Major Indexes Break Higher on Economics and Earnings

Friday – Notes & Research

Boring end to the week and not excitement from options expiration. Intel was a drag early for investors as the stock fell 6.7% not on earnings as much as guidance that the bottom was not in for the PC market. That sent the semiconductors back to their Wednesday close erasing the solid gains from Thursday. The good news from General Electric couldn’t offset the negative from Intel and thus the challenge on the trading day. The move higher in the major indexes held for the most part on Friday, but the concerns remain relative to growth looking forward.

Technology was down on Intel’s drop as well. The index has attempted to keep up with the 200 day moving average, but at each attempt to move higher some news has kept the sector in check near term. All of the sub-sectors were off their highs today. Watch the sector for upside opportunities going forward.

Telecom, energy and industrials were the leaders on Friday. The move in energy was a follow through to the break higher on Thursday. Crude was flat on the day holding near the $96 level. Gold was off $5 after hitting some resistance at the 50 day moving average. Nothing much changed overall.

The were analyst report pronouncing the financial sector done for now. A look at XLF on Friday shows the index stuck at the $17.15 level. Banks (KBE) fell back to $25 and held and regional banks (KRE) fell back near the $29.50 support level. Something to watch unfold as we head into next week. The sector has been a key player in the upside move for the S&P 500 index.

In a side note Congress said it will vote next week on three-month debt-limit hike. That will give time to approve the budget and then debate the increase in the limit. Maybe, just maybe, there will a logical progression to the this issue moving forward. I know that is optimistic, but it would be nice.

Plenty on the table as we conclude another week of trading. Earnings will ramp up again on Monday as more of the large cap technology stocks are on the docket to report fourth quarter results. Verizon’s earnings will provide some insight into the iPhone sales and tablet market. Google’s data will show their impact on the mobile market as well when they report earnings. Then Wednesday Apple reports, and that is sure to draw plenty of attention! Rest up this weekend you will need your strength next week.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index finally made a move above 1475, but the conviction level for the index is lukewarm. I have heard the phrase several time the last couple of weeks of the market “melting up”. That may very well be the theme for 2013. The economic data, earnings and investor sentiment are all in play short term.

Filtering¬†through the sectors of the S&P 500 ¬†index we find Financials (XLF) holding above $17 level as large banks struggle. Healthcare (XLV) broke to a new high closing above the $41.60 and finally made a follow through move on¬†Thursday. ¬†Industrials (XLI) pushed back to a new high and followed through on Friday. Basic Materials (XLB) closed at a new high, but still needs to follow through on the upside. Technology (XLK) moved to support at the 200 day moving average based on Apple’s move. Bottom line… uptrend remains in play and is working/melting higher.

The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. Still moving sideways with a drift to the upside on the chart and still attempting to make a move towards the target of 1550 short term. The short term chart below (second chart) show the leadership off the lows on December 28th.

SP500Scatter

The chart below is the 28th of December starting point looking for current leadership on the renewed push higher. Energy established itself as one of the new leaders this week. Materials, Consumer Services, Industrials, and Healthcare are the current leaders. Financials are testing lower. Consumer Staples have kept pace with the index overall, and technology, utilities and telecom have been lagging of late. Still drifting higher overall, but it is definitely a stock pickers market.

SP500Scatter

The VIX index dropped to 12.5 and a new low on Friday. No signs of anxiety yet and the overbought signs are building. That is only a term for being cautious not selling.

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 index cleared 3110 and made a positive move back near the October highs to end the week. The move is holding above 3120 for now with the upside in play. Apple is putting pressure on the index, but has settled for now. Be patient to see who this plays out short term. Large cap technology stocks could hold the answer for the major index next week… up or down.

Dow Jones 30 Index Р13,440 level on the upside was a positive. Move to a new high on Thursday and tested the move some on Friday. DIA is worth a trade if the index continues to gain momentum short term. Look for a move above 13,640 as entry on DIA.

Small Caps jumped 1.2% Thursday as they continue to be the leader for the broad markets. and Midcap Indexes showed equal moves gaining 1% to assist on the upside after holding support similar to the other major indexes. Friday both held the moves and coasted into the weekend. Weigh out the risk factor of buying at these levels currently or continuing to hold existing positions.

Financials¬†– XLF held above $17 as Bank of America, Citigroup and other large institutions rattled investor confidence in the sector. The numbers are being made out as bad relative to the settlement payments from the financial crisis. That said… they continue to make money. KBE tested lower, but watch for the opportunity to add to positions. KRE broke higher as regional banks make good, but tested on Friday. One day at a time as we move through earnings on the financials. Closed at $17.16. Entry above $17.20 on XLF.

We still have to protect against the downside if the news is bad from investor response the balance of the week, but the upside plays are setting up nicely. I would still take the selling as a opportunity to add to positions with a longer term focus. Be disciplined.

Basic Materials РXLB  hit a new high and remains one of the leaders. This remains one of the leading sectors on the upside. Watch for any adjustments short term.

