Market Becoming Sector Specific on the Upside

Tuesday – Notes & Research

Talk about a change of heart from the selling tone on Monday! Why the buying mood today? The buyers wanted to own the healthcare stocks on the bump in Medicare reimbursements helping the broad market move higher. The Russell 2000 closed lower by 0.5% on the day which added to the 1% decline on Monday. That was one negative we noted on the day. Europe was positive on the day and that helped set the tone for the US markets. Telecom, Healthcare and Consumer Staples were the leaders on the day. Financials and Technology continue to be a drag on the broad market, but for now the buyers are happy, but the weaknesses are starting to show and we have to be on guard.

Take what the market gives going forward, but be aware of your surroundings.

As we stated in our notes this morning this week will be all about the economic data… good or bad.

  1. Broad markets were up on the day with a small give back into the close. Nothing changed per say, but the upside remains in play and the questions continue to be asked relative to sustaining the upside near term. Only time will tell, but we manage the risk and keep going forward.
  2. Healthcare has been one of the primary leaders for the broad market and continued to lead the way today in trading. The healthcare providers received good news on Medicare reimbursement being higher versus lower for 2014. That sparked a rally in XLV and all the parts.
  3. Gold dumped $25 on the day closing back below $16oo at $1576. This is what I have been warning about on 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.
  4. Oil rallied back to close above the $97 level and unchanged for the day. This is the second day crude attempted to move lower on the day, but rallied back to maintain the current level. Watch the downside as this plays out short term.
  5. Europe (IEV) bounced as the US markets led the way higher. The trendline is still the level to watch with the fund closed near the line. Support remain near the $38.40 to 38.75 level. A break below that would open the way to a short play. EPV is the leveraged short play on Europe.
  6. Volatility index closed at 12.7 and back where it was on Friday. No fear, but then no real buying conviction either for the broad markets.
  7. Interest rates were flat not impacting much in terms of fear towards the markets today.
  8. Small cap did not participate on the move higher today. In fact, it fell and closed lower on the day. That is a negative sign on the day. This has to watched for the outcome going forward, but it does present a challenge for now.

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. Thus, the balance was returned to the economic picture as we head into tomorrows trading with the ISM Services the lead the numbers. The balance of the week will bring plenty of additional input from the US economy.

Economic Events & Calendar 

1) US Equities:

The back and forth of the indexes continue as investor worries and relief play out on the charts. Last week all eyes were on the 1565 level for the S&P 500 index to hit a new high. Monday we tested lower and Tuesday we moved higher? Yes, it is crazy, but remember the buyers are still willing to step in and buy the selling patches. That keeps the momentum positive overall despite the sector rotation showing some changes in momentum. The swings have not been big enough to spike the volatility index to any degree nor has it created much in terms of speculation. Thus, remain patient and take it one day at a time.

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. The move last week pulled the index back above the close on the 14th keeping the upside in play. After a return below that level on Monday today the index moved back above the level of the 14th. We will watch to see how this plays out. The consumer discretionary (XLY) and Healthcare (XLV) switched place of  leadership short term, with Utilties (XLU) and Consumer Staples (XLP) on a positive trek to the upside. Stay focused and protect the downside risk.

Scatter 225

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

Scatter1228

November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend. Interesting note that the healthcare sector is move closer to crossing above the financials as the leader off the low. SP500Scatter

Sector Rotation of Interest:

Healthcare –¬†Continued to a new high above the $45 mark on XLV. Good point to add to position if you don’t own the sector already. This was the post in this mornings notes to break the sector down and look for the opportunities. March 18th was the pivot point off the recent pullback and XLV is leading all the sub-sectors! that is very unusual. IHF has had strong push the last two days breaking above the previous high at $76.

Small Cap –¬†IJR made a move back to the previous high, continues to consolidate in a sideways trading range. However, 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.

Midcap РIJH moved to a new high on a solid break higher on Thursday. The move through the $114.50 level was a positive for the index, however we have retraced that gain and we are now testing on the downside. This sector like small caps is needed on the upside leadership for the broad markets.

Utilities РThe sector has been a clear leader on the upside after clearing resistance at the $38.30 level. Holding near the highs with some movement this week,  but still one of the key leaders for the broad index.

