Friday – Notes & Research
The broad market gets spooked late in the trading day sending the broad indexes lower. The headlines have been full of reasons and speculation as usual. The bigger question, will the momentum carry over into next week? In two of the last eight days we have seen significant trend reversals intraday. That activity is telling us something, but what? I discussed several days of activity that didn’t look right relative to the uptrend and we tightened stops. Many of those stops were hit on the May 22nd reversal. As things calmed and the bounce on Tuesday it seemed things were back to normal with the buyers stepping in. But, Friday quieted that crowd again and here we are with the decision of what’s next. The close below 1633 on the S&P 500 index is a negative heading into next week technically.
Last Thursday I made the comment in the notes that the best action would be to play golf and let this settle out. That has turned out to be the right thing to do. Now the short side is brought into play and it will be settled by who has the greatest conviction, the buyers or the sellers. Friday should have emboldened the sellers.
Below we review each sector and the current outlook heading into next week.
Sector Moves of Note:
- Gold failed to follow through on the upside and clear the $137 resistance. It did manage to give up 2% and move back into the trading range. Still watching to see how this plays out from here.
- Small Caps have been a sector we discussed needing leadership from short term if the upside was to remain in play. It has remained below the $99.50 level, but not broken down as much as others. That leaves some hope, but I would look more to the downside. Short IWM at $97.70 and add on a move below $96.50.
- Bond yields continue high on the 30 year to 3.3% and the 10 year is at 2.12%. No relief for the bond market yet. This is the push behind equities reacting short term. Utilities, RIETs, MLPs and Bonds have all move down 6-9% on the current decline.
- Natural gas has moved down to support at $21.15 again. Watch the downside and KOLD entry at $18.30 if UNG breaks support.
- Semiconductors (SOXX) broke to a new high Thursday, but reversed on Friday? Big volume on the reversal and we will be watching to see if the downside follow through.
- Consumer Staples was the first big break lower for the major sectors. The drop below support at $40.75 was a big negative and move for the sector. Short setup if it continues below the $40 level.
- Healthcare was another break lower as XLV failed to hold $48.70. Watching to see how Monday plays out, but the $47.93 level is the key support. Watch to see how it follows through.
We talk about downside risk management all of the time. Friday was not one many saw coming with the late day collapse for stocks after what looked to be a normal of trading. Stops were hit again and some of our early entries were close. Choppy markets create many headaches for investors and this is just another example. Manage your risk exit positions that are not working and look for what is working moving forward. Don’t get stuck in paralysis of analysis.
Somewhat positive data on the economy this week. We can all find fault in what the data reported, but in the end it was enough to keep the growth on the positive side of the meter, but not enough to show growth worthy of optimism looking forward. Next week will be full of information and it will start on Monday with the manufacturing reports. Bad news may add the confidence the sellers are looking for. Be aware of your surrounding and watch the sentiment towards the data releases this week as a clue on direction.
1) US Equities:
Major market indexes sell into the close on Friday and do some damage to the trend lines and bring into play the new pivot point we pointed out last week of May 22nd being the high following the selling on the 23rd. We are watching this following the results on Friday validating the downside off that point.
The April 18th chart below is the last low in the test off the April 11th high. You can see the selling impact at the end of the chart and who the biggest losers were. Added line on the high for May 21st to track as the current high or pivot point if the downside continues as it has five of the last six trading days. To follow up on that thought on Friday, the move lower did open the door for a follow through on the downside. The second chart below shows the May 21st pivot point chart and the leadership on the downside. It gives some clarity to what you are seeing on the April 18th chart. Utilities, Telecom, Consumer Staples, Energy and Consumer Services are leading the downside move. Healthcare jumped into the picture on Friday. Not pretty for the buyers.
April 18th Pivot Point:
May 21st Pivot Point:
The current trend started on November 15th and has been tested by the the ‘fiscal cliff” issue bottoming on December 28th, The February 25th low pivot point was prompted by FOMC rumor of withdrawing stimulus, Cyprus on March 14th and the April test on economic worries. The original target for the move was 1550-1575 which has been obtained. The uptrend is now in question with the current activity and a potential rolling top. Watch and don’t be fooled by the analyst… charts don’t lie.
Sector Rotation of Interest:
Technology (XLK) – The pullback from the move higher tested $31.40 as support and held for now. If support holds $31.45 it would validate some leadership for the sector in the current pullback. Otherwise the shorts will be looking for the opportunity. Developing a wedge consolidation pattern at the end of the chart.
Consumer Staples (XLP) – This was the first big break lower for the major sectors. The drop below support at $40.75 was a big negative and move for the sector. Short setup if it continues below the $40 level. The move is a result of higher interest rates and pressure on these stocks, not to mention the valuations were ahead of themselves.
