Markets Rally on Hope

Tuesday, November 6th

Big push higher intraday as investors want to believe there will be a clear cut winner in today’s election. That is the vote for those investing at least. Markets like clarity and that is what today’s move was all about a clearer direction in the White House, Congress and the Senate. The fiscal cliff will need all the clarity it can find to resolve the looming issues with the tax cuts, budget and deficit. The race to the end of the year promises to be exciting and today was just the beginning.

I have heard more noise today than any election I remember in recent history. Let this all settle out overnight and start the day with a fresh perspective relative to the outcome.

We added the EGG today on the bounce. I would have preferred tomorrow, but we take the hand dealt and look for the clarity relative to the outcome. We added positions in most models today as the rally put us in the position based on our defined entries. Manage the risk of each position and accept the outcome.

What am I watching?

NASDAQ held support and moved back above the 3000 mark again today. This puts our play on for the NASDAQ 100 index. Manage the risk and expect volatility as we move forward.

Volatility is in play as VXX moved lower on the rally today.

Watch health care support at $40 on XLV? Hold and bounce higher or break and sell lower?

S&P 500 index (SPY) versus S&P 600 Small Cap Index. Is the appetite for risk coming back? Is the summer selling over? These are two indexes to watch for a shift in risk and momentum. IJR was looking good on Thursday, but the selling on Friday puts the index back near support of $75.50. Still potential upside if the bounce gains support.

Gold and Silver bounced today on relief of the election, and whatever else we need to justify the gains in the metals. Still looking at the downside. Stopped out of our short positions here and looking for more opportunities in the metals on the downside.

Oil jumped back above the $87.50 level? Yes, the relief bounce gains 3.2% for crude and the energy sector was up 1.6%. Large cap energy stocks were the big winner.

Dow jumps 134 points, but lands near resistance. Watch to see if follows through tomorrow.

1) US Equities:

S&P 500 Index / Sectors-to-Watch –

The index made another run at the 1430 level on the day, but closed at 1428! The gain of 10.7 points on the day did nothing to change our outlook or the technical data for the index, but it was interesting to watch. The directional issues remains a challenge for the broad market overall as investors attempt to determine the impact of the election moving forward.

The Scatter Graph below has a starting point on 10/17 which is the current pivot point off the recent high. The move lower has turned sideways with the blip higher last Thursday, selling on Friday, and a bounce today. Leadership is the biggest challenge as we discussed yesterday, and yes, Industrials have become the leader???? Not exactly what will impact the market long term. But, help is on the way as Consumer Services and Financials made a nice move on the day. We need some follow through from Technology on the upside as we saw today. The downside leadership was from Utilities and Telecom moved sideways after leading the downside move. Basic Materials and Energy bounced off lows and are adding to the upside short term. Patience as this all plays out.

 

Breaking the Sectors Down:

Financials – The index held support at $15.80 after an early test. Earnings were ok for the quarter and the large banks should continue to benefit from QE3 stimulus. Currently the cloud is the government lawsuits for banks. Watch and be patient with the sector as we still like the upside play.

WATCH: XLF – Entry $16.10 (HIT ENTRY TODAY)

Technology – After selling lower we have been looking for the bounce play in the sector. We finally saw some money flow on with all four sub-sectors posting solid gains. Held support at $28.80 for now… need some leadership from the sector if we are moving higher?

WATCH: XLK – Entry $29.25 / Stop $28.65

On my Watch List looking forward:

The bounce in energy, technology and basic materials were at least a positive on the day. Not ready to put money into the sector today, but they are on my watch list of opportunities short term.

NASDAQ Index – The index has been under pressure from the large cap technology stocks selling, and earnings within the sector didn’t help matters. So far the index has held the uptrend line and the 200 day moving average. The downtrend is still in play, watch for follow through on the upside bounce or the short play to develop again.

WATCH: – QQQ – Entry 65.70 / Stop 65.10 Watch the volatility. (HIT ENTRY)

Small Cap Index – Made a bounce off support on Wednesday to set up the entry on UWM (Russell 2000 Index). The downtrend is still in play, but this is a bounce trade as we discussed starting the trading week. Watch the near term resistance as exit point on the trade.

WATCH: IWM – $82 if the upside is the play. (HIT ENTRY)

2) Currency:

Dollar – The dollar bounce continues as the weaker outlook in Europe is hitting the euro. The economic data has some believing the Fed QE3 will be shortened relative to the improved jobs report? Whatever it takes to bring strength to the dollar I say. Watch the bounce on the buck as it broke higher through resistance.

WATCH: UUP – Entry – break above resistance. $22.05 – Stop $21.90

The Chines Yuan (CYB) has been in a steady uptrend since September. This move has been similar to the move in Chinese stocks as well (GXC).

3) Fixed Income: The sector remains somewhat volatile as investors continue to look for direction from stocks. We have a small allocation to the sector overall, but continue to scan for the opportunity.

Treasury Bonds – Another attempt to make break above the downtrend line. Watch to see how this plays out short term with $120.80 support. $124.60 is resistance. Investors still can’t decide the direction, but the upside is looking better currently.

WATCH: TLT – Downtrend line off the July high. $123.60 entry?

Emerging Market Bonds – the reversal off the high has reached short term support at $120.75. A move below the 50 day moving average would be a negative to technically. Watch for the downside opportunity or a bounce off support as a trading opportunity.

WATCH: The bounce has started $121.80 Entry.

4) Commodities: Tough sector to own currently with the rise in volatility across the sub-sectors. The downside shift is in control and the break below the 200 day moving average on DBC is not a good sign overall. Remains a mixed bag of volatility based on the data and speculation.

WATCH: GLD – Hit stop on today’s rally locked in nice profit. Still like the downside play relative to the metal looking forward.  GLL Watch.

WATCH: SLV – Hit stop on today’s rally locked in nice profit. Still like the downside play relative to the metal looking forward. ZSL Watch.

WATCH: DBB – Selling gave way to hope on the hurricane speculation. Bounce trade? Sitting on support. Clear $18.2o on volume could be interesting.

WATCH: OIL – Cleared $21 entry on the bounce Tuesday. Watch for follow through.

WATCH: UGA – Cleared $$56.25 entry point on Tuesday. Follow through?

WATCH: UNG – Bounced, but no real conviction on the move. I still like the Short play? KOLD

5) Global Markets: The global markets are starting to trade in sympathy with the US markets. Watch and let this play out short term. If you have not set your stops it is key to do so.

WATCH: EFA – Testing support at the 50 day moving average. Entry trade at $54.15 and target of $55.25?

WATCH: EEM – Testing support at the 200 day moving average. Entry trade at $41.75 and target of $42.35?

6) Real Estate (REITS) – The sector tested the recent high and support at $64 (IYR). The sector broke support last week and bounced back this week. The downside is still the play to watch.

WATCH: IYR  – Attempting to break lower through support? Volatile within the trading range.

WATCH: REM – Downside back in play after the short term bounce. Big break lower.

WATCH – NLY – Downside back in play after the short term bounce. Big break lower.

7) Global Fixed Income – Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector.

WATCH: PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity if we move above the $11.80 which it hit today for an entry. $11.81 Entry – Stop $11.74 (Watch for the stop tomorrow)

WATCH: Emerging market bonds (EMB) – testing the move higher with a pullback.

WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch how it plays out short term.

Watch: International High Yield Bonds (IHY) – Testing and pulling back near the breakout point.

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 downside risk determines your long term results. Trade Smart!