Not much changed overall on the day

Tuesday – Notes & Research

Another day with a positive open, today was a result of the trade deficit data. It reversed and worked its way lower throughout the day and then bounced the last two hours. Not the greatest of day overall, but enough buyers to keep the sellers at bay still. The worry over the Fed trimming stimulus was back today… of course that is following the don’t worry about the Fed talk on Monday. Stop the madness please!

S&P 500 index still holding the 1623 support, NASDAQ holding 3425 and the Dow is holding 15,100. If this level is taken out the downside opens up short term.

Investors and analyst with a selling bias currently are starting to speak out. The news headlines are focusing more on the downside risk currently in the market and short term they may have an impact.

We will have to be patient here and see how this plays out tomorrow.

Sector Moves of Note:

  1. The VIX moved above 17 again on Tuesday only to close at 16.4. Watching VXX and SVXY as opportunity depending on how the current movement settles out. VXX has been the trade intraday. But, not sustaining any upside that is trade-able.
  2. Gold can’t make a decision on direction. The move back to $136.51 on GLD Monday gave way to a 1% decline to $135.23 on Tuesday. Give it room to decide is all we can do for now. GDX failed to make the move above the $30.50 level as well. Patience is a virtue.
  3. Natural gas has moved down to support at $21.15 again. Watch the downside and KOLD entry at $18.30 if UNG  breaks support. Still watching for the trade to develop. Sector Rotation Model.
  4. Semiconductors (SOXX) sector made a move to new high, but continues to test the move. Looking for a clear break higher and opportunity. INTC continues to lead on the upside short term.
  5. Consumer Staples was the first big break lower for the major sectors. The drop below support at $40.75 was a big negative and move for the sector. Short setup if it continues below the $40 level. Broke lower early, but managed a 1% gain on Monday. Watch to see if support holds.
  6. Healthcare was another break lower as XLV failed to hold $48.70. Watching to see if the $47.93 support holds.
  7. Small caps failed to make the follow through higher, but still watching for direction.

We talk about downside risk management all of the time. Choppy markets create many headaches for investors and today is just another example. Manage your risk, exit positions that are not working, and look for what is working moving forward, but most of all be patient.

Economic Data:

ISM Manufacturing drops below 50% and shows contraction similar to what we experienced in November… When the current rally started. Not a good start to the data release on the economy.

Trade deficit below expectations. Home prices rise 12.1% year-over-year.

Economic Events & Calendar

1) US Equities:

Major market indexes sold modestly on the day, and the yo-yo effect remains in play. The April 18th chart below is the last low in the test off the April 11th high. Added line on the high for May 21st to track as the current high or pivot point. The second chart below shows the May 21st pivot point chart and the leadership on the downside. It gives some clarity to what you are seeing on the April 18th chart.

Utilities, Telecom, Consumer Staples, Energy and Consumer Services are leading the downside move. Healthcare jumped into the picture on Friday. Not pretty for the buyers.

April 18th Pivot Point:

Scatter 418

May 21st Pivot Point:

Scatter 418

The current trend started on November 15th and has been tested by the the ‘fiscal cliff” issue bottoming on December 28th, The February 25th low pivot point was prompted by FOMC rumor of withdrawing stimulus, Cyprus on March 14th and the April test on economic worries. ¬†The¬†original¬†target for the move was 1550-1575 which has been obtained. The uptrend is now in question with the current activity and a potential rolling top. Watch and don’t be fooled by the analyst… charts don’t lie.

10 Sectors

Sector Rotation of Interest:

Technology (XLK) –¬†The pullback from the move higher tested $31.40 as support and held for now. If support holds $31.45 it would validate some leadership for the sector in the current pullback. Otherwise the shorts will be looking for the opportunity. Developing a wedge consolidation pattern at the end of the chart. Gained on the day, but still in trading range.

Consumer Staples (XLP) РThis was the first big break lower for the major sectors. The drop below support at $40.75 was a big negative and move for the sector. Short setup if it continues below the $40 level. The move is a result of higher interest rates and pressure on these stocks, not to mention the valuations were ahead of themselves. Monday managed a 1% bounce off support? Watch.

Healthcare (XLV) РThis was another break lower in the major sectors as XLV failed to hold $48.75. Watching to see how Monday plays out, but the $47.93 level is the key support. Watch to see how it follows through and if any opportunities result from the move. All of the subsectors worked lower within their respective consolidation ranges.

