Markets Continue to Look for Catalyst

Friday, August 17th

S&P 500 index spent the week grinding towards the 1418 mark with four days of sideways movement and one day moving higher. The analyst remain mixed on the outlook and I am with them. I want to like the upside opportunities, but the risk of the trade is higher. Thus, we have to focus on our discipline, take what the market gives and keep moving forward.

The NASDAQ 100 index continues to set the pace pushing towards the March high. Volume on the index has been above average on the move higher as well. The economic data for the week was mixed as the manufacturing sector struggles, but the consumer is holding steady. Friday the consumer sentiment improved to 73.6 and the leading economic indicators were up 0.4%. Thus, the economic data is flat to improving and the earnings have been stronger in the technology sector boosting investor confidence. This has led to the question relative to the FOMC meeting in September and if the Fed will put off any QE stimulus until the new year? For now we take what the data gives and keep moving forward.

Sectors below are updated based today’s activity.

1)  US Equities:

S&P 500 Sectors-to-Watch – The S&P 500 index is near the March high. The volume was up slightly, but remains on the low end of the scale. As we discussed in the morning notes we need some type of catalyst for the broad market index to move higher. Stimulus, earnings, economic data, etc. any or a combination will work fine to push the market higher.

The leadership remains in the energy, technology and consumer services sectors. Financials have attempted to put in a push higher, but they have struggled to follow through. Volatility is at the low and sentiment remains hopeful to positive. The following sectors are showing worthy actions to trade or invest.

Telecom – The sector made a solid move higher and consolidated some on the run to a new high. The uptrend remains in play of the June 4th low and the move higher remains in play and we must manage our stops.

WATCH: IYZ – Entry – 22.40 – Stop – 23.95

Energy – Uptrend remains in play off the June lows and we are pushing against resistance at $73 on XLE. Hold and manage the risk to see how this plays out short term. Oil services (OIH) is moving above short term resistance at $41.15. Watch for a follow through on the upside. Production and exploration (XOP) are breaking from consolidation above $53.75. Crude moved above $96 watch to see if the break above resistance will carry oil higher. UGA broke to a new high on Wednesday, but tested the move on Friday, watch to see if it holds above $57.80. Raise your stops to protect the gains.

WATCH: XLE – Entry @ 69.25. Stop 70.40 —– OIH – Entry $41.50 add position.

Financials – The sector hit against resistance at $15 the last week, but has now managed to break above that level and held the follow through. Still looking for some upside leadership from the sector going forward. Raised stop to break even on the trade.

WATCH – XLF – Entry @ 14.55 – Stop 14.60

Healthcare – The sector continues to trade sideways. Friday we dropped to support at $38.40 and we need to watch the short term volatility in the sector. Hold positions and manage the risk. 50 day moving average is stop.

WATCH – XLV – Entry @ 38.10. Stop 50 DMA ($38.20)

Consumer Staples – The sector continues to bump against the high and looking for a follow through on the upside. $35.95 move is the key short term.

WATCH – XLP – Entry 35.31 – Stop 35.31 (Raise stop to break even)

Consumer Services – The consumer is attempting to make a comeback and lead the sector higher. This is still a stock picking sector overall. The leaders remain WMT, TGT, KSS, etc. XRT got the follow through on the consumer confidence data Friday moving higher. XLY broke higher on Thursday and is in position to challenge the May highs for the sector.

WATCH: XLY – Entry 44.50 – Stop 44.25 (Raise stops)

Basic Materials – broke above $35.75 resistance to continue the uptrend off the June bottom. Some weakness in the metals and mining stocks on Monday, but made a move higher to end the week. Watch and manage the trade short term.

WATCH: XLB – Entry 35.80 – Stop 35.10

NASDAQ Index – Broke through the 3025 mark and the 3065 level on Friday. The upside momentum has been as a result of the technology stocks. The NASDAQ 100 index broke above resistance at the 2660 mark and found the upside move easy with 2785 the next level to clear. The play continues to pan out for now – manage your risk.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 67 (Raise stops)

Small Cap Russell 2000 Index – The upside move off the July 30th bottom was positive, but we have now spent the last week trading sideways and testing the move. Took the entry on the move above $79.20 and through the downtrend line. Got the continued move higher above the $80.50 level, which happened on Thursday with solid gains. Still have to manage the risk of the position.

WATCH: IWM -Entry 79.60 – Stop – 80.10 Raise stop – Manage the risk.

Volatility Index – The index hit new low at 13.46 on Friday. No volume on the indexes has pushed the volatility lower. Without some news or catalyst this could move lower on the downside. Watch for ECB or the Fed to be the tie breaker for the VIX. Earnings are acting as a catalyst to calm investors short term.

WATCH: SVXY – Continues higher on low volatility.

2)  Currency:

Dollar – The dollar found support at the $22.55 mark on UUP. The risk for the dollar has been stimulus from the Fed and the ECB. The longer there is no activity in that vein the better it has been for the dollar. For now sideways is the activity and we will be patient to see how this moves.

WATCH: UDN – Entry $26.40. – Stop $26.10

3)  Fixed Income:

Treasury Bonds – The bond is selling off as institutions and retail traders dump bonds. The yield has moved to 2.93%  and the thirty year bond pushed lower. The move to 1.81% on the ten year pushed prices lower as well on IEF. TLT moved lower breaking support at $124.60 the break lower is starting to accelerate short term. The short play on bonds is going well and moved above resistance at 16.10 on TBT and held the move. Raised our stop today.

WATCH: TBT – $14.80 entry. Stop $16 (stop on the close)

4)  Commodities:

Agriculture – DBA broke support at $29.70, but bounced back to hold near that level as support.  The next support is $29. Watch as the stories around the drought are starting to get factual information and it could be a buy on the rumor, sell on the news event. Take profit if you have not already done so and see how it plays out short term. CORN, SOYB, WEAT, etc. are all testing lower end of support currently.

