Japan Lifts the Global Markets Higher

Thursday – Notes & Research

The news from the Bank of Japan gave the markets a boost at the open, but the jobless claims worried investors as they jumped back to the 385,000 mark. The open produced a rally pushing the S&P 500 index to 1562, but then after an hour of trading the index started to drift lower, but in the end closed at 1560. What gives? What happened to buy on the dip? Is it becoming sell into the bounce? Those are the questions I want answers to looking forward. What is the sentiment of the investor and is it shifting? Time will tell soon enough.

The big test will be the jobs report tomorrow. There is a silent majority that hope the numbers is better than expected to give the market an economic boost after the disappointments this week. We will know soon enough.

The scatter chart of the S&P 500 is shift some with utilities pushing back towards the leadership in the index. That shows the defensive leadership along with healthcare and consumer staples. Telecom, made a solid move today towards getting out of last place and financials bounce back for Wednesday’s selling. Still plenty to be concerned about short term, but the key is to be patient and take what the market gives going forward.

Seven sector moves to know today:

  1. Bank of Japan offers big easing to fight deflation and get their economy running. This was expected to some degree, but the reaction by investors in Japan was positive. The two fold impact on stocks and the yen were immediate following the announcement. EWJ open higher by more than 3%, and FXY fell nearly $3 to $102.60 at the open. Since both gapped to these levels we will have to see how the opportunity unfolds going forward. YCS is the short yen play and we will watch to see if that continues higher.
  2. Jobless claims jump to 385,000 that is up 28,000 versus last week which was up as well. That news erased a 0.4% gain in the futures before the opening bell. Thus, the key data points continue to disappoint investors. The impact on the market was immediate as we saw. Tomorrow is the jobs report and it may well be the icing on the cake to a awful week of economic reports. Thus far they have been the downside catalyst for the markets. Watch how S&P 500 index reacts to the data report in the morning.
  3. The ECB pledged to be accommodation for as long as needed relative to interest rates and support to the euro countries. Those comments pushed the euro lower to $1.278 against the dollar. That pushed the dollar to a new high intraday. However, by the end of the day the euro was at $1.294 and the dollar was lower on the day. IEV dropped in response, showing no upside response in stocks, but managed to close flat on the day. Still no positive buy signals from Europe.
  4. What is up with Telecom? The sector has been awful over the last four months. Every attempt to break higher has been met with selling. The last two weeks it is acting as if it really wants to move higher? IYZ move back above the $24.40 breakout level we have been watching from the current trading range. We added it to the S&P 500 Model and it has been moving sideways essentially, but now we are looking for a boost to the upside.
  5. Yields on the 30 year Treasury fall to 2.98% the lowest level of the year. If stocks are going higher the bond market is agreeing with the outlook. Is this money from Europe? Institutions? Where? TLT moved to $120.35, the highest level since January. This exceeds are short term target on the bonds and we have to manage the risk going forward.
  6. Crude oil was down 1% again today and found support at the $93 level again. Watch to see how this plays short term on the downside or does it hold support here?
  7. Real Estate REITs have been working higher, but the international REITs are looking even better in some ways short term. RWX broke to a new high on Thursday and remains positive.

The activity on the trading day leaves plenty of short term questions, but we will have to be patient and let them all play out. The positive bias today was almost expected when you consider the current environment. Watch the jobs report and see how the market responds to the news, good or bad.

Economic Data:

Big week for data in store. Started on negative note with the ISM Manufacturing sector falling below expectations. Today the factory orders data was positive overall, but ex-aircraft the gains were only 0.3% for February. The overall number was positive for the economic picture. Vehicle sales were up 6% and that was a positive sign for the sector.

The negative train was back as we stated above, a miss on the ISM Services number and the ADP Private Sector Jobs Report. That set up a negative day of trading and money headed for the exits Wednesday as the selling melted higher throughout the day. The jobless claims on Thursday didn’t help with the claims climbing to 385,000. That set investors back on their heels for most of the trading day.

We still have the jobs report tomorrow to deal with to finish the week.

Economic Events & Calendar 

1) US Equities:

The back and forth of the indexes continue as investor worries about the data. Last week all eyes were on the 1565 level for the S&P 500 index to hit a new high. This week we have been on both sides of that number, with the pressure building on the downside. Yes, it is crazy, but remember the buyers have been willing to step in and buy the selling patches. Today we didn’t see that same commitment even though the indexes closed higher on the day. Thus, remain patient and take it one day at a time as this story plays out.

Downside Pressure РIndustrials (XLI), Telecom, (XLB), Financials (XLF) and Technology (XLK) are struggling to keep on their rally caps. They all have struggled to maintain the uptrend and that leaves plenty of concern short term. If we are looking longer term the test or pullback will be an opportunity to add to positions as it bounces off support. Look for some follow through on the stabilizing move Thursday.

