Markets Take Another Step Higher

Monday – Notes & Research

The economy may stink, but investors don’t seem to care. This is the weakest recovery since the great depression and Friday’s GDP report did nothing to change the course. As long as the Federal Reserve stays fully engaged in dumping money into the economy via ‘quantified easing’ at the rate of $85 billion per month investors have no worries. Markets rose 9% in the first quarter versus and economy growing at 2.5%? earnings reports for the first quarter have not been much better in terms of top line growth. In fact, revenue data has been poor across the board. Major industrial stocks have warned that things are not good around the world. China is slowing, Europe is¬†bordering¬†on a negative GDP, but investor keep buying and trading the market. Thus, the old adage of don’t fight the Fed, and don’t fight the tape.

The housing market is supposed to be the savior this time around. What happens to the growth in the housing sector if jobs don’t pick up? What happens if the economy remains sluggish? GDP data showed that personal savings have fallen to 2.6%… where will the money come from to fund future purchases. There is hope, rumors, speculation and belief that Congress will do something to reverse the sequestration (Budget Cuts) and tax hikes on the American Public. Based on the recent backpedaling on the FAA layoffs of¬†air-traffic¬†controllers, many expect that to become the norm from Congress as they continue to spend in the areas that scream the loudest.

The market has mastered shrugging off the data. At some point we all know it will end badly, but until then someone keeps buying and believing it will continue higher.

Below are our revised notes relative to the trading outlook from the watch list, and what I saw of interest for next week.

Sector Moves of Note:

    1. S&P 500 index moved above the previous high of 1593 intraday to 1595 and closing at 1593. The answer to my morning question is no, the market did not make a further test lower today, and yes, investors were willing to step back into the market today with more vigor than I would have believed at this point.
    2. If the S&P 500 index is going to continue higher then it will need the financials to continue the move from last week. That didn’t happen today as the financials managed only a 0.3% gain. The bounce off $17.80 was a positive for the index and the move back to the previous high at $18.60 presents a challenge to break higher. The banks (KBE, KRE) and brokers (IAI) have been lagging the move higher, the leadership has come from the insurance sector (KIE). No real addition from any of these, thus the minor movement on the day. Still need
    3. The NASDAQ moved above the previous high intraday and close at 3307. More buyers came back to take the index to a new high, in fact, it looked much stronger than the S&P 500 move thanks to the large cap stocks. The consensus among investors is buy until it drops. I have seen crazier and more irrational moves in my career, but we will watch to see how it plays out.
    4. If the NASDAQ is going to push higher it will need some help from the technology sector. Asked, and done with XLK gaining 1.5% back to $30.50 on the day. The ETF moved last week from a test of support at $29.25 back to the $30 level was a positive. The continuation of that move today was a positive for the broader index.
    5. Crude oil remains a commodity of interest, and we held our position into this week. Tighten the stop to $28.02 and let it go. The move higher today puts us at the resistance we expect near the $94.60 level. We now ratchet the stop up to $29 on the move today and watch the open tomorrow.
    6. Gold filled the gap, but then moved lower on Friday. The speculation in the metal continues, but I have been looking at the miners for an opportunity. The bounce on Monday keeps the consolidation at or near the low in play. The price movement in the metal isn’t going to reflect in the stocks until some confidence from investors shows they believe the price will remain higher near term. If the price of the metal doesn’t hold or the reversal picks up GLL will come back into play as a short term trade.
    7. Europe runs with weak dollar, strong euro and confidence from investors that things are improving? I hear it, but you will forgive me if I doubt it. This is a pure technical play on global markets. They are moving in unison with the US markets and that’s how I see it for now. EFA, IEV and FXI all moved through resistance and higher today. Is there more upside? Worth watching as all the major indexes are dealing with key resistance points.

Economic Data:

Personal income fell more than expected from March with a increase of 0.2% versus the 0.4% expected and 1.1% growth in February. Just another validation of the weakness. Consumer spending rose 0.2% with 0.1% expected. Pending home sales were up 1.5% and well ahead of expectations at 0.9%.  More sluggish news to start a week full of data.

