Thursday & Weekend – Notes & Research
Market puts in just enough effort for the S&P 500 index to establish a new closing high. The close was 1569 and 4 points above the previous high. Now comes the validation of the move. As we have discussed this will be where investors determine the willingness to step in and buy more or run to cash with a solid profit on the year. The bad news is they will now have three days to think about it.
Scanning the sectors for rotation we continue to see developments in the making.
- The Dow hit another new high on Thursday, it didn’t want to left out of the fun. JPM, BA, XOM, CVX and BA were the worst performers again for the index. Definitely getting interesting at these levels for the index.
- Europe (IEV) moved below the uptrend line on Wednesday and managed to rally back above it today. Support remain near the $38.40 to 38.75 level. A break below that would open the way to a short play. EPV is the leveraged short play on Europe.
- The first quarter comes to a great end for many, but the question relative to earnings and growth will start to be debated on Monday.
- Oil moved to $97.28 as the upside stretches it to five days on the upside. The breakout move from the consolidation on Monday has followed through on the upside. We will raise our stops to protect the gains.
- Volatility index closed at 12.7 and turns a deaf ear and a blind eye to what is happening round the world.
- Interest rates dropped on the week as money rotates to safety. The 30 year bond is at 3.1% and doesn’t seem to buying into the markets optimism. This is an area to watch for clues on how investors really feel about stocks.
- NO – that’s not a flash crash on CORN down 7% on the day. WEAT down 5.3 and SOYB down 2% adding to the downside response. Inventory reports showed more build up than analyst expected. Maybe this explains why the soft commodities have been trading lower, DBA was off 1.4% as the basic of commodities fell in response. This the link to the grain report if you are interested in reading on it further.
The focus to end the day was on the new high for the S&P 500 index. For the quarter it was on returns and for the month it was improvement in the economy. There is plenty to discuss on all of these matters going forward. We have to stay focused. Watch the downside risk as it is in play should things not pan out the way everyone wants.
Big week for data in store. Durable goods orders (good on Tuesday), home prices (best increase in years reported on Tuesday), home sales, pending home sales (fell on Wednesday), GDP 4th quarter (whopping 0.4%), personal income and consumer spending. The data should make it interesting.
1) US Equities:
The yo-yo syndrome continues as investors want to buy stocks without the fear of Europe. That they did again on Friday with a slow rise throughout the day. New game new attitude and hopefully a different result going forward. All eyes were on the 1565 level for the S&P 500 index to hit a new high. It accomplished that today and the real challenge as we stated above, will come on the other side of that move. Is there enough momentum for the index to travel higher?
Sector Rotation Strategy:
The February 25th low pivot point remains in play. We added the March 14th high as the next potential pivot point on the downside. The move Wednesday – Friday pulled the index back above the close on the 14th keeping the upside in play for now. The consumer discretionary (XLY) and Healthcare (XLV) are the leadership short term and Utilties (XLU) made a big push to the upside this week as well. Stay focused and protect the downside risk.
December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. The trend has continued to push higher after the February 25th test. See above.
November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend.
Sector Rotation of Interest:
Healthcare – Continued to a new high above the $45 mark on XLV. Good point to add to position if you don’t own the sector already. This was the post in this mornings notes to break the sector down and look for the opportunities. March 18th was the pivot point off the recent pullback and XLV is leading all the sub-sectors! that is very unusual. IHF has had strong push the last two days breaking above the previous high at $76.
Small Cap – IJR made a move back to the previous higher, continues to consolidate in a sideways trading range. If we are to move higher in the broad indexes, I would argue we need to see some leadership from the index short term.
Midcap – IJH moved to a new high on a solid break higher today. The move through the $114.50 level was a positive for the index. We need to follow through on the upside, but the hard part is done. Be patient and watch how this plays out near term.
Utilities – The sector has been a clear leader on the upside after clearing resistance at the $38.30 level. Watch and protect your gains going forward.
Downside Pressure – Industrials (XLI), Telecom (IYZ), Basic Materials (XLB), Financials (XLF) and Technology (XLK) are struggling to keep on their rally caps. They have not broke trends nor have they turned lower, but they are testing the recent moves relative to the trendlines. Watch… no cheating on placing shorts or selling positions before the downside validates the direction.
- Dollar was back to a new high on euro news Wednesday, but gave up the gains on Thursday. UUP closed at $22.60. Still watching support at the $22.35 mark on the downside. Manage your stops.
- FXB – the British Pound jumped last week and held the move. However, it is testing lower this week. Watching to see how it does near the $149 level. Took the entry on the move and the target is $150.25. $149 stop in place on the trade. Bounced back on Thursday.
