Market hold gains, but close flat on the day

Wednesday – Notes & Research

The headlines just keep coming on the Dow Jones Industrial Average hitting a new high. “bull market or bear trap?” Of course over time we will know the answer to that question, but the speculation against the uptrend continuing short term is amazing. Believe ¬†me I get the skepticism, but the level of belief the rally is over has reached a level of noise it is distracting. That alone is why we need to keep our stops in place and manage the risk of our portfolio.

Today the market attempted to follow through on the upside but gave up the effort into the last hour of trading. The S&P close up one point, the NASDAQ down two points, and the Dow gained forty-two points. Nothing to dance over, but it did hold the move above the February highs.

Market Drivers: Speculation or Reality Check?

  • Wednesday was a flat day of trading thus, not much in the way of driving the markets higher.
  • Speculation currently is on the Dow and other indexes not holding the current move to the upside and that we will have to watch for the near term outcome.

Market Worries: Climbing the Wall!

This is not the kind of market I like, nor do I like the risk of this environment.

  1. Budget cuts came and went without fanfare, but they are still a looming issue relative to the cuts and the true impact over time. Thus, this has turned into a longer term impact item than a current one.
  2. What will the Fed do at the March FOMC meeting (speculation). No real changes expected to QE infinity, but will they shorten the timeline or adjust any method of delivery. Any changes will prompt a reaction. On the radar as we move towards the event.
  3. Can the economy really recover? Earnings grow? Revenue increase? Simple things that make the market more¬†palatable¬†to investors. Bottom line will there be enough momentum to carry the markets to new highs and sustain the move? Starting to get some positive data points for February and if it continues with the jobs report on Friday… could offer a upside catalyst for stocks.
  4. Will Europe be a problem for global markets as they unwind the issues in Italy, Ireland, Spain, etc? This is going to be a touchy subject across Europe short term. Moved to the back burner for now, but it is still simmering.
  5. Put/Call Ratio shifted last week to the PUTS. The ratio has declined the first two trading days of the week, but this is till a key issue relative to the forward looking progress. relative to the VIX this is unwinding short term, but remain on our radar.

Technical Outlook:

  • The S&P 500 index dealt with the recent volatility with a breakout move today above the consolidation. Watch for follow through and target of 1570 short term.
  • Dow and NASDAQ both break higher as well setting the tone for the broad markets overall.
  • Value has been better than growth during ¬†the recent trend off the November 15th low.

Market Leadership:

  • Leadership is shifting yet again after two weeks of struggling. ¬†The financials made a move back to the February highs. Industrials are in a similar position moving back to the previous high.
  • Breaking higher is Technology, ¬†Healthcare, Consumer Staples & Discretionary and Utilities short term. Watch for their leadership to carry the markets higher.
  • Rotation is back towards the previous leaders for now.

Economic Data:

Maybe now the focus will shift to the positive data from the economy versus the negative? If the trend continues the market will get the catalyst it has needed to continue the upside move.

Data Summary:

  • Beige¬†book showed that business believes the government is getting in the way of a sustained economic recovery. Employers in several districts stated the “unknown effects” of Affordable Healthcare ACT as reason for future layoffs and non-hiring currently. There were plenty of¬†interesting¬†comments from the business community in the report relative to government intervention hurting versus helping.
  • Factory orders fell 2% and were better than the forecast of a 2.2% decline.
  • ADP Employment Report show a gain of 198,000 private sector jobs. That was well ahead of the expectations and could act as a catalyst into the Government jobs report Friday.
  • ISM Services rose to 56% February from 55.2% the previous month. 18 industries produced gains versus 8 prior. New orders rose to 58.2% up 3.8%! Production edged higher to 56.9%, but employment fell slightly to 57.2%. Overall a very positive data point for the economy to match the ISM Manufacturing data.
  • ISM Manufacturing rose to 54.2% from the 53.1% in January. Solid improvement in the underlying data. The only concern was the rise in cost. This may signal higher PPI data or inflation at the producer level. That eventually moves to the consumer. Worth watching this further.
  • Personal income was a drag, down 3.6% and worse than expected.
  • Consumer spending rose 0.2% and in line with expectations. Michigan Consumer Sentiment was up to 77.6. The consumer continues to show positive signs despite the negative data around them.
  • Construction spending unexpected fell 2.1%. Big miss sent the housing sector lower on Friday.
  • Auto sales were better than expected giving the sector a boost.
  • Weekly jobless claims were down 18,000 which continues to show improvement.
  • GDP was revised to a positive 0.1% versus the -0.1%… at least it is positive.
  • Chicago PMI was up to 56.8 versus the 55.6¬†announced¬†last month.
  • Durable goods orders drop 5.2%, but without transportation they actually grew by 1.9%. That news helped push the broad markets higher on Wednesday.
  • Pending home sales rose 4.5% versus the decline of 1.9% last month. That helped the homebuilder stocks move up 2.1% on the day. On Tuesday New Home Sales were 437,000… 53,000 ahead of expectation. Two positive reports for the housing sector after a disappointing January.
  • Consumer confidence jumped to 69.2 following a 58.4 reading in January. Nice jump for the consumer.

