Markets find way higher, but caution is advised

Monday – Notes & Research

Market finds a way to rally and close higher. While I am not negative on the market, I am getting extremely cautious about this run. The S&P 500 index closed at 1556, and heading towards 1576, the 2007 high. The index has appreciated 4.6% since the February 25th close with only one negative day (Feb. 28th down 1.5 points) in the eleven trading days following. I have seen bigger runs, but this is worth our attention short term. If your outlook is longer term buckle up for some volatility as we proceed down the course. Scanning for rotation we continue to see developments on the upside along with some warnings.

  1. Consumer discretionary and financials continue to lead the pack. Financials are putting up some solid numbers the last two weeks. Raise your stops and monitor the progress.
  2. Basic materials have come to play and today they move above the February resistance and challenged the January highs. Positive outlook results in positive advancement of the sector.
  3. Healthcare continues to advance to new highs and remains a leader for the broad index.
  4. Energy rested on Monday, but remains in the uptrend off the February test.
  5. EAFE index made move back to the January highs and in position to break higher. Europe (IEV) is the primary driver on the upside short term. Japan (EWJ) has helped relative Asia, and Australia (EWA) is one of the leaders overall since the February 25th low.
  6. Natural gas is leading the commodities sector, but not enough to offset the negative trend in the other components. Watching for a near term bottom to establish and then track the leadership.

Interesting start to the week as the major indexes find a way to attract more buyers and push stock prices higher. We have updated the research to reflect today’s activity.

Economic Data:

No economic data of note today, but the upcoming calendar of events is at the link below.

Economic Events & Calendar 

1) US Equities:

Market Summary:

  • S&P 500 index creeps towards the all time highs. Dow still setting new highs daily.
  • Short interest has fallen and margin percentage have risen. Not the best of signs for the buyers.
  • Apple jumps 1.4% on news of special dividend payment. Jumped $10 on the rumor? Watch to see how this plays out relative to the NASDAQ 100 play.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play this week. The chart below shows the leadership from XLY & XLF accelerating to lead the move. XLB playing catch-up after some selling has rebounded nicely on the upside. This position was added to the S&P 500 Rotation Model and the Variable Annuity Model. , XLU has returned to the positive trend after some selling last week. XLK played into the leadership move overall last week and we continue to look for some leadership to arise from the sector.

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. Watch the bounce of the newly minted low on 2/25. The index moved above the previous high in February erasing the downside move. See chart above for the leadership on this move.

Scatter1228

November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play. The trend has now overcome two attempted moves lower.

SP500Scatter

Tracking Sectors of Interest:

Telecom РThe sector has finally made a bounce off the low and is attempting to head back towards the February highs. Added to the S&P 500 Watch List for entry. No move higher on Monday, but we remain patient.

  • Verizon (VZ) and AT&T (T) are both still moving higher from last weeks post.

Technology РThe sector finally made a move above the top side of the trading range. XLK broke above the $30 level and held. The entry point was hit on XLK and IGV. Added to the Sector Rotation Model Portfolio.

  • Google (GOOG) and Hewlett Packard (HPQ) continue to set upside pace short term.

Financials РBanks pass the stress test on Thursday and give the sector a needed boost on the upside. They continue to follow through on the move higher. Banks, regionals and insurance are all heading higher.

Energy РThe sector bounced off the low and is heading back towards the February highs. The stronger dollar has been the biggest detractor to the sector overall. Now inventory data is showing a record build of inventory. Despite all the bad implications XLE is making a move back toward the February highs.

  • Added XLE to the S&P 500 Model Portfolio.

Basic Materials РMoved back to resistance at the February highs. As seen on the rotation chart above the gains to the upside have accelerated above the other sectors and it is one of the leader of the Feb. 25th low. Watch for the sector to clear resistance and offer some upside opportunity.

  • Added to the S&P 500 Model Watch List.

Consumer Discretionary РBroke above the $51 resistance on XLY hitting the entry point. The consumers are leading the broader market indexes on the race to the top. Extended the upside on Monday.

2) Currency:

Sector Watch:

  • Dollar remains in a uptrend despite the¬†constant¬†bashing of a¬†stronger¬†currency.
  • FXB – the British Pound dropped to $150.50 support level and has accelerated lower as a result.
  • FXC – the Canadian Dollar is attempting to hold support at $95.35. Building a base short term.
  • FXY – yen is still in bottoming mode. ¬†Hit new low again today! (YCS)
  • FXA – Australian dollar bouncing as equities continue higher in the country. Bottoming watch.

