Monday – Notes & Research
Higher open for the broad markets on hope. Resolution to the fiscal budget? More rumors is all. But, hope springs eternal and brings buyers back to the table. It is time for the year end rally after all. Financials were the biggest winner up 1.5% on the hope of a resolution. Banks gained 2% to lead the sector. Utilities joined in by jumping 1.4% as well. The two laggards were the leaders for the day.
What changed the mood of investors? The belief that something will happen in Washington. Short covering was part of the jump higher as a deal would likely bring money into the market short term. This is all speculation until it is done. Therefore we continue to be cautious about the upside.
What happens from here? More buying would be my guess as the assumption returns that a deal is in the making and the outlook for the increased money supply to find its way to the market. Investors believe… in Santa even tough the rally may have been delayed, but for them it started today.
We will update the Watch List to account for the upside tonight.
The uptrend remains in play off the November low. Thus, the short term trend is higher. After moving to the top of the range the index failed to break above resistance at 1428. The Fed announcement failed to provide the upside stimulus and now the focus is on support at 1405. The hope of a resolution on the fiscal budget pushed the index higher to start the week, but we are still cautious at this point. For now we stick with the trend and see how it plays out the balance of the year.
The Scatter Graph below has a starting point of 11/15 which was the pivot point for the recent uptrend. After two days of selling the index bounced back to the 1430 level with financials, consumer discretionary and utilities leading the upside on Monday. All ten sectors were higher on the day and the upside remains in play.
The leadership is still not clear as the outlook for 2013 is still a big question mark in terms of growth. Today the leadership came from Financials, Consumer Discretionary and Utilities. We have to be patient and disciplined as we see how it unfolds. Look to take the hedge position in SH off tomorrow.
The VIX index was rising on concerns of the fiscal budget, Today the opposite was true. Watch as the game of guess what will happen continues.
Click on link above to see the S&P 500 Mode Watch List and Model
Tracking the Indexes and Sectors of Interest:
NASDAQ Index – Stalled in a trading range of 3030 on the upside and 2960 on the downside. Looking for a resolution up or down relative to the trend.
Dow Jones 30 Index – Similar to the NASDAQ the index tested the top end of the trading range at 13,300. The support is 13,080 short term. Watch to hold support or break above the top side resistance.
WATCH: DIA – See Sector Rotation Model.
S&P 400 Midcap Index -The break above the 1000 mark on the index was a positive and a opportunity to trade or add the sector. Manage the short term volatility relative to the objective.
WATCH: IJH – See Sector Rotation Model.
S&P 600 Small Cap Index – Stalled near resistance at the $77.60 level on IJR. Still looking for a break from the consolidation to the upside short term. The lower support level remains $75.60 for now. Watch and manage your positions.
WATCH: IJR – See ONLYETF Model
Telecom – IYZ broke through the short term resistance $23.90. Support on the move is $24.20 and then $23.90. Resistance is $24.61. Manage the risk of the play short term.
WATCH: IYZ – SEE ONLYETF MODEL.
Financials – XLF made a solid move higher on the day. The upside remains in play as we attempt to move above the September high. Banks (KBE) gained 1.7% to take out the resistance at $23.62. Uptrend off November low still in play.
WATCH: KBE – broke above downtrend line, tested and now moving higher. ONLYETF MODEL.
Basic Materials – XLB made a solid move back to the $36.85 resistance. Break above this level is the entry for a trade short term. The steel stocks are the driver for the index currently.
WATCH: XLB – S&P 500 Model
Dollar – Downtrend in play – WATCH – UDN
Euro – The euro breaking above the $130 resistance mark on FXE. May be the beginning of a run higher in the euro.
WATCH: FXE – $130.80 Entry.
3) Fixed Income:
Treasury Bonds – The yield on the 10 year rose to 1.75% and the 30 year to 2.91% The downside risk in Treasury bonds is back after a test on Friday. TLT testing the 200 day moving average as support.
WATCH: TBT – See ONLYETF Model.
High Yield Bonds – Testing the highs and resistance near $94 on HYG. Break higher would positive for the bonds as well as stocks.
WATCH: HYG – 92.75 entry. Watch as the upside may be limited on any trade.
The commodity sector continues to be a challenge relative to direction short term. The volatility remains very much in play off the recent lows.
KOLD _ Natural Gas broke support and continues to move lower. The short trade is still n play.
OIL – Oil is stuck in trading range too narrow to even trade short term. Patience as a play develops.
UGA – Gasoline fell to the 200 day moving average. Watch for direction.
GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. Volume is declining showing loss of interest over the last fifteen months. Look for a test of $161 on GLD and break below is a clear short signal for the metal. Patience as this all unfolds.
DBB – Base Metals are testing resistance at $19.50 on the upside and if we find the catalyst to move through that level would be short term trade opportunity.
5) Global Markets:
The NASDAQ Global Market Index (NQGM) struggling to get above the 200 day moving average. The consolidation near the high is worth watch for a direction indication short term.
WATCH: EFA – Moved above $55.20 resistance and the uptrend short term continues. Stick with the uptrend play for now. ONLY ETF Model.
WATCH: DXJ – Japan total dividend ETF broke higher, tested the support of the 200 day moving average and has moved higher. The break from the trading range is a positive with a trade entry at $33.25. Manage your risk and raise stop to $34. Falling yen is driving the stocks higher.
WATCH: FXI – China gapped higher followed through on the upside. Clearing the $38.10 resistance on FXI. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Manage your downside risk.
WATCH: IEV – Europe continues to rally despite all the negative economic reports and sovereign debt issues looming. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance recently and putting a target of $45.60 on IEV.
6) Real Estate (REITS):
The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading if the cliff issues remain at bay short term.
WATCH: IYR – Look for reasonable entry.
7) Global Fixed Income:
Uncertainty about the sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now.
WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD.
WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high. HOLD.
WATCH: PAFCX – bounced off support near the $11.66 mark. Holding the uptrend line and support. HOLD.
WATCH: PICB – International Corporate bonds are broke above the top end of the current range. HOLD.
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.