Market Drifts Into the ECB Announcement on Thursday

Wednesday, September 5th

The markets were rocky at the open, but settled into a flat-line kind of day. Some believe it is investors waiting to see what the ECB will do tomorrow. I would not expect any big surprises as Germany courts have not ruled on the legalities of the ECB issuing bonds to improve the financial systems and the euro. We will see how the markets react soon enough.

Fedex warned about profits today and that sent a negative ripple through the markets. Why? Transportation stocks are a bell-weather for the markets looking forward. I like how everyone acts surprised when these things are announced. The global economy has been soft for awhile and the natural reaction for companies to struggle. Thus, the old saying is in play… Transports have to lead or at least move higher if the broad market is going to be higher. This is on our watch list to see what impact results.

Still no clear direction short term for the broad markets. This is a period where you have to pay attention and not assume anything. The rumors relative to September being the worst month for the overall markets are in full bloom. While September does have a reputation for being down more than up, it also a month of opportunity for investors to take advantage of the selling should it appear. The key is patience looking forward without assumptions of what is going to take place.

Sectors are updated below based on the results for the day.

1)  US Equities:

S&P 500 Sectors-to-Watch – The index has moved below 1400 intraday testing support at the 1395 level. This remains our first level of support to watch short term. The uptrend remains in play, thus the selling is a continued test of the uptrend off the June 4th low. As we have discussed uptrends don’t die easily as the last two weeks validates. We still have to respect the downside risk and the increased volatility of late. The rolling top pattern is a warning, but investors are still believing in stimulus, and until it is set aside for good the upside remains in play.

WATCH: SH – Entry – 35.15 – Stop – 34.50

Energy – Uncertainty would be one word for what is happening to the price of crude oil and the sector overall. The selling in XLE continued today closing at $70.71 and testing the next level of support. UNG, UGA and OIL all moved slightly lower on the day. We have to be patient and let the uncertainty play out short term.

WATCH: HES – Entry $51 Patience required as we test the lower end of the trading range.

Financials – The sector pulled back from the move higher and tested support at $15. The move has challenged the current trend higher and we have to manage the risk short term. Any concerns with the sovereign debt issues will weigh on the sector going forward.

WATCH – XLF – Entry @ 14.55 – Stop 14.95 (on the close) — WATCH: KBE – Entry – $22.80 (look for volume on the move)

Healthcare – The sector continues to trade sideways. We dropped to support at $38.40 and held. Hold positions and manage the risk.  IHF moved up nicely off the lows and and back to the previous highs. XPH moved off the lows as well, but stalled near the $59 mark on Friday and jumped 2.8% today to break higher. Gap made entry a mess and we passed on the position today.  Looking to add to our positions if the support holds and the upside continues.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $38.20 (Added to position at $39 Wednesday)

Biotech – The sector broke from the consolidation and was worth a trade on the upside play. The sector is helping drive the healthcare higher as well.

WATCH – XBI – Entry at $89  – Stop $89

Consumer Services – The consumer services sector has the retail stocks support relative to the trend higher. XLY and XRT are both moving higher short term. Digging in and looking for the leaders has been the best play. JC Penny’s broke above our entry point on Wednesday. Continues to consolidate and looks positive short term.

WATCH: XLY – Entry 44.50 – Stop 44.50 / JCP – Entry 25.50 – Stop 25.30 Raise Stop

Semiconductors – The sector has been testing lower and the downside leadership has been from Intel. We added the short play on the selling on Thursday. Friday the stock bounced, of course, gaining more than 2% on the day. Watch the stop and manage the play short term. SMH is testing the 200 day moving average as support.

WATCH: Short Intel (INTC) – 24.55 – Stop – 25.20

NASDAQ Index – Moved back near the 3045 support? Watch for the index to hold or a test of 3000 next. The upside momentum has been as a result of the technology stocks. However, the accelerated run higher has been slowing and volatility picking up intraday. The trend is up for now, but manage your risk.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 67.40

Small Cap Russell 2000 Index – The upside move off the July 30th bottom was positive, but we are struggling with resistance at the $81.75 level. Moved above $82 on Tuesday… held, but we are still questionable moving forward.  The key is to protect the small gains we have and see how this plays out short term.

