. 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. Made move back above the $60 mark again… Watch and manage your stops.

WATCH: UGA – Entry at 52.75 – Stop 58.50 (Stop on the close)

5)  Global Markets: The global markets responded to the ECB stimulus anticipation. The EAFE index tested support near term and bounced. Risk is on as the index gains relative to the US heading higher.

WATCH: EFA – Entry 52 – Stop – $52

Brazil Small Cap – Bought on the move to the channel top at $37.50 with potential move higher. Solid move and follow through on the upside breakout prompted the entry at $37.60. Manage the trade and Raise Stop to $39.40 on move higher.

WATCH: BRF – Entry 37.60 – Stop – 39.40

6)  Real Estate (REITS) – The sector remains near the current highs. I like the outlook long term, and short term we have made a move back to the top end of the trading range. IYR made the move through the top end of the trading range and hit a new high. Still scanning and looking for the best opportunities.  Mortgage REITs (REM) bounced off the selling and headed back to a new high. The uptrend remains in play. Yield on the fund is above 11% currently.

WATCH: IYR – Entry $65.30 – Stop $65.30 (Raise Stop)

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 and moved higher on Friday. Hold positions and manage your downside risk.

WEDNESDAY Outlook:

Tomorrow is the FOMC decision on on what they will do or not do relative stimulus. There will be plenty of speculation over the next two days as to what action if any the Fed will take. Key to the week is the outcome.

Watch the downside risk as the events on the week will have either a positive outlook or more selling will come itno play.

China (FXI) big reversal off the jump higher on Friday. Calmed in trading on Tuesday, but still have to watch for the upside move .

What am I watching:   1) MSFT – Break above $31 would be a break from the consolidation pattern. Hit on Thursday, but pulled back into the consolidation. 2) Facebook (FB) is approaching our target of $15. Bounced 7% last week.  Watch the upside for a break above $19.70 as an entry point. The move back to the upside is going to take some conviction to buy. 3)  Financials to provide the key leadership higher. BAC, C, MS, JPM, etc are on my watch list. 4) DBB – the base metals have picked up in response to the stimulus from China? They have run fast and may want to wait for a test on entry. JJC shows the jump in copper worth watching. 5) TBT – Short Treasury play is attempting to break higher as yields fall. If the Fed acts on the stimulus it could be an issue. Watch for possible move higher short term. 6) UNG and FCG are moving higher the last week.

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.