Markets gain on the day despite China

Monday – Notes & Research

The morning notes outlined six things to watch this week. Commodities remains flat on the day. Retail moved up nicely on the day as one of the leaders. Europe was positive, but that was about the extent of the move. China was down 1.7% following the governments attempt to control real estate bubble, and technology posted a small gain. When it was all said and done… positive day overall without much changing. Updates are below.

Market Drivers: Speculation or Reality Check?

  • Consumer back? XLY was added to S&P 500 Model. XRT made solid move on the day.
  • Hope springs eternal! There is plenty of hope driving stocks as the data remains lack-luster.
  • FOMC or the Fed outlook¬†relative¬†to QE infinity. This is the reason for the stall. The treat of taking away the stimulus sent the markets lower. The market will need reassurance on this front heading into the March FOMC meeting.
  • Positive economic data is pushing investors to own stocks.
  • Watching the Jobs Report as reports start on Wednesday.
  • Volatility jumped more than 30% on Monday last week and now is fully engaged. However, we are on sequential move back below 15 on the VIX. Showing signs buying more than selling for now.

Market Worries: Climbing the Wall!

This is not the kind of market I like, nor do I like the risk of this environment.

  1. How do investors accept the budget cuts? The hype was leaning towards selling, and as I stated for awhile, I am not convinced that is the case after the initial reaction. Thursday saw a reversal intraday with a 1% reaction down. Friday started lower, but manufacturing data offset and closed higher. End effect… neutral thus far with an upside bias.
  2. What will the Fed do at the March FOMC meeting (speculation). No real changes expected to QE infinity, but will they shorten the timeline or adjust any method of delivery. Any changes will prompt a reaction. On the radar as we move towards the event.
  3. Can the economy really recover? Earnings grow? Revenue increase? Simple things that make the market more palatable to investors. Bottom line will there be enough momentum to carry the markets to new highs and sustain the move?
  4. Will Europe be a problem for global markets as they unwind the issues in Italy, Ireland, Spain, etc? This is going to be a touchy subject across Europe short term. Moved to the back burner for now, but it is still simmering.
  5. Put/Call Ratio shifted last week to the PUTS. That would indicate worry looking forward for stock prices overall.

Technical Outlook:

  • The S&P 500 index has gone from calm and melting higher to increased volatility and struggling to hold the uptrend. The index moved back above the 1515 level and held into the close on Friday, but still looks to be prepared for more of a test before any move higher.
  • Value has been better than growth during ¬†the recent trend off the November 15th low.
  • Indexes are choppy and building a short term trading range. Watch to see how it unfolds.

Market Leadership:

  • Leadership is struggling and shows some weariness relative to the short term action. The financials have shown of late a divergence in RSI and MACD from price. The top is in short term, but we have to be¬†patient¬†to determine how long this shift will last. Looking for a move to eclipse the recent highs.
  • Look at a chart of SPLV versus SPY. The lower volatility/value stocks have outperformed. The rotation to defensive value stocks has been the trend for the new year.
  • Currently looking for the establishment of leadership going forward… up or down.

Economic Data:

The focus is on the budget cuts of $85 billion and the potential impact going forward. Analyst agree the cuts will have an impact on the economy over the longer term and could cost up to 1 million jobs. In the end only time will tell, and more is made of these issues than ever really materializes over time.

Data Summary:

  • ISM Manufacturing rose to 54.2% from the 53.1% in January. Solid improvement in the underlying data. The only concern was the rise in cost. This may signal higher PPI data or inflation at the producer level. That eventually moves to the consumer. Worth watching this further.
  • Personal income was a drag, down 3.6% and worse than expected.
  • Consumer spending rose 0.2% and in line with expectations. Michigan Consumer Sentiment was up to 77.6. The consumer continues to show positive signs despite the negative data around them.
  • Construction spending unexpected fell 2.1%. Big miss sent the housing sector lower on Friday.
  • Auto sales were better than expected giving the sector a boost.
  • Weekly jobless claims were down 18,000 which continues to show improvement.
  • GDP was revised to a positive 0.1% versus the -0.1%… at least it is positive.
  • Chicago PMI was up to 56.8 versus the 55.6¬†announced¬†last month.
  • Durable goods orders drop 5.2%, but without transportation they actually grew by 1.9%. That news helped push the broad markets higher on Wednesday.
  • Pending home sales rose 4.5% versus the decline of 1.9% last month. That helped the homebuilder stocks move up 2.1% on the day. On Tuesday New Home Sales were 437,000… 53,000 ahead of expectation. Two positive reports for the housing sector after a disappointing January.
  • Consumer confidence jumped to 69.2 following a 58.4 reading in January. Nice jump for the consumer.

Economy is steadily treading water with little to no growth as the GDP report bears witness to. The short term outlook for the economy is positive, but just barely. Keep your focus and remain disciplined relative to your stops and exit points. Correction anyone? Famous last works from last week.

1) US Equities:

Market Summary:

  • China was the headline relative to the slowing in real estate. FXI was down 1.7% on the day. However, the US markets shrugged off the news closing higher.
  • Is the Dow setting up investors for a drop? The index came within 15 points of the high on Thursday before closing lower? Watch the trap that the index is setting up.
  • S&P 500 index held on barely to the 1515 level on Thursday and the worries begin over no deal on budget cuts. We will continue to take this one day at a time.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play this week. The chart below shows the leadership from XLY, XLB, XLF and XLU. Looking for the upside to regain momentum if the uptrend is to hold short term.