Volatility index Р(4/3 post) РWith a jump back near the 14 level the anxiety is picking up. A break above the 15 mark on the index gets interesting short term. VXX hit the previous support, now resistance, at $20.30 and break above this level may open the way for a trade on rising volatility short term. Thursday the attempt to move higher gave up and closed back below 14. Still have the jobs report to deal with on Friday.

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, but the market has continued sideways more than down. The move last week pulled the index back above the close on the 14th keeping the upside in play. However, it has struggled to hold on to that move short term. Healthcare (XLV) remains the leaders off this low. Consumer Discretionary (XLY),  Utilties (XLU) and Consumer Staples (XLP) were on a positive trek to the upside, but we have to watch for the shift currently. Stay focused and protect the downside risk.

XLB and XLE race to the bottom of the Sector Scatter Chart. Watching to see if the they hold support and bounce of continue lower.

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher after the February 25th test. See above.

Scatter1228

November 15th Pivot Point is the start of the current uptrend. Target 1550-1575 was attained and now there is pressure to test the move. The uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend. Watch the trendline as the support on the current pullback.

SP500Scatter

Sector Rotation of Interest:

Financials – (4/3 post) –¬†Banks are rolling over. The chart of KBE shows the current pullback breaking support at $26.50 and moving below the 50 DMA. This has impacted the financials overall as XLF moves lower. The weakness however, is owned by the banks. The regional banks (KRE) have joined in on the downside now which adds to the downside pressure. Thursday XLF bounced back to $18 and we have to watch to see if it can recover the previous uptrend.

Transports¬†– (4/3 post) – Broke support on Tuesday and moved lower Wednesday. IYT has enjoyed a solid run higher, but it broke the up trendline. Now the downside is in play for a confirmation. Airlines are leading the move lower for the broad sector. $106.15 is support short term. The downside play isn’t attractive, but a bounce off support would be.

Energy Р(4/3 post) РXLE is breaking lower, crossing below the $78.20 level was a negative short term. Broke the 50 DMA as well and $76.25 is the level to watch for some support. IEZ moved to support at $55.45 and XOP got ugly down more than 2%. The refiners are under pressure as the commencements relating to the new EPA standards on sulfur would cut margins. For now the downside is in play. If crude continues lower that would add to the downside pressure on the sector. DUG is worth watching as it breaks higher if the downside stays in play. ADDED short play DUG 4/4 (ONLY ETF Model)

Healthcare –¬†(4/2 post) –¬†Hit a new high on XLV and held on Wednesday for the most part. We raised the stop in the models, but want to still give it some room for volatility. The outlook remains positive and the news on Tuesday relative to reimbursement helps the bottom line fundamentals as the technical data deals with the volatility. IHF, XPH and IHI all remain in a positive uptrend for the sector near term. Holding near the highs currently.

Small Cap – (4/2 post) –¬†IJR made a move back to the previous high, but on Tuesday the index tested the 30 DMA on the downside. With the upside in the broad market and the small cap index not participating,¬†this is a warning sign from my view short term. Without small cap participation on the upside it will be limited. As stated above on Tuesday the warning signs was right with the index losing another 0.8% on the day. This is setting up the downside play in small caps short term or at least adding a hedge against positions if you are looking longer term. Since we have no allocation currently to the sector we would look at the downside play.

4/4 post Рadding TZA as short opportunity to the ONLY ETF Watch List. 3X leverage means we will only take a 3.5% position to account for the higher volatitility of the fund. Example: $10 share with stop of 30 cents = 3% risk on 100 shares is $30. $10 Share with stop of 90 cents = 9% risk, but only 35 shares is $31 risk.  Same risk/reward by reducing the allocation relative to the leverage.

Midcap Р(4/2 post) РIJH moved to a new high on a solid break higher last week. The move on Tuesday was not as poor as the small caps, but today it joined the party down 1.1%. Watch the downside risk short term and tighten stops if you own the sector. More interested in a bounce play here versus the short side. This sector like small caps is needed on the upside leadership for the broad markets.

2) Currency:

Sector Watch:

  • UUP¬†– The Dollar remains in a consolidating phase relative to the move higher. ¬†UUP closed at $22.52. Still watching support at the $22.35 mark on the downside. Manage your stops.
  • FXB¬†– the British Pound jumped two weeks ago, held¬†the¬†move, but is testing in another trading range. Held the $149 level and moved back near the current resistance only to test again. For now we just have to be patient and let the pound work through the directional challenge it is facing. Took the entry on the move and the target is $152.50. $149 stop in place on the trade.
  • FXC¬†– the Canadian Dollar held support at $95.35. Bounced nicely to breakout, retraced to the consolidation zone and heading higher again. $98.50 is the level to watch.
  • FXY¬†– yen is still in bottoming mode, but the upside was building one day at a time. ¬†That got squashed on the the Bank of Japan doing it all to get the economy started along with inflation. Big drop to the previous low in the yen is the response. It may have further to fall if the BOJ follows through.
  • FXA¬†– Australian dollar bouncing as stocks continue higher leading the way. Big test Monday and held for now. ¬†Watch to see if it recovers or take your profit on the position at $104.25.
  • FXE¬†– ¬†The euro is testing support on the downside again? Broke support at the $128.15 level and closed below the ¬†200 DMA. Small bounce off the low worth watching as the downside is still in play. ECB comments spark rally in the euro back to the $128.50 level we have been watching.

