Markets Continue to Gain with Cyclical Stocks Leading?

Thursday – Notes & Research

Buyers were willing once again to step in and push the broad indexes higher. Damn the torpedoes full speed ahead! The willingness to put money to work continues along with some rotation in leadership. The telecom, materials, industrial and energy sectors have stepped up the pace the last two days as money is content to rotate versus exit the markets. This activity shows a commitment to the upside for the time being. Take what it offers and keep moving forward is the motto for now.

There was some late day selling, but it was halted into the close with bounce. Tomorrow sets up a selling day based on what we saw late, but you have to see how it plays out overnight.

After hours Amazon report earnings that essentially beat Wall Street estimates. Sales rose 22% and the stocks was trading higher by 2% in the after hours session. Mixed report when you dig into the data further, but for now it is positive to investors we will watch to see how it looks in the AM.

Starbucks raises guidance for 2013, but is trading lower after hours. Not the reaction you would expect from positive report. That will be one of interest as the day unfolds tomorrow.

JCP gets money from Soros for 7.9% stake in company. The stock is up 7.2% after-hours on the news. This a vote of confidence for the company and the new/old CEO. Again a story worth following for the opportunity.

Below are our revised notes relative to the trading day from my list, and what I saw of interest for tomorrow.

Sector Moves of Note:

  1. I am looking for the test of the previous high to lead to a decision for investor, sell and retest the previous lows, or break higher and continue the uptrend. Today we hit near the highs and saw some profit taking into the close. Watch the futures and see if any follow through on the downside.
  2. Semiconductors have been leading technology higher. We missed the trade on the move with no test and follow through for entry. Regardless the sector broke higher (SMH) on the completion of the reverse head-and-shoulder pattern and follow through. If you own it, let it run and raise your stop.
  3. Crude oil opened lower on the day, but reversed and ran high on UK reports of better growth. Just the reason posted. Oversold and buyers looking for bargains.  UCO was the posted trade at $26.80 and we added the position to the ONLYETF Model. Solid run higher and hit the target already. Raised stop and want to watch as the trading day opens to determine if hold or sell.
  4. Gold opened higher today as we begin to fill the gap left behind from the selling. We added the play and we will continue to manage the upside to a target of $143.50 short term. Managing risk now.
  5. Europe (IEV) hit our entry point of $40.40 yesterday and followed through on the upside today. Watch and manage going forward.
  6. VIX index remained at 13.5 today as the market were flat and no anxiety to drive the upside. The volatility is in a vacuum and any downside spike has been met with buyers on the other side to take the volatility out of the markets short term. Still watching VXX as the volatility did move up slightly on the late day selling. Watching for follow through tomorrow?
  7. Treasury bonds yield moved up slightly and TBT did respond, but not enough to spark any interest short term.

It has been earnings driving the markets this week and we have had mixed reviews. That aside the buyers continue to be willing to put money to work and step in to keep the sellers at bay. Today was another day a modest push to the upside, some modest selling late in the day. Need a catalyst to the upside if we are going to run? We also need a catalyst to the downside if that direction is to play out. Watch and be patient as this unfolds.

EACH MORNING I WILL POST AN UPDATE TO THE RESEARCH PAGE TITLED TRADING NOTES FOR TODAY! This is will take the evening notes and post what I am looking for in the trading day. They will be posted by 7 am to give you time to establish what you would like to do with the notes. .

Economic Data:

Weekly jobless claims were the lowest in six weeks. That added a spark to the futures and the broad market on the day. Tomorrow is the Q1 GDP. The estimates are 3.2-3.5% growth. It will be interesting for all to read.

Economic Events & Calendar 

1) US Equities:

We are testing the previous highs on the major indexes. My bias is to the downside, but that is why we watch the charts and go with the trend. The data continues to show weakness in the economy, but the buyers keep stepping in with the belief it will be better long term. That may very well be true and we will all see how it unfolds one day at a time.

