Is the Rally Ready to End?

Monday, September 14th

More analyst are writing about the downside risk of the markets versus the upside growth from the stimulus. Throw in both current and future challenges from politics, earnings and a stagnate economy, and you have enough to believe the headwinds will be strong for the broad markets. Thus, a sideways to down market day to start the week.

One big issue facing the US markets is the need for Congress to pass a stopgap Federal Spending Bill before October 1st. The US fiscal year end is September 30th for the government. Versus working on this they are working on a six month bill to fund government while they work on the election. By the way, after the election there are only 55 days to work on the infamous “fiscal cliff”! Good Luck!

Other trouble brewing around the world include… China and Japan are arguing over ownership of islands in the East China Seas, and the building tension could impact trade. The Middle East protests and attacks on Americans over a idiotic movie? Iran and Israel continue to exchange words over nuclear power and the threat of attack by Israel on Iran. Miners are striking in Africa which accounts for 80% of the platinum. Russia demonstrations against Putin are rising despite the crackdown on such events. Each and all of these issues threaten the global economies in one way or another, let alone the potential of war both financial and physical.

Throw in the JP Morgan money laundering probe and you have the perfect storm building if of these issues combine forces. The warning signs are starting to push investors to the sidelines.

All of this promises to get interesting going forward. Below we review the moves in the sectors and the outlook.

1)  US Equities:

S&P 500 Sectors-to-Watch – The index held above the 1420 level and ran higher on the Fed decision on stimulus. Investors stepped in despite the economic picture and trusted the Fed would do the right things to take the markets higher. Stimulus is back in the driver seat and the only question is will efforts ever pay off over the longer term outlook.

WATCH: SPY – Entry $142.50 – Stop $144.40 (Raise Stop)

The leadership shift over the last week continues for the broad index:

Basic Materials – The sector has taken on a role of leadership of late, but the speculation around the strategic petroleum reserves being released sent the sector lower. The move started based on the stimulus in China was a positive for the materials sector. The question is will it last? Does China actually follow through? Watch and look for the opportunities in XLB. Resistance at the $37 mark short term and looking for the breakout to establish or add to the position.

WATCH: XLB – Entry $37 – Stop $37 (Watch Stop)

Financials – The sector tested the move higher, but is back on the upside clearing $16 resistance. The trend higher remains in play with the move accelerating. The FOMC meeting was the driver for the sector short term. Banks and brokers have been leading the move higher. IAI moved above resistance $22.85 and looking for a catalyst move to continue the uptrend. Tested the move higher today.

WATCH – XLF – Entry @ 14.55 – Stop 15.50 (on the close) — WATCH: KBE – Entry – 22.80 – Stop – 24.20 (HIT Stop)

Energy –  From uncertainty to leadership of the S&P 500 index. The selling in XLE tested support at the $70.40 level and held. The move higher has now accelerated pushing XLE back near the February high . The sector sold along with oil on Monday, but remains in play. UGA hit a new high, but tested lower of late- tighten your stops on the play. Oil fell to $96.60 after breaking higher last week on “speculation” of a release of strategic reserves. This will do nothing to curb the price of oil longer term, but another band-aide by the current administration. Opportunity on the pullback and test of support.

WATCH: HES – Entry $51 – Stop $53.95 / WATCH: OIL – Entry $23 test of support and hold.

Telecom – The test of support resulted in a continuation of the uptrend for telcom. Hit a new high and is taking on leadership for the broad index. This remains a key sector for investors to take advantage of short term.

WATCH: IYZ – Entry $24.40 – Stop $25

Healthcare – The sector continues to find buyers and pushes gradually higher. Moved above $39 and remains near recent highs.  IHF moved up nicely off the lows and hit new highs and is testing the move. XPH moved off the lows as well, and moved to new highs. IHI medical devices ETF hit new highs last week. Only question mark for the sector is earnings looking forward.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $39

Biotech – The sector broke from the consolidation and was worth a trade on the upside play. The sector is helping drive the healthcare higher as well. Solid move to the upside and we have raised our stop to protect the gains. Break above $94 would be a positive for the sector.

WATCH – XBI – Entry at $89  – Stop $91.20

Consumer Services – The consumer services sector has the retail stocks support relative to the trend higher. XLY and XRT are both moving higher short term. Digging in and looking for the leaders has been the best play. JC Penny’s broke above our entry point and continues higher with the sector overall. Take the upside, but protect against the downside short term.

WATCH: XLY – Entry 44.50 – Stop 46.50 / JCP – Entry 25.50 – Stop 27.81

Technology – The sector overall has performed well and continues to push higher. Watching the weakness in Semiconductors (see below). The networking (IGN), software (IGV) and internet (FDN) have all moved higher to support the rise in the overall sector. Watching FFIV, F5 Networks to break above resistance at $105.

WATCH: FFIV – Entry $105 breakout

Semiconductors – The sector has been testing lower and the downside leadership has been from Intel. The sector remains weaker, but is still consolidating and looking for direction. Watch the Intel play as it is attempting to bounce off the low. We adjusted the stop to protect the gain on the trade.

WATCH: Short Intel (INTC) – 24.55 – Stop – 23.50 (Stop on the close)

NASDAQ Index – The upside momentum has been as a result of the technology stocks, but the downside risk in in the semiconductor stocks. The trend is up for now, but manage your risk. Solid bounce back in the index.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 68.25 Held support and bounced.

Small Cap Russell 2000 Index – The upside move off the July 30th bottom struggled, but the move higher since has been a reflection of the belief in stimulus from the Fed. The new high today at $85.60 was a positive for the sector. The key is to protect the gains we have and see how this plays out short term.

