Investors see hurdles, buyers see opportunities

Wednesday – Notes & Research

Today we got to do the hokey-pokey as the market couldn’t decide on up or down. The S&P 500 index spent most of the day in the red and no leadership to drive stocks in either direction. At the close the major index managed to close up 0.7 points or essentially even on the day. When it was all said and done it was a boring trading day following three days of 1% moves up or down. Maybe the fun returns tomorrow.

Crude oil was lower to start the day as there was concern over the last couple of weeks oil supply data. Supply had climbed near the 30 year high. The supply numbers were up 2.6 million barrels versus the 3 million expected and crude rallied back to even after dropping  1.5% at the open. Crude closed essentially flat on the day. Energy stocks traded lower on the day in response. This has been one of the primary leaders for the broad markets, watch to see how this plays out going forward.

Gasoline was off early as well, but managed to rally back to even on the day. The commodity has been tracking the fall in supply data higher over the last couple of week. The supply numbers today showed a jump in supply of 1.7 million barrels and in line with expectation. It was the short fall in inventory data that was driving prices higher short term. If the demand falls or production catches up, look for the price of gasoline to give up some of those gains. Thus far the challenge has been on the supply side as refineries go through maintenance and shutdowns for expansion.

Is Europe really back in the picture as a concern for US investors? The issue relative to Spain has pushed the euro and the sovereign debt debate back into the headlines, but is it the same as it was a year ago? With the ECB and the EU behind bailing out troubled countries will it have the same impact on the US markets? It is definitely something to watch short term, but you probably don’t want to panic at this point

What other data was helpful on the day?

XME – bounced off support at the $43.25 level? DBB sold from the current high? These two ETFs cannot seem to get in sync. The mining stocks and the base metals should be trading somewhat in unison, but the metals have been doing better than the miners. The same exists between GLD and GDX. The relationship has to find some parity by the miners rising or the metals falling. Watching to see which it is short term.

IEO – the exploration and production ETF from iShares has accelerated to the upside as the refiners take the lead again. The S&P Refining Index is up more than 20% since the first of the year. VLO, WNR, TSO, MCP and others have been the key leaders for the sector. One reason for the run higher is the spread between Brent Crude and US oil prices. The $20 spread helps the US refiners as gasoline in priced relative to Brent Crude. Thus, we are seeing solid gains from the US refiners.

The downside risk of the broad indexes remains a hot topic among analyst. The concern of having a mini correction continues to be spewed across the headlines. I will be the first to agree the market levels seem too high relative to the fundamental data, but if money flows continue to support the each test on the downside the buyers will continue to push prices higher. If Bill Gross of PIMCO is right in his beliefs that the money flow has not really come from bond… yet. The upside of this market could have a long way to go. Be patient relative to the downside and let it validate before jumping on that bandwagon.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index remained above the 1500 level to 1512 on the close. The uptrend remains in play and today lost the volatility we have experienced the last three days. The renewed volatility has my attention relative to near term direction still and we have to be aware of our surrounding. We have to step back and re-evaluate the volatility range on the index and within the sectors of the S&P 500 index.

The  leadership shifted in the sectors of the S&P 500  index. Energy (XLE) remains the leader, but moving sideways over the last week. Consumer Services (XLY), Industrials (XLI), Financials (XLF), Basic Materials (XLB), Utilities (XLU) and Healthcare (XLV) are shifting to sideways movement currently.Technology (XLK) is struggling period on mixed earnings data. Telecom (IYZ) has attempted to break higher, but remains in a sideways trend. The bottom line for the broad market is the short term  trend is being challenged and we have to be patient to see how it unfolds.

The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. The testing of the upside is in play as the markets find a way to move sideways. The upside outlook is for a move towards the target of 1550-1575 short term.

SP500Scatter

The chart below is the 28th of December starting point. The leadership is similar to the chart above but, you can see the acceleration of the Energy and Healthcare sector clearly over the last week plus. The last week you can see the uncertainty building along with renewed volatility. Sit tight for now and let’s see how the week progresses.

SP500Scatter

The VIX index jump around much like the broad index itself. Thus, the short term uncertainty seems to be in play again. Still worth watching as this unfolds.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index – The NASDAQ has settled in near the resistance/support of 3160 as the volatility picks up again. Watch and see how it plays out short term.

Dow Jones 30 Index – Remained below the 14,000 mark after making another attempt to break through. Failed to confirm a move higher and puts the index back on watch relative to the downside. Need some direction either way.

Small Caps – IWM cleared the $90 mark Friday only to retrace it’s steps and challenge support on Monday. Support is $87.50 and if you are unwilling to hold to that level you may not want to stay if the downside follows through. Moved back above the $90 mark on Tuesday.

Midcap Index – Tested lower losing 1% on the day. The index continues to hold up well in the face of opposition. Weigh out the risk factor at these levels currently and continuing to hold or exiting positions. A break higher is no guarantee at these levels and the downside risk has to be protected.

Financials – XLF moved above $17.50 resistance, retraced, and back above it again today. Banks (KBE) and regional banks (KRE) both made moves higher again to set the pace. Hold for now and watch the downside risk of the sector if the broad markets shift momentum.

