Markets Digest Wednesday’s Move Higher

Thursday – Notes & Research

Investors take a break from the push higher on Wednesday, but still manage to end the day higher. Today I am digging in and looking at some asset classes of interest going forward…

What about Technology? The sector jumped more than 3% on Wednesday and remains an upside opportunity as XLK broke above resistance at $29.35. The semiconductors (SMH) tested support and gapped higher as well on Wednesday above $33.25. Networking (IGN) is attempting to break to a new high and Software (IGV) made a move above the December high. Internet (FDN) hit a new high and is setting the upside pace short term. Overall this remains one of the more positive sectors to own.

What about Apple? The merry-go-round that are Apple analyst continue to beat on the stock relative to the outlook for earnings. The consensus remains negative on margins as competition heats up in the smart phone and tablet markets. The need for a lower end smart phone is one issue facing the company as well as the non-launch of Apple TV in 2012.

What about Bonds? Range bound or do we see the bottom fall out? First you have to consider that the Fed is suppressing rates by buying bonds in the open market as part of QE3+. Thus, the recent rally in yields back above 3% on the 30 year Treasury bond could be a buying opportunity. The yield over the last three days has jumped back to the September high of 3.1%. That equates to TLT testing the September low at $118.45. This could be an interesting time to buy bonds.

Can financials continue higher? The upside may be limited in the sector based on the Fed activity. While the Fed is still buying Treasury and Mortgage bonds in the open market the expectation is for that to taper off this year. Unless interest rates start to tick higher that will put pressure on the bottom line of banks. Thus, the short term outlook is for more upside, but the downside risk will rise and the year moves forward.

Economic data… ADP jumps and weekly claims rise? The ADP private sector jobs report showed an additional 215,000 jobs for December. That was well ahead of 149,000 expected. The weekly claims rose to 372,000 versus the 360,000 expected. Good news, bad news again for the data. Expectations for the jobs report on Friday will get a boost from the ADP report and is worth watch relative to investor reaction.

Retail sales for December feel the pinch from consumers. The psyche impact on the consumer from the fiscal cliff, threat of higher taxes, Hurricane Sandy, etc. all played a role. Those reporting today were mixed as Coscto showed promise beating expectations, Limited Brands missed for one of the few time in recent history and Target was flat, just to review few. The outlook isn’t overly positive, but then it isn’t negative either. XRT, SPDR Retail ETF was up 1.1% on Thursday. This remains a sector to watch going forward. Earnings will shed some light on the outlook for 2013.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index moved near the 1400 level last Friday and held the key level of support. Monday the index bounced back to the 1426,Wednesday closed at 1461, and today essentially flat.  The move negates the break of the trendline following a lower-low that took out the 1413 low on 12/14. Now comes the proof of direction as we finish out the week on Friday. We still have to watch the current volatility and the switching of direction near term. December 28th becomes the new low to watch for leadership.  The news is creating the swings, but in the end the trend is what we want to watch.

The chart below has a starting point of 11/15 which was the pivot point for the uptrend. The first vertical line drawn on the chart shows the starting point of the drop relative to the fiscal cliff issues. The second is the rebound start on Monday. Thus, you can see the drop of 3.2% was met with a bounce of 4% or we have erased the downside movement between the vertical lines. We remain cautious, but optimistic that the Santa Rally may yet be positive as the data shows a positive bias barely.

Manage the risk short term the party is far from over.

The VIX index jumped above 22.7 as expected on Friday, but fell to 14.5 as the fear factor subsided the last three trading days. The deal on the cliff issues are the reason for the rally thus far. The uncertainty from the 18th through the 28th of December pushed the fear factor up… and the confidence of the deal pulled the fear out of the markets over the last two days. Watch for a test of the low as this plays out short term.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РStalled in a trading range of 3030 on the upside and 2960 on the downside. The index closed right on 2960 at the bottom of the current range and support on Friday. Bounced on Monday to close at  3019. Wednesday the index closed above the range at 3090 on positive trading. 3107 is the next level to clear on the upside and would be our entry point based on the confirmation of the move higher.

Dow Jones 30 Index РThe support of 13,080 short term was broken Friday showing the worst results for the major indexes. The bounce on Monday and Wednesday put it back above that level for now. Again, wait and see how this plays out. Two day bounce back to the December high. Move above the next resistance level is key for the broad index.

