Market Likes Stimulus Promise From Europe

Friday, September 7th

Markets react positive to the comments from Mr. Draghi of the European Central Bank on Thursday and the S&P 500 index hits new a new high finally. The big question on Friday was would the index hold the new level or test the move. It did hold and the financial stocks provided some key leadership for the index. Below we discuss further the action in the index and some moves that didn’t impress.

A market motivated by stimulus versus fundamental growth isn’t the ideal trend, but we have to play the hand we are dealt. This remains one of the most hated rallies I can remember in a long time. We are as guilty as anyone of doubting this rally at every turn and I am not overly confident in the move this week. That said, we still have to put money to work and manage the risk of the positions.

Investors are still in the mood for stimulus and the FOMC meeting is next week. Will the Fed finally make a move that pacifies the cravings for more money? If they don’t, the elevated expectations may create a challenge for the markets short term. The key question will be if the Fed does enough relative to the expectations. The meeting on the 12th & 13th will watch closely by all.

Economic data was not very impressive this week as we get the first look at August numbers. The ISM Manufacturing remained below 50% showing contraction remains in that sector of the economy. The services data was better at 53.7% and better than expected, but jobs report was off with only 96,000 jobs created. Thus, the positive response by the markets on Friday was the numbers solidifying the need for the Fed to add stimulus.

It promises to be a interesting week for the markets and we will prepared to take what it offers… good or bad.

Below we discuss all the moves that were made today and the impact and importance to each sector.

1)  US Equities:

S&P 500 Sectors-to-Watch – The index held the move above the 1430 mark. After holding support at the 1395 mark over the last three weeks the index made a move on above average volume to the upside. The stimulus remains the driving factor short term and everyone is watching to see how it plays out. We still have to respect the downside risk as the data remains weak. We will watch and see how this play out from here.

WATCH: Hit entry $142.50 on SPY Thursday.

Energy – Uncertainty would be one word for what has been happening to the price of crude oil and the sector overall. The selling in XLE tested support at the $70.40 level and held. The bounce on Thursday and Friday put the ETF back above the $73 resistance and held on the close. This needs to confirm the move as we start the week of trading. UNG fell 3.74% the last two days and is testing support again. UGA gained 1.3% and is at a new high – tighten your stops on the play. OIL was up 1.9% on the day. The mixed results are all swirling around the demand versus hope of higher demand. The numbers are what we will ultimately trade off of, but the emotions are in play for now. We have to be patient and let the uncertainty play out short term.

WATCH: HES – Entry $51 – Stop $51 (Raised to Breakeven)

Financials – The sector pulled back from the move higher and tested support at $15. The move challenged the current trend higher and we bounced to break higher on Thursday and Friday. The relief relative to Europe helped push the sector higher. Banks and brokers have been leading the move higher.

WATCH – XLF – Entry @ 14.55 – Stop 15.20 (on the close) — WATCH: KBE – Entry – $22.80 HIT ENTRY TODAY

Healthcare – The sector has been trading sideways. We dropped to support at $38.40 and held. Moved up to $39 and stalled, but we finally move through the resistance and pushed higher.  IHF moved up nicely off the lows and and hitting new highs. XPH moved off the lows as well, but stalled near the $61 mark on Friday.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $38.20

Biotech – The sector broke from the consolidation and was worth the trade on the upside play. The sector is helping drive the healthcare higher as well. Solid move to the upside and we have raised our stop to protect the gains.

WATCH – XBI – Entry at $89  – Stop $90.40 (Raised Stop)

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 and continues higher with the sector overall. Take the upside, but portect against the downside short term.

WATCH: XLY – Entry 44.50 – Stop 45.70 (Raise Stop) / JCP – Entry 25.50 – Stop 26.80 (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 last week. The sector remains weaker, but the bounce in the broad index may set up the upside move short term. Watch and manage the play short term. SMH is testing the 200 day moving average as support. Intel reversed again on Friday and the downside play is still working.

WATCH: Short Intel (INTC) – 24.55 – Stop – 25.20 / WATCH: SMH – $30.30 Entry – Stop $32.60

NASDAQ Index – Moved back near the 3045 support reversed and has now moved through the 3090 resistance. The upside momentum has been as a result of the technology stocks, but the consolidation has been testing the move. The breakout is something to watch going forward. The trend is up for now, but manage your risk.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 68.25 (Raise Stop)

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

WATCH: IWM -Entry 79.60 – Stop – 83.20 (Raise Stop)

Volatility Index – The index broke low on the upside on Thursday. The VIX should move lower if the rally is going to continue.

WATCH: SVXY – Broke higher on big drop in volatility

2)  Currency:

Dollar – The dollar started lower on the FOMC rumors and the ECB stimulus is helping push the dollar lower as well. The risk for the dollar has been stimulus from the Fed and the ECB. We remain short the dollar and the bump lower today sets up for further downside.

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

3)  Fixed Income:

Treasury Bonds – The bond had reversed course on the stimulus from the Fed short term. Breaking support again at the $124.50 level again. Watch TBF for a short play.

WATCH: TBF – 29.35 Entry

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. Made move back above the $60 mark on Thursday again… Watch and manage your stops.

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 gain of 2.5% on Thursday came from the ECB news. Held and moved higher on the Friday.

WATCH: EFA – Entry 52 – Hit entry at $52 Thursday. Stop – $52 (raise stop break-even)

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 $39.40 on move higher.

WATCH: BRF – Entry 37.60 – Stop – 39.40 (Raise Stop)

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. IYR made the move through the top end of the trading range and hit a new high. 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 $65.30 (Raise Stop)

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.

MONDAY:

The upside remains a give and take as the overall market is fixated on the Fed and the ECB. Thursday the ECB did enough to get investors to buy in on the stimulus and bond purchases. The Fed is September 12th and the stakes have now been raised for them to act. The market is looking for reasons to move higher and investors want to believe in the upside… and today added one key reason to rise. Watch for the follow through on the indexes.

Gold jumped to $1740 on Friday and the upside continues to move on the belief of inflation and alternative asset class. The precious metals have been moving on the rumor and anticipation of stimulus.  Silver is hit our target of $31.40 on SLV. It looks like time to collect some gains and see who this plays out short term. It climbed again on Friday to $32.64. Watch and raise your stops.

What am I watching:   1) MSFT – Break above $31 would be a break from the consolidation pattern. Hit on Thursday and looking for the follow through to add a position. 2) Facebook (FB) is approaching our target of $15. Bounced 4.8% on Wednesday and 2% on Thursday? Watch the upside for a lift and entry opportunity. 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). Solid move higher on MS through the 200 day moving average.  4) SINA broke from a flag type pattern on Tuesday and held the move. 4.3% gain on Thursday. 5)  TIBX broke from a cup pattern to move higher as well on Wednesday. Added 3.4% on Thursday.

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.