WATCH: IWM -Entry 79.60 – Stop – 80.90

Volatility Index – The index is establishing a short term trend higher. However, the index tested lower today in trading. The uptrend is in play, but not translating into much profit on VXX. Watch for clear direction short term.

WATCH: SVXY – Testing the highs

2)  Currency:

Dollar – The dollar got thumped on the FOMC stimulus grab. The risk for the dollar has been stimulus from the Fed and the ECB. The lack of activity from the central banks has served to create volatility with the buck. We remain short the dollar, but if the upside starts to accelerate on fear we will head for the exits.

WATCH: UDN – Entry $26.40. – Stop $26.40 break-even.

3)  Fixed Income:

Treasury Bonds – The bond has reversed course on the stimulus from the Fed short term. The yield has moved to 2.7% on the thirty year bond, pushing prices higher on the bond. The move to 1.59% on the ten year pushed prices higher as IEF and TLT both bounced off the lows. TLT cleared $124.40 for the entry point. IEF had big pop higher on Friday as the yield continues to fall.

WATCH: TLT $125 Entry.  Stop $125 Raise Stop

4)  Commodities:

Crude Oil – Testing near the move higher as the fear factor steps up on the stimulus packages not materializing. The risk trades are coming off and that is impacting the commodities. Manage risk of the play and mange your stops.

WATCH: OIL – Entry 20.75 – Stop 22.95 (stop on the close)

Gasoline – Can’t decide as it trades near the high… up or down? The upside is still in play, but watch oil prices and if they stall at resistance. Watching for a test short term on the steep move higher. Held move above the $59 level.

WATCH: UGA – Entry at 52.75 – Stop 58.50 (Stop on the close)

5)  Global Markets: The global markets responded to the ECB stimulus anticipation. The EAFE index has rolled over and is testing support near term. The challenge remains no direction from Europe and weakness in China. Watch and see how it plays short term. The downside is in play short term. EFU is the leveraged Short Play from ProShares.

WATCH: EFA – Entry 52 on above average volume! / EFU – Entry – $21.45 be patient

Brazil Small Cap – Bought on the move to the channel top at $37.50 with potential move higher. Solid move and follow through on the upside breakout prompted the entry at $37.60. Manage the trade and Raise Stop to $38.10 on move higher. Looking for follow through move on the upside short term.

WATCH: BRF – Entry 37.60 – Stop – 38.10

6)  Real Estate (REITS) – The sector remains near the current highs. I like the outlook long term, and short term we have made a move back to the top end of the trading range. Still scanning and looking for the best opportunities.  Mortgage REITs (REM) bounced off the selling and headed back to a new high. The uptrend remains in play. Yield on the fund is above 11% currently.

WATCH: IYR – Entry $65.30 – Stop $64.20

7)  Global Fixed Income – The issues with sovereign debt in Europe keeps us out of the asset class currently. Emerging market bonds (EMB) tested lower and bounced off support to move higher. Passed on the opportunity due to risk/reward. International Corporate Bonds (PICB) and International High Yield Bonds (IHY) remain in a long term uptrend and moved higher on Friday. Hold positions and manage your downside risk.

THURSDAY:

The upside remains give and take as the overall market is fixated on the Fed and the ECB. Thursday is the ECB and the Fed is September 12th. The late day rally on Tuesday came from Apple’s move as they set to announce the iPhone 5, Wednesday was flat heading into the meeting. The market is looking for reasons to move higher and investors want to believe in the upside… but, there are plenty of issues still facing the broad markets.

Gold jumped to $1700 following belief of inflation and alternative asset class. The precious metals have been moving on the rumor and anticipation of stimulus.  Silver is near our target of $31.40 on SLV. It looks like time to collect some gains and see who this plays out short term.

What am I watching:   1) MSFT – Break above $31 would be a break from the consolidation pattern. 2) Facebook (FB) is approaching our target of $15. Bounced 4.8% today off the recent low. When it was launched I stated I believed it was $15 stock. With the current activity it is worth watching. The move back to the upside is going to take some conviction to buy. 3)  MS – Morgan Stanley is moving higher and leading the brokerage stocks (IAI). Thus you can play the break higher in IAI or MS. 4) SINA broke from a flag type pattern on Tuesday and held the move. 5)  TIBX broke from a cup pattern to move hgiher as well on Wednesday.

Watch and play according to your risk tolerance. 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 downside risk determines your long term results. Trade smart.