Investors Unsettled With Fed and Economic Data

Thursday – Notes & Research

Dealing with a new reality or at least the perception of one. The Federal Reserve Presidents discussion relative to the Treasury and Mortgage bond purchases not working to stimulate economic or job growth set investors back. The fact they are looking at alternative options sent investors towards the nearest exits the last two days. Thus, if the new reality becomes no more money from the Fed, how will that impact stocks going forward. The first reaction will be shock and selling. Wednesday… Then it will be what happens with interest rates, housing, the consumer, and, and, and. The real issue is it creates uncertainty about the outlook short term. There is one primary thing investors want… clarity looking forward. Thus, if the uncertainty remains watch for volatility to continue to rise along with short term selling pressure.

Tomorrow ends the trading week and we are scanning and looking at the current developments and which make sense and which offer opportunities. Be patient and maintain your discipline.

Economic Data:

The FOMC minutes hangover from Wednesday remained for investors. The attempted bounce early didn’t last and the broad indexes moved lower on the day with the NASDAQ taking the lead off 1.2%. As you can see from the data below, this week did little to improve the outlook for the economy. There are no reports tomorrow leaving the market to trade on it’s own merit.

Data Summary

  • The disagreement among the Fed Presidents was evident in the FOMC notes. The general idea is they think the Fed should slow or stop the rate of purchases of Treasury and mortgage backed securities. That was a shock to the market and the selling ensued. If you take away the punch bowl the party will stock quick enough. The next meeting is March 20th and there will be plenty of¬†discussion¬†on alternative methods to handle the existing problem. This has to be watched going forward for the simple reason it will impact the markets overall.
  • The Philly Fed was minus 12.5 versus up 1.6 expected. Now that is a disappointment the investment community. The Northeast continues to struggle with manufacturing. However, add this to the Fed speculation and you have another catalyst for selling today.
  • The Leading Economic indicators (LEI) were up 0.2% versus 0.3% expected. Confirms that forward looking data isn’t expecting much in terms of growth. Consumer expectations were the biggest drag on the index.
  • Producer Price Index (PPI) rises 0.2% and below the 0.4% expected. The core was up 0.2% and in line with expectations. Inflation remains under control at the producer level for now.
  • Consumer Price Index (CPI) was flat for January. The core was up 0.3% and above the 0.2% expected. Gasoline prices were a part of the move higher.
  • House starts fell short of the 914,000 expected with 890,000 report. Apartments were the difference in the data reported for January.
  • Home Builders Index fell to 46 from January’s 47 level. Estimates were for a rise to 49. Disappointing number for the sector. XHB fell 0.4% on the news Tuesday, but declined 4.5% on Wednesday.
  • Existing home sales were 4.92 million versus 4.95 million expected. There were gains of 0.4% in January sales despite the short fall against expectations.

Economy is steadily treading water with little to no growth. The short term outlook remains positive, but just barely. Keep your focus and remain disciplined relative to your stops and exit points. Correction anyone?

1) US Equities:

Market Summary:

  • Sentiment shifts to negative in light of the FOMC notes showing a possibility of QE Infinity coming to an end. The VIX index jumps above 15 on Thursday and puts the downside in play. VXX up 14% the last two days.
  • S&P 500 index pulls back and closed below the 1515 support Wednesday and Thursday flirted with the 1500 level. Off 2.1% the last two trading days.
  • NASDAQ index broke 3160 and 3130 support bringing the 3100 level back into play. The index has been the weakest link on the move higher and it is therefore on of the leaders on the downside currently down 2.9% the last two days.
  • Small Caps drop 1.4% and continue to pace the downside. Off 3.3% the last two trading days.
  • Crude Continues to fall and energy stocks were off 1.3%

Technical Outlook:

  • Broad indexes are breaking down over the last two days. Key support is 1495 for the S&P 500 index with the VIX above 15 on the close on Thursday we are setting up for more downside short term. The technical data has been building a case over the last two weeks for a pullback. Throw in a outside market catalyst (FOMC minutes) and you could get more than some bargained for.¬†

Short Opportunities:

  • Downside established ¬†in gold (GLD). Hit entry on GLL and it has accelerated lower. manage your stops. Small bounce on Thursday may only serve as accelerator for the selling.
  • Euro weakening on concerns. This is the TWO EGG play… short euro, long dollar.
  • Short S&P 500 (SH) and NASDAQ 100 (PSQ) both broke higher through resistance. (opposite support for the both indexes.)
  • December 28th Pivot Point is¬†Jeopardy¬†of breaking the trend! Watch to see if the 1495 level holds.
  • Uptrend line is still in play, but the selling is putting pressure on the current move.

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test.

Scatter1228

November 15th Pivot Point for current uptrend. Target 1550-1575 short term.

SP500Scatter

VIX Index: Spiking higher on the FOMC prompted selling and index moved to 16 intraday – ADDED VXX to S&P 500 model Wednesday. This is a negative indication going forward for the broad market index.

Tracking Sectors of Interest:

Telecom РThe DJ US Telecom index has pulled back, but the defensive nature of the stocks offers some opportunities at the stock level. We have been tracking both AT&T and Verizon as a dividend/growth idea.

