Monday – Notes & Research
Slow day as investors look for the start of earnings with Alcoa. As covered in the morning notes the sector to watch is the Banks and Financials. Both traded higher late in the day as buyers were willing to step in and help push the index higher.
Are we developing a buy the dip pattern? I would say yes, there are too many people looking for the opportunity for a dip to actually materialize. It is akin to the saying a watched pot never boils. The late day buying shows a continued interest in stocks and the fact we close Monday near last Thursday’s close and essentially erasing the dip from the jobs report. We can say that the intraday low on Friday tested the uptrend and we are back on the upswing! The bigger question is does it hold into the beginning of earnings season and find the upside necessary to fuel further gains.
I stated last week my concern has been with earnings. The first quarter estimates for growth in earnings isn’t very impressive, but the challenge will come in the guidance as well. Alcoa reported after the close tonight
We still have the buyers wanting to control the tape and that will have to be respected short term. I am looking for a modest upside move and then some reality as earnings from the financials are released.
Tracking the sector moves to know today:
- Gasoline prices are dropping along with crude oil and for investors that is not pleasing, but for drivers it is a welcome break at the pump. After spiking higher in January, the move has reversed in March falling nearly 30 cents per gallon at the pump. This helps the consumer who is already stretched monthly on expenses. That said, watch UGA at $56.80 support. It could produce a tradable bounce higher as it finds support.
- Crude oil hit support at $21.57 on OIL on Friday. Like gasoline the commodity is set up for a short term bounce higher. Be patient and look for a move above the $22 mark short term.
- Updating our Weekend Sectors to Watch:
- Basic Materials – XLB broke support at $38.15 and has established a micro downtrend. The acceleration lower in the sector is purely due to the struggles in the mining stocks. They are all attempting to put in a low, but for now the pressure remains. I am not ready to short the sector, but it is on my watch list for possible move lower. Held above the next support at $37.65. No changes for now.
- Industrials – The rolling top has established a micro downtrend and the break of the 50 DMA on Friday addeds to the negative sentiment. Support for XLI is $40.85 currently and this is another sector I am not willing to short at this point. Watch see how it plays out, but the risk of the downside trade currently is too high. Held support at $40.85 and moved back to the 50 DMA for now.
- Financials – XLF broke support at $18.05 this week and Friday flirted with breaking the 50 DMA. The weakness in the banks has been documented and discussed below. We have posted a short play opportunity on the ONLY ETF Model and gapped above the entry price. This is one to watch as move forward. The downside risk is in play and we will monitor the entry point on the short play. Held support at $17.93 and moved back to the 10 day moving average.
- Technology – The sector has remained in a trading range for the last five weeks and Friday it broke lower. This is a negative for the sector along with moving below the 200 DMA. $29.20 is now support on XLK and the short opportunity is too much risk for too little reward if the support level holds. Looking for rally back to the $30 level would be of interest on the downside play if it materializes. Monday we held the 200 DMA without much in terms of change or movement. Patience as it plays out.
- Energy – Crude is falling back towards the $90 support level and the stocks are selling in response. The four week move from $89.50 to $97.50 on crude has been essentially erased in three days. Opportunity or more downside? Look for a bottom is crude to build and then determine if the upside is still in the cards. XLE tested the $76 level of support and held, but it left plenty of question marks along the way. Too much risk to get short at this level, but watch to see how it will play our going forward. Monday provided a nice bounce off the low, but getting above $77.80 is the trick.
- Fixed income rally is in play as money rotates to safety. I discussed this issue in the morning notes and we see that bonds have been a better indicator for the markets overbought conditions. The challenge with the 30 year bond now is they are in an overbought environment? TLT closed at $122.72 as the yield on the bond fell to 2.86% after starting the week at 3.1%. We recommend raising the stop on TLT to $122 to protect the gain on the bond. The gain off the entry point has returned more than the annualized yield. Monday produced some downside in the bond, and we moved below the $122 mark and the 200 day moving average.
The activity today was one of sell at the open and buy into the close. Nearly a 1% swing on the S&P 500 index bottom to top. Telecom, Consumer Staples, Consumer Discretionary were all up 1% and Financials gained 0.9%. Positive day posted by the market on less than impressive volume again.
No data today, but tomorrow we have the same-store sales data out to add some additional insight into how much slowing took place in March. It will shed some light with the actual March Sales Report on Friday morning. Not as busy of a week on the data front, but there will be some meaningful data to review.