SP500Scatter

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. Watch the bounce of the newly minted low on 2/25.

SP500Scatter

November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play.

SP500Scatter

Tracking Sectors of Interest:

Telecom РThe DJ US Telecom index has pulled back, but the defensive nature of the stocks offers some opportunities at the stock level. We have been tracking both AT&T and Verizon as a dividend/growth idea.

  • WATCH: T – Break above resistance at $35.65 is attractive on the upside, plus the 5.1% dividend.
  • WATCH: VZ – Looks just like T on the consolidation and resistance $42.85, plus the 4.6% dividend. The stock has broken above resistance at the $44.80 level and moved higher.
  • Both stocks have moved higher with VZ showing the strongest move. Watch the risk of the trade.

Technology РThe trading range remains in play and holding support.

  • WATCH: GOOG – some consolidation at the high. Watch for move higher short term. Got the move today with a 1.9% gain to $821.50.
  • WATCH: HPQ – in our model and moved higher on earnings. Raise stop and watch for opportunity to add to the position on any pullback. The test of support at $19 held and has now continued higher.
  • WATCH: SOXX – the semiconductors need to lead the sector. $57.30 support needs to hold. Moving back towards the current high.

Financials РStruggled of late to hold support and maintain the current uptrend. May see more pullback short term, but watch for the leadership to return to the sector. Creeping back towards the previous high today.

  • WATCH: KBE – banks are being driven by those with extensions into the brokerage business. BAC, C, MS, JPM and GS. Attempting to bounce back, but still have to watch how it plays out short term.
  • WATCH: IAI – sub-sector play on the brokers.

Energy РThe sector remains under pressure from the decline in crude oil prices. The stronger dollar along with increases supply and storage has been the biggest detractor to the sector overall. XLE tested lower and we are looking for upside opportunity to return if the prices settle.

2) Currency:

Sector Summary:

  • The currency landscape is shifting short term to dollar strength. Watch UUP play.
  • FXB – the British Pound dropped to $150.50 support level and failed Friday to hold. Short still in play for the pound. Small bounce on Monday.
  • FXC – the Canadian Dollar continued lower as well heading towards support at $95.35.

Tracking Currency of Interest:

US Dollar РThe buck rallied back and closed at $22.36. Watch support at $22.20 level, if it breaks look at a downside play.

Euro РThe euro (FXE) Broke support at $129.50 and ready to move lower? This is not improving short term as the outlook for Europe remains questionable. Still looking for some support.

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 = 3.08% – up 2 basis points — ¬†TLT = $118.27 down 63 cents
  • 10 Year Yield = 1.87% – up 2 basis points — IEF = $107.05 down 25 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РBounce on lower rates in play short term. Not something I would expect to remain in place unless the fear factor rises considerably.

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 РLQD = 3.8% yield. The price has found short term support ($118.90). Broke above resistance at the $119.50 level and the entry or pivot point. Holding the 200 day moving average.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds continue to move sideways. Found support and bounced back, but still looking for direction. Willing to wait for the right opportunity on the bonds.

Convertible Bonds РCVRT = 2.7% yield. Price had been moving higher on the current rally in stocks. The reversal pushed the bonds lower short term.

4) Commodities:

Sector Summary:

  • The commodity rotation chart below shows the high on January 6th to date as the index has sold lower. The drop of 5.2% has been accompanied by high volatility.
  • UNG (natural gas) taking on a role of leadership the since the 21st of February. Watch the upside.
  • Bounce in gold reversed after a move to $156.17 on GLD . Downside remains and issue short term. Watch as the short set up with GLL is back on the table. Move above $70.50 is of interest.
  • Crude tested support at $90 on Friday and closed at $91.02. Looking for support to hold here.
  • Copper (JJC) broke support at $44.30 and is heading towards $43.25 support next. Nearly 10% decline in the last two weeks.
  • DBB broke lower to continue the downside run as well.
  • Commodities remain weak with the dollar adding to the pain short term.

Commodity

Tracking Commodities Sectors of Interest:

BAL РA trading range of $52.80-54.40 is in play. A break higher would be a continuation of the move off the November lows. Stalled and trading sideways. Watch and see it this can break higher. Tested lower again on Monday and back near the high on Wednesday? Thursday closed at the break out point watch for trade going forward. Confirmation to the break from consolidation last week. 

UGA¬†– Testing support at $63 … failed as it move to $61.65 on the close. Short play? Look for support and a bounce more than the short side.

WATCH: Testing support at $60.50. Holds look for trade at $61 (volume has dried up use limit orders only/AON)

5) Global Markets:

Sector Summary:

  • Europe bounced and held the lows – that is the good news. Still looking for some positive momentum to lead the indexes higher.
  • Japan (EWJ) bounced back after some more testing. Looking for a break above $10.20. Got the break higher on Thursday. Upside remains in play.
  • Italy (EWI) still in the news and the downside is at support of $12. Bounce held of the break lower on Wednesday. Still interesting short term. The upside bounce may come into play?
  • Singapore (EWS) broke support today in¬†sympathy¬†with China. If it grows short play would be of interest.

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 to this point. Patience for the trade to develop.

IEV РLong term uptrend is still in play, but testing support near the $38.75 level. Watch as this unfold there will be an opportunity off support.

FXI РDownside pressure remain on China despite the short term bounce. Look for a move below the $38 level to $35.50 support.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders bounced support at $27. Watch to see if the upside remains after disappointing news in the housing sector. The is weakening some as the trend matures.
  • 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 is support. Moving back towards the high at $68.50 resistance. 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.