Market Bounces on Housing and Earnings

Tuesday – Notes & Research

The answer to our question… bounce. The market recovered from the selling on Monday to recover at least half of the downside. The buyers were once again willing to buy the dip. The housing starts data was the first positive report relative to the economy in two weeks. That helped along earnings on the day to lead the markets higher. There remains a desire to buy stocks by some, but the concern level continues to rise across the broad market indexes.

The earnings theme remains, meet or beat earnings and miss on revenue. That is a repeat of last quarters theme and it may not hold up as well under current conditions. Yahoo and Intel announced after hours and they were both in that camp again. This puts more of the emphasis on the economic picture than the companies themselves. The inability to grow sales shows the lack of growth in the overall economy. Thus, it remains the number one concern.

Gold was up $6 to $1366. That is not much of an endorsement for a bottom in the metal. Oil closed at $88.73 up 2 cents. The same goes for this commodity. However, oil did manage to bounce off the overnight low of $86.06 and at least showed some positive signs relative to support. Agriculture, energy and metals all moved up on the day for the commodities.

How do we play this going forward? Cautiously is the one word that comes to mind.

Sector Moves of Note:

  1. Commodities bounce off the new low from Monday, but not enough gain my interest just yet. DBC volume was better than twice average and closed up 1% on the day. Worth watching to see if anything of interest develops in the sector.
  2. Consumer Staples moves to new high at $40.81. The sector remain in a leadership role and we continue to hold our positions for now.
  3. Materials bounced 1.8%, but still weak with support at $37.25 on XLB.
  4. Financilas up 1.5% Despite the decline by Goldman Sachs following earnings today. Citigroup was rewarded a day later following positive earnings up 4% on the day. KBE & KRE both held support near the recent lows. I still like this sector with a longer term time horizon to deal with the short term volatilty.
  5. Healthcare, Consumer Discretionary and Industrials were up 1.4%, but industrials remain questionable short term.
  6. Technology, Energy and Utilities were up 1.2%. XLK and XLE are still not convincingly healthy.
  7. VIX index jumped to 17.2 on Monday only to fall back to 14 today. So much for anxiety and this does not act convincing for those wanting the downside to take control. We are back below the resistance or boiling point for fear and volatility in the broad market index.
  8. S&P 500 index back at the 1575 level again. Watch to see if it meets with resistance this time around.

The markets opened higher and never really looked back slowly progressing to close higher on the day.  The trendline support held for the broad index and that is as simple as it gets. No clear indication of selling at this point, but for now protect your positions and let this play out.

Economic Data:

The housing sector gets some positive news from the home starts jumping higher than expected. XHB bounces 2% of the test lower from Monday. Finally had some economic data that was worthy of tracking. Plenty of data to come the balance of the week.

Economic Events & Calendar 

1) US Equities:

The chart of the broad index is starting to look more like a heart monitor than the market. The ups and downs since March 14th have made me sea sick. Not much has changed in terms of the leaders and the laggards, but the activity day to day to get here has been a little rough. The index was at 1563 on August 14th and it closed at 1574 today. Not much in terms of overall change, but it was higher in the end. However, last night it was lower. The consolidation or digestion of the move is in play and we will take all of that into consideration.

Volatility index РVolatility returned with a jump to 17.2 in the VIX index on Monday. That was the end of that as the index moved back to 14 today. We are back in the comfort zone relative to the VIX, but we still have to be aware of our surroundings going forward.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play. The last two days has established a new potential pivot point on the downside to join the March 14th (Cypress and budget) high. Today’s move negated the downside move from Monday, but there is still plenty of room for concern short term. This activity puts the trend back to a sideways trek, with a downward bias.

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. With today’s developments we have to protect against the downside and look to lock in gains if our positions are short term. Longer term holdings will be managed accordingly.

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 trend has overcome two attempted moves lower to maintain the uptrend. The move on Monday now makes it four attempts to break lower. Watch the trendline as the support on the current pullback. A break of the uptrend brings downside options back into play for the short term. 