Healthcare (XLV) – This was another break lower in the major sectors as XLV failed to hold $48.75. Watching to see how Monday plays out, but the $47.93 level is the key support. Watch to see how it follows through and if any opportunities result from the move. All of the subsectors worked lower within their respective consolidation ranges.
Energy (XLE) – Big pullback on Friday as crude and natural gas broke lower. The $80 support is in play and the downside from there is the big question mark. Watch to see if it holds or goes lower.
Utilities (XLU) – Short side in play as interest rate creep higher. SDP is the ETF, but little volume. If you want to short better off the short XLU and borrow the shares.
Since the high on March 27th the dollar has essentially moved sideways to down. Starting April 23rd the dollar steadily declined until bouncing on May 1st. It accelerated back to the upside. The May 17th line on the chart is marked as the last high and potential pivot point on the downside. That is starting to play out with the move lower on the week. The chart below shows the path of the dollar against the other currencies.
- UUP – The dollar has been trading sideways and looking for an upside catalyst to continue the current move. Got the opposite with a break on the downside and the short play setting up relative to interest rates moving. The other currencies continue to struggle. The yen has made the biggest reversal relative to the dollar.
- FXE – Added a play on the currency against the dollar at $128.50. Sector Rotation Model.
3) Tracking Bond Sectors of Interest:
- 30 Year Yield = 3.3% – up 2 basis points — TLT = $114.45 down 39 cents.
- 10 Year Yield = 2.12% – unchanged — IEF = $105.32 down 29 cents.
Treasury Bonds – Complete reversal on the yield has pushed the bond lower and broke below the previous low. Not a place to be other than short the bond. TBT. Hitting against March highs again at $69. Raise your stops and look for a short term rally in bonds and a test back to $66.50 on TBT.
High Yield Bonds – HYG = 6.5% yield. No positions currently as it plays out.
Corporate Bonds – LQD = 3.6% yield. No positions currently. Downside risk in play.
Municipal Bonds – MUB = 2.8% tax-free yield. No positions currently. Downside risk in play.
Convertible Bonds – CWB = 3.6% yield. No positions currently. Starting to trade sideways.
4) Commodities – Sector Summary:
- Commodity Index (DBC) – Developed into a trading range and just need to practice patience short term.
- Natural Gas – (UNG) Testing the $21.15 support level short term. No plays currently
- Crude Oil – (OIL) Reversed testing support again at the $21.20 level. Weaker dollar didn’t help. No direction as the worries globally and domestically for demand have weighed down price and direction short term.
- Gold – (GLD) Cooked in a squat. Can make up its mind up or down.
- Palladium – PALL – Move above $73.70 is worth a trade on the continuation of the upside. $72.65 stop, $$77 target. Patience for the metal to break higher.
Commodities Rotation Chart:
I have moved the starting point forward on the chart. DBC has moved sideways since April 15th start point. PALL is moving higher and leading the metals, but tested on Friday. The balance of the sector is vertically challenged. CORN since May 21st has been trekking higher and one to watch. (CORN break above $41 positive.) Watch for $42.25 to hold on CORN. Be patient and let the winners define themselves before going into sector. Thursday added positive move in gold, silver and base metals.
DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.
5) Global Markets:
Global markets have shifted to the downside over global economic slowing. The May 21st pivot point lower has been more dramatic than the US markets, but the pivot correlates to the struggles starting in the US markets. The Asian connection is hurting the overall index. The chart below shows the shift over the last week plus on the downside. We don’t own any positions in the global markets and for now I am still willing to sit on the sidelines.
EFA – iShares EAFE Index ETF (click to view) 10 Developed Countries making up Europe (66.6%), Australia (8.9%) and Far East (24.5%). (Weighting of fund) Not most balanced, but give indication of global markets.
- FXP– Added short play on China as the downside has been the leader. Sector Rotation Model.
6) Real Estate (REITS):
Real Estate Index (REITS) – The sector broke the uptrend and signaled exits. Moved to Cash versus holding the sector short term. Shorts are dangerous here, but technically that is the call.
- IYR – Hit our stop at $73.50 and has continued to move lower. Out for now.
- RWO – SPDR Global Real Estate ETF hit stop and watching for now.
- MDIV – First Trust Multi- Asset Income ETF is a good alternative to picking through all the choices of income funds. This multi-assets income fund pays a 5% dividend. Watch the downside currently in play with rising rates.
7) Global Fixed Income:
Sector Summary: Complete reversal low and uninterested in the sector currently.
- Watching these funds for a bottom.
- PAFCX – Spike to the downside.
- PICB – Breaking aggressively lower short term. 3.1% dividend.
- EMB – Breaking lower still no support. 4.3% dividend yield.
- PCY – Big downside move and break of support. The current dividend yield is 4.8%.
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.