Investors React to Germany’s Comments on ECB

Tuesday, July 31st

The broad indexes closed slightly lower on the day as comments from Germany rattle the positive feeling relative to the ECB. The devil is always in the details and one truth is no dramatic changes are taking place with the ECB on Thursday. Many have been waiting for Germany to react and today was the day. The challenge is it was rumored comment from a bank official and mixed signal comment from the Minister of Finance. Either way it was enough to put investors on notice that the comments that sparked the rally last week are just that… comments. The action to back up those comments will take time and the issue is will investors be patient enough to see how it develops? We will find out by week end.

The talk about gold moving higher continues along with the other commodities. The metal closed slightly lower on the day after pushing against resistance on GLD at the $158 level. The short term break above the downtrend line was a positive, and this is the next test on the upside. This is stimulus based talk pushing the metal higher

The economic data was better than expected with the personal income up 0.5%, home prices rising 2.2%, Chicago PMI expanding at 53.7% and consumer confidence at 65.9 and much better than the 61.4 expected. That is the kind of data we need to see the balance of the week.

Tomorrow is the day we have all been waiting for… what if the Fed doesn’t provide enough stimulus or waits until September? Be mindful of the news and the short term risk it represents. Watch, evaluate and manage your risk.

S&P 500 Sectors-to-Watch:

The S&P 500 index closed down6 points or 0.4% on Tuesday as investors react to the comments from Germany. Failed to break above the 1390 level again. There are still plenty of issues to tackle going forward for the broad index. Tomorrow will bring more challenges.

Since the June 4th low there has been a constant rotation of leadership. The obvious result is an inconsistent trend or trading range. The bullish uptrend channel remains in play with the index touching against the top end of the channel this week. The pivot points on the higher highs and higher lows is creating new leaders and losers and that is in play off the July 25th low.

Telecom – The sector continued to add to the upside as IYZ has gained better than 12% off the low last Wednesday. The renewed speculation that Apple will be fine going forward has brought buyers back to the sector. Bottom line is the earnings and data have been good and the sector continues to rise.

WATCH: IYZ – Hold and raise your stops to $23.32

Energy – Taking on the leadership role as well with the bounce in crude back near the $90 per barrel level. However, today crude dropped to $88 and the sector dropped 1% on the day. The move back above $69 on XLE on Friday was a positive for the sector and we continue to like the upside opportunity short term. Uptrend off the June low still in play.

WATCH: XLE – Entry @ 69.25. Stop 68.75. WATCH – LINE, FCG for breakout on upside in natural gas.

Financials – Holding above $14.40, but you are going to have to be patient and accept the volatility to own the sector near term. Hitting against the resistance once again and we will see how it plays out. Looking for a break above the $14.80 mark on XLF.

WATCH – XLF – Entry @ 14.55. Stop 14 (have to use lower stop due to the volatility short term.)

Healthcare – Recovered last week and holing near the highs. Hold positions and let it go. 50 day moving average is a good stop for now. Expect the volatility to remain as we go forward.

WATCH – XLV – Entry @ 38.10. Stop 50 DMA

Consumer Staples – The sector has been leading to the upside for the broad index. Uptrend in play and the steady move higher continues for now.

WATCH – XLP – Let it continue to move higher (no positions currently)

OTHER ASSET CLASSES:

Volatility Index – The index bounced back near 19 today as market trades sideways. If the news is holding up and buyers come back to the market, look for the volatility to continue to fall short term, however if the ECB or Fed disappoint look for it to spike higher on selling from disappointed investors.

WATCH: SVXY moved lower again on Tuesday as volatility rises.  Hit $95 on test lower. Entry $97.10 if reverses.

Dollar – Hits new high last week on renewed concerns on Europe. Last Thursday the dollar drops big on the news from ECB. What happens from here is up to the ECB from my view. Thus, we exited our positions, but looking for direction on the news later this week.

WATCH: UUP – Watch or UDN – on ECB action

Treasury Bonds – The yield moved up to 1.55% on Friday, but fell to 1.49% today as the ten year bond remains in limbo. Some of the worry is off the table short term is setting the tone for interest rates. Thirty year bond jumped to 2.64% Friday, gave some back today at 2.57%. Still looking for short trade in bonds with TBT or TBF.

WATCH: TBT – $14.80 entry. Stop $14.50 Tested lower on Monday – patience on entry

NASDAQ Index – Bounced last week off support near 2850. Facing resistance from the downtrend line at 2965 ish. Watch the upside to follow through or the news to dive it lower.  NASDAQ 100 index tested 2550 support and bounced back. Facing resistance at the 2665 mark or the top end of the range short term. Watching the large cap stocks to take the lead again an move higher. Solid day for Apple on Monday.