SP500Scatter

Sector Rotation of Interest:

Financials¬†– (4/12 post) –¬†Banks are rolling over on the Wells Fargo and JP Morgan earnings announcements. OR are they really going to sell off? The chart of KBE shows the current pullback and test of the support at $26.50 and the 50 DMA. Wait, isn’t this the level we broke last time? Yes, but this time we take the exit if it breaks lower. Watch XLF, KBE, KRE, KIE, and IAI as we progress into next week. I like the longer term outlook for the sector, but we will treat it as a trading sector for now.

4/15 post – Selling accelerated in response to the broad markets. Citigroup did it’s part to give the sector a boost from better than expected earnings. There will be plenty more this week, but the threat of the downside is in play. We erased last¬†week’s¬†gains today and now look for some clarity in direction. Stop is $18 on XLF… watch the open on how to treat the trade.

4/16 – held above the stop and bounced modestly on the day. Watch and hold for now.

Transports¬†– (4/15 post) – IYT sold off tested support and bounced. Resumed selling on Monday and is now below the trendline. You have to transport goods to sell them… thus leading indicator. Not looking to own near term, but more as an indicator of direction short term.

4/16 – Nice bounce up of 2.3% showing some positives for the sector and the belief in the outlook.

Healthcare –¬†(4/12 post) –¬†Hit a new high on XLV and held to end the week. We raised the stop in the models, but want to still give it some room for volatility. The outlook remains positive and the news relative to reimbursement helps the bottom line fundamentals as the technical data deals with the volatility. IHF, XPH, XBI and IHI all remain in a positive uptrend for the sector near term. Holding near the highs currently.

4/15 post – Watch the stop and let it play out short term. Evidence of the fact that defensive sectors still go down when the market moves down.

4/16 post – bounce back from the selling on Monday.

Small Cap –¬†(4/15 post) –¬†IJR tested lower and rallied back near the previous highs. However, the weakness in the sector remains a concern. Watching more for a leading indicator than investing.

4/16 post – it is leading the downside. This was a weak link over the last month. Tuesday recaptured half of the downside from Monday. Watching for indication of risk from investors.

Telecom¬†– (4/12 post) –¬†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? We added it to the S&P 500 Model and has accelerate this week. Watch maintain your stops and let it run.

4/16 post – held up better than most as a current leader. Building a pennant pattern on the vertical run higher.

Technology РThe sector was in a trading range for the last five weeks and managed to reverse and move higher. The move above the $30 level was the entry for the position in the model and we are looking for that level to hold in the current move higher near term. Semiconductors and Computers were a drag on the sector, but if that can reverse short term the upside remains a positive opportunity. Manage your stops accordingly.

4/16 post – Moved back above $30 as the yo-yo trade continues.

2) Currency:

Sector Watch:

  • UUP¬†– The Dollar broke the support at $22.35 mark on the downside. Hit our exits and now we watch to see how this play out going forward. More selling in the buck could develop near term.
  • FXB¬†– the British Pound jumped two weeks ago, held¬†the¬†move at the $149 level. The currency is now in an uptrend off the low and moving through the current resistance at $151.50. For now we just have to be patient and let the pound work through the directional challenge it was facing. Took the entry on the move and the target is $152.50. $150.40 stop in place on the trade.
  • FXE¬†– ¬†The euro made gains on the week against the dollar and is in position to break higher. $130 mark is the entry on the upside. Retracted some on the trading day Monday and continued higher on Tuesday. Watch to see if the upside to resume.

3) Fixed Income:

Sector Summary:

  • The volatility we are all looking for in stocks has found its way to bonds. The yield moved higher after the selling last week, but resumed the downside in the yield and the upside for the bond. ¬†The fear factor is back in play for the bond and puts both TLT and IEF in play again short term.¬†
  • 30 Year Yield = 2.9% – ¬†up 2 basis points — ¬†TLT = $121.98 down $1.01
  • 10 Year Yield = 1.71% – up 1 basis point — IEF = $108.38 down 31 cents

Tracking Bond Sectors of Interest:

Treasury Bonds¬†–¬†Yields on the 30 year Treasury is back to 2.9% as the pressure on stocks fueled the rally in bonds. Economic data, some need for safety, you state the reason, but the great rotation from bonds has not¬†occurred¬† At each sign of trouble money tends to flow back into the sector versus out. Expect more volatility in the price of the bonds a the worries and the optimist duke it out.

