Friday, November 9th
Rally? Right up to the beginning of the fight! Obama spoke and told Congress to pass the middle-class tax cuts under $250,000… NOW! The invitation was extended to come to the White House and do it his way and he will sign the bill. Bottom line… nothing learned through the campaign. The Major indexes gave up the one percent gains they had managed to that point in the day. This is what investors have feared since election night. Somewhere there has to be a compromise between the two parties and if not the ramifications will be negative for the markets.
The “fiscal cliff” is taking on a picture that can now be monetized. If the tax cuts aren’t renewed and the spending cuts take place mandatorily it would cut an estimated 4 percent from the GDP in the US. Since we are realistically growing at 1.2% it would turn negative quickly. Thus, the anxiety of investors towards investments.
Tough week for investors as the market turns lower following the election and the selling remains a big concern for all. The list of issues facing the market is huge. We will spend time reviewing and looking for the opportunity in the mess that is short term. We have raise cash levels and remain in a holding pattern for now.
Below we are outlining the reality of the current trends and the opportunities short term.
What am I watching?
I am truly watching the stupidity of the entire market being focused on an event that may not take place, but is fixated on the possibility that it may.
The volatility index pushed towards the recent highs and stalled. IF we break through the ceiling currently on the VIX index watch for a the sentiment to shift negative and the selling to resume. Key indicator moving into next week.
Dividend stocks continue to struggle as investors worry about the hike in taxes. Utilities (XLU), Telecom (IYZ), Staples (XLP), and REITs (IYR) 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 attempted to bounce back above the 200 day moving average Friday, but the President started the battle an sent the index down from the highs of the day. 1357 is the key support level near term to hold. 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 then renewed the trek lower. 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. Hit the Entry on the pullback test today as described in the video last night. Manage the risk and expect some volatility in the trade.
Breaking the Sectors Down:
Financials – Fell to $15.50 support on XLF. A break of this level is the entry on SKF (short financials). The banks attempted to rally on Friday, but the comments from the White House didn’t help the cause. Downside still in play.
WATCH: SKF – Entry 37.85- (HIT ENTRY FRIDAY) Mange the leverage volatility.
XLU – No Support and more selling on Friday. $34.10 is the level to watch for now.
XLK – No support yet. Watching the $28 level to hold?
XLV – 38.85 support level to watch. Break lower negative, bounce opportunity?
XLB – 35.55 support level to watch. Global picture has an impact on the sector.
IYZ – 23 support level to watch. Dividend tax rumors hitting the sector.
XLE – 68.80 support level to watch. Broke 200 day and demand story pushing sector lower.
XLI – at the bottom of the trading range support at 36. Watch and let this play out short term.
XLP – attempting to hold the 200 day moving average. Could play the bounce off support if it holds.
XLY – 45.20 support level to watch. Consumer is still in play with retail stocks holding up into the holidays.
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 any 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. Patience is the key work to follow.
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 have test it the last two days. Break lower is good for adding a small position in QID.
WATCH: – QID – Entry $31.45 (HIT FRIDAY) Manage the volatility of the play.
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 – $22.05 – Stop $21.90 Creeping higher day by day.
Euro – Watching for the oversold conditions to produce a bounce and dollar to decline as the “fiscal cliff” issue gains momentum. Watch for a play to develop in the euro near term. $125.80 support level to watch short term.
NOTE: The YEN moved higher the last couple of days as bounce off support? Worthy of watching. 200 day MA resistance.
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 1.61% 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 $123.60
Emerging Market Bonds – the reversal off the high has reached short term support at $120.80. 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: Tested support again at $120.80 on Friday.. Watch
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 (HIT ENTRY FRIDAY). (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 opportunity at $167.20. Still opportunity on the upside fear in stocks.
WATCH: SLV – Break above the $31.50 entry point. (HIT ENTRY FRIDAY)
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. Bounced again on Friday off the lows. Watch and be patient on any upside opportunity.
WATCH: UGA – Cleared $56.25 entry point on Tuesday. Nice follow through on Friday.
WATCH: UNG – I still like the Short play? KOLD ($22.30 Entry Friday)
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. Testing the downside play opportunity watch on Monday for entry.
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. SRS – Entry 26.35 Friday
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). Pulling back and testing the move.
WATCH: Emerging market bonds (EMB) – testing the move higher with a pullback.
WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch and remains in trading range.
Watch: International High Yield Bonds (IHY) – Testing support? Watch downside risk.
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