- FXC – the Canadian Dollar held support at $95.35. Bounced nicely to breakout, retraced to the consolidation zone and heading higher again. $98.50 is the level to watch.
- FXY – yen is still in bottoming mode, but the upside is building one day at a time. Watch for a base to build short term if the direction is to switch. $104.50 is the level to watch for a upside play on the bounce.
- FXA – Australian dollar bouncing as stocks continue higher leading the way. Big test today? Watch to see if it recovers or take your profit on the position at $104.25.
- FXE – The euro is testing support on the downside again? Broke support at the $128.15 level and closed below the 200 DMA. Watch the downside risk of the euro in play. Small bounce of the low and downside is still in play.
3) Fixed Income:
- Yields continue are shifting slightly higher as stocks hold gains. The question is if the market corrects how much will it impact? Patience as the downside in bonds continues.
- 30 Year Yield = 3.1% – up 1 basis point — TLT = $117.76 down 60 cents
- 10 Year Yield =1.85% – unchanged — IEF = $107.34 down 20 cents
Tracking Bond Sectors of Interest:
Treasury Bonds – The volatility in the bond sector has risen short term and it is causing grief for investors. The bounce lower in yields is the fear factor in play. That would make this move temporary and the trade is to short the bond on the rally higher. Be patient and let it develop.
High Yield Bonds – HYG = 6.55% yield. Support held at $92.75. heading to the previous highs near $95 Let it run as investors remain in love with junk bonds. I expect the trading range to remain near term.
Corporate Bonds – LQD = 3.8% yield. The price has found short term support ($118.90)… again. Downtrend line remains in play. Big jump today on the fund, but still not making progress short term.
Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds broke support and the chart is attempting to bottom or build a base. The downside risk remains and this is a sector of the bond market to avoid for now.
Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the current rally in stocks. Starting to see some selling off the highs. Watch stops and protect your gains. Nice bounce on Thrusday.
- The commodity sub-sectors are flat lining and no real progress overall. Still watching and waiting to see if anything other than the energy commodities will pick up momentum. Oil is moving higher along with natural gas and gasoline. In fact we need to watch UGA short term.
- Soft commodities fell today on the inventory data as discussed above. DBA fell 1.4% showing the weakness on the data. Corn, Wheat and Soybeans were all off on the day. Selling opportunity or buying? Watch the response to the Thursday selling and be prepared to be short each of the grains based on the response.
- UNG (natural gas) made the big move higher breaking out and following through on the upside. Hit resistance and has been testing the move. Gained 2.3% on Wednesday and dropped 1.6% on Thursday pushing the index back near the break higher? Watch ans see if this holds the upside momentum.
- Crude tested support at $89.30 last week and closed at $97.23 for the day. ONLYETF Model Portfolio The upside is still in play. Cleared the $22 resistance on OIL – watch and manage the risk of the move.
- GLD – Gold continues in the consolidation range and looking for the upside. Not likely to happen with the current events in play.
Commodities Rotation Chart:
5) Global Markets:
Global markets tested lower on the new in Europe, volatility is yawning, as the global markets continue to bounce up and down. We are a long way from being out of the woods on this issue. Take the positive today for what is… a move higher following some selling. Patience as this all plays out short term.
- FXI – China continues to lead the downside relative to the global markets. Watch the base that is building short term. Downtrend in play… news not enough to change direction short term.
- Japan (EWJ) broke higher, tested, and continued to move higher. Got the move above $10.60 and still moving to the upside. Getting extended, protect your gains.
- EFA – The long term uptrend remains in play and support has held, but the sideways motion remains in play. The 30 DMA broke today. Watch the ripple effect of Europe short term as this plays out.
- EEM – emerging markets continue to struggle. Small bounce of the lows this week, but still questionable on any move to the upside.
- EWW – Mexico is breaking higher again. Watch for the upside opportunity to follow through.
6) Real Estate (REITS):
Real Estate Index (REITS) – IYR Settling into a trading range near the high of $68.50-69.50. Sector Rotation Model
- XHB – Homebuilders moved to new high on the housing starts Wednesday, retraced some today, but still remains a positive sector. Be patient and manage your stops if the downside resumes.
- REM – Mortgage REIT continues to push higher in the trend – let it run is the only thing to do with trailing stop.
- NLY- Annaly Capital Management – continues the upside trek with some daily volatility. gained 2.5% on Friday to clear the 200 DMA. Hold and let it run.
7) Global Fixed Income:
- 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.
- Some basing is starting to take place and we continue to scan and look for opportunities in the sector.
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.