Tracking Currency of Interest:

US Dollar РThe buck rallied in uptrend and held as it closed at $22.51. Watch support at $22.20 level, if it breaks look for the exits. hold for now. (UUP) long dollar play.

Euro РThe euro (FXE) Broke support at $129.50 and moved lower? Watch to see if this moves lower still? (EUO short the euro) Attempting to build a base at the $128.50 mark for now?

3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly on the turmoil in stocks. ¬†The question is if the market corrects how much will it impact? We are in the process of finding out now.¬†
  • 30 Year Yield = 3.25% – no change in basis points — ¬†TLT = $114.86 up 11 cents
  • 10 Year Yield = 2.05% -no change basis points — IEF = $105.70 up 5 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe downside pressure on bond prices remains a concern for the Treasury market. Watch and protect on the downside. Estimates are for 2.75% on the 10 year bond by year end? That is something to watch and play PST on the short side.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. Let it run as investors remain in love with junk bonds. I expect the trading range to remain near term.

Corporate Bonds¬†– LQD = 3.8% yield. The price has found short term support ($118.90)… again. If we break lower being short is the opportunity. Patience as this plays out.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds broke the support at $111.30 mark week and the selling continued today. This is a sector of the bond market to avoid for now.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the current rally in stocks. Hold for the ride and raise your stops.

4) Commodities:

Sector Watch:

  • The commodity sub-sectors are finding some signs of life.Watch and play the leadership. GSG attempting to build a base on the parts moving.
  • UNG (natural gas) made the move higher. The trade entry point was hit. SEE¬†ONLYETF Model Porfolio
  • PALL – Accelerated higher, established a new high, and is testing the move today.
  • Crude tested support at $89.30 this week and closed at $91.85 on the week. ONLYETF Model Portfolio
  • The break in Crude goes with the¬†Note posted on Gasoline. The two trades to watch were UGA and UCO. Both have been added off the advance.

Commodities Rotation Chart:

Commodity

Tracking Commodities Sectors of Interest:

BAL РA trading range of $52.80-54.40 is in play. Cleared resistance at the upper end of the range at $54.40 and continues to move higher. Big start on Friday, but ended the day flat. Let it run and keep your stops at $54.50 or break-even.

UGA РGasoline has gained in volatility as traders look for catalyst on upside, but none being established on the current move. Testing the support levels again on Monday.

WATCH: Testing support at $60.50. Hit entry point and added to the model portfolio.

5) Global Markets:

Sector Watch:

  • EWW – Mexico broke higher today after test of support. Watch the upside follow through.
  • China remains a country of contradictions. Not willing to trade currently, but the volatility is due to the potential issues in the housing sector. FXI remains in a downtrend short term and support at $37.75. We did get a bounce off the support, but still needs to validate the move higher.
  • Europe bounced and held the last few days – that is the good news. Still looking for some positive momentum to lead the indexes higher. $40.25 resistance and $38.90 support.
  • Japan (EWJ) broke higher, tested, and continued to move higher. Got the move above $10.20 and still moving to the¬†upside. Watch the top at $10.55 level.
  • Australia (EWA) making a move higher the last week as well. Uptrend accelerating.

Tracking Global Sectors of Interest:

EFA РWatch $56.90 support to hold on the recent test. The long term uptrend remains in play and support has held and the fund has moved back to resistance at the $59.30 level. Watch and trade accordingly if it breaks to new high short term.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders bounced off support at $27. Watch to see if the upside remains after disappointing news in the housing sector. Housing remains in an uptrend despite the rumors.
  • REM – Mortgage REIT held $14.80 support. At the $15.23 resistance to move higher currently.¬†Attempted to break higher on Monday.
  • NLY- Annaly Capital Management finally broke above $15, and is testing¬†the¬†$15.20 support currently on the upside move.

Tracking Real Estate Sectors of Interest:

Real Estate Index (REITS) РThe pullback test is in play for IYR and $67.25 support held. The break higher above $68.50 was positive for the continuation of the uptrend.  Followed through on the upside. ADDED: Sector Rotation Model & S&P 500 Model.

7) Global Fixed Income:

Sector Summary:

  • 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.

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.