The April 11th chart below starts on the high as a potential pivot point lower, but has failed to accomplish any further downside. The interesting shift on Wednesday, changed again on Thursday. IYZ, XLV, XLF and XLP all bounced higher. The rest were basically flat on the day. The late day give back was reflected in the end of day close relative to leadership currently. If the commodity based sectors gain momentum it will create an extremely interesting shift in money flow.

Scatter 411

Sector Rotation Strategy: 

The February 25th low pivot point remains in play. However, the volatility of the sideways trading is making crazy. The index was at 1563 on August 14th and it closed at 1578 today. All of the previous leaders are reestablishing their positions again on the chart. Watch XLV, XLP, XLY, IYZ, and XLU as the leaders. Watch XLF as financials attempt to move higher again.

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher after the February 25th test. With today’s developments we have to protect against the downside and look to lock in gains if our positions are short term. Longer term holdings will be managed accordingly.

Scatter1228

November 15th Pivot Point is the start of the current uptrend. Target 1550-1575 was attained and now there is pressure to test the move. The trend has overcome two attempted moves lower to maintain the uptrend. The move on Monday now makes it four attempts to break lower. Watch the trendline as the support on the current pullback. A break of the uptrend brings downside options back into play for the short term.

SP500Scatter

Sector Rotation of Interest:

Semiconductors –¬†held support and we are watching for a boost from the sector on the upside to continue to push technology stocks higher. Some rotation towards the growth sectors is needed if the index is are going to make another run higher. SMH is moving back to key resistance at $35.60. Watch to see if their is any gas left in the tank to run higher. Nice move higher on Tuesday as SMH tests the previous high at $36. Wednesday followed through with a break to a new high. Missed the trade, but that is the way it works.

Telecom is building a flag pattern off the vertical move higher. Hold and add to positions if we can clear the $26.10 level on IYZ. Tuesday broke higher and the positive continues. AT&T earnings pushed the initial trading lower on Wednesday, but held above the$26 mark at the close. Sector continued to move higher despite missed earnings from QCOM.

TAN РThe Solar ETF jumped 5% today. SOL, WFR, CSUN and FSLR were the leaders within the ETF. This puts the fund back at resistance at the $18.12 mark and it cleared it on Tuesday. Upside remained in play with move above $19.25.

Financials moved back above the $18.08 level Monday after testing support at $17.80 last week. No momentum from banks, insurance or brokers, but that changed slightly on Tuesday. XLF followed through on the upside and hit $18.42, KBE up 1.2% to $26.09 and KIE jumped back to $52.18 up 1.8% on the day. Some life in the sector again, finally. Posted another gain and back to the previous high at $18.60. Watch for a break higher on volume.

2) Currency:

Sector Watch:

  • UUP¬†– The Dollar still trading sideways¬†essentially¬†and don’t expect much change short term.
  • FXB¬†– the British Pound jumped higher to $512.43 on Thursday. The currency is in an uptrend off the low and moving through the current resistance. For now we just have to be patient and let the pound work through the directional challenge day-to-day and continue in the uptrend currently in play. Took the entry on the move and the target is $152.50. $150.40 stop in place on the trade.
  • FXE¬†– ¬†The euro is like the dollar, in a state of confusion and looking for direction short term off support.

3) Fixed Income:

Sector Summary:

  • 30 Year Yield = 2.9% – ¬†up 1 basis point — ¬†TLT = $122.27 down 53 cents
  • 10 Year Yield = 1.71% – up 2 basis points — IEF = $108.50 down 12 cents

Tracking Bond Sectors of Interest:

Treasury Bonds¬†–¬†Yields on the 30 year Treasury is finally flattening out. The economic data, flight to safety, or many other reasons had pushed money back into the bond short term. If the volatility in stocks returns, look for more rotation into bonds short term. For now be patient and let this play out.

High Yield Bonds РHYG = 6.5% yield. Support remains at $92.75. Move back towards the previous highs near the $95 level. Manage the position for the dividend as the growth side is uncertain short term. I expect the trading range to remain near term. Use $92.75 as the stop. The fund broke to a new high and uptrend remains in progress.