1) US Equities:
The back and forth of the indexes continue as investor worries about the data, but they are willing to buy on the dip for now.
Downside Pressure – Monday’s continued move higher of the Friday lows has put the positive spin back on the indexes. We will continue to watch the downside risk of each sector and practice patience as this all unfolds.
Volatility index – (4/5 post) – With a jump back above the 15 level the anxiety picked up from the jobs report. However, in the end the issue was set aside and the index fell back to the 14 level at the close as if nothing happened on Friday. Still looking for the anxiety level to rise if the correction that is being promoted is to materialize. No significant changes to the index on Monday.
Sector Rotation Strategy:
The February 25th low pivot point remains in play. We added the March 14th high as the next potential pivot point on the downside, but the market has continued sideways more than down. The move last week pulled the index back below the close on the 14th keeping the upside in play. However, it has struggled to hold on to that move short term. Healthcare (XLV) remains the leaders off this low. Consumer Discretionary (XLY), Utilties (XLU) and Consumer Staples (XLP) were on a positive trek to the upside, but we have to watch for the shift currently. Utilities (XLU) is exerting upside momentum short term to take the lead. Stay focused and protect the downside risk.
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. See above.
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 uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend. Watch the trendline as the support on the current pullback.
Sector Rotation of Interest:
Financials – (4/3 post) – Banks are rolling over. The chart of KBE shows the current pullback breaking support at $26.50 and moving below the 50 DMA. This has impacted the financials overall as XLF moves lower. The weakness however, is owned by the banks. The regional banks (KRE) have joined in on the downside now which adds to the downside pressure. Thursday XLF bounced back to $18 and we have to watch to see if it can recover the previous uptrend. Need to push back above $18 .05 resistance now.
post 4/8 – made move through resistance on both XLF and KBE – added the positions to the model today.
Transports – (4/3 post) – Broke support on Tuesday and moved lower Wednesday. IYT has enjoyed a solid run higher, but it broke the up trendline. Now the downside is in play for a confirmation. Airlines are leading the move lower for the broad sector. $106.15 is support short term. The downside play isn’t attractive, but a bounce off support would be.
post 4/8 – made move through the resistance level on IYT and hit the entry point at $107.55.
Energy – (4/3 post) – XLE is breaking lower, crossing below the $78.20 level was a negative short term. Broke the 50 DMA as well and $76.25 is the level to watch for some support. IEZ moved to support at $55.45 and XOP got ugly down more than 2%. The refiners are under pressure as the commencements relating to the new EPA standards on sulfur would cut margins. For now the downside is in play. If crude continues lower that would add to the downside pressure on the sector. DUG is worth watching as it breaks higher if the downside stays in play. ADDED short play DUG 4/4 (ONLY ETF Model)
post 4/8 – rallied with crude moving higher and the broad market indexes. Watch and manage the stop on the play.
Healthcare – (4/2 post) – Hit a new high on XLV and held on Wednesday for the most part. We raised the stop in the models, but want to still give it some room for volatility. The outlook remains positive and the news on Tuesday relative to reimbursement helps the bottom line fundamentals as the technical data deals with the volatility. IHF, XPH and IHI all remain in a positive uptrend for the sector near term. Holding near the highs currently.
post 4/8 – sold lower at the open and struggled most of the day until a last minute rally back to positive territory for the broad index. Still have to be cautious and manage the downside risk.
Small Cap – (4/2 post) – IJR made a move back to the previous high, but on Tuesday the index tested the 30 DMA on the downside. With the upside in the broad market and the small cap index not participating, this is a warning sign from my view short term. Without small cap participation on the upside it will be limited. As stated above on Tuesday the warning signs was right with the index losing another 0.8% on the day. This is setting up the downside play in small caps short term or at least adding a hedge against positions if you are looking longer term. Since we have no allocation currently to the sector we would look at the downside play.
4/4 post – adding TZA as short opportunity to the ONLY ETF Watch List. 3X leverage means we will only take a 3.5% position to account for the higher volatitility of the fund. Example: $10 share with stop of 30 cents = 3% risk on 100 shares is $30. $10 Share with stop of 90 cents = 9% risk, but only 35 shares is $31 risk. Same risk/reward by reducing the allocation relative to the leverage.
4/5 post – Gapped open and we passed to start the trading day. Still interested, but pushing lower following the open. Watch for the entry level to be hit on the upside again for a clear entry point.
4/8 post – follow through rally on the upside from the Friday intraday bounce relative to the opening sell off. Upside bounce looks to be in play short term.
