Thursday – Notes & Research
Markets shift to sideways trending throughout the day. Jobless claims drop 42,000 back to previous ranges. The news helped the early shift to the upside for the broad indexes. The retail same store sales data was positive for the sector overall as some stores reported better results. The results were positive for 9 of the 10 sectors in the S&P 500 index.
Tracking the sector moves to know today:
- The leadership in telecom (IYZ) continued on the day. Technology (XLK) struggled on the news relative to computer shipments declining 16.9% in the first quarter. That puts MSFT, INTC, SOXX and others on the defensive short term. Industrials remained on the upside, but the NASDAQ struggled along with the technology weighting. Upside remains in play and some trades are setting up for more upside if the markets follow through. Manage your risk and keep going with the trend.
- Updating our Weekend Sectors to Watch: Our theme of the week it seems.
- Basic Materials – XLB broke support at $38.15 and had 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 watchlist for possible move lower. Held above the next support at $37.65. Tuesday moved back to the 50 DMA, and Wednesday at resistance of $39.20 watch for a entry at this level for a short term trade. Thursday, broke above the $39.20 level added plays and looking for the upside to continue short term.
- Industrials – The rolling top has established a micro downtrend and the break of the 50 DMA on Friday added 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 above the 50 DMA for now. Wednesday – made the move higher and cleared the $41.60 resistance on the move. Watch for a upside trade on the move.
- Financials – XLF broke support at $18.05 and 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. (voided any entry on the short play with the bounce Monday & Tuesday) This is one to watch as we move forward. Held support at $17.93 and moved back to the 10 day moving average. Tuesday followed through on the upside bounce with long entry play on S&P 500 Model. Wednesday followed up with 1.3% gain and new high. Thursday, held the move, but as we discussed the earnings data in the AM will set the tone!
- 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. Tuesday bounced above the 430 level and entry on the S&P 500 Model. Wednesday XLK broke through the top end of the previous trading range and showing some promise short term on the upside. Thursday, tested with the sector moving lower 0.3% as the semiconductors hit a snag on computer sales. Watch to hold above $30.30 or take exits on the short term trade taken early in the week.
- 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. Tuesday produced the magic to get above the $78 level and entry on the S&P 500 Model. Wednesday continued higher, but still has to deal with the $80 level at the top end of the trading range. Thursday, heading to the top end of the trading range again and looking for the catalyst to take the sector higher.
The activity today was higher with some intraday ups and downs closing near the high of the day. Still below average volume, but the bounce is in play and that is what we are trading for now. Watch the earnings news and any potential swings to the downside. Friday is setting up as a big day with the banks setting the earnings pace and retail sales reports for March. Same store sales in the morning as well.
Jobless claims were the hit on the day along with some same stores sales that helped foster a positive momentum at the open. Hopefully no big surprises Tomorrow on bank earnings and the March Sales Report on Friday morning.
1) US Equities:
The back and forth of the indexes continue as investors worry about the data, but they are still willing to buy on the dip for now. Taking it one day at a time with our stops in place.
Downside Pressure – All but gone on Tuesday as the upside rebound gains some momentum relative to price.
Volatility index – (4/5 post) – With a jump back above the 15 level last week, 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. This week it has continued the retreat back towards the previous lows. No sign of anxiety in play currently.
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. 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. Financials (XLF), Telecom (IYZ) and Technology (XLK) add to the upside momentum. 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.
4/10 post – 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 trend has overcome two attempted moves lower to maintain the uptrend. The move on Wednesday now makes it three attempts to break lower. Telecom and Technology are both making moves within the trend and showing some rotation in the short term leadership. 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.
post 4/11 – moved to new high and have plenty of worries still surrounding the sector. Watch the earnings tomorrow from WFC and GS as they give the first glimpse into the sector overall.
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.
post 4/10 – The upside jump on Wednesday is still in play, but slowed on Thursday. Still watching the upside back to the previous high.
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.
post 4/9 – hit stop on the DUG play. Added XLE to the S&P 500 Model on the move higher Tuesday.
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.
post 4/10 – Followed through on the upside move and it is starting to go vertical. That usually ends bad at some point. The key is to manage the 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.
4/10 post – hitting the previous high.
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.
4/8 post – 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.
4/10 post – this has gone vertical the last week. We have to manage this risk currently.
- UUP – The Dollar remains in a consolidating phase relative to the move higher. UUP closed at $22.43. Still watching support at the $22.35 mark on the downside. Manage your stops.
- 4/10 post – broke the $22.35 support today. That is an exit signal for the dollar short term.
- 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.
- 4/10 post – Nice move back to the upside and filling the gap.
- 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
- 4/9 post – need to push through the 50 DMA – Accomplished that on Thursday… watch to see if follows through.