Small and Midcap Indexes showed equal moves to the upside after holding support similar to the other major indexes. Small caps are testing the previous highs already? Investors looking to take on risk again?

Financials РXLF was one of the stronger sectors during the selling and has moved to a new high at $16.80. Look for a test near the $16.40 level and entry point if it holds the test. The gap open negated the ability to buy at $16.40 today. (SEE NOTES ABOVE)

Basic Materials РXLB made a move back to the $36.80 support. The move to a new high was similar to the financials with a gap higher and close at the new high. This is another sector to like on the upside as we got a small test of the move on higher today.

The gap on Wednesday left many of the play opportunities well above our entry levels. Thus, we wait to see how the market and investors react near term. Thursday didn’t really provide much in the terms of insight or a test of the move. ¬†This is no time for assumptions as we move forward with a cautious outlook.

2) Currency:

Dollar РThe dollar is enjoying the upside as investors like the news in the Fed minutes today. Some see the need for QE3 to end this year. Watch resistance near the $22 level on UUP. Needs to make a definitive move to the upside in order to play.

Euro РThe euro is testing lower on the rally in the dollar on Thursday. The support at $129.80 is in play currently and break is the exit point for the play on the euro.

WATCH: FXE – $130.80 Entry. IN PLAY

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year jumped again to 1.89% and the 30 year to 3.1%. The downside risk in Treasury bonds remains. TLT is is testing support at $118.40 and could provide a buying opportunity. (SEE NOTES ABOVE)

High Yield Bonds РTesting the highs and resistance near $94 on HYG, as the upside in stocks resume. Look for support holding at $92.75.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. They have bounced off the December lows, but lack much in terms of upside conviction. Even the breakout move on Wednesday seems lackluster. The volatility remains very much in play off the recent lows.

UNG – Natural Gas broke support and move lower to $18.70. The bounce off the lows didn’t hold short term and the new low today was not pretty. Short natural gas seems to be the better opportunity (KOLD).

OIL РOil has been stuck in trading range, but on Monday moved above the top end of the range and today continued higher towards $93. Still looking for clarity in trading relative to the price of crude. The upside is in play, and the breakout on Monday is confirmed to the upside.  The trade is there short term if you are willing to take the risk. ENTRY OIL is $21.70. (STOP $21.45)

UGA РGasoline fell to the 200 day moving average and has bounce off support. Bounced back to the $58 resistance level and broke higher on Wednesday. Manage risk if you take any trades here. UGA at $58.50 Entry? Watch move higher today to confirm it holds.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We are in the midst of a test of $161 on GLD. The bounce back to $163.50 on Wednesday showed there are still interested buyers, allbeit they were not interested long as give the gains back on Thursday.

Silver – SLV gapped higher and is holding above $30. Filled gap and sold back to $29.45.

DBB – Base Metals failed to hold support at $19.10 last week, but resumed the move on Monday. The sector has struggled to hold the upside. Watching for opportunity on upside to continue. gapped higher on Wednesday. Watch to see if there is a pullback opportunity. Thursday did pullback to fill most of the gap. Watching for entry. ENTRY $19.25 if holds.

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. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain. Resumed higher today on the cliff resolution.

WATCH: EFA – Moved above $56.80 resistance and the uptrend short term continues. Stick with the uptrend play for now as it holds support.

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 was a positive trade entry at $33.25. Manage your risk and raise stop to $36.75. Falling yen is driving the stocks higher. Some topping in play – manage your risk.

WATCH: FXI – China has firmly established the uptrend off the November low. Clearing the $38.10 resistance on FXI was a plus as the upside continued. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Cleared the resistance at $39.50 – 40.50 on the gap higher Wednesday.

WATCH: IEV – Europe continues to rally despite all the negative reports and sovereign debt issues. 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 for IEV. Upside target is $45.50 going forward.

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 as the cliff issues are resolved short term.

WATCH: IYR – Look for reasonable entry. $64.90 Gapped open on Wednesday, but still of interest on test of the move. No real test on Thursday… watch.

7) Global Fixed Income:

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. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD. Watch the volume as money flow picks up in the sector and gives opportunity to add to positions.

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 broke above the top end of the current range and trading higher for now. 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.