High Yield Bonds РHYG = 6.5% yield. Support remains at $92.75. Move back towards the previous highs near the $95 level. Manage the position for the dividend as the growth side is uncertain short term. I expect the trading range to remain near term. Use $92.75 as the stop. OR TBF to hedge your position when volatility picks up on the downside.

Corporate Bonds РLQD = 3.6% yield.  The jump higher 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 it starting to act like one. Use stop at the $120.50 level to protect the upside gains.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds found a bottom built a small base and produced a upside trade opportunity. Watch the current resistance at the $110 level. Moving back towards the resistance at the $111.50 mark. This is a tax-free dividend play with limited upside from growth.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the rally in stocks. Testing the highs again near the $42.50 level. Watch stops and protect your gains.

4) Commodities –¬†Sector Summary:

  • The¬†commodity index¬†continued lower with the move lower in both gold and oil setting the markets on edge. It has not looked back and with the acceleration of the decline on Friday and Monday with gold dropping to the to $1361. DBC broke support at $26.80 and continued to track lower closing at 25.90. ¬†Without any good news… the downside remained in play along with a small bounce.
  • Natural Gas¬†– UNG made the big move higher, but then moved sideways the last three weeks and now a follow through on the upside to end the week. After testing the move higher it is resuming the trek higher currently. Part of the consolidating came from the seasonal transition. For now the commodity continues to drift higher and we will stay with the trade for now with our stops in place.
  • Crude Oil¬†– Crude tested lower Thursday and broke below the $91 level on Friday, not to be outdone it fell to the $88 level on Monday. What does this mean looking forward?¬†Downside in play on lack of demand. Not short or long currently, but watching to see who offers the best alternative looking forward.
  • Gold –¬†The metal has continued to struggle and despite the bounce we have maintained our short position. Friday showed why we have stayed short the pressure is on the downside… right or wrong the trend is holding firm. Monday added icing on the cake of the short trade. Watch you stops and see how low it goes. We will continue to monitor the progress, but short remains the play.

Commodities Rotation Chart:

Natural gas still leading despite the test of the upside. Looking at the chart below you will note that the other nine ETFs of commodities have all turned lower the last week.

Commodity

5) Global Markets:  

Global markets drop on slower economic data in China, Europe and the US. They tested lower on the news in Europe and Ching keep the markets in check. Monday reversed the upside momentum and now we have to watch how the downside unfolds short term. One day at a time.        

Global Mkt

Country Watch:

  • FXI¬†– Wanted to move higher on the week, faded into the weekend. Downtrend is still in play off the February highs and that is to be respected if the bounce off the low fails to produce a reversal. Still watching the downside or support at this level.
  • EFA¬†– Faded and then tested the breakout level. The volatility in the global markets isn’t going away. Watch and let the move validate before making any commitments to the sector.¬†Willing to watch for now to see if any leadership evolves from the global markets.

6) Real Estate (REITS):

Real Estate Index (REITS) РIYR broke through the trading range near the high of $68.50-69.50 and continues to climb to new highs.  Watch your stops and take the exit if the selling progresses.

Sector Summary:

  • REM – Mortgage REIT has been testing lower as pressure on the sector has risen of late.
  • 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: Tested lower on Monday with the rest of the world markets.

  • The sovereign debt issues are fading again and opening the upside potential as the issues find relief. This offers some short term trading opportunities, but you still have to be¬†aggressive¬†in managing your exposure.
  • There are some funds moving in favorable direction of late.
  • PAFCX – Bounced off low with the movement in yields going lower. Holds $11.60 worth owning short term.
  • PICB – hit support traded sideways and now breaking higher.
  • EMB & PCY – Big recovery the last four trading days and interesting in watching.

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.