WATCH: IWM -Entry 79.60 – Stop – 84.60 (Raise Stop)

Volatility Index – The index is back near the lows at 14 and testing the sentiment from investors. The VIX as we stated did move as the rally continued. Still need to watch for unexpected  events moving forward. SVXY continues to move higher on the news.

2)  Currency:

Dollar – The dollar started lower on the FOMC rumors and the ECB stimulus is helping push the dollar lower as well. Throw in the Fed action on stimulus and the dollar is testing the lows from April. The short pay remains the move.

WATCH: UDN – Entry $26.40. – Stop $27.20

3)  Fixed Income:

Treasury Bonds – The bond had reversed course on the stimulus from the Fed short term. Breaking support again at the $124.50 level as entry for the TBF short play. Watch the worries starting to rise in the global concerns. Set your stop and see how it plays short term.

WATCH: TBF – 29.30 Entry – Stop – $30.10 (Raise Stop)

4)  Commodities:

Crude Oil – The “speculation/rumor” of the release of the strategic reserves hurt the price today. Watch for the opportunity on how this plays out.  Manage risk of the play and mange your stops.

WATCH: OIL – Entry 20.75 – Stop 22.95 (stop on the close)

Gasoline – Can’t decide as it trades near the high… up or down? The upside is still in play, but watch oil prices on the rumors relative to the reserves being released. This is the test we were looking for, but more than expected. Watch and manage your stops.

WATCH: UGA – Entry at 52.75 – Stop 58.50 (Stop on the close)

5)  Global Markets: The global markets responded to the ECB stimulus, Germany’s approval of bonds, and the Fed QE3. The EAFE index tested support near term and bounced back near the March highs. Risk is on as the index gains relative to the US heading higher.

WATCH: EFA – Entry 52 – Stop – $53.40 (Raise Stop)

Brazil Small Cap – Bought on the move to the channel top at $37.50 with potential move higher. Solid move and follow through on the upside breakout prompted the entry at $37.60. Manage the trade and Raise Stop to $40 on move higher.

WATCH: BRF – Entry 37.60 – Stop – 40.20

6)  Real Estate (REITS) – The sector remains near the current highs. I like the outlook long term, and short term we have made a move back to the top end of the trading range. IYR made the move through the top end of the trading range and hit a new high. Still scanning and looking for the best opportunities.  Mortgage REITs (REM) bounced off the selling and headed back to a new high. The uptrend remains in play. Yield on the fund is above 11% currently.

WATCH: IYR – Entry $65.30 – Stop $66.60

7)  Global Fixed Income – The issues with sovereign debt in Europe keeps us out of the asset class currently. Emerging market bonds (EMB) tested lower and bounced off support to move higher. Passed on the opportunity due to risk/reward. International Corporate Bonds (PICB) and International High Yield Bonds (IHY) remain in a long term uptrend and moved higher on Friday. Hold positions and manage your downside risk.

Ideas and Beliefs On The Horizon:

How much negative influence will Spain have on the current uptrend in the European markets? The answer to that will depend on the time line and details released or how long it will take to cut a deal with the IMF. Watching for a opportunity short as this all unfolds.

China is moving on infrastructure stimulus. Watch FXI if it gets too extended and manage your stops. The fight developing with Japan is worth our attention as well. The violence over the weekend is just a small part of what this can erupt into.

Commodities should be the benefactor from the Fed stimulus activity. ETFs to watch relative to this move… 1) DBA, PowerShares Agriculture ETF – broke from consolidation on Friday on above average volume. {Sold off on Monday with the drop in CORN by 4%}  2)  MOO, Market Vectors Agribusiness ETF – broke higher at $51.10 as stocks in the sector jump on the news. Look for reasonable entry point. testing the $52.40 level or the downtrend line broken on Friday? Watch to see if it holds and give an opportunity for a upside trade.  3)  OIH – HOLDRs Oil Services ETF – Break above $41.80 is continuation of the uptrend. The rumored release of the strategic oil reserves.  4)  IYT, iShares Transportation ETF – The rails and shipping will be needed to transport the products internationally. Pipelines will benefit here as well. 5)  GSG, iShares Commodity Index ETF – broke above $34.85 to continue the uptrend already in play. The story in these ETFs will build if the stimulus plays out according to plan. Watch, build a strategy to capture the upside and always use stops to protect against the idea or belief not validating itself.

Attention will turn towards the election soon and certain sectors will start to react to whoever is leading. For now that is Obama and as we get closer to November investors will factor in specific policy events they believe will influence the markets. One to watch now is the tax hike on dividends. Long term it will be neutralized by the Fed keeping rates at zero, but shorter term it could create some opportunities. This is on my watch list looking forward.

QE3 was good for stocks to move higher on Thursday, but what about the future? Inflation is one concern reflected in the precious metals prices jumping higher, and what does this action really say about the economy for two. The latter is a bigger concern from my view going forward. The Fed is essentially stating the economy is in enough trouble we need to take more action towards fixing it. This is where we have to be aware that stocks may move higher now in response to the stimulus, but as the economic data is reported we have to prepared for a correction or pullback in prices.

What am I watching now:   1) MSFT – Broke above $31 and looking for entry point near the $31.25 mark.  2) Chipotle Mexican Grill gapped lower on earnings in July, but has recovered off the low. $340 resistance is in play and a move to fill the gap is what I am watching short term.  3)  The miners are running again as both the precious and base metals are moving higher. XME broke above $43.50 and ready to jump above $49. 4)  Utilities are building a base near support at $36.20 on XLU. Watch to see if we bounce back towards the highs. 5) TBT – Short Treasury play is attempting to break higher as yields fall. If the Fed acts on the stimulus it could be an issue. Watch for possible move higher short term. (Got the break higher on Wednesday as trade opportunity)  6) UNG and FCG are moving higher as natural gas continues to climb on inventory data. Watch for move back to $22.50.

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.