Wednesday – Notes & Research
Day 3 of the Cyprus… what was it that was going on there? Out of sight, out of mind. The FOMC meeting took center stage relative to the concerns and those were put to rest by a Fed that will remain fully engaged in pouring more money down the toilet. The endless blather today about whether the Fed is doing the right thing or not made me vomit. Glad the meeting is over and we can get back to speculating on if the markets are too high or not. Speaking of that they did manage to hold onto the rally that began yesterday afternoon. Some good looking moves in sectors today along with some laggards. Scanning for rotation we continue to see developments on the upside along with some warnings.
- The Utility sector broke higher from the consolidation at the highs. XLU cleared $38.18 resistance and we posted a buy to add to our position on the S&P 500 Model.
- The Consumer Staples broke higher as well. XLP cleared $38.90 on the move to new high. Looking for entry to add to positions on the S&P 500 Model.
- Volatility index recedes as quickly as it rose today. A close above at 12.4 makes this interesting short term again short term. SVXY rose more than 5% on the day. A move above $91 resistance opens the door on the upside.
- Japan broke to a new high as well with EWJ closing above the $10.64 high.
- Gold started the trek lower again as the Cyprus catalyst fades. The decline of 0.4% opens the door for the short trade in GLL. Close near the entry today on the ONLY ETF Model.
- Interest rates rose on the 30 year bond to 3.17% and the bond retreated slightly. Is this another rally in the short trade with TBT? Adding to the ONLY ETF Model.
- China bounced 2.5% on the day and with a move above $37.85 would get interesting for a bounce trade.
Big question mark on the day… Will this move higher hold? Back to the four options on the S&P 500 index high of 1565 we posed earlier in the week.
Housing Starts were better than expected at 917,000. FOMC meeting announcement.
1) US Equities:
FOMC brings end to the upside drought. Challenge is volume or should I say lack of on the move Thursday. Take what it gives, but protect against the downside risk of the markets going forward. Below we review the rotation charts and sectors to watch.
Sector Rotation Strategy:
The February 25th low pivot point remains in play. We added the March 14th high as the next potential pivot point on the downside, and today we add another reversal point on the upside. I know it looks confusing, but it keeps the trend in perspective and allows you to focus on what matters, the trend. As you can see on the chart the moved higher in unison today. The shift yesterday in XLP, XLU, IYZ and XLV to green was a follow through on the trading day today. XLP and XLU broke to new highs on the day. XLY rallied back nicely and along with financials (XLF) and healthcare (XLV). The index will need to eclipse the high from last Thursday to reverse the selling, but the positive day helped calm some nerves.
December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. The trend has continued to push higher after the February 25th test. See above.
November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend.
Sector Rotation of Interest:
Technology – The sector finally made a move above the top side of the trading range. Bounced back to the top after hitting the stop! I love this game. Still looking for a break high. XLK
- Semiconductors (SOXX) Tested the bottom end of the up trending channel. Watch $58.80 as trade on upside. Added to the Sector Rotation Model.
Financials – Banks have been leading the upside as the stress test is passed. The selling relative to the Cyprus concerns have been mixed, but muted overall. This could nag the sector and we need to manage our stops and potential downside risk. Consolidating near the high.
Energy – The sector hit resistance at the $80 level and tested lower. Watch for support to hold at 50 DMA. Thus far it has and we will start looking for the drivers.
Consumer Discretionary – Broke above the $51 resistance on XLY. The consumers are leading the broader market indexes. The stall is with the broad markets, patience short term. held and bounced back for now.
- Added to the S&P 500 Model Portfolio.
- Jim’s Notes – Consumer Discretionary
- XRT pushed the index higher today gaining 1.5%. Not dead yet.
- Dollar jumped on euro news and moves on positive market and Fed announcement. The move higher keeps the upside trend in play. UUP closed at $22.56. Still watching support at the $22.35 mark on the downside. Manage your stops.
- FXB – the British Pound jumped big last week and held the move. Watch for move above the $150 level. Tested the move today, but closed lower.
- FXC – the Canadian Dollar is attempting to hold support at $95.35. Bounced nicely to breakout, but has retraced to the consolidation zone.
- FXY – yen is still in bottoming mode. Watch for a base to build short term if the direction is to switch.
