Markets Trade Their Way to Flat

Wednesday – Notes & Research

The broad market indexes essentially traded in place today. Not surprising following the last three days on the upside. The bigger question remains relative to the downside risk. I am not attempting to prophecy about the future, but it is a ugly relationship between growth in price versus the fundamentals. I am happy to trade the long side of the market, but I am ready to start accumulating the short side of the major indexes. This will take some indication the market is tired and the buyers are willing to give up some control of the short term direction. This is a story line that will develop with time and we will continue to focus on our positions, but just as importantly where the downside plays make sense (#6 morning post).

Last Friday the S&P 500 index tested the lows early in the trading and then started higher. The follow through on Monday & Tuesday pushed the major index back into the up trending channel. Today they held as to levels and attempted to add to the gains. Now comes the final test, a potential move above this previous high (1297) or a retest of the low (1536) just established last week. Even if the test higher is the move, it still leaves a test of the downside in play unless the index breaks out to a new high and follows through on the upside. Watch, be patient and let this all play out.

Sector Moves of Note:

  1. In the morning post I was looking for a test of the major indexes on the move higher. That never really materialized as the indexes hovered near positive all day. Thus, today accomplished nothing in terms of moving higher or testing the move to this point. Tomorrow is another day.
  2. No test for the semiconductor trade posted, and we continued to pass on the trade. It did follow through on the upside with SMH gaining 1.2% and breaking above the February and March highs. Solid move higher.
  3. Crude oil opened higher on the day and never looked back. UCO was the posted trade at $26.80 and we added the position to the ONLYETF Model. Crude closed higher at $91.36 up more than 2% on the day.  The volatility in the commodity remains, but the bounce off the low was the play. Good news on earnings from Halliburton pushed the stocks higher in the sector as well. XOP up 2.7%, IEO up 2.3%, XLE up 1.7% and OIH up 2.8%.
  4. Natural Gas continued to trade opposite of crude oil again today. Look at the intrday chart of natural gas and it traded higher when oil was lower and lower when oil moved higher. The selling today in UNG hit our stop and we took the exit. I still like the future of natural gas on the upside and we will continue to watch how it plays out.
  5. Gold opened higher today following the test from Tuesday. We added the play yesterday and we will continue to manage the upside to a target of $143.50 short term. Watch for the upside to fill the gap on the move lower.
  6. Europe (IEV) hit our entry point of $40.40 this morning posted to the notes. The rally was in response to the US markets predominantly, but the upside is worth watching play short term.
  7. VIX index remained at 13.5 today as the market were flat and not anxiety to drive the upside. The volatility is in a vacuum and any downside spike has been met with buyers on the other side to take the volatility out of the markets short term. Still watching VXX if the volatility steps up short term.
  8. Treasury bonds remained flat and trading near the high on both the 30 and 10 year bonds. LQD, corporate bonds are near the high also, HYG, high yield broke to new high today and CWB, convertible bonds moved up to the previous high as well. Fixed income rally with stocks near the high? Divergence? Worth watching in conjunction with opening comments above.

It has been earnings driving the markets this week and we have had mixed reviews. That aside the buyers continue to be willing to put money to work and step in to keep the sellers at bay. Today was one of those days were the news wasn’t hot or cold, but just enough for everyone to rest and watch

EACH MORNING I WILL POST AN UPDATE TO THE RESEARCH PAGE TITLED TRADING NOTES FOR TODAY! This is will take the evening notes and post what I am looking for in the trading day. They will be posted by 7 am to give you time to establish what you would like to do with the notes. .

Economic Data:

Durable goods orders fell 5.7%? The economy is slowing and JP Morgan revised their growth rate for Q2 lower with a sharper slowdown than previously forecast. Q1 GDP estimates of 3.2% may be in trouble as the March data continues to show sharper slowing than expected.

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.

The April 11th chart below starts on the high as a potential pivot point lower, but has failed to accomplish any further downside. The interesting shift on Wednesday was in the leaders. IYZ, XLP and XLV all sold lower on the day? The rotation moved to XLY, XLF, XLB, XLI and XLE. The losers were the winners and the winners were the losers. This is something to watch moving forward. If the commodity based sectors gain momentum it will create an extremely interesting shift in money flow.