WATCH: Entry $17.20 XLF. Stop @ $17.20

2) Currency:

US Dollar – The dollar remains in a downtrend, but got a bounce today on the worries about Europe (IEV). The buck retreated some, but holding near the $21.70 level. Watch the bounce for evidence of a continued move higher.

WATCH: UDN – Entry $27.45

Euro – The euro was testing lower on the rally in the dollar, but this is only one day and we will have to see if the trend reverses relative to the dollar.  Let this play out on the upside.

WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $133.30 Raise Stop

Japanese Yen – Has the yen found the near term low… yet? FXY moved to a new low at $104.78. I am not convinced the bottom is in yet for the yen. The devaluation is an attempt to stimulate exports for Japan. Short Yen (YCS) exit if the bounce finds reason.

3) Fixed Income:

Treasury Bonds – The yield on the 10 year fell to 1.96% and the 30 year to 3.18%. The downside risk in Treasury bonds is in play as the talk shifts to rising rates with the Fed stepping out of the way as unemployment data improves along with the housing market. TBT is in the model currently to take advantage of the move lower. Watch if the sentiment change on Monday continues.

High Yield Bonds – Big drop in the bonds this week and hit our stop at $93.75 (HYG). Hit the stop levels on Thursday and the next level of support is at $92.75. Manage your exit points if you have not already done so.

Corporate Bonds – LQD, iShares Investment Corporate Bond ETF was struggling to hold support near the $120.40 level. Broke support and the 200 day moving average. The downtrend started in October and has not settled yet at support. Short play on LQD hit entry and we have continued to push lower to close at $118.74 on Friday. Downside pressure is building on fixed income.

WATCH: LQD – Short @ 120.25 Entry.  Stop – $119.30

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. There are sub-sectors attempting to make moves to the upside, but you have to manage your risk. This remains a traders sector for now.

UNG – Consolidating near the $18.25 level. Inventory data helped to hold support for now at $18.25 on UNG. The bottom line for natural gas is volatility based on news and speculation. Not willing to own or trade currently. Watch for a move through the $19.25 area currently.

OIL – Crude held above the $22.90 level after falling near $22.60 at the open. The close at $96.63 was flat for the day with an open at $95.01. We still have to watch the downside risk relative to an emotional reaction from investors and the speculation on demand… I like the current follow through on the upside, but the risk is still in play short term. Manage your stop. We now have another week before the supply data again.

WATCH: ENTRY OIL is $21.70. Raise stop to 22.70. (YOU should have applied stop open gap management to hold the position today!)

UGA – Gasoline tested support $56.80 held and has moved higher breaking above resistance at the $59.35. The inventory data fell pushing the price higher and prompting the rally. That data leveled in today’s report testing the move higher. The flag forming at the high is worth watching short term for downside risk.

WATCH: ENTRY: $58 UGA – Stop = $62.75

GLD – Still in a consolidation wedge and downtrend off the October high. Watch and play accordingly. Watch for a short term move above $163.

DBB – Base Metals broke support, tested $18.60 low and is attempting to break higher on the upside. Some volatility showing in the chart, but the upside is still in play. Need to clear the $19.70 level currently.  Watch for the continuation of the play higher.

Palladium (PALL) broke above the $69.50 high and heading higher. Cleared the $71.80 resistance and now at new high of $73,64.

Platinum (PPLT) remain the better bet on the precious metal side. Platinum was testing the consolidation pattern on the upside, but this week has pushed higher and hit a new high at $170.45 today.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above 970 on the index and has moved to 1025. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain.

WATCH: EFA – Dropped 1.8% on Monday on concerns relative to Spain. The test of the uptrend short term continues. Stick with the uptrend play for now as it holds support. $58.25 support was tested.

WATCH: IEV – Dropped 2.7% Monday as the concern relative to Spain rose. Attempting to hold $40.20 support short term. One day at a time. Don’t assume anything and keep your focus going forward. Watch for the uptrend to resume when the dust settles. Looking at the daily chart for the last year we can see the break above resistance and the trend higher remains in play. Upside target is $45.50 going forward.

WATCH: FXI – China had established the uptrend off the November low. However, the volatility of the move has picked up on economic data developing a sideways trading range. The move below $40.75 was a big negative short term and the confirmation on the downside the last couple of days is worthy of attention. The current support to watch is $39.65.

ENTRY: $42 FXI – Stop = $40.

WATCH: EEM – $43.65 is the current support level and the chart is pushing lower and the consolidation pattern is testing support on the downside. Watch the downside as this plays out.

6) Real Estate (REITS):

WATCH: IYR – The break above $66.12 was the entry point of the move above resistance. Still in position to move higher short term. Watch for potential test of support in the move. Be patient as this plays out short term.

ENTRY – $66.15,  – Stop $67

WATCH: REM, NLY & SJT – all three are in a position to break higher.

7) Global Fixed Income:

The sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – Exited play on Monday’s break of support.

WATCH: Emerging market Sovereign Debt (PCY) – Exited play on Monday on break of support.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high and still moving up. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding within the trading range for now. HOLD.

WATCH: PICB – International Corporate bonds are testing the support at $29.20. HOLD.

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.