Economy is steadily treading water with little to no growth as the GDP report bears witness to. The short term outlook for the economy is positive, but just barely. Keep your focus and remain disciplined relative to your stops and exit points. The data has shown some positive signs over the last week and the key will be for markets to buy-in that things are improving with the economy.

1) US Equities:

Market Summary:

  • Major indexes essentially unchanged on the day. Good day to digest what was eaten yesterday and keep looking forward not backwards.
  • Short interest has fallen and margin percentage have risen. Not the best of signs for the buyers.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play this week. The chart below shows the leadership from XLY accelerating to lead the move. XLB playing catch-up after some selling the last two weeks. , XLF regaining some leadership poise. XLU still accelerating higher XLK played into the leadership move on Tuesday. Looking for the upside to regain momentum if the uptrend is to hold short term. (FLAT on Wednesday, but still watching the upside. Financials and Basic Materials remain in an upswing.)

SP500Scatter

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. Watch the bounce of the newly minted low on 2/25. The index moved above the previous high in February erasing the downside move. See chart above for the leadership on this move.

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.

SP500Scatter

Tracking Sectors of Interest:

Telecom РThe DJ US Telecom index has pulled back, but the defensive nature of the stocks offers some opportunities at the stock level. We have been tracking both AT&T and Verizon as a dividend/growth idea.

  • WATCH: T – Break above resistance at $35.65 is attractive on the upside, plus the 5.1% dividend.
  • WATCH: VZ – Looks just like T on the consolidation and resistance $42.85, plus the 4.6% dividend. The stock has broken above resistance at the $44.80 level and moved higher.
  • Both stocks have moved higher with VZ showing the strongest move. Watch the risk of the trade.

Technology РThe trading range remains in play and holding support. XLK broke above the $30 level and held on Wednesday. The entry point was hit on XLK and IGV. FDN and SOXX are both in position to move higher as well.

  • WATCH: GOOG – some consolidation at the high. Watch for move higher short term. Got the move Monday to break higher and has continued to do so. Raise your stops to $810.
  • WATCH: HPQ – in our model and moved higher on earnings. Raise stop and manage the risk of the trade short term. The test of support at $19 held and has now continued higher.
  • WATCH: SOXX – the semiconductors need to lead the sector. $57.30 support needs to hold. Moving back towards the current high. Solid gains on Tuesday… look for follow through.

Financials РStruggled of late to hold support and maintain the current uptrend, but it has now made it to the previous high with banks ready to break higher. KBE, KRE, IAI, KIE all are ready to eclipse the February highs short term.

  • WATCH: KBE – banks are being driven by those with extensions into the brokerage business. BAC, C, MS, JPM and GS. Attempting to bounce back, but still have to watch how it plays out short term.
  • WATCH: IAI – sub-sector play on the brokers.

Energy РThe sector remains under pressure from the decline in crude oil prices. The stronger dollar along with increases supply and storage has been the biggest detractor to the sector overall. XLE tested lower and we are looking for upside opportunity to return if the prices settle. Sitting on $7820 resistance for now.

Basic Materials – Moved back to resistance at $39.15. As seen on the rotation chart above the gains to the upside have accelerated above the others and the sector is the leader of the Feb. 25th low. Watch for the sector to clear resistance and offer some upside opportunity.

2) Currency:

Sector Summary:

  • The currency landscape is shifting short term to dollar strength. Watch UUP as it tests support near the $22.35 mark currently. moved back to $22.49 on Wednesday. Upside remains in play.
  • FXB – the British Pound dropped to $150.50 support level and failed Friday to hold. Small bounce on Monday and Tuesday… could offer some upside play… no, back to selling on Wednesday.
  • FXC – the Canadian Dollar continued lower as well heading towards support at $95.35.
  • FXY – yen is still in bottoming mode.