Economic Events & Calendar 

1) US Equities:

We are testing the previous highs on the major indexes. My bias is to the downside, but that is why we watch the charts and go with the trend. The data continues to show weakness in the economy, but the buyers keep stepping in with the belief it will be better long term. That may very well be true and we will all see how it unfolds one day at a time. Today was another example hold your nose and jump in for many. Solid day with the primary exception of volume. Watch, hold, set stops and go to the next day.

The April 11th chart (bottom chart) below starts on the high as a potential pivot point lower, but has failed to accomplish any further downside after the April 18th low. In fact, we have now swung back to the highs of the April 11th pivot point. That brings in the question of a test of the move or a break higher? Utilities, telecom, consumer discretionary and consumer staples are the leaders over this period. Still looking for the key leadership of the move since April 18th (top chart). Basic materials, financials, energy, telecom and technology are providing the leadership from there. The two are different and that is where we have to understand the dynamics of the current trend an movement.

Scatter 418

Scatter 411

Sector Rotation Strategy: 

The February 25th low pivot point remains in play relative to the trend. However, the volatility of the sideways trading is making me crazy. The bounce in telecom, industrial, basic materials and energy changed the bottom side of the chart to be more positive overall. Uptrend still in play, but the continued test leave plenty to worry about.

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher. The trend remains higher, but the short term volatility is picking up. Watch the downside risk and protect your gains appropriately.


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. Watch the trendline as the support on the current pullback. A break of the uptrend brings downside options back into play for the short term.


Sector Rotation of Interest:

Technology (XLK) –¬†Broke above the $30 level again. The key has been to buy the position as it moved and we have added to the S&P 500 as a trade. Solid leadership on the trading day for the sector.

Consumer Staples (XLP) Рthe downside relative to earnings and warnings from the big cap stock this week is a concern. Tighten stops and watch how the trend plays out next week. Started off on positive note, but the sector is still lagging from earnings impact. Watch and manage the downside risk.

Healthcare (XLV) Рthe biotech stall from earnings is weighing on the sector for now. $46.80 support is level I am watching now. protect the gains. Large cap biotech took a hit and slowed the progress. Watch to see if we can regain the upside momentum.

Industrial (XLI) Рgot a bounce from earnings this week and now at resistance near the $41.50 level. A break higher would be worth trading short term. Shift in commodities is the reason for the move. Watch the commodity emphasis on the sector. If fades pass, if it builds buy. Moved higher on the day and looks positive short term.

Energy (XLE) Рtesting the move and resistance. Watch for a move above $77.50 as possible buy point on the upside. Need crude to behave and the earnings to be positive in the sector. All positive for now, watching the downside risk.

Telecom (IYZ) РMoving higher, but test on Friday with an inside trading day. Still like the uptrend here and consolidating.

We are still looking for that clearly defined leadership for the broad markets. One day at a time and stay focused on the objective of each position as well as  the overall portfolio.

2) Currency:

Since the high on March 27th the dollar has essentially moved sideways. The chart below shows no one currency is leading. Only FCY led to the downside, but is gaining of late. Nothing of interest now expect the British Pound (FXB) which bounced on economic data this week.


Sector Watch:

  • UUP¬†– The Dollar still trading sideways¬†essentially¬†and don’t expect much change short term. Moved lower the last three trading day and testing the $22.30 level currently. Watch with interest relative to commodities.
  • FXB¬†– the British Pound jumped higher and is trading above the $153 level. The currency is in an uptrend off the low and moving through the current resistance. For now we just have to be patient and let the pound work through the directional challenge day-to-day and continue in the uptrend currently in play. Took the entry on the move and the target is $152.50. $151.75 stop in place on the trade.
  • FXE¬†– ¬†The euro is like the dollar, in a state of confusion and looking for direction short term off support.

