Markets Slow in Response to the Debt Ceiling

Wednesday – Notes & Research

Early selling in anticipation of the temporary debt ceiling extension vote loomed. Sounds important doesn’t it? The reality is the can has been kicked down the road for ninety-days. Thus, now the Senate will vote okay and the President has agreed to sign it… now what? The most interesting comment was by Senator Patty Murray of Washington who said, “last years election showed that the public agrees with the Democrats on budget issues like raising taxes on the wealthier earners.” I am not sure that is a true statement, but at least we know what grounds the Senate is playing on relative to the coming budget¬†arguments. Ninety days isn’t likely to be enough to resolve the issue concerning the budget and deficit spending.

What else did we learn today?

Gasoline held the break above resistance and attempted to make a run higher, but for now is content to near the $60 level on UGA. Oil fell back below the $96 level down nearly one percent on the day. The move pushed energy stocks down near 0.5% on the day. The commodities and stocks are still a positive going forward, but require patience from investors as the volatility level remains high.

Google price jumped on earnings report from last night by more then six percent. The move boosted the technology sector and put it back on the upswing. XLK was up more than one percent on the day as well. IBM gained 4.7 percent as well relative to positive earnings.

Apple is out after-hours with earnings and the consensus is mixed at best. There has been too much downside in the stock to bring the buyers to the table without some convincing data… and the survey says – lower by 5% after-hours. Earnings were slightly ahead of estimates, revenue less than expected barely, and margins were 38.6% in line. Not bad, but investors were disappointed about the growth and it showed in the stock price.

NetFlix rallied 30% after-hours on earnings beating estimates add their outlook topped forecasts. Maybe offers some positives for the broad markets in tomorrows trading.

Very mixed picture for earnings on Wednesday! Manage your risk tomorrow.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index is making it’s move towards the 1500 level slowly and methodically. We have to take what the market gives and for now that is a slow move to the upside. The economic data, earnings and investor sentiment are all in play short term, and thus far they have not done anything to disrupt the trend. The positive vote on the debt ceiling extension created a reversal in afternoon trading.

Filtering¬†through the sectors of the S&P 500 ¬†index we find Financials (XLF) made a move above $17 level. Healthcare (XLV) broke to a new high closing above the $41.60 and has follow through moving higher. ¬†Industrials (XLI) pushed back to a new high and followed through today. Basic Materials (XLB) closed at a new high,and tested some on Wednesday. Technology (XLK) moved back above the 200 day moving average, and made solid move on earnings data Wednesday. Bottom line… uptrend remains in play and is working/melting higher.

The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. Still moving sideways with a drift to the upside on the chart and still attempting to make a move towards the target of 1550 short term. The short term chart below (second chart) show the leadership off the lows on December 28th.

SP500Scatter

The chart below is the 28th of December starting point looking for current leadership on the renewed push higher. Energy established itself as one of the new leaders along with, Materials, Consumer Services, Industrials, and Healthcare. Financials made a move above resistance, Consumer Staples have kept pace with the index overall. The Technology sector (up 1% on Wednesday), Utilities (back near the 200 day MA) and Telecom (back near the January high) are playing catch up after lagging the broader index. Still moving higher overall, but it is definitely a stock pickers market as the leaders push higher.

SP500Scatter

The VIX index moved back to the 12.4 low on the close. No signs of anxiety yet and the overbought signs remain, but ineffective at this point. This is a time for being cautious not selling.

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

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РThe index got a jump from earnings and cleared 3150 as the index makes progress back towards the September highs. The move is holding and keeping the uptrend in play. Apple has been putting pressure on the index and tonight the earnings report from Apple will settle the argument  Be patient to see who this plays out short term. Large cap technology stocks could hold the answer for the major index short term.

WATCH: QQQ – cleared $67.30 resistance on the close. Look for test and entry in the position.

Dow Jones 30 Index Р13,620 level cleared on the upside was a positive. Move to a new high the last four trading days.

Small Caps jumped $87.50 on IWM to continue to lead the broad markets. And, Midcap Indexes showed equal moves above the $105 level on IJH. Monday both continued the moves higher and set the pace to start the week. Weigh out the risk factor of buying at these levels currently or continuing to hold existing positions.

Financials РXLF moved above $17 and continues to the test the move higher. Banks (KBE) and regional banks (KRE) both tested the moves higher on Wednesday. Hold for now and watch the downside risk of the sector if the broad markets shift momentum.

WATCH: Entry above $17.20 on XLF. Hit ENTRY today with move to $17.30. Stop @ $17

Basic Materials РXLB  hit a new high and is still in a strong uptrend. This remains one of the leading sectors on the upside. Watch for any adjustments short term.

Retail Рthis has been a mixed bag, but last week the Retail Sales Data for December was better than expected and the sector made a move higher from the consolidation range. XRT has pushed to the $65.60 resistance for now (new high). The scans from the sector last week turned up some stocks worth watching. PSUN (holding the break above $1.92), WAG (new high), CVS (new high), URBN (uptrend in play), ANF (testing the high).