Corporate Bonds РLQD = 3.6% yield.  The jump higher was in response to the rotation of assets towards safety or defensive to the stock market. This is not likely a new trend for the bond, but it starting to act like one. Use stop at the $120.50 level to protect the upside gains.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds found a bottom built a small base and produced a upside trade opportunity. Watch the current resistance at the $110 level. Moving back towards the resistance at the $111.50 mark. This is a tax-free dividend play with limited upside from growth.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the rally in stocks. Broke to a new high and steady as she goes. Keep and practice dividend collection.

4) Commodities –¬†Sector Summary:

  • The¬†commodity index¬†continued holding above the $25.50 level with oil attempting to bounce. The sector gained 1.3% as the move in oil, gold and base metals push the sector along. Don’t get overly excited this is a challenging sector near term. Watch and be patient as any trades will be plain to the eye.
  • Natural Gas¬†– UNG continues to trade opposite of oil. (exited trade as hit stop on Wednesday)
  • Crude Oil¬†– Crude broke higher and followed through with more positive buying today. Manage the UCO play ¬†short term.
  • Gold –¬†The metal has bounced to begin filling the gap short term. GLD is moving higher. Watch and see how it plays out short term.

Commodities Rotation Chart:   

Commodity

 5) Global Markets:  

Global markets struggle with the slower economic data in China, Europe and the US. But, the EAFE index has started to bounce in response to the US markets this week and EFA hit the high from earlier in April today. The bounce is no indication of things improving, but trading in tandem with the US markets.  

Global Mkt

Country Watch:

  • FXI¬†– Follow through on the bounce off the recent lows. The 2.8% gain breaks the downtrend line again and now needs to follow through on the upside. There is a trade, but the risk is high. Watch and see how this develops.
  • EFA¬†– Held support and is now back at the previous high of $60.85. Watch to see how it plays out.
  • EWI¬†(Italy) was up 2.4% Monday off the lows and followed up Tuesday with a gain of 2.5%. The move above $12.60 was the entry and where we added the trade to the ONLYETF Model on a upside break above resistance. Still moving higher and we will manage the play going forward. Wednesday held the gains and continued slightly higher on day.

6) Real Estate (REITS):

Real Estate Index (REITS) РIYR tested $70.73 support and is now back at the high of $72.50. VNQI and AMJ continue in the current uptrend.

Sector Summary:

  • Most of the REITs are extended short term on the upside, thus the test in IYR. Watch and manage your stops. But, let it run as high as it intends to go.
  • Scanning IYR we find the charts look very similar on the upside. SFI (breakout), VNO, PLD (breakout and retraced), LXP, FR (breakout), KRC, ARE and HST show some consolidation and some have broken higher since we posted here last Friday.
  • Mortgage REITs are selling back towards support and worth watching. NLY, REM, IVR, WMC and MBG. Moving slightly higher and allowing investors to collect the dividend.
  • RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Watch for test of the move if markets struggle.
  • REITs and MLPs mixed in the same ETF with MDIV is a good alternative to picking through all the choices. This mult-assets income fund pays a 5% dividend.

7) Global Fixed Income:

Sector Summary: Tested lower on Monday with the rest of the world markets.

  • The sovereign debt issues are fading again and opening the upside potential as the issues find relief. This offers some short term trading opportunities, but you still have to be¬†aggressive¬†in managing your exposure.
  • There are some funds moving in favorable direction of late.
  • PAFCX – Bounced off low with the movement in yields going lower. Holds $11.60 worth owning short term.
  • PICB – hit support traded sideways and now breaking higher. Entry $28.95 + 3.1% dividend.
  • EMB – Big recovery and interesting in watching. 4.3% dividend yield. Entry $120.25
  • PCY – Big recovery as well off the low for short term play. Entry $30.60. 4.8% dividend yield.

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.