Downside Pressure¬†– Industrials (XLI), Telecom (IYZ), Basic Materials (XLB), Financials (XLF) and Technology (XLK) are struggling to keep on their rally caps. They have not broke trends nor have they turned lower, but they are testing the recent moves relative to the trendlines. Watch… no cheating on placing shorts or selling positions before the downside validates the direction. XLB is testing the waters on the downside and if it continues lower it will be the first of the sectors to break the uptrend. Watch and be patient as this all plays out.

2) Currency:

Sector Watch:

  • Dollar was back to a new high on worries in Europe last week and now we are consolidating to digest the move. ¬†UUP closed at $22.57. 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 is building one day at a time. ¬†Watch for a base to build short term if the direction is to switch. $104.50 is the level to watch for a upside play on the bounce. Hit the $104.50 level on the open. Added a position as a short term trading opportunity. YCL is the leveraged play on the upside, but volume is very thin.
  • 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.

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 = 3.1% – ¬†up 2 basis points — ¬†TLT = $117.93 down 46 cents
  • 10 Year Yield =1.86% – up 3 basis points — IEF = $107.30 down 13 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe volatility in the bond sector has risen short term and it is causing grief for investors. The bounce lower in yields is the fear factor in play. That would make this move temporary and the trade is to short the bond on the rally higher. Be patient and let it develop.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. heading to the previous highs near $95. The first decline that go our attention on the day. it fell 0.4%, but is was more than that earlier in the trading day. Let it run as investors remain in love with junk bonds, but you have to protect the downside risk. . I expect the trading range to remain near term.

Corporate Bonds¬†– LQD = 3.8% yield. The price has found short term support ($118.90)… again. Downtrend line remains in play. Big jump Thursday gave way to some selling today. Be patient and let this direction play out.

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 downside risk remains and this is a sector of the bond market to avoid for now.

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

4) Commodities:

Sector Summary:

  • The commodity sub-sectors are struggling as base metals sell lower, agriculture takes a dive on inventory data in corn, and the energy commodities are getting toppy short term. Watch OIL, UNG and UGA for clarity.
  • Soft commodities were flat today after selling the last two days. DBA fell 0.25% and broke support at the recent lows. Corn, Wheat and Soybeans were all lower on the Agriculture inventory data relating to corn supplies. Selling¬†opportunity¬†or buying? Watch the response to the selling and be prepared to be short each of the grains based on the response.
  • UNG (natural gas) made the big move higher breaking higher, but setting up to test the move short term. Hit resistance and has been testing the move. Watch and see if this holds the upside momentum.
  • Crude tested support at $89.30 last week and closed at $97.22 for the day.¬†ONLYETF Model Portfolio¬†The upside is still in play. Cleared the $22 resistance on OIL – watch and manage the risk of the move.
  • GLD – Gold reversed on the positive momentum in stocks and didn’t look back closing lower at $152.44 on GLD. As we have warned… the downside remains in play short term. GLL is the short ETF for gold.

Commodities Rotation Chart:     

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 take the leadership role currently.  Japan (EWJ) has moved lower on response to the banks holding rates lower. The balance is status quo for now and not much to like or dislike at this point in time. 

Global Mkt

Country Watch:

  • EFA¬†– The long term uptrend remains in play and support has held, but the sideways motion remains in play. No clear direction from the developed markets with plenty of downside pressure on specific countries holding the index down currently.
  • EWW¬†– Mexico is breaking higher again. Watch for the upside opportunity to follow through.

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 and remains positive looking forward. The Sector is getting positive press on the creation of REITs to absorb the excess housing defaults from banks and Fannie Mae. Watch and enjoy the ride from here.

Sector Summary:

  • XHB – Homebuilders moved to new high and remains a positive sector. Be patient and manage your stops if the downside resumes on the test of support near the $29 level.
  • REM – Mortgage REIT continues to push higher in the trend – let it run is the only thing to do with trailing stop.
  • NLY- Annaly Capital Management – continues the upside trek with some daily volatility. gained 2.5% on Friday to clear the 200 DMA. Hold and let it run.
  • RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high today as well.

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.