Investors Like JPM and Stage a Rally

Four days of gradual selling and one day of crazy buying. Friday I was speaking with investors and the comments on the rally were that of disbelief. They stated technically the rally was overdue, but that the upside was limited based on the outlook for growth. I thought the comments were correct overall, and that the move on Friday is still focused on stimulus. The headlines gave the rally credit to JP Morgan for their earnings report. Wells Fargo reported good numbers as well and the helping the banks lead the way higher. All said, Friday was another news driven event with the focus actually on the data not hype. Albeit the response or news around JPM was over hyped.

Thursday’s early sell off took sectors and indexes below support, but they bounced and closed above key levels. The S&P 500 index held at the 1330 level, NASDAQ held the 2837 intraday, and the Dow tested below 12,500 mark. In the end not pretty relative to intraday lows, but the bounce gave some hope of holding and a bounce. Thanks to the news it did bounce on Friday. That validated what I said all week, the market internals didn’t show fear for selling to be aggressive and the buyers were still hanging around. The did step in on Friday, which leaves us with the key question… how long and how far do we bounce?

Discipline remains the priority! This is not an easy market environment and the outlook remains cloudy at best.

Sectors-to-Watch:

The lack of perceived options from the Fed Minutes was hanging over the markets all week. The cry for stimulus continues, but the Fed is ignoring it for now. When we scan both the fundamental and technical data we find some good and some bad. The commodities have come to life on the drought worries for the soft commodities, and geopolitical issues in Iran have rattled the oil commodities. They have taken on a speculative leadership role.

The defensive sectors continue to lead the broad markets with healthcare, utilities, consumer staples and telecom. Financials had a good showing on Friday to bounce off support. Technology is leading the downside as worries relative to growth hang over the markets overall. This is a sector driven and theme driven market. The theme of owning dividend stocks or defensive stocks has done well all year. The anti-growth theme is alive and well. Thus, we remain diligent in following the themes and attempting to get front of them.

The negative twist in the market continues as investors attempt to determine short term direction.

Positive – XLV, XLU, XLP, IYZ

Negative – XLF, XLE, XLY, XLK, XLB, XLI

News is driving, earnings are starting to ramp up and they will be the key for next weeks trading.

Volatility Index – The index closed at 16.7 back to last weeks lows. Watch for the index to flatten if the market continues to push higher. There is no real fear or negative showing in the index and the outlook is for more of the same. This has been a big help over the last two weeks to keep the focus on the upside versus the selling.

WATCH: SVXY was the winner as the market rallied on Friday up 5.85%.

Dollar – Heading fell against the euro on Friday, but has rallied nicely off the lows last week. Bounced back to the top of the trading range and we will hold for now.

WATCH: UUP – Support is at the $22.40 level. Watch resistance the $23 mark. (Closed above that level on Thursday)

Treasury Bonds – The yield is 1.5% on the ten year bond. The economic data sent the bond higher and yield lower for the week and the trend has continued. The fear factor support was 1.56% short term and we broke that level to test the June lows. Bond bounce was not equal to the Friday rally leaving plenty of questions about the move higher.

WATCH: IEF – $108.80 (HIT ENTRY ON MONDAY) Stop at $108.30 for now.

S&P 500 Index – Test lower, but the 1330 level held. That helped hold the uptrend line off the June 4th low and keep the move in play for now. The move on Friday put the index back at the level of last weeks close. Thus, four down, one up, flat week. Volume on the move Friday was weaker than the selling on Thursday. Nothing has changed and we have to remain patient and focused.

WATCH: SPY – $132.50 Support? Tested and bounce on Friday

NASDAQ Index – More aggressive selling due to the technology sector. The support at 2860 held and we even closed back above 2900 on Friday. The volatility index for the NASDAQ tested to lows, but bounced significantly over the last seven trading days and with Friday’s rally returned lower. This is the index that is challenged and shows extremes currently. The Semiconductors hit a new low on Thursday and only gained 0.9% on Friday. Still not healthy and not interested in owning this for now.

NASDAQ 100 index holds more interest as the large cap stocks are doing better. The QQQ ETF held support and closed just aboce the potential entry point if we follow through on Monday.

WATCH: QQQ – support held at $62.25 – Entry at $63.60

Small Cap Russell 2000 Index – Broke support at $79.60 with IWM. Held support or a retest of the $78.30 mark on Thursday. Watch for support to develop before taking any positions. Big bounce Friday back to $79.60 support.

WATCH: IWM – Tough call on the bounce. $80 potential entry point.

Financials – XLF broke $14.40 support on Tuesday and tested $14.25 on Thursday. led the bounce on Friday with a move back to $14.70. Held the uptrend line and looks ready to take on a leadership role on the earnings data. With plenty more next week this is as sector watch. Maybe the data isn’t as bad as the pundits want us to believe.

WATCH: XLF – $14.45 entry on Friday. This is not an easy sector to own short term.

Energy – The jump off the lows were the result of geopolitical issues in Iran. Thus, we now have a premium built into the sector based on fear. Demand will be the ultimate deciding vote in time. The inventory data Wednesday was responsible for another bounce higher. Thus, the assumption is demand is rising? Watch the price of crude and other energy related commodities.

WATCH: XLE – Test of $65.50 failed and now looking to hold the $64.75 for any trade opportunity. Break back above $66.40 would be of interest short term. Got the entry on Friday.

Commodities:

1) Crude is above the breakout level on OIL at $20.75 ($21.32 close). 2) Watch Gasoline was up slightly and holding above $51.20 on UGA. 3) Watch Natural Gas as it is attempting to break higher above $20 on UNG. 4) Watch Agriculture Soft Commodities (DBA) are moving higher. Corn (CORN) and other commodities see some profit taking, but still testing the recent highs. 5) Gold bounced following the test lower on GLD. $148.50 is support. Watch Mining stocks fell 5% on the week with a small bounce on Friday. The sector is finding favor with investors as they look for the volatility to return in the sectors.

Global Markets:

China (FXI) fell and broke through support again at $32.40. Import data was a disappointment. If the US rallies the overlap will move to the global stocks to follow. Europe (IEV) broke support near $32.80, but bounced on Friday’s rally. The downside is halted on the Friday move, but the downside is still the trend. Watch. Turkey (TUR) remains near the high. Break above $53.10 could get interesting for trade.

What I am watching now?

Earnings have already started and the outlook is hopeful. However, hope is not an investment strategy and we have to be prepared for the worst. 85 of the S&P 500 index stocks have already warned or adjusted earnings for Q2. However, JPM started the banks off with good news. If that acts as a catalyst at the beginning of the earnings cycle it will prove to be a plus going forward.

More banking news with Citigroup and Bank of America to start the week. Watch for follow through in the financials if the data is positive.

Technology stocks start the earnings season as well. Intel will have to step up if the sector is to get any relief short term.

Energy stocks and commodities rally back on news and inventory data. Watch for the rally to step up into the start of the week.

Semiconductors broke support at 362 on the SOX index and the weakness in the growth sector remains. SMH broke support at $30.60. Watch for follow through and potential downside plays in the sector. The bounce on Friday was small relative the balance of the market. The downside could still be the play 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.