3) Fixed Income:

Sector Summary:

  • 30 Year Yield = 2.87% – ¬†up 1 basis point — ¬†TLT = $122.94 down 45 cents
  • 10 Year Yield = 1.66% – up 1 basis point — IEF = $108.85 down 4 cents

Tracking Bond Sectors of Interest:

Treasury Bonds¬†–¬†Yields on the 30 year Treasury was flattening out, but jumped on Friday after the GDP data. Didn’t seem to bother investors in stocks, but rattled somebodies cage as money moved into bonds again. Watch to see how this unfolds next week.

High Yield Bonds РHYG = 6.5% yield. Support remains at $92.75. Move back towards the previous highs near the $95 level. Manage the position for the dividend as the growth side is uncertain short term. I expect the trading range to remain near term. Use $92.75 as the stop. The fund broke to a new high and uptrend remains in progress.

Corporate Bonds РLQD = 3.6% yield.  They jump higher again this week as money finds its way to bonds. Use stop at the $120.50 level to protect the upside gains. Otherwise keep collecting the dividend.

Municipal Bonds РMUB = 2.8% tax-free yield. Moving back in an uptrend ever so gradually. Collect your dividends and let it ride for now.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the rally in stocks. Broke to a new high and steady as she goes. Keep and practice dividend collection.

4) Commodities –¬†Sector Summary:

  • The¬†commodity index¬†continued holding above the $25.50 level with oil attempting to bounce. The sector gained 1.3% as the move in oil, gold and base metals push the sector along. Don’t get overly excited this is a challenging sector near term. Watch and be patient as any trades will be plain to the eye.
  • Natural Gas¬†– UNG posted nice gain on day.
  • Crude Oil¬†– Crude broke higher and followed through with more positive buying today. Manage the UCO play ¬†short term.
  • Gold –¬†The metal has bounced to begin filling the gap short term. GLD is moving higher. Watch and see how it plays out short term.

Commodities Rotation Chart:

I have moved the starting point forward on the chart. DBC has moved sideways since April 15th start point and gold, oil and precious metals have move higher. Watching for some leadership to develop going forward.


5) Global Markets:  

Global markets struggle with the slower economic data in China, Europe and the US. But, the EAFE index has started to bounce in response to the US markets this week and EFA hit the high from earlier in April today. The bounce is no indication of things improving, but trading in tandem with the US markets.  

Global Mkt

Country Watch:

  • FXI¬†– Follow through on the bounce off the recent lows. The 2.8% gain breaks the downtrend line again and now needs to follow through on the upside. There is a trade, but the risk is high. Watch and see how this develops.
  • EFA¬†– Held support and is now back at the previous high of $60.85. Watch to see how it plays out.
  • EWI¬†(Italy) was up 2.4% Monday off the lows and followed up Tuesday with a gain of 2.5%. The move above $12.60 was the entry and where we added the trade to the ONLYETF Model on a upside break above resistance. Still moving higher and we will manage the play going forward. Wednesday held the gains and continued slightly higher on day.

6) Real Estate (REITS):

Real Estate Index (REITS) РIYR tested $70.73 support and is now back at the high of $72.50. VNQI and AMJ continue in the current uptrend.

Sector Summary:

  • Most of the REITs are extended short term on the upside, thus the test in IYR. Watch and manage your stops. But, let it run as high as it intends to go.
  • Scanning IYR we find the charts look very similar on the upside. SFI (breakout), VNO, PLD (breakout and retraced), LXP, FR (breakout), KRC, ARE and HST show some consolidation and some have broken higher since we posted here last Friday.
  • Mortgage REITs are selling back towards support and worth watching. NLY, REM, IVR, WMC and MBG. Moving slightly higher and allowing investors to collect the dividend.
  • 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.
  • REITs and MLPs mixed in the same ETF with MDIV is a good alternative to picking through all the choices. This mult-assets income fund pays a 5% dividend.

7) Global Fixed Income:

Sector Summary: Tested lower on Monday with the rest of the world markets.

  • 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. Entry $28.95 + 3.1% dividend.
  • EMB – Big recovery and interesting in watching. 4.3% dividend yield. Entry $120.25
  • PCY – Big recovery as well off the low for short term play. Entry $30.60. 4.8% dividend yield.

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 losse