- 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.
- 4/10 post – tested lower despite what Japan’s finance minister stated. Watch as the downside may be a runaway train.
- 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.
- 4/9 post – nice follow through on the upside move through $129.50. Holding steady for now.
3) Fixed Income:
- The volatility we are all looking for in stocks has found its way to bonds. The yield moved higher after the selling last week and the bonds are giving up some of the gains. This is why we said to hedge your gain or sell the position short term. We recommended taking the profit on Tuesday and we will continue to watch the opportunity near term.
- 30 Year Yield = 2.9% – down 1 basis points — TLT = $120.14 up 23 cents
- 10 Year Yield = 1.79% – down 1 basis points — IEF = $107.85 up 12 cents
Tracking Bond Sectors of Interest:
Treasury Bonds – Yields on the 30 year Treasury fell to 2.86% the lowest level of the year. Stocks did reverse and go higher following the worries that prompted the rise in yields. The money flow has shifted away from bonds and back towards stocks. However, considering the roller coaster ride this has been you have to keep your eyes wide open and take advantage of the trading opportunities versus buy and hold.
post 4/8 – Take the exit from TLT tomorrow if the yields continue to climb. 4/9 took the exit on the bond.
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.
4/10 post – the break above $94.50 was positive for the bonds as money has flowed back into the sector. Hold and raise your stops to $94 for now.
Corporate Bonds – LQD = 3.8% yield. 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 found a bottom built a small base and produced a upside trade opportunity. Watch the current resistance at the $110 level.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. Testing the highs again near the $42.50 level. Watch stops and protect your gains. Breaking to new high on Thursday? Watch the upside.
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 and continued to track lower. Without any good news… the downside remained in play. Looking for a bottom short term.
- 4/8 post – Watch for a bottom or support to build at this level currently.
- 4/9 post – bounced off the low and it is important to watch for some improvement before any interest.
- 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.
- 4/11 post – still holding above the down trendline and looking for catalyst higher. Stops in place and watching.
- Crude Oil – (4/3 post) – Rallied back to close at the $97 level. As we stated in our notes the downside was building momentum on the selling tests. How low does it go down? It closed at support at $91.75 and could hold there for now. Watching to see if it continues lower or settles into a narrow trading range.
- 4/8 post – the bounce off lows in play with a move above the $22 mark a potential upside trade. ONLY ETF model.
- 4/9 post – cleared $22 for the entry on Tuesday.
- 4/11 post – testing lower today and support at the $93.25 level on crude. Watch stops on OIL at $21.50 short term.
- 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.
- 4/8 post – downside back in play on Monday, but still have to watch the risk relative to the short side play.
- 4/9 post – bounced back o $1586, but still under pressure short term. Watch for a move above $1615 if the upside is to gain any momentum.
- 4/10 post – so much for the upside momentum as the downside resume on renewed selling. Watching $1545 level break and selling will accelerate on the metal.
Commodities Rotation Chart:
Natural gas still leading despite the test of the upside.
5) Global Markets:
4/10 post – Global markets tested lower on the news in Europe and continue to trade sideways. The last two trading days we have seen some renewed moves to the upside showing up in the overall index, but also some interesting country charts as well. I have added those below with new comments. The graph below has a starting point of the last low… still looking for a bounce higher short term. Mexico (EWW) has taken the leadership role currently. Japan (EWJ) had moved higher as well showing solid leadership currently. EWZ, IEV and FXI have made a push to the upside as well.
- FXI – Took the exit on the short play and now we are looking at the bounce to gain momentum in conjunction with the US markets. We have added the entry on the ONLY ETF Model.
- EFA – The shift is to a down trending channel off the March 15th high has produced a new high on the breakout the last two days. Looking to add the position if holds the move higher tomorrow. ONLY ETF Model
- 4/11 post – Accelerating higher… watch for upside to continue, but keep stops tight for now.
- EWW – Mexico confirmed the move higher, tested the move above the $72.25 mark and has proceeded to a new high currently. Watch for the upside opportunity short term.
- EWZ – Brazil has bounced back nicely following the selling. Watch to see if the move provides a better entry point on the move. It tested on Thursday, but still showing signs of buyers.
6) Real Estate (REITS):
Real Estate Index (REITS) – IYR broke through the trading range near the high of $68.50-69.50 and continues to climb to new highs. Sector Rotation Model 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.
4/8 post – IYR continued higher to accelerate the upside move. Adjust stops and keep focused on the direction.
4/11 post – upside remains in play and continues higher on strong money flow.
- 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 are fading again and opening the upside potential as the issues find relief. This offers some short term trading opportunities, but you still have to be aggressive in managing your exposure.
- 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.