Market Sells on the Pain of Spain – What’s Next?

That thud was the market dropping to support and then wandering aimlessly through the balance of the trading day! What is the problem now? As we discussed in the weekend update Spain in back in the headlines as a worry for investors relative to the bailout needed to go forward. The greatest challenge remains in how to fund this issue and while everyone is figuring that out the yields are rising sharply in Spain and Italy, and euro is declining again. Thus, we are back to where started this mess… Europe.

Yields on the ten-year bond rose to 7.42% up 21 basis points today. The rise above the 7% level bring rising default worries for investors and in the past the ECB has stepped in to pacify concerns or provide confidence relative to a bailout. Will this happen? If so, when? The longer the doom-and-gloom builds the worse it will be for both stocks and bonds globally.

German and US bonds both moved lower by 18 basis points signaling yet another flight to safety by investors. The ten-year Treasury bond marked another new low today and pushed IEF to $109.55, also a new high. Investors continue to find the risk of Europe high relative to the other areas. This rise in yields for Spain don’t help as the borrowing costs are offsetting the reductions in spending, thus exacerbating the situation further. Look for the ECB to step in to restore confidence at some point soon.

The market reaction was selling and there was plenty of that to go around. The markets did manage a late day rally, but the concerns remains in play for now.

Discipline remains the priority! This is not an easy market environment and the outlook remains cloudy at best.

Sectors-to-Watch:

The negative and positive twist in the market continues as investors attempt to determine short term direction. The variables between earnings, economic outlook and investor confidence remain volatile and it is keeping money in motion. This is definitely a traders market and anything else is a frustrating game. Keep your focus on your goals and not attempting to determine what is happening or will happen in this short term market gyrations. Sector rotation is alive and well with energy taking on a new role of leadership.

Positive (fell on Friday & Monday, but still in uptrend) – XLV, XLU, XLP, IYZ, XLE

Negative/Sideways – XLF, XLY, XLK, XLB, XLI

This remains a traders market and one that shifts on news and emotions. If you are looking longer term manage the volatility with wider stops, otherwise you are going to get whipped in and out of positions. Make sure your objectives are clearly stated for each position!

Volatility Index – The index opened at 20.50 versus the Friday close at 16.27. The close at 18.3 showed some calming as the day progressed, but the move higher shows the concern relative to Spain and the European markets. The fear was short lived, but it is important to watch how this plays out in the coming days.

WATCH: SVXY – Dumped to support near $89.20 today. Didn’t have to wait long for the move lower! $91.50 entry on the day and looking for stop at $92 and target at $98 as trade.

Dollar – Traded higher early and closed basically flat on the day. All is well now in Europe. Not really, but we are watching the resistance at the $23 mark short term. We still have to watch the downside risk as all of this unfolds.

WATCH: UUP – Support is at the $22.80 short term. Watch resistance the $23 mark. Take exit if we break the $22.75 mark.

Treasury Bonds – The yield is 1.43% on the ten year bond. Worry is back and yields hit a new low. Hold your positions in IEF as this plays out.

WATCH: IEF – $108.80 Entry. Stop at $108.50 for now.

S&P 500 Index – The uptrend off the June 4th low was tested today at the open. The intraday bounce helped keep the trend in play. Still the worries over Europe are in play and they may stay in play for the near term. If you don’t like volatility… cash is a better alternative short term.

WATCH: SPY – A move above $135.70 is a trade. Needs above average volume to interest me.

NASDAQ Index – The index has struggled with direction relative to the technology sector. The test of support at 2850 today was noteworthy. Watch the 2900 mark yet again on the upside and 200 day moving average on the downside.

NASDAQ 100 index tested 1550 intraday as support and bounced to close at 2590. The QQQ ETF held support and closed above the entry point. Watch, manage and deal with the outlook near term.

WATCH: QQQ – Entry at $63.60, Stop $62.40. managed the gap down and holding the position into tomorrows trading.

Small Cap Russell 2000 Index – Broke the trendline with a gap lower. The 200 day moving average is in play along with the downside for now.

WATCH: IWM – Tough call on the bounce. Watch the 200 day moving average?

Financials – XLF gapped to the 200 day moving average and bounced to close at $14.26 or support? The outlook continues to weigh on the sector overall. Europe doesn’t help as the threat of default would hurt US banks. Mixed picture based on investor response. The sector is showing signs of cracking and a short play may be in order.

WATCH: XLF – $14.25 support? Watch the downside opportunity with SKF (entry $45.30)

Energy – Fear remains the catalyst for the sector overall. We talked about the premium escaping the sector unless it is validated. There was no validation, but different type of fear… the one of economic slowing in Europe and thus, some reality on crude prices. Crude closed at $88.40, down 3.75% for the day. XLE gapped down and gradually recovered the balance of the day. Closed above our stop and thus, we watch to see how this plays out tomorrow.

WATCH: XLE – entry is $66.80 for a trade. Stop is $67.50.

Commodities:

1) Crude is above the breakout level on OIL at $20.75 ($21.54 close). 3.8% drop today on Europe fears. Look to see how this plays out tomorrow. Could set up a trade off support ($21.50). 2) Gasoline is up in response to crude and closed at $53.07 (dropped 2.5% today) on UGA. Entry at $52 hit and stop at $53.40 sold today on the failed recovery into the close. I still like the play in gasoline if oil moves higher. 3) Watch Natural Gas as it is attempting to break higher above $20 on UNG ($21.19 on follow through move). FCG is ETF for the stocks. 4) Watch Agriculture Soft Commodities (DBA) are moving higher. Corn (CORN) resumed move higher with some testing today. 5) Gold not doing much, but investors still want to push it higher. GLD, $148.50 is support.

The commodity sector remains in favor with investors, but have to watch this short term negative impact from Spain.

Global Markets:

The global markets were making a move higher in response to the climb in US stocks, but then Spain reappeared as the detractor once again. The issues brought the down 2.3% on Friday, and 2% today. 1) China (FXI) tested the lows again today. The issues in Europe remain a primary source of pain. No follow through on the bounce opportunity, but there is a test of the lows in play again. 2) Mexico (EWW) had rallied back to the top of the range, but has responded to the European issues and that puts us back at the $60.80 support and watching. 3) Europe (IEV) broke support near $32.30, but bounced into the close? Watch for downside play if this continues. EPV above $42.70 is attractive. 5) Singapore (EWS) was moving back near the high at $13 and worth watching for bounce off support at $12.50. 6) Australia (EWA) broke higher in response to crude prices and is testing the breakout with the push lower in oil prices today. Watch for a trade opportunity short term above $22.15.

Watch the global markets in response to Europe. If the weakness remains the ripple effect will be on the downside for stocks.

What I am watching now?

Leadership was the missing clue heading into the trading week and thus far the leadership is on the downside. Consumer stocks, materials and small caps took the honors on Monday. The 200 day moving average has come into play on each of these sectors. A break lower is a negative and raised our interest in the downside plays. Those holding support maf offer some trades on the upside if they bounce.

Large cap stocks are of interest to me as they have taken some big hits in this pullback. Yes, some are weaker stories than others, but it does show the risk of trading large cap dividend stocks without a respect for the downside risk. Watch to see how they play out short term and any resulting opportunities.

Gold is setting up to in a consolidation pattern. Bias is to the downside… Watching DZZ.

Fixed income is seeing more money rotate on the Europe news. Watch REITs, MLPs and Dividend ETFs for opportunities both as trades and short term investments.

Economic data… oh yea! More to chew on with Q2 GDP. New home sales, home prices and pending home sales. Consumer sentiment will end the week. Watch as the trend relative to data continues to move lower.

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.