Modest bounce to hold some support

Tuesday – Notes & Research

Volatility settled some today, but the jury is still deliberating on the direction.

The focus today shifted from Italy to “sequestration”! I repeat what I wrote yesterday on that matter…

“That brought out more worries in the US relative to the budget cut deadline. Or now known as sequestration. As we stated in our weekend update, “the total cuts are not as dramatic as the media has made them out to be and they will not really impact the operation of government. In fact, one report noted the net spending for the fiscal year would still rise over $15 billion. ¬†The real impact will be psychological and the markets will likely react to the act itself more than the¬†economic¬†impact of the event. Another outside market event that will add to the volatility on the week.” Those worries came with the European worries.”

We continue to dig in to gain some insight into the current activity. This is not the kind of market I like, nor do I like the risk of this environment. The following are my key concerns:

  1. How do investors accept the budget cuts, assuming no deals are cut. The hype is leaning towards selling and I am not convinced that is the case after the initial reaction. 
  2. What will the Fed do at the March FOMC meeting. No real changes expected to QE infinity, but will the shorten the timeline or adjust any method of delivery.
  3. Italian elections have now become important enough to what the impact on the euro and the EU. Despite all the rhetoric, Europe does matter to the global economy.
  4. Can the economy really recover? Earnings grow? Revenue increase? Simple thing that make the market more palatable to investors.

Plenty to consider, but the key going forward is the level of uncertainty about the future that will set the tone for stocks and the global markets overall.

Economic Data:

The focus is now shifting to the budget cuts of $85 billion if a deal is not made prior to Friday. If we are going to cut any spending in government then this may be the only hope. What is¬†truly¬†sad is we can’t cut $85 billion in spending from a budget that exceeds $3 trillion! Thus, we all look for this to be the economic event of the week.

Data Summary

  • Congress calls for the Senate and White House to come up with a solution. Good luck!
  • Still dealing with the week data from last week. There is plenty of data to be released this week from the durable goods orders to home prices and personal income and spending.

Economy is steadily treading water with little to no growth. The short term outlook for the economy is positive, but just barely. Keep your focus and remain disciplined relative to your stops and exit points. Correction anyone? Famous last works from last week.

1) US Equities:

Market Summary:

  • Bernanke testimony set the record straight that QE benefits are clear and the risks are¬†manageable. I don’t know about you, but I feel much better following his testimony with that valuable input.
  • Italy concerns not off the table yet. Global economic picture got dimmer on the news.
  • Senators stated they believed the sequester cuts will take place at the weeks end. Without the Republicans giving in to more tax increases the deal seems dead. Thus, what how this impacts the economic picture?
  • S&P 500 index bounced back above the 1495 level that seems important level of support. We are far from being out of the woods for now. One day at a time.
  • NASDAQ bounced back above the 3130 support, and like the S&P 500 index still looking for a definitive direction on the index. Watch the downside as it is still in play.
  • Crude made an attempt to bounce, but failed to hold the move closing flat on Tuesday. UGA managed to hold support at the $63 level.
  • Gold wakes up from the selling and manages a bounce back above $1600. That is a positive for now.

Technical Outlook:

  • Broad index failed to hold the key support of 1495 for the S&P 500 index was broken. That level was recovered in trading today and leaves the question of direction. The technical data has been building a case over the last two weeks for a pullback. That is the play currently and we will have to be focused and discipline to capture any of the move as it play out.
  • Bottom reversal on GLD today. That is worth keeping an eye on relative to the¬†upside¬†trading opportunities.

Leadership Opportunities:

  • The last shall be first… XLB up 1.2% after a 5% decline over the last week. Watch to see if it follows through on the bounce.
  • Utilities and Consumer Staples have held up the best short term. That shows the defensive stocks with the current leadership. Not the best leadership, but better than none.
  • Healthcare is still on our radar for the upside and worth watching if the reversal builds any steam.

Short Opportunities:

  • Housing fell big on Monday, but managed a solid recovery bounce today thanks mostly to Home Depot beating earning expectation. Watch to see how this plays out going forward.
  • Euro weakening on concerns. This is the TWO EGG play… short euro, long dollar. Sold half on the calming today, still could move higher as this get muddier.
  • Still some developing set ups worth our attention. We will add them to the Watch List when appropriate.

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. The 1495 level was broken Monday and we have to watch the pivot off the low from Monday. Patience is key as this unfolds.

Scatter1228

November 15th Pivot Point for current uptrend. Target 1550-1575 short term. The uptrend off the November low remains in play,  but the downside attempting to take over the up trendline.

SP500Scatter

Tracking Sectors of Interest:

Telecom РThe DJ US Telecom index has pulled back, but the defensive nature of the stocks offers some opportunities at the stock level. We have been tracking both AT&T and Verizon as a dividend/growth idea.

  • WATCH: T – Break above resistance at $35.65 is attractive on the upside, plus the 5.1% dividend.
  • WATCH: VZ – Looks just like T on the consolidation and resistance $42.85, plus the 4.6% dividend. The stock has broken above resistance at the $44.80 level and moved higher.

Technology РThe trading range remains in play and holding support.

  • WATCH: GOOG – some consolidation at the high. Watch for move higher short term.
  • WATCH: HPQ – in our model and moved higher on earnings. Raise stop and watch for opportunity to add to the position on any pullback.
  • WATCH: SOXX – the semiconductors need to lead the sector. $57.30 support needs to hold.