- FXA – Australian dollar bouncing as stocks continue higher leading the way. ONLY ETF MODEL.
- FXE – The euro is testing support on the downside again? Broke support at the $128.15 level for now? Watch.
3) Fixed Income:
- Yields continue are shifting slightly higher as stocks hold gains. The question is if the market corrects how much will it impact? Patience as the downside in bonds continues.
- 30 Year Yield = 3.17% – up 4 basis points — TLT = $116.12 down $1.31
- 10 Year Yield =1.94% – up 3 basis points — IEF = $106.57 down 41 cents
Tracking Bond Sectors of Interest:
Treasury Bonds – The volatility in the bond sector has risen short term and it is causing grief for investors. Watch and protect on the downside. Estimates are for 2.75% on the 10 year bond by year end? Bounce in motion for the bond off the lows for now. Volatility is back.
High Yield Bonds – HYG = 6.55% yield. Support held at $92.75. heading to the previous highs near $95 Let it run as investors remain in love with junk bonds. I expect the trading range to remain near term.
Corporate Bonds – LQD = 3.8% yield. The price has found short term support ($118.90)… again. Downtrend line remains in play. Patience as this plays out.
Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds broke support and the chart is attempting to bottom or build a base. The downside risk remains and this is a sector of the bond market to avoid for now.
Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the current rally in stocks. Starting to see some selling off the highs. Watch stops and protect your gains.
- The commodity sub-sectors are finding some signs of life along with volatility in the sectors. Watch and play the leadership. GSG attempting to build a base on the parts moving. Hitting the 200 day moving average as short term resistance? Not for the faint of heart.
- UNG (natural gas) made the big move higher breaking out and following through on the upside. Higher again on the day, closing near the highs. The trade entry point was hit. SEE ONLYETF Model Portfolio
- Crude tested support at $89.30 last week and closed at $92.10 for the day. ONLYETF Model Portfolio The upside is still in play. Tested the $22 resistance on OIL.
- GLD – Gold gained on the alternative asset choice. The gain put the metal back near the $156 level. Downside is still the outlook with a potential short term bounce in progress.
- DBA and DBB both broke lower today – watch the downside acceleration.
Commodities Rotation Chart:
Tracking Commodities Sectors of Interest:
- BAL – Hit stop at $58 today. Watch to see how far it moves.
5) Global Markets:
- Global markets tested lower on the Cyprus news to start the week. There was no selling today, but no real bounce either. The other shoe syndrome is still alive relative to this issue.
- FXI – China continues to lead the downside relative to the global markets. FXI bounced 2.5% on the day and could find some buyers if the situation clears relative to the real estate issues. Otherwise the bounce will turn to resumed selling going forward.
- Japan (EWJ) broke higher, tested, and continued to move higher. Got the move above $10.60 and still moving to the upside. Getting extended, protect your gains.
- Australia (EWA) Testing the downside of the the uptrend in play. Watch to see if the 50 DMA holds a support.
- EFA – The long term uptrend remains in play and support has held and the fund has moved back to resistance at the $59.30 level. Watch the ripple effect of Europe short term as this plays out.
- EEM – emerging markets continue to struggle. My view they don’t get better until the commodities flatten out or increase in price near term. Got uglier on Tuesday with more selling.
6) Real Estate (REITS):
Tracking Real Estate Sectors of Interest:
Real Estate Index (REITS) – The pullback test is in play for IYR and $67.25 support held. Tested lower today as markets adjust to Cyprus fears. ADDED: Sector Rotation Model & S&P 500 Model.
- Homebuilders bounced off support at $27. Housing starts were better than expected leading the index higher. Watch and play accordingly. Added to the Sector Rotation Model. XHB holding near the new closing high. Got the break higher in trading today. good earnings are pushing the sector along with the data.
- REM – Mortgage REIT held $14.80 support. Test lower today to $15.60 watch and adjust your stop.
- NLY- Annaly Capital Management finally broke above $15, and is testing the $15.20 support currently on the upside move.
7) Global Fixed Income:
- The sovereign debt issues had faded, but with Spain in the news again, Italy facing disruptive elections this weekend, and France taxing itself out of existence, too many concerns and the safest play is to avoid the asset class for now.
- Some basing is starting to take place and we continue to scan and look for opportunities in the sector.
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 losses.