Markets End Basically Unchanged on the Day

Monday, December 10th – Notes & Research

Italy’s Prime Minister resigned today and stated the markets should not be concerned. Thanks, that was reassuring. As if Europe doesn’t have enough to be concerned about. This puts them back on our Watch and Worry List. IEV, started lower, but managed to post a small gain on the day. The euro (FXE) ended the day higher as well.

The President stated he would not compromise on taxes today. Shock! The talk is entering the last lap for politicians to come to some type of compromise on the fiscal budget issues. If there is no progress in the near term the market will start reacting. The ripple effect of nothing getting done is significant, thus why most believe there will be some solution taken before the end of the year. The risk is in the market reaction short term.

The FOMC meeting starts to tomorrow with rumors of more quantitative easing. It is believed the Fed will announced Treasury bond purchases to keep interest rates low. How that helps with the economy is a mystery to me. It is something to watch as it unfolds and the details of any actions are made public.

HPQ jumped more than 2% on the day as rumors started that Carl Icahn was building a position in the company. That will be interesting and worth watching. This is a company that has been discussed as way undervalued. Time will tell and the move could offer some opportunities.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index moved the 1415 level to close at 1419. The 1415 mark has been a challenge for the index of late, but the range up to 1430 offers resistance. The 50 day SMA is at the same level currently and could provide some resistance.  The Scatter Graph below has a starting point of 11/15 which was the pivot point for the recent uptrend. As you can see at the end of the chart the sideways movement depicts the confusion from investors as well as some rotation in leadership. Materials bounced back from the selling and pushing higher. Technology has struggled with the Apple saga. Still struggling overall to define direction and leadership.

The chart is showing rotation to financials, industrials and utilities as the leaders. Energy has made a turn off the low despite oil dropping back to $86. We continue to watching the jockeying for position short term, but we are still in need of a catalyst to the upside to break through resistance on the index. The market wants to move higher, but it can’t get all the parts going in the same direction.

VIX index rose last week before the big drop on Friday. Watch to see if the upside returns as investor worries rise?

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

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РApple remains a drag on the index which tested lower, but ended higher on the day. The index is sitting on the 200 day moving average and near the 3000 mark. As goes Apple, so goes the index for now. Not willing to buy into the index until the Apple flu is cured. This could get interesting short term.

Dow Jones 30 Index РThe bounce back above the 200 day moving average is a positive, and we made the move above the 13,080 resistance. 13,300 is the next level to clear on the move higher. The close on Monday was above the 50 day moving average.

WATCH: DIA – See Sector Rotation Model.

S&P 400 Midcap Index РThe bounce off the low has now returned to the top end of the previous trading range. A break above the 1000 mark on the index would a positive and a opportunity to trade the sector. Took the entry today on the move from the trading range. Watch and manage the risk.

WATCH: IJH – See Sector Rotation Model.

S&P 600 Small Cap Index – Stalled near resistance at the $76.80 level on IJR. Still looking for a break from the consolidation to the upside short term.

WATCH: IJR – See Sector Rotation Model.

2) Currency:

Dollar РThe dollar sold lower and broke support at the $21.95 level on UUP last week. Now it is back at $21.95 and resistance? The greenback has been up and down of late and for now I am more interested in watch than owning the dollar. The dollar index (DXY) pulled back to support at 79.6 and bounced on Monday back to 80.26.

 

Euro РThe euro dropped back to the 200 day moving average and looks like the inverse of the dollar for now.

Yen РFXY tested support again at $119 and bounced two days and reversed to $119 again. We will watch to see how support holds?

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year rose to 1.61% and the 30 year to 2.8% on Monday. For TLT that pushed it lower from the consolidation wedge and sets up a trade opportunity on the short side. Watch for the outcome on Monday to give some clarity to the trade.

High Yield Bonds РBig bounce on stocks moving higher with stocks. Interesting bounce. Hitting resistance at the 93.50 level. Watch for a follow through move higher?

WATCH: HYG – 92.75 entry. Watch as the upside may be limited on any trade.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. The volatility remains very much in play off the recent lows. The best course of action is to take the trading opportunities presented short term.

Natural Gas fell 2.6% on the day. The break of support near $20.15 on UNG opens the downside even further. Watch for the gap to fill and any opportunity that results on the downside.

Oil moved lower testing near term $86 support on the close. Still not acting well. Watch the downside setup.

Gasoline fell to the 200 day moving average and set to test the lows near $53.50.

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.

Base Metals – DBB are testing resistance at $19.40 on the upside and if we find the catalyst to move through that level would be short term trade opportunity. Gapped higher today and is ready to climb further short term.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above the 200 day moving average. However, the week ¬†the index has tested lower.¬†The reversal isn’t reflective of the move in the EAFE which closed near the top end of the current trading range. Watch for the support to come into play.

WATCH: EFA – Back at the highs of $55.20 and in position to break from the trading range for a trade set up. The jump back to this level has been quick and may test before continuing higher. Be patient and see how it play to start the week. ONLY ETF Model.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the 200 day moving average and has moved higher again. The break from the trading range is a positive with a trade entry at $33.25. Consolidating near the current high with a move higher on Friday. Manage your risk and raise stop to $32.85.

WATCH: FXI – China gapped higher on Wednesday (passed on our trade) and followed through on the upside today. Clearing the $38.10 resistance on FXI is testing the gap higher and watch for the $36.65 level to hold as possible entry play short term. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Gap higher on Monday as money rotates into the ETF.

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 – moved above the 200 day moving average. SEE Sector Rotation Model

7) Global Fixed Income:

Uncertainty about the sovereign debt issues remain, but they are clearing up as the global economy bottoms. Thus, the lack of willingness to accept much in the way of risk from this sector.All of the charts have bounced off the low and continued their respective uptrends. Watch and protect the downside risk in the sector near term.

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 back near high. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Held the uptrend line and support. HOLD.

WATCH: PICB – International Corporate bonds are breaking 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.