Financials РHit our stop, but still looking for the upside opportunity in the sector. The sector should still benefit on the upside if we and when the volatility dies further.

  • WATCH: KBE – banks are being driven by those with extensions into the brokerage business. BAC, C, MS, JPM and GS. Sold lower on Monday, but still on watch list.
  • WATCH: IAI – sub-sector play on the brokers.

2) Currency:

Sector Summary:

  • The currency landscape is shifting short term to dollar strength, weakening euro and possible bounce in the yen short term..
  • TWO EGG Model went long the dollar (UUP) and short the euro (EUO) on Tuesday. Solid move higher today in the trade. Adjusting the stops.
  • FXB – the British Pound has dropped to $150.50 support level? This is a new near term low for the Pound. However, the $149.90 close is now lower.
  • FXC – the Canadian Dollar continued lower as well heading towards support at $95.35.

Tracking Currency of Interest:

US Dollar РThe close $22.23  (UUP) after hitting the entry point on Tuesday. Dollar index traded higher as well. Watch the dollar/euro trade short term.

WATCH: UUP – TWO EGG MODEL – sold half today.

Euro РThe euro (FXE) fell below support at $132.70, and closed at $129.55 on the Italy worries. Manage your risk of the trade.

WATCH: EUO: TWO EGG MODEL – sold half today.

3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly on the turmoil in stocks. ¬†The question is if the market corrects how much will it impact? We are in the process of finding out now.¬†
  • 30 Year Yield = 3.07% – down 2 basis points — ¬†TLT = $118.56 down 67 cents
  • 10 Year Yield = 1.88% – down 1 basis points — IEF = $107.08 down 18 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe move in yields hit the exits for the short side play with TBT Friday. The upside play with TLT hit the entry point. Watch and manage the volatility.

I am starting to like the long IEI vs the short TLT paired trade longer term. Working on the idea of the trade currently.

High Yield Bonds РHYG = 6.55% yield. Support is at $92.75, which has held short term and the fund moving off the lows for now. We will watch to see if support holds and then make a determination. $93.80 resistance in play. A move above that level would bring the fund back into play short term.

Corporate Bonds РLQD = 3.8% yield. The price has found short term support ($118.90). Broke above resistance at the $119.50 level and the entry or pivot point. Follow through on the move higher Monday. $119.90 stop.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds continue to move sideways. Found support and bounced back, but still looking for direction. Willing to wait for the right opportunity on the bonds.

Convertible Bonds РCVRT = 2.7% yield. Price had been moving higher on the current rally in stocks. The reversal pushed the bonds lower short term.

4) Commodities:

Sector Summary:

  • Bounce in gold continued today with a move to $156.17 on GLD up 1.2% . Watch for a reversal of trend if this continues. This puts GLD back in the down trending trading range again.
  • Crude flat on the day, but still down following the selling on Monday. Closed below support of $93 — Watch downside? Closed at $92.73.
  • Copper was down 5.3% last week and is testing support at $44.58. Watch to see if the bottoming over the last three days plays out on the upside.
  • DBB bounce some support at $18.60 again. Could offer another trade if the metals like copper bounce.

Tracking Sectors of Interest:

BAL РA trading range of $52.80-54.40 is in play. A break higher would be a continuation of the move off the November lows. Stalled and trading sideways. Watch and see it this can break higher. Tested lower again on Monday?

UGA РTesting support at $63 watch to see if any opportunity develops short term.

GLD РReversal in play on the big bounce Tuesday.

5) Global Markets:

Sector Summary:

  • Europe bounced and held the lows – that is the good news.
  • Japan (EWJ) bounced back today after some more testing.
  • Italy (EWI) still in the news and the downside is at support of $12. Break gets ugly from there.

Tracking Sectors of Interest:

EFA РBroke support at the $57.62 mark on Monday and traded back to it on Tuesday, but remained lower. The close below the 50 day moving average was another negative for the global ETF.

IEV¬†– Dropped last week on Spain’s sovereign debt concerns. Moved lower again on Monday’s Italian election worries. Euro down as well on the news. Hit exit points last week and now we wait to see how it plays short term. EPV broke above resistance at $25. Watch how this plays out short term.

FXI¬†– China’s PBOC announced they would cut off money relative to the real estate market and repos. This is equivalent to what the Fed announced on Wednesday relative to quantitative easing. The impact was four days of selling. FXI, GXC, etc. all fell nearly 5% on the week. Watch to see how this downside move plays out. If the PBOC is serious the economic impact could be big for China’s market. Watch FXP hit entryon the Sector Rotation Model.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders found some resistance near the $29.25 (XHB) level and managed to test lower. This has been building as the stocks are ahead of themselves short term. Inventory has shrunk on both existing and new construction, but the worries are rising again. Watch for opportunity in the selling short term. (XHB fell 3.4% on Monday) But, bounced 3% on Tuesday as Home Depot posed better earnings. Watch!
  • REM – Mortgage REIT is breaking down with $14.80 support. Held Friday.
  • NLY- Annaly Capital Management finally broke above $15, but testing lower on the emotions in the sector.

Tracking Sectors of Interest:

The pullback test is in play for IYR and $67.25 is support. Selling resumed and hit our stop on Monday.

7) Global Fixed Income:

Sector Summary:

  • The sovereign debt issues had faded, but with Spain in the news again, Italy facing disruptive elections this weekend, and France taxing itself out of existence, too many concerns and the safest play is to avoid the asset class for now.

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.