Midcap – (4/2 post) – IJH moved to a new high on a solid break higher last week. The move on Tuesday was not as poor as the small caps, but Wednesday it joined the party down 1.1%. Watch the downside risk short term, but I am more interested in a bounce play versus the short side. (4/5 post) – Tested the $110.30 support level on Friday and bounce back near the 50 DMA. Still looking for a bounce play short term.
4/8 Post – followed through on the upside and hit the entry as posted on the watch list of the sector rotation model.
Telecom – (4/4 post) – What is up with Telecom? The sector has been awful over the last four months. Every attempt to break higher has been met with selling. The last two weeks it is acting as if it really wants to move higher? IYZ moved back above the $24.40 breakout level we have been watching from the current trading range. We added it to the S&P 500 Model and it has been moving sideways essentially, but now we are looking for a boost to the upside.
post 4/8 – Solid gain of 1.3% on Monday. This is a follow through to the boost on Friday above the trading range highs. S&P 500 model owns the position short term.
- UUP – The Dollar remains in a consolidating phase relative to the move higher. UUP closed at $22.51. Still watching support at the $22.35 mark on the downside. Manage your stops.
- FXB – the British Pound jumped two weeks ago, held the move, but is testing in another trading range. Held the $149 level and moved back near the current resistance only to test again. For now we just have to be patient and let the pound work through the directional challenge it is facing. Took the entry on the move and the target is $152.50. $149 stop in place on the trade.
- 4/5 post – closed up nicely on Friday and we will now manage our stop as we approach the target short term.
- FXC – the Canadian Dollar held support at $95.35. Bounced nicely to breakout, retraced to the consolidation zone and heading higher again. $98.50 is the level to watch as target.
- 4/5 post – Big test on lower but rallied back. manage your exit point near the $97 level as stop. Inside day on Monday… watch the upside short term.
- FXY – (4/4 post) – Bank of Japan offers big easing to fight deflation and get their economy running. This was expected to some degree, but the reaction by investors in Japan was positive. The two fold impact on stocks and the yen were immediate following the announcement. EWJ open higher by more than 3%, and FXY fell nearly $3 to $102.60 at the open. Since both gapped to these levels we will have to see how the opportunity unfolds going forward. YCS is the short yen play and we will watch to see if that continues higher.
- 4/5 post – hit entry at the $61.85 mark and moved higher on Friday. Manage the risk of the trade now.
- 4/8 post – hit a new high again as the craziness from Japan continues to have a negative impact on the currency.
- FXE – (4/4 post) – The ECB pledged to be accommodating for as long as needed relative to interest rates and support to the euro countries. Those comments pushed the euro lower to $1.278 against the dollar. That pushed the dollar to a new high intraday. However, by the end of the day the euro was at $1.294 and the dollar was lower on the day. IEV dropped in response, showing no upside response in stocks, but managed to close flat on the day. Still no positive buy signals from Europe.
- 4/5 post – gaps higher and holds the move despite the issues still facing Europe. Not convinced move is higher short term.
3) Fixed Income:
- The drop in yield is pushing the price of the bond higher. The question is if the market corrects how much will it impact? The rally in bonds is getting overbought at this point and if is prudent to protect the solid gains short term.
- 30 Year Yield = 2.9% – up 4 basis points — TLT = $121.88 down 93 cents
- 10 Year Yield = 1.73% – up 4 basis points — IEF = $108.14 down 35 cents
Tracking Bond Sectors of Interest:
Treasury Bonds – Yields on the 30 year Treasury fall to 2.86% the lowest level of the year. If stocks are going higher the bond market is trading differently. Money flow has picked up in the sector and you have to wander if this money from Europe? Institutions? Where? TLT moved to $122.82 the highest level since January. This exceeds are short term target on the bonds and we have to manage the risk going forward.
post 4/8 – Take the exit from TLT tomorrow if the yields continue to climb.
High Yield Bonds – HYG = 6.55% yield. Support held at $92.75. Hit the previous highs near $95 and now testing the move. Manage the position for the dividend as the growth side is under pressure from an uncertain equity market short term. I expect the trading range to remain near term. Use $92.75 as the stop.
Corporate Bonds – LQD = 3.8% yield. The price has found short term support ($118.90)… again. 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 we will take what the market gives. Use stop at the $120.50 level to protect the upside gains.
Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds broke support and the chart is attempting to bottom or build a base. The bounce is is from money rotating towards safety? We will see how it moves from here. Moving back towards the resistance at the $111.50 mark.
Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the rally in stocks. Starting to see some selling off the highs and testing the 50 day moving average as support. Watch stops and protect your gains.
4) Commodities – Sector Summary:
- The commodity index continued lower with the move on March 28th. It has not looked back and with the acceleration of the decline in oil prices it has only accelerated the downside. DBC broke support at $26.80 on Wednesday and continued to track lower. Without some good news… the downside remain in play. Corn supplies added to the downside last week and for now I don’t see any reason to invested in the sector. Post 4/8 – Watch for a bottom or support to build at this level currently.
- Natural Gas – (4/3 post) – UNG made the big move higher, but has moved sideways since. $21.20 is support for now, let it play out relative to short term direction. The end of winter is spring, and the consumption or inventory data will shift towards building versus consuming as usage lessens. That could keep the upside in check until summer consumption begins. Set your stops and manage the downside. (ONLYETF Model)
- (4/5 post) – up 4.5% on Friday and back near at the recent highs. inventory data showing consumption still running higher. Manage your stops relative to the position risk.
- 4/8 post – holding the upside, but gave up some gains on the day. Profit taking or just selling? Watch the downside stops and keep going forward.
- Crude Oil – (4/3 post) – Rallied back to close at the $97 level Monday & Tuesday, that didn’t happen Wednesday as crude closed at $95 down more than 2% on the day. As we stated in our Tuesday notes the downside was building momentum on the selling tests. How low does it go down? It closed at support and could hold there for now. Watching to see if it continues lower or settles into a narrow trading range.
- (4/4 post) – The simple answer is lower. The gap down was in response to the current weakness. Momentum selling is aggressive. now we have to look for the support bounce $21.30 target on OIL. 4/5 – found some support at the $21.55 level worth watching.
- post 4/8 – the bounce off lows in play with a move above the $22 mark a potential upside trade. ONLY ETF model.
- Gold – (4/3 post) – The metal dumped $50 in two trading days last week showing the weakness towards the metal currently. This is what I have been warning about relative to gold and the downside pressure remaining in play short term. Watch to see how it plays from here and manage the stops on GLL. (ONLYETF Model)
- (4/5 post) – the bounce of 1.6% helps the metal maintain the base and reverse the break lower. Not a buyer here, but still we have to manage the downside play. Set your stop and let this unfold.
- post 4/8 – downside back in play on Monday, but still have to watch the risk relative to the short side play.
Commodities Rotation Chart:
Natural gas still leading despite the test of the upside. Watch for possible move higher in gasoline.
5) Global Markets:
Global markets tested lower on the news in Europe and continue to trade slightly lower since the high on August 15th. We have moved the graph below to that as the start date to gain some insight into what is leading or rotating currently. As you can see Mexico (EWW) has taken the leadership role currently. Japan (EWJ) had moved lower, but that bounced back. The balance is status quo for now and not much to like or dislike at this point in time.
- FXP – China continues to move in a confirmed downtrend from early February. The move today confirms the next leg lower for FXI. Watch for a move to $23.25 on FXP.
- EFA – The shift is to a down trending channel off the March 15th high. Looking for a move down near the $58 level currently.
- EWW – Mexico confirmed the move higher, but is now testing the move above the $72.25 mark. Watch for the upside opportunity to follow through of the test.
6) Real Estate (REITS):
Real Estate Index (REITS) – IYR broke through the trading range near the high of $68.50-69.50. Sector Rotation Model Followed through on the upside, tested one day, and now on the upside again. The Sector is getting positive press on the creation of REITs to absorb the excess housing defaults from banks and Fannie Mae. The risk still has to be managed despite what anyone thinks day to day.
(4/4 post) – Real Estate REITs have been working higher, but the international REITs are looking even better in some ways short term. RWX broke to a new high on Thursday and remains positive.
post 4/8 – IYR continued higher to accelerate the upside move. Adjust stops and keep focused on the direction.
- REM – Mortgage REIT has been testing lower as pressure on the sector has risen of late. Stop $15.30.
- NLY- Annaly Capital Management – continues the upside trek with some daily volatility. Watch the test lower with stop at $15.50
- 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.
7) Global Fixed Income:
- The sovereign debt issues had faded, but with Spain in the news again, Italy facing disruptive elections this weekend, and France taxing itself out of existence, too many concerns and the safest play is to avoid the asset class for now.
- 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.
- EMB & PCY – Big recovery the last four trading days and interesting in watching.
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.