2) Currency:

US Dollar РThe dollar remains volatile on a daily basis. The buck retreated to support at $21.70 on UUP. The test lower was a negative for the upside short term, but still watching to see how it plays out and follows the move higher off the $21.70 support?

Euro РThe euro was testing lower on the rally in the dollar, but that reversed on the dollar weakness and is now above the previous high. Let this play out on the upside. Could add to the position on the test of support at $131.50.

WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $131

Japanese Yen¬†– Has the yen found the near term low? FXY bounced off the $108.80 low. The question is will the bounce hold this time or continue lower? The devaluation is an attempt to stimulate exports for Japan. Watch the upside if Germany steps in a they have been rumored to due so to negate the Japanese advantage on the devaluation move. Watch the $110 level to hold… if it reverses FXY could be a play opportunity.

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year held at 1.83% and the 30 year to 3.03%. The downside risk in Treasury bonds was in play, but they have regained their poise to bounce short term after holding $117.50 support on TLT. Still an upside opportunity in the bond short term. (SEE SECTOR WATCH LIST)

High Yield Bonds РTesting the highs and resistance near $94 on HYG, with the upside continuing to melt higher for now. Look for support holding at $92.75. Continued to creep higher.

Corporate Bonds РLQD, iShares Investment Corporate Bond ETF is struggling to hold support near the $120.40 level. The downtrend started in October and has not settled yet at support. This is worth watching as a short opportunity as well as an indication of the risk being added by investors to portfolios.

WATCH: LQD – Short @ 120.25 if breaks support.

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. There are sub-sectors attempting to make moves to the upside, but you have to manage your risk. Traders sector for now.

UNG РNatural Gas broke support and moved lower on January 2nd. On 1/10 the inventory data showed a drop in supply and the bottom was established. The good news finally pushed the price higher? Winter demand remains mild, but the cold weather this week and forward forecast could push prices higher near term. The follow through above $19.20 again brings the buyers out. Nice follow through on Friday for entry. Patience is a must for the commodity. (SEE ONLY ETF MODEL)

OIL¬†– Oil fell in late trading giving up 1.5% on the day to close at $95.23 and back below the $96 level. The low on the day was $94.95 in reaction to the news of limited capacity in the newly expanded Seaway Pipeline. The news is not because of the new pipeline, but demand isn’t there. Cushing, OK was reaching capacity again based on the expansion of the Seaway Pipeline to 400k barrels. The news send crude lower. Now you have to watch the downside risk relative to an emotional reaction from investors.

WATCH: ENTRY OIL is $21.70. (STOP $22)  Gapped to $22.75 on Thursday. Raise stop to 22.35.

UGA РGasoline tested support $56.80 held and has moved higherand breaking above resistance  at the $59.35 on Tuesday and holding the move on Wednesday.

WATCH: ENTRY: $58 UGA – Hit entry. Stop is $58.50 currently.

GLD¬†– Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We tested $159 on GLD and the metal cannot make up its mind short term. The downtrend line was challenged today as the metal moved to $162.65. That clears the way to $165.50 and then up to $174 potentially.

WATCH: GLD – Entry $163 – Stop $161.

DBB РBase Metals broke support, tested $18.60 low and now is attempting to move to the upside. A move through the $19.25 level would be the key short term. Be patient and let this develop further.

Palladium (PALL) broke above the $69.50 high and heading higher. Platinum (PPLT) remain the better bet on the precious metal side. Platinum gapped higher and it is testing the upside.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above 970 on the index and has moved to 1025. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain.

WATCH: EFA – The uptrend short term continues, following a small test short term the fund has moved back above the previous high. Stick with the uptrend play for now as it holds support.

WATCH: IEV – Europe continues to rally as investors believe the worst is over. 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 and the trend higher remains in play. Upside target is $45.50 going forward.

WATCH: FXI – China has firmly established the uptrend off the November low. However, the volatility of the move has picked up on economic data from China. Watch as a consolidation pattern is building on the chart. Watch to add to positions. ENTRY: $42 FXI

WATCH: EEM – Emerging markets have been doing well. The chart shows a consolidation pattern developing similar to FXI, but there are other single country ETFs doing well. EPHE, THD, EPU, EPI, TUR, EWW and others are worth watching. (Consolidation pattern breaking to the upside on Thursday)

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 as the cliff issues are resolved short term.

WATCH: IYR – Look for reasonable entry. $64.90. The break above $66.12 was the entry point of the move above resistance. Still moving higher short term. Watch for potential test of support in the move.

ENTRY $66.15, Stop $65.75

WATCH: REM, NLY & SJT – all three are in a position to break higher.

7) Global Fixed Income:

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. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – Looking for support and an entry opportunity from the selling. Looking for a move above the $122.10 level for the entry.

WATCH: Emerging market Sovereign Debt (PCY) – Testing support near the $31 mark short term. Watch to see if this breaks lower or offers and entry on the bounce. Pays a 4.6% dividend as well.

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

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding within the trading range for now. HOLD.

WATCH: PICB – International Corporate bonds broke higher and they are testing the current high again. 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.