Market Confirms Downside Turn

Thursday, November 8th

What looked like a small recovery in play early in the trading day was just to sucker everyone into a bear trap, and the market dumped lower again. We take out 1387 on the S&P 500 index and no signs of stopping for now. You cannot have all the rattling on about how bad things are going to be on Wall Street based on the “fiscal cliff” and a second term for Obama, and expect the markets to rally. The big question… How do we play the current movement? Short is about the only answer that makes sense, but the fear of a snap back rally is keeping many on the sidelines for now.

Fiscal issues are the number one story in the headlines, but is it really that big of a story? Since there are odds makers now for just about everything the current probability of nothing happening prior to year end to deal with the looming issue of the “fiscal cliff” are 15 percent. That is higher than I expected at this point in time, but as each day passes with no progress the odds will rise. There in lies the problem for the broad markets.

Cash is a sector and one we exercised today. We hit stops and sold positions to shift toward the sidelines for now. Maybe the Walls-of-Reality are closing in on Congress and the Senate to deal with this issue. Pawlenty made that quote earlier today on dealing with the fiscal responsibility before year end.

Below we are outlining the reality of the current trends and the opportunities short term.

What am I watching?

Support remains an issue for the broad indexes. Until we find some support worthy of holding the sellers have control of the market direction.

VIX is pushing higher – yesterday we stated this could climb near 30 before buyers are willing to step back into the current risk of the markets overall. A break and follow through above 19 would be a negative to momentum short term.

Dividend stocks continue to struggle as investors worry about the hike in taxes. Utilities, Telecom, Staples, and REITs have dropped on the worry. It is easy to say this may not happen, but some are not taking any chances. The capital gains tax is another concern for investors and some are locking in gains to take advantage of the current rate for 2012. Uncertainty is the number one enemy of the markets and without some clarity around tax implications investors are taking matters into their own hands. How much more selling will we see in relationship to this issue?

1) US Equities:

S&P 500 Index / Sectors-to-Watch –

The index broke below the 200 day moving average, 1389 support and the next potential support is 1372 after closing at 1377 today. The intermediate term uptrend line is coming into play off the November 2011 low. Today’s move was confirmation on the downside short term.

The Scatter Graph below starting point is 10/17 which is the current pivot point off the most recent high. The move lower turned sideways for two weeks and has now renewed the trek lower. The follow through move today confirms the downside move and negative sentiment. The downside leadership in Utilities and Telecom accelerated thanks to the concerns over the dividend taxation. The chart shows the downside leadership in Telecom, Energy, Technology, Utilities and Financials. The majority of sectors are selling lower and the downside is in play.

ProShares Short S&P 500 index ETF is the trade to hold for now relative to the index. Entry $35.20 on the break above resistance. Stop $34.80 on a reversal short term. Model Post Tonight S&P 500.

Breaking the Sectors Down:

Financials – Fell to $15.50 support on XLF. A break of this level is the entry on SKF (short financials).

WATCH: SKF – Entry 38.25 – Watch for opportunity on Friday.

On my Watch List looking forward:

Short opportunities are building in each of the sectors, but we are technically oversold. Thus, we have to be cautious how we build our short positions. We have discussed all the data and negative outlook for fundamentals. They have validated those issues the last two quarters, but now the fiscal cliff and the election are coming together to provide the catalyst on the downside. Tomorrow being Friday makes it a tough entry point. We have been digging all day relative to the technical and fundamentals to glean some insight.

The VIX index (S&P 500 Volatility Index) didn’t signal fear today? That was one indicator I would expect to jump higher if the downside is going to continue. VXN index (NASDAQ Volatility Index) has been in a stronger, but still not spiking higher. Watch and be patient as this all plays out short term.

NASDAQ Index – Confirmation on the break below 2660. Apple is providing the downside leadership, but it isn’t alone. QQQ support is $63.15 and we closed on it. Break lower is good for adding a small position in QID.

WATCH: – QID – Entry $32.20

2) Currency:

Dollar – The dollar bounce continues as the weaker outlook in Europe is hitting the euro. The play continues on the upside short term for the buck.

WATCH: UUP – Entry – break above resistance. $22.05 – Stop $21.90

Euro – Watching for the oversold state to bounce and dollar to decline as the “fiscal cliff” issue gains momentum. It has held the dollar in check the last two days, but the issues in Greece and Draghi comments have negated the euro from befitting short term. Watch for a play to develop in the euro near term.

NOTE: The YEN moved higher the last couple of days as bounce off support? Worthy of watching.

3) Fixed Income: Yields are dropping! Thursday was was a big shift on the 30 year bond down to 2.76%, 10 year bond fell to 1.63% We are moving back towards the summer lows as the fear factor jumps… money moves to higher ground.

Treasury Bonds – TLT break above the downtrend line as bond rally. Watch to see how this plays out short term with $120.80 support. $124.60 is resistance (broke well above today on fear rally). Investors have not been able to decide on direction, but the fear generated today put the bonds back in play short term.

WATCH: TLT – $123.60 entry (11/7) – Stop $$123.

Emerging Market Bonds – the reversal off the high has reached short term support at $120.75. A move below the 50 day moving average would be a negative to technically. Watch for the downside opportunity or a bounce off support as a trading opportunity.

WATCH: The bounce has started $121.80 Entry.

High Yield Bonds – We discussed the downside risk several months ago, but the recent rally negated any entry points short the bonds. However, we are not at the point of exit on the bonds with the break of $91.80 on HYG. Watch for a confirmation on the downside at $91.50 to short the sector.

WATCH: HYG – short play at $91.50 Entry. (ProShares Short High Yield ETF (SJB) low volume ETF)

4) Commodities: The commodity sector continues to be a challenge for the

WATCH: GLD – Hitting against the $167 resistance for now. Watch to see if upside can gain any momentum. Hit entry oppotunity at $167.20. Still opportunity on the upside fear in stocks.

WATCH: SLV – Break above the $31.50 entry point.

WATCH: DBB – Selling gave way to hope on the hurricane speculation. Bounce trade? Sitting on support. Clear $18.2o on volume could be interesting.

WATCH: OIL – Cleared $21 entry on the bounce Tuesday. Watch for follow through… No follow through on the upside, but the selling was strong on the day. Down 4.2 percent. New low short term.

WATCH: UGA – Cleared $$56.25 entry point on Tuesday. Follow through? NO – $53.60 low in play on the downside.

WATCH: UNG – Bounced, but no real conviction on the move. I still like the Short play? KOLD

5) Global Markets: The global markets are starting to trade in sympathy with the US markets. Watch and let this play out short term. If you have not set your stops it is key to do so.

WATCH: EFA – Testing support at the 50 day moving average. Broke lower, now $53 support – short set up.

WATCH: EEM – Testing support at the 200 day moving average. Back to the bottom of trading range. $40.70 break.

6) Real Estate (REITS) – The sector tested the recent high and support at $64 (IYR). The sector broke support last week and bounced back this week. The downside is still the play to watch.

WATCH: IYR  – Attempting to break lower through support? Volatile within the trading range.

7) Global Fixed Income – Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector.

WATCH: PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity if we move above the $11.80 which it hit today for an entry. $11.81 Entry – Stop $11.74 (Watch for the stop tomorrow)

WATCH: Emerging market bonds (EMB) – testing the move higher with a pullback.

WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch how it plays out short term.

Watch: International High Yield Bonds (IHY) – Testing and pulling back near the breakout point.

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