Markets Remain Hopeful and Optimistic

Tuesday – Notes & Research

Wash, Rinse, Repeat… Today looked very similar to yesterday as the market opened higher and continued higher throughout the trading day. The Santa Rally is on, but the Grinch is still hanging out in Washington DC and could spoil the rally with one wink of an eye. The fiscal budget is still be talked about and the some give and take being discussed in the media anyway, but we will see how it plays out.

Is the market really in good shape baring the budget issues? That depends on who you ask, but some are drinking the cool-aid that things are improving. Housing news was in the headlines with bullish overtones. Banks getting upgrades from those who hated them two months ago. Global markets are moving higher in hopes of global improvement. But… no one is talking about the fundamentals improving. Unless you think that 2% GDP growth in the US is good. Regardless stocks are going higher for now and we have to take the trade opportunities it presents.

The key is patience, discipline and focus. Don’t get distracted by how much money your are making… manage the risk of this market going forward.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The uptrend remains in play off the November low and accelerating the last two days. Thus, the short term trend is up. After moving to the top of the range the index broke above resistance at 1428 to close at 1447 on the day. This puts the 1465 mark square in the cross-hair of the market. The hope of a resolution on the fiscal budget pushed the index higher to start the week, but we are still cautious at this point. For now we stick with the trend and see how it plays out the balance of the year.

The Scatter Graph below has a starting point of 11/15 which was the pivot point for the recent uptrend. After two days of selling  followed by two days of buying he index moved through the 1430 resistance and with the continued help of financials, consumer discretionary, energy and technology leading the upside on Tuesday. All ten sectors were higher on the day and the upside remains in play.

Banks are leading the way. Basic Materials continues to add to the upside. Overall solid movement with broad breadth this week.

The VIX index was rising on concerns of the fiscal budget, Today the opposite was true. Setting up to retest the lows near term. No volatility currently.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РStalled in a trading range of 3030 on the upside and 2960 on the downside. Looking for a resolution up or down relative to the trend. Broke through resistance on the upside and looks positive to continue higher. NASDAQ 100 index cleared the 2700 level and closed positive as well.

Dow Jones 30 Index¬†– Similar to the NASDAQ the index tested the top end of the trading range at 13,300. The support is 13,080 short term. Watch to hold support or break above the top side resistance. 13,350 on the close above resistance… need follow through tomorrow.

WATCH: DIA – See Sector Rotation Model.

S&P 400 Midcap Index -The break above the 1000 mark on the index was a positive and a opportunity to trade or add the sector. Manage the short term volatility relative to the objective. Hitting against the September high today.

WATCH: IJH – See Sector Rotation Model.

S&P 600 Small Cap Index РStalled near resistance at the $77.60 level on IJR. Still looking for a break from the consolidation to the upside short term. The lower support level remains $75.60 for now. Watch and manage your positions. Jumped above resistance at $77.60 and holding.

WATCH: IJR – See ONLYETF Model

Telecom РIYZ broke through the short term resistance $23.90. Support on the move is $24.20 and then $23.90. Resistance is $24.61 was cleared on Tuesday. Manage the risk of the play short term.

WATCH: IYZ – SEE ONLYETF MODEL.

Financials¬†– XLF made a solid move higher on the day. The upside remains in play as we attempt to move above the September high. Banks (KBE) gained 1.4% to follow through on Monday’s move. Uptrend off November low still in play.

WATCH: KBE – broke above downtrend line, tested and now moving higher. ONLYETF MODEL.

Basic Materials РXLB made a solid move back to the $36.85 resistance. Break above this level is the entry for a trade short term. The steel stocks are the driver for the index currently. Solid follow through on Tuesday to the upside trade.

WATCH: XLB – S&P 500 Model

2) Currency:

Dollar РDowntrend in play РWATCH РUDN

 

Euro РThe euro breaking above the $130 resistance mark on FXE. May be the beginning of a run higher in the euro.

WATCH: FXE – $130.80 Entry. HIT ON TUESDAY

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year rose to 1.82% and the 30 year to 3.01% The downside risk in Treasury bonds is back after a test on Friday. TLT broke support on the downside helping the play in TBT.

WATCH: TBT – See ONLYETF Model.

High Yield Bonds РTesting the highs and resistance near $94 on HYG. Break higher would positive for the bonds as well as stocks.

WATCH: HYG – 92.75 entry. Watch as the upside may be limited on any trade.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. The volatility remains very much in play off the recent lows.

KOLD _ Natural Gas broke support and continues to move lower. The short trade is still n play. Look for a bounce off the lows near $18.70 short term? Watch for possible bounce play.

OIL – Oil is stuck in trading range too narrow to even trade short term. Patience as a play develops.

UGA – Gasoline fell to the 200 day moving average and has bounce off support. Watch for direction.

GLD – Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. Volume is declining showing loss of interest over the last fifteen months. Look for a test of $161 on GLD and break below is a clear short signal for the metal. Patience as this all unfolds. All of this is finally setting up on the down side for gold. GLL moved above the $62 entry point on the day.

DBB – Base Metals are testing resistance at $19.50 on the upside and if we find the catalyst to move through that level would be short term trade opportunity. SLX has been the trade on the upside along with the mining stocks in XME.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) struggling to get above the 200 day moving average. The consolidation near the high is worth watch for a direction indication short term. Setting up to break higher today.

WATCH: EFA – Moved above $55.20 resistance and the uptrend short term continues. Stick with the uptrend play for now. ONLY ETF Model.

WATCH: DXJ – Japan total dividend ETF broke higher, tested the support of the 200 day moving average and has moved higher. The break from the trading range is a positive with a trade entry at $33.25. Manage your risk and raise stop to $34.50. Falling yen is driving the stocks higher.

WATCH: FXI – China gapped higher followed through on the upside. Clearing the $38.10 resistance on FXI. The economic challenges facing China moving forward are many, but investor are willing to look past that and believe in the trend. Manage your downside risk.

WATCH: IEV – Europe continues to rally despite all the negative economic reports and sovereign debt issues looming. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance recently and putting a target of $45.60 on IEV.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading if the cliff issues remain at bay short term.

WATCH: IYR – Look for reasonable entry.

7) Global Fixed Income:

Uncertainty about the sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and held support at $121. HOLD.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding the uptrend line and support. HOLD.

WATCH: PICB – International Corporate bonds are broke above the top end of the current range. HOLD.

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.