Retail Рthis has been a mixed bag, but Tuesday the Retail Sales Data for December was better than expected and the sector made a move higher from the consolidation range. XRT had pulled back after threatening to break from the trading range, but reversed on the news and is now above $64. The scans from the sector last week turned up some stocks worth watching. PSUN, WAG, CVS, URBN, SVU, TSCO, ANF. We added the position in the ONLY ETF Model today. Watch XLY as well as it continues to move to the upside.

2) Currency:

US Dollar РThe dollar made a bounce off the lows as the Fed minutes gave reason to believe that QE funding would stop. The buck retreated to support at $21.70 on UUP. The test lower was a negative for the upside short term, but still watching to see how it plays out and follows the move higher on Friday?

Euro РThe euro was testing lower on the rally in the dollar, but that reversed on the dollar weakness and is now above the previous high. Let this play out on the upside. Could add to the position on the test of support at $131.50.

WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $131

Japanese Yen РHas the yen found the near term low? FXY bounced off the $109.60 low, but has retreated to a new low at $108.90. The devaluation is in an attempt to stimulate exports for Japan. Watch the upside if Germany steps in a they have been rumored to due so.

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year held at 1.84% and the 30 year to 3.03%. The downside risk in Treasury bonds was in play, but they have regained their poise to bounce short term after holding $117.50 support on TLT. Still an upside opportunity in the bond short term. (SEE SECTOR WATCH LIST)

Big jump in the yield Thursday on the positive economic data. Some give back on Friday to balance things out again. Be patient as this all unfolds. There is plenty of risk in the bonds short term as the argument over the Fed buying program remains in the media.

High Yield Bonds РTesting the highs and resistance near $94 on HYG, as the upside in stocks resume. Look for support holding at $92.75. Continued to creep higher on the week.

Corporate Bonds РLQD, iShares Investment Corporate Bond ETF is struggling to hold support near the $120.40 level. The downtrend started in October and has not settled yet at support. This is worth watching as a short opportunity as well as an indication of the risk being added by investors to portfolios.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. Still a shot in the dark on some, but others are starting to shift and trend higher. Traders sector for now.

UNG РNatural Gas broke support and moved lower on January 2nd. On 1/10 the inventory data showed a drop in supply and the bottom was established. The good news finally pushed the price higher? Winter demand remains mild which is why the downside had been in play. The follow through above $19.20 again brings the buyers out. Nice follow through on Friday for entry. (SEE ONLY ETF MODEL)

OIL РOil has been stuck in trading range, but moved above the top end of the range at $93.50 last week. The political risk is rising again thanks to Algeria   Still looking for clarity in trading relative to the price of crude, but for now the news is driving it higher. The upside is in play. ENTRY OIL is $21.70. (STOP $22)  Gapped to $22.75 on Thursday. Raise stop to Breakeven $21.70. (SEE ONLY ETF MODEL)

UGA РGasoline broke support at $58 and now looks to $56.80 as the next level to hold. ENTRY: $58 UGA РHit entry on Thursday. Stop is $57.70 currently.

GLD¬†– Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We tested $159 on GLD and the metal cannot make up its mind short term. The downtrend line was challenged today as the metal moved to $162.65. That clears the way to $165.50 and then up to $174 potentially. The entry for GLD is $163 on the close. (Hit entry on Thursday) Stop $161.

DBB РBase Metals broke support, bounced, and is back at that level again? No follow through on the upside for now. The downside is testing, but the upside remains the direction of choice if the metals find their way. Be patient and let this develop further.

Palladium (PALL) broke above the $69.50 high and heading higher. Platinum (PPLT) remain the better bets on the precious metal side. Platinum gapped higher on Monday and followed it again on Tuesday. The upside is testing.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above 970 on the index and has moved to 1015. 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 – The uptrend short term continues, following a small test short term the fund has moved back above the previous high. Stick with the uptrend play for now as it holds support.

WATCH: IEV – Europe continues to rally as investors believe the worst is over. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. 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 has firmly established the uptrend off the November low. However, the volatility of the move has picked up on economic data from China. Watch as a consolidation pattern is building on the chart. Breaking above the pattern on Thursday and followed through on Friday on economic data? Watch to add to positions. ENTRY: $42 FXI

WATCH: EEM – Emerging markets have been doing well. The chart shows a consolidation pattern developing similar to FXI, but there are other single country ETFs doing well. EPHE, THD, EPU, EPI, TUR, EWW and others are worth watching. (Consolidation pattern breaking to the upside on Thursday)

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading as the cliff issues are resolved short term.

WATCH: IYR – Look for reasonable entry. $64.90. The break above $66.12 was the entry point of the move above resistance. Still moving higher short term. Watch for potential test of support in the move.

ENTRY $66.15, Stop $65.75

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) – Looking for support and an entry opportunity from the selling. Looking for a move above the $122.10 level for the entry.

WATCH: Emerging market Sovereign Debt (PCY) – Testing support near the $31 mark short term. Watch to see if this breaks lower or offers and entry on the bounce. Pays a 4.6% dividend as well.

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 broke higher and they are testing the current high again. 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.