WATCH: T – Break above resistance at $35.65 is attractive on the upside, plus the 5.1% dividend.

WATCH: VZ – Looks just like T on the consolidation and resistance $42.85, plus the 4.6% dividend.

Financials РXLF tested back to support and we hit our stop on the position.

WATCH: Entry $17.20 XLF. Stop @ $17.50 HIT STOP ON THURSDAY.

2) Currency:

Sector Summary:

  • The currency landscape is shifting short term to dollar strength, weakening euro and possible bounce in the yen short term..
  • TWO EGG Model went long the dollar (UUP) and short the euro (EUO) on Tuesday. Solid move higher today in the trade. Adjusting the stops.

Tracking Currency of Interest:

US Dollar РThe close $22.25  (UUP) after hitting the entry point on Tuesday. Dollar index traded higher as well. Watch the dollar/euro trade short term.

WATCH: UUP – TWO EGG MODEL

Euro РThe euro (FXE) fell below support at $132.70, and moved down to $130.59 at the close today. Manage your risk of the trade.

WATCH: EUO: TWO EGG MODEL

Japanese Yen РHas the yen found the near term low? FXY is testing support and bouncing currently. Watch to see if this develops into a possible trade on the yen. YCL Proshares Ultra Yen ETF

3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly on the turmoil in stocks. ¬†The question is if the market corrects how much will it impact? We are in the process of finding out now.¬†
  • 30 Year Yield = 3.16% – down 5 basis points — ¬†TLT = $117.05 up 78 cents
  • 10 Year Yield = 1.96% – down 6 basis points — IEF = $106.40 up 28 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe move in yields hit the exits for the short side play with TBT. The upside play with TLT is starting to be attractive short term for a defensive move.

High Yield Bonds РHYG = 6.55% yield. Support is at $92.75, which has held short term and the fund moving off the lows for now. We will watch to see if support holds and then make a determination.

Corporate Bonds РLQD = 3.8% yield. The price has found short term support ($118.90). Broke above resistance at the $119.50 level on Thursday. Watch to see if a short term upside trade results.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds continue to move sideways. Found support and bounced back, but still looking for direction. Willing to wait for the right opportunity on the bonds.

Convertible Bonds РCVRT = 2.7% yield. Price had been moving higher on the current rally in stocks. The reversal pushed the bonds lower short term.

4) Commodities:

Sector Summary:

  • Crude losses again on fear globally about economic growth. Closed on support of $93 — Watch downside?
  • Technically an inside day for Gold after falling below support and accelerating to the downside. Watch to see if the selling resumes from this pause.
  • Eliminated the sectors that weren’t working for now. We will continue to watch for further developments.

Tracking Sectors of Interest:

BAL РCotton jumped in mid January nearly 10%, but has stalled since. A trading range of $52.80-54.40 is in play. A break higher would be a continuation of the move off the November lows. One reason for the jump is rising demand from China? They are importing more than analyst expected and that provided the initial bump. Now we look to see if it a true increase going forward. Still testing the upside.

WATCH РBAL РEntry $54.60 hit on break from consolidation Monday.  Watch the downside move $53.40 stop.

KOL РBreaking lower Рshort set up for those willing to take the risk.

UGA РTesting support at $63 watch to see if any opportunity develops short term.

GLD РDownside follow through on Friday with drop of more than 2% on the metal. This is the accelerated selling we discussed and we will monitor to see how low it will fall. Big follow through on Wednesday and the 2.5% decline puts the negative sentiment in control of the metal. GLL short trade working from the Research Table.

5) Global Markets:

Sector Summary:

  • Spain (EWP) still in the news relative to sovereign debt.
  • Italy (EWI) still in the news on the elections this weekend.

Tracking Sectors of Interest:

EFA РDropped last week on Spain and is still testing as the euro-zone GDP data disappointed. The support levels are key and it is holding above the first level at $58.15. Broke support as the euro works against the global markets along with weak economic data. Watch for the next opportunity.

IEV¬†– Dropped last week on Spain’s sovereign debt concerns. Testing the first level of support at $40. ¬†Euro-zone GDP data didn’t help the situation. Hit exit points and now we wait to see how it plays short term.

FXI¬†– China’s news on spying and using attacks on US corporations in this country. The new impacted the Country ETF selling off 2.1%. The fund had already broke support at the $40.85 support of the trading range. The $39.30 support failed and the downside is in play short term.

EEM РDowntrend back in play on the break lower.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders found some resistance near the $29.25 (XHB) level and managed to accelerate lower. This has been building as the stocks are ahead of themselves short term. Inventory has shrunk on both existing and new construction, but the worries are rising again. Watch for opportunity in the selling short term.
  • REM – Mortgage REIT is breaking down with $14.80 support.
  • NLY- Analy Capital Management finally broke above $15, but testing lower on the emotions in the sector.

Tracking Sectors of Interest:

The pullback test is in play for IYR and $67.25 is support. If we break below that head for the exits.

WATCH РIYR РEntry Р$66.15,  РStop $67  Risk rising on the trade.

7) Global Fixed Income:

Sector Summary:

  • 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.

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.