Energy (XLE)¬†– Big pullback on Friday as crude and natural gas broke lower. The $80 support is in play and the downside from there is the big question mark. Watch to see if it holds or goes lower. Held support on Monday, watching…

2) Currency:

From the May 17th high we have seen the dollar gradually decline. The last three trading days the downside has accelerated and today we added UDN (Two Egg Model) as a position.

Currency

Sector Watch:

  • UDN¬†–¬† The dollar has been trading sideways and has now move lower breaking the uptrend. Adding UDN as the down dollar play for now. Two EGG Model.
  • FXE¬†– Added a play on the currency against the dollar at $128.50. Sector Rotation Model.

3)  Tracking Bond Sectors of Interest:

Sector Summary:

  • 30 Year Yield = 3.29% – up 2 basis points —¬† TLT = $113.73 down $1.05.
  • 10 Year Yield = 2.13% –¬† up 1 basis point ¬†— IEF = $105.08 down 25 cents.

Treasury Bonds РComplete reversal on the yield has pushed the bond lower and broke below the previous low. Not a place to be other than short the bond. TBT. Hitting against March highs again at $69. Raise your stops and look for a short term rally in bonds and a test back to $66.50 on TBT.

High Yield Bonds РHYG = 6.5% yield. No positions currently as it plays out.

Corporate Bonds РLQD = 3.6% yield. No positions currently. Downside risk in play.

Municipal Bonds РMUB = 2.8% tax-free yield. No positions currently. Downside risk in play.

Convertible Bonds РCWB = 3.6% yield. No positions currently. Starting to trade sideways.

4) Commodities –¬†Sector Summary:

  • Commodity Index¬†(DBC) – Developed into a trading range and just need to practice patience short term.
  • Natural Gas¬†– (UNG) Testing the $21.15 support level short term. No plays currently
  • Crude Oil¬†– (OIL) ¬†Reversed testing support again at the $21.20 level. No direction with worries globally and domestically for demand have weighed down price and direction short term.
  • Gold –¬†(GLD) Cooked in a squat. Can make up its mind up or down. Looking for break above the $137 level.
  • Palladium¬†– PALL – Move above $73.70 is worth a trade on the continuation of the upside. $72.65 stop, $$77 target. Patience for the metal to break higher.

Commodities Rotation Chart:

I have moved the starting point forward on the chart to May 1st as a potential uptrend. As you can see that didn’t happen and DBC has moved sideways since the start point. PALL is moving higher and leading the metals. The balance of the sector is vertically challenged. CORN since May 21st has been trekking higher and one to watch. (CORN break above $41 positive.) Watch for $42.25 to hold on CORN. Be patient and let the winners define themselves before going into sector. Thursday added positive move in gold, silver and base metals. DBB – the base metals are attempting to move higher the last week.

Commodity

DBC –¬†PowerShares Commodity Index ETF¬†(click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

Global markets have shifted to the downside over global economic slowing. The May 21st pivot point lower has been more dramatic than the US markets, but the pivot correlates to the struggles starting in the US markets. The Asian connection is hurting the overall index. The chart below shows the shift over the last week plus on the downside. We don’t own any positions in the global markets and for now I am still willing to sit on the sidelines.

Note the bounce in EWJ today after selling off.

Global Mkt

EFA –¬†iShares EAFE Index ETF¬†(click to view) 10 Developed Countries making up Europe (66.6%), Australia (8.9%) and Far East (24.5%). (Weighting of fund) Not most balanced, but give indication of global markets.

Country Watch:

  • FXP– Added short play on China as the downside has been the leader. Sector Rotation Model.
  • EWJ¬†– Leading lower as fast as it did to the upside. Still looking for an upside move from the country. Nice bounce today as the country finally gets some recovery.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke the uptrend and signaled exits. Moved to Cash versus holding the sector short term. Shorts are dangerous here, but technically that is the call.

Sector Summary:

  • IYR – Hit our stop at $73.50 and has continued to move lower. Out for now.
  • RWO –¬†SPDR Global Real Estate ETF¬†hit stop and watching for now.
  • MDIV –¬†First Trust Multi- Asset Income ETF¬†is a good alternative to picking through all the choices of income funds. This multi-assets income fund pays a 5% dividend. Watch the downside currently in play with rising rates.

7) Global Fixed Income:

Sector Summary: Complete reversal low and uninterested in the sector currently.

  • Watching these funds for a bottom.
  • PAFCX – Spike to the downside.
  • PICB – Breaking aggressively lower short term. 3.1% dividend.
  • EMB – Breaking lower still no support. 4.3% dividend yield.
  • PCY – Big downside move and break of support. The current dividend yield is 4.8%.

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.¬†