3) Fixed Income:

Sector Summary:

  • 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 = 2.98% – ¬†down 7 basis points — ¬†TLT = $120.39 up $1.42
  • 10 Year Yield =1.75% – down 6 basis points — IEF = $108.15 up 43 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe volatility in the bond sector rose short term and now the trend is higher with yields dropping again on the bond. Thus, the upside remains in play for the bond as money pushes yields lower. Be patient and let it play out short term. Raise your stops on the bond to protect the downside risk.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. Hit the previous highs near $95 and now testing the move. Manage the position for the dividend as the growth side is under pressure from an uncertain equity market short term. I expect the trading range to remain near term. Use $92.75 as the stop.

Corporate Bonds¬†– LQD = 3.8% yield. The price has found short term support ($118.90)… again. The jump higher on Thursday was in response to the¬†rotation¬†of assets towards safety or defensive to the stock market. This is not likely a new trend for the bond, but we will take what the market gives.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds broke support and the chart is attempting to bottom or build a base. The bounce is is from money rotating towards safety? We will see how it moves from here.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the rally in stocks. Starting to see some selling off the highs and testing the 50 day moving average as support. Watch stops and protect your gains.

4) Commodities –¬†Sector Summary:

  • The commodity index continued lower with the move on March 28th. It has not looked back and with the acceleration of the decline in oil prices it has only accelerated the downside. DBC broke support at $26.80 on Wednesday and continued to track lower. ¬†Without some good news… the downside remain in play. Corn supplies added to the downside last week and for now I don’t see any reason to invested in the sector.
  • Natural Gas – (4/3 post) – UNG made the big move higher, but has trekked sideways since. $21.20 is support for now, let it play out relative to short term direction. The end of winter is spring, and the consumption or inventory data will shift towards building versus consuming as usage lessens. That could keep the upside in check until summer consumption begins. Set your stops and manage the downside. (ONLYETF Model)
  • Crude Oil – (4/3 post) – Rallied back to close at the $97 level Monday & Tuesday, that didn’t happen WEdnesday as crude closed at $95 down more than 2% on the day. As we stated in our Tuesday notes the downside was building momentum on the selling tests. How low does it go down? It closed at support and could hold there for now. Watching to see if it continues lower or settles into a narrow trading range.
  • (4/4 post) – The simple answer is lower. The gap down was in response to the current weakness. Momentum selling is aggressive. now we have to look for the support bounce $21.30 target on OIL.
  • Gold – (4/3 post) – The metal¬†dumped $50 in two trading days showing the weakness towards the metal currently.¬†This is what I have been warning about relative to gold and the downside pressure remaining in play short term. Watch to see how it plays from here and manage the stops on GLL. (ONLYETF Model)

Commodities Rotation Chart:      

Natural gas still leading despite the test of the upside. Looking at the balance of the parts shows the downside is firmly in play.

Commodity

5) Global Markets:  

Global markets tested lower on the news in Europe and continue to trade slightly lower since the high on August 15th. We have moved the graph below to that as the start date to gain some insight into what is leading or rotating currently. As you can see Mexico (EWW) has taken the leadership role currently.  Japan (EWJ) had moved lower, but that bounced back today. The balance is status quo for now and not much to like or dislike at this point in time.   

Global Mkt

Country Watch:

  • FXP¬†– China continues to move in a confirmed downtrend from early February. The move today confirms the next leg lower for FXI. Watch for a move to $23.25 on FXP.
  • EFA¬†– The shift is to a down trending channel off the March 15th high. Looking for a move down near the $58 level currently.
  • EWW¬†– Mexico confirmed the move higher, but is now testing the move above the $73.25 mark. Watch for the upside opportunity to follow through of the test.

6) Real Estate (REITS):

Real Estate Index (REITS) РIYR broke through the trading range near the high of $68.50-69.50. Sector Rotation Model Followed through on the upside, tested one day, and now on the upside again. The Sector is getting positive press on the creation of REITs to absorb the excess housing defaults from banks and Fannie Mae. The risk still has to be managed despite what anyone thinks day to day.

Sector Summary:

  • REM – Mortgage REIT has been testing lower as pressure on the sector has risen of late. Stop $15.30.
  • NLY- Annaly Capital Management – continues the upside trek with some daily volatility. Watch the test lower with stop at $15.50
  • RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Watch for test of the move if markets struggle.

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.
  • 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.