Scatter 411

Sector Rotation Strategy: 

The February 25th low pivot point remains in play. However, the volatility of the sideways trading is making crazy. The index was at 1563 on August 14th and it closed at 1578 today. All of the previous leaders are reestablishing their positions again on the chart. Watch XLV, XLP, XLY, IYZ, and XLU as the leaders. Watch XLF as financials attempt to move higher again.

Scatter 225

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. With today’s developments we have to protect against the downside and look to lock in gains if our positions are short term. Longer term holdings will be managed accordingly.


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 Monday now makes it four attempts to break lower. 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:

Semiconductors – held support and we are watching for a boost from the sector on the upside to continue to push technology stocks higher. Some rotation towards the growth sectors is needed if the index is are going to make another run higher. SMH is moving back to key resistance at $35.60. Watch to see if their is any gas left in the tank to run higher. Nice move higher on Tuesday as SMH tests the previous high at $36. Wednesday followed through with a break to a new high. Missed the trade, but that is the way it works.

Consumer Staples continues to defy gravity and moves higher. The 10 day moving average is the trailing the uptrend for the sector and we hold and watch for now.

Utilities are in the same mode. Remember the current theme is deflation and that favors the defensive sectors. They continue in an uptrend and we maintain our positions with the trend. Nice gain on Wednesday to add to the upside.

Telecom is building a flag pattern off the vertical move higher. Hold and add to positions if we can clear the $26.10 level on IYZ. Tuesday broke higher and the positive continues. AT&T earnings pushed the initial trading lower on Wednesday, but held above the$26 mark at the close. Good move from QCOM on the day.

TAN – The Solar ETF jumped 5% today. SOL, WFR, CSUN and FSLR were the leaders within the ETF. This puts the fund back at resistance at the $18.12 mark and it cleared it on Tuesday. Upside remained in play Wednesday.

Financials moved back above the $18.08 level Monday after testing support at $17.80 last week. No momentum from banks, insurance or brokers, but that changed slightly on Tuesday. XLF followed through on the upside and hit $18.42, KBE up 1.2% to $26.09 and KIE jumped back to $52.18 up 1.8% on the day. Some life in the sector again, finally. Wednesday posted a gain of 0.7% and back to the previous high at $18.60. Watch for a break higher.

2) Currency:

Sector Watch:

  • UUP – The Dollar broke the support at $22.35 mark on the downside and reversed on worries in Europe again. Still willing to watch and see how it holds up short term. Pushed back to the upside and near the high of $22.65.
  • FXB – the British Pound jumped two weeks ago, held the move at the $149 level. The currency is now in an uptrend off the low and moving through the current resistance at $151.50. Wednesday it sold back near the support at $150.50. For now we just have to be patient and let the pound work through the directional challenge it was facing. Took the entry on the move and the target is $152.50. $150.40 stop in place on the trade.
  • FXE –  The euro made gains on the week against the dollar and this week is giving them back.  This is uncertainty at its best. Be patient and let the trend build for now.

3) Fixed Income:

Sector Summary:

  • 30 Year Yield = 2.89% –  up 1 basis point —  TLT = $122.78 up 29 cents
  • 10 Year Yield = 1.69% – flat on the basis points — IEF = $108.64 up 7 cents

Tracking Bond Sectors of Interest:

Treasury Bonds – Yields on the 30 year Treasury is finally flattening out. The economic data, flight to safety, or many other reasons have pushed money back into the bond short term. If the volatility in stocks returns look for more rotation into bonds short term. For now be patient and let this play out.

High Yield Bonds – HYG = 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 today and we continue to monitor the progress.

Corporate Bonds – LQD = 3.6% 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 it starting to act like one. 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. This is a tax-free dividend play with limited upside from growth.

Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the rally in stocks. Back to testing the top end of the trading range with more volatility. 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 1.1% 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 hit stop today on another day of selling in opposition to oil prices rising.
  • Crude Oil – Crude broke higher today and we took the trade in UCO to play the move short term.
  • Gold – The metal has tried to bounce and fill the gap short term. GLD is moving higher and starting to fill the gap. The trade was up and sideways not offering much relative to the intraday. Watch and see how it plays out short term.

Commodities Rotation Chart:  


 5) Global Markets:  

Global markets struggle with the slower economic data in China, Europe and the US. 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 – Bounced today to show some love from buyers. The 1.3% 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) – IYR tested $70.73 support and is now back at the high of $72.50. VNQI and AMJ both posted new highs on the day.

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, VNO, PLD (breakout), LXP, FR, 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 losses.