Tracking Currency of Interest:

US Dollar РThe buck rallied back and closed at $22.49. Watch support at $22.20 level, if it breaks look for the exits. hold for now.

Euro РThe euro (FXE) Broke support at $129.50 and ready to move lower? This is not improving short term as the outlook for Europe remains questionable. Still looking for some support. $128.80 holding as support for now.

3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly on the turmoil in stocks. ¬†The question is if the market corrects how much will it impact? We are in the process of finding out now.¬†
  • 30 Year Yield = 3.14% – up 4 basis points — ¬†TLT = $117.93 down $1.07
  • 10 Year Yield = 1.93% – up 4 basis points — IEF = $106.94 down 34 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РBounce higher in rates short term. Not something I would expect to remain in place unless the fear factor is completely removed and the VIX is pointing to that short term.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. Let it run as investors remain in love with junk bonds. I expect the trading range to remain near term.

Corporate Bonds РLQD = 3.8% yield. The price has found short term support ($118.90). The move above $120 has reversed on the move higher in rates. Watch to see if the bond ETF tests support again.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds continue to move sideways. Found support and bounced back, but still looking for direction. Some downside on Wednesday break support on the move at $111.40.

Convertible Bonds РCVRT = 2.7% yield. Price had been moving higher on the current rally in stocks. The reversal pushed the bonds lower short term.

4) Commodities:

Sector Summary:

  • The commodity rotation chart below shows the high on January 6th to date as the index has sold lower. The drop of 5.2% has been accompanied by high volatility.
  • Gold (GLD) is attempting to hold support at the $152ish level currently. Not trad-able, but worth watching to see if it holds or moves lower. GLL on the break lower. WATCH:¬†$70.50 Entry?¬†
  • UNG (natural gas) Tested the move higher. Watch the upside for potential trade? WATCH: 19.65 Entry.
  • PALL – Bounce off support and potential trade. WATCH: 73.60 Entry.
  • Crude tested support at $90 on Friday and closed at $91.02 Tuesday. moved to $89.50 on test lower Wednesday. Downside still has control of ¬†the trade for now. WATCH: SCO entry 42.75

Commodities remain weak, but there is some hope on the upside for some. Watch those components with a trade opportunity short term.

  • Silver holding support at $27.50. Gold as well.¬†
  • PALL gaining momentum again on the upside (above)

Commodity

Tracking Commodities Sectors of Interest:

BAL РA trading range of $52.80-54.40 is in play. A break higher would be a continuation of the move off the November lows. Stalled and trading sideways. Watch and see it this can break higher. Tested lower again on Monday and back near the high on Wednesday? Thursday closed at the break out point watch for trade going forward. Confirmation to the break from consolidation last week. Keeps moving higher for now.

UGA РTesting support at $60.50 Short play? Look for support and a bounce more than the short side.

WATCH: Testing support at $60.50. Holds look for trade at $61 (volume has dried up use limit orders only/AON) Got the trade opportunity on Tuesday on the upside. Test on Wednesday with the selling. Willing to wait for a clear bottom and opportunity on the upside or downside.

5) Global Markets:

Sector Summary:

  • China remains a country of contradictions. Not willing to trade currently, but the volatility is due to the potential issues in the housing sector. FXI remains in a downtrend short term and support at $37.75. Exercise some patience here as this plays out going forward.
  • Europe bounced and held the last few days – that is the good news. Still looking for some positive momentum to lead the indexes higher. $40.25 resistance and $38.90 support.
  • Japan (EWJ) broke higher, tested, and continued to move higher. Got the move above $10.20 and still running for now.

Tracking Global Sectors of Interest:

EFA РWatch $56.90 support to hold on the recent test. The long term uptrend remains in play and support has held to this point. Patience for the trade to develop. Moved back to resistance at the $59.10 level today. Watch and trade accordingly.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders bounced off support at $27. Watch to see if the upside remains after disappointing news in the housing sector. Housing remains in an uptrend despite the rumors.
  • REM – Mortgage REIT held $14.80 support. At the $15.23 resistance to move higher currently.¬†Attempted to break higher on Monday.
  • NLY- Annaly Capital Management finally broke above $15, and is testing¬†the¬†$15.20 support currently on the upside move.

Tracking Real Estate Sectors of Interest:

Real Estate Index (REITS) РThe pullback test is in play for IYR and $67.25 support held. The break higher above $68.50 was positive for the continuation of the uptrend.  Followed through on the upside. ADDED: Sector Rotation Model & S&P 500 Model.

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.

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.