Crude Oil – Moved higher slowly, but is taking out the short term resistance and attempting to move higher short term. Manage risk of the play and mange your stops.

WATCH: OIL – Entry 20.75 – Stop 22.40 raise stop (stop on the close) Cleared $23 resistance.

Gasoline – Solid move off the test the last few weeks. The upside is still in play, but watch oil prices. Watching for a test short term on the steep move higher. Don’t be afraid to take some profit off the table short term. Tested lower on Friday and we will watch how it acts on Monday.

WATCH: UGA – Entry at 52.75 – Stop 57.80 (raise stop)

Natural Gas –  There short term break of support led to recommending a short position last week. Analyst have turned negative on the commodity as well keeping the downside in play.  Volume jumped in the short ETF KOLD. Took the short ETF play in response to the negative selling.

Thursday inventory data was somewhat positive for the price of natural gas. Watching if support holds near the $18.50 level.

WATCH: KOLD – Entry 27.15 watch and be patient. Raise stop to 27.80 (raise stop)

Coal – Started to benefit from the selling in natural gas, but has been testing the move of late. Watch the $24 level as near term support. Risk remains in the commodities short term, but watch to add to positions on the test of the move if we find support at reasonable level.

WATCH: KOL – Entry $25.20 – Stop $23

Resources and Commodities Strategy (BCX) breaking above resistance to continue higher at $13.92. Test and entry at $13.95. Stop at $13.65. Attempting to resume the upside move, but the 200 day moving average is in the way at $14.25.

5)  Global Markets: The global markets responded to the US markets of late, but they still have one eye on the ECB for some news. The EAFE index has moved higher this week on the positive US data on earnings. Watch and manage any opportunities short term. If there is not activity near term from the ECB the downside risk will grow for the market.

WATCH: EFA – Entry $50.50 – Stop $51.25 Raise stop.

Sweden – Making a break from consolidation and worth watching on the upside. Move above $28.35 positive and looking for a follow through on the country ETF EWD.

WATCH: EWD – $28.35 entry.

China -Broke above short term resistance, stalled and is testing support near $34.25. I expected volatility along the way as China decides to push stimulus at the economic picture. Disappointing data is impacting the outlook short term. Manage the stops. Broke back below the downtrend line on Thursday? Honor the stop at break even.

WATCH: FXI – Entry $34.20 – Stop $34.20

Mexico – Moved against resistance again and still looking for a break out move on the index. Watch the volatility and manage the position.

WATCH: EWW – Entry $62.25 Friday. Stop $60.30

Singapore – moving back above the high at $13. I still like the country looking forward, but the near term weakness isn’t a positive. Manage the risk of the trade short term.

WATCH: EWS – Entry $12.70, Stop $13.10

Brazil Small Cap (BRF) channel top $37.50 with potential move higher. Posted on Wednesday for the opportunity in the global markets moving higher. Solid move higher on Thursday to follow through on the upside breakout. The entry was at $37.60. Manage the trade and Raise Stop to $37.20.

6)  Real Estate (REITS) – The sector remains near the near term highs. Double top (IYR) set up on the downside short term. I like the outlook long term, but short term we remain on hold. Still scanning and looking for the best opportunities.

WATCH: IYR test of support at $63.60 to hold and then bounce.

7)  Global Fixed Income – The issues with sovereign debt in Europe keeps us out of the asset class currently. Emerging market bonds (EMB) are overbought and we have put this on a wait and see list short term as the bonds have pulled back to support at $118 short term. Watching for the opportunity. The downside may pick up – look for a confirmation either way.

WATCH: EMB – tested support at $117.60. Looking for entry opportunity on bounce.

MONDAY: Look for additional update on Sunday Night for next week.

What I am watching.  1) The miners (XME) are attempting to pick up some momentum. Worth watching for a move through resistance$42.50 or test of support at $40.50 and bounce higher. Look for play on break higher. 2) Mortgage REITs (REM) bounced off the selling last week and heading back towards the previous high and remain in an uptrend.  3)  IWC, iShares Microcap Index ETF broke above $50 as the small caps picked up 0.8% on Friday. Test and follow through with entry at $50.35. 4)  Silver Miners (SIL) attempting to break above $19.50 resistance. 5)  Crude Oil making move above resistance short term. OIL $23.50 break watch for opportunity.  6)  Dividend stocks continue to move higher as the favored asset class short term. PEY is set to break above the $9.50 top. Accomplished the move on Friday – look for entry if not already taken. 7) GDXJ – Junior Gold Minders ETF breaking above the $20.25 resistance… look for upside follow through trade.  8)  JJG – Grains Total Return ETF is in a flag pattern on the move higher. Watch for break higher and continuation of the trend. 9)  KRE – Regional banks in position to break from the consolidation pattern and resume the uptrend. Watch for entry at $27.90. 10)  Financials cleared $15 on XLF. If you like leveraged plays FAS is breaking higher on the move in financials. Remember the leverage is 3X.

Impact of Geithner (Treasury) accelerating the divestiture of Fannie Mae and Freddie Mac. $6 trillion worth of mortgages to sold off. Who will buy this debt? Can you say the Federal Reserve? Forced QE3? Something to think about.

How major indexes act as they challenge the March highs? More buyers or do the sellers step up?

Small cap accelerated on Friday to play catch up? Does it have what it takes to sustain the move higher?

Restaurants have seen a decline in revenue in June and accelerating in July. Indicator for the consumer looking forward?

VIX at 13? Last two times at this level the broad market corrected. Watch to see how it plays out.

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.