WATCH: – QQQ Entry @ $63.70 Friday. Stop $63.10

Small Cap Russell 2000 Index – The downside has been a challenge and the index is still in a downtrend. Watch for move higher if we play this move off the July 23rd low.

WATCH: IWM – Entry $79.10. Still opportunity for the entry. Stop is $77.90.

Commodities: Mixed signals as investors waffle on the comments from Germany relative to the ECB. Watch for any opporutnities as the volatility picks up.

Crude Oil – Crude fell 2.4% today, but OIL remains above $20.75 breakout mark ($21.87 close). Closed at $87.90 today on some profit taking. Watch and hold positions for now. Watch the downside short term.

WATCH: OIL – Entry $20.75 – Stop $21.20

Gasoline – bounced back last week, but remains in a push sideways and testing the move. Closed at $52.97. The upside for the fund still in play if oil continues to move or hold near these levels short term.

WATCH: UGA – Entry at $52.75 – Stop $52.75

Natural Gas – Holding above $20 on UNG. The trend remains to the upside with some volatility expected. Solid gain on Monday up more than 5.6%. Watch and manage your stops. Up 0.6% on Tuesday

WATCH: $20.80 is stop on position – Entry $20.50

Precious Metals – Gold rose from the grave last week and broke from consolidation pattern as a trade. GLD, $148.50 is support. Gold mining stocks jumped on move in gold. Move above $42.60 entry on Thursday.

WATCH: GLD – Entry $156 – Stop $155.   WATCH: GDX – Entry $42.60 – Stop $41.10

Global Markets: The global markets moved higher in response to the ECB comments relative to the euro, Spain and Italy. The EAFE index has moved higher on the news and belief something with happen this time around. Watch and manage your risk in the short term.

China – Tested the lows bounced on the European news. Watch the consolidation wedge forming over the last 6-7 weeks and ready to break higher. This has been volatile based on the global economic issues and the economic slowing in China. Watch for a upside move on the improving data this week from China, but expect volatility short term.

WATCH: FXI – Entry $34.20 on breakout from consolidation. HIT ENTRY TODYA

Mexico – moved lower after a test of the March highs and bounced on Europe news. Got the bounce off the $60.50 support and closed above the 30 day moving average. Got the follow through and entry point on $62.25 Friday.

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

Singapore – moving back above the high at $13. tested back and bounced off support at $12.50, and we took the entry at $12.70 on Tuesday. Nice follow through to $13.18 and new high.

WATCH: EWS – Entry $12.70, Stop $12.88

LEADERSHIP:

Housing – Positive outlook for housing sector and the homebuilders going forward. The new home sales data last week didn’t go over well with a 8.4% decline bucking the positive news. The sector tested support near the $20.80 mark and reversal was the opportunity to take a new play in the sector. The upside is still in play with some stalling short term taking place. Watch and manage the opportunity going forward.

Watch: XHB – testing support at the $20.80 mark. Held support at $20.80 $21.90 entry opportunity on breakout from consolidation.

Energy – See Above – The sector is setting up to take a leadership role short term on anticipation of improvement globally. (thin ice)

Materials – solid bounce of the bottom of the up trending channel and looking for a move to resistance at $35.75 and this higher if the leadership is to follow through.

Financials – See Above – The volatility in the sector will give you motion sickness, but there is strength. JPM broke from the consolidation and look for a break above the $37 level as positive. BAC bounced off the low and worth watching. WFC retesting the highs $34.40. Follow through break above $14.85 on XLF is a positive. Watch for the leadership to return to the sector.

Retail – Sector is working off support and cleared resistance. This is still a stock picking sector. AMZN looks solid and earnings were good along with guidance. Pushed to new high on the news. EBAY made solid move on earnings as well. RL ready to break back above the $150 mark. COH moved back above $61.30 and COST cleared another new high. TJX and TGT both in position to break higher as well.

WEDNESDAY:

Fixed income as the short lived selling of bonds reversed to buying Monday. Watch this as a sign of what is in store looking forward.

S&P 500 Index to break above the 1390 mark as short term resistance.

Earnings, FOMC today, ECB on Thursday and Jobs Report on Friday are the biggest risks of the week. If the news disappoints the exits will be crowded.

Economic data was better than the expectations Tuesday and should offer a leg up as the market digests the actions from the FOMC meeting today. Plenty of data this week as the month comes to a close. Tuesday started the parade with better personal income, higher home prices and improving Chicago PMI. Jobs data starts on Wednesday and ends Friday with the jobs report. Construction spending, FOMC announcement, Auto Sales, Factory Orders and ISM Manufacturing. Promises to be interesting.

FOMC meeting on Wednesday looms large based on the anticipation created for the Fed to provide stimulus. Watch the outcome and the reaction to the meeting.

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.