Positive Day Gives Some Breathing Room

Monday, October 15th

Market takes the opposite approach of moving lower to start the day and then rallies to close higher. Nice change from the higher open that fades to a loss by the end of the day. Plenty of data out today for investors to digest as the sales reports were better than expected. Even without energy and food sales rose 0.9% for September. The good news helped the broad market as well as the retail stocks. No huge winners on the day, but the S&P 500 index gained enough to keep the wolves at bay for another day.

Banks lost 2.6% on Friday and were up 0.5% today. Not much of a rebound, but it did stop the bleeding in the financials. The broad sector gained 1.2% due to Citigroup gaining 5.4% on beating earnings despite weaker revenue. Goldman Sachs and JP Morgan were higher as well. We have to watch to see how this plays our near term for the banks and sector overall.

Semiconductors finally found some buyers as the index gained 1.5% on the day. No real changes in the index as it attempts to establish support and a bounce point. Look for SMH to move above the $30.95 mark as a positive bounce off the lows.

Economic news relative to the Empire State index showed a drop of 6.16 versus a drop of 4 expected. The negative economic picture remains in place for now. Inventories rose only 0.6% and improved from August. It remains hit and miss, but the overall weakness is present in the reports.

Overall it was a challenging day for the markets, but it amounted to another test of near term support. There is still plenty of work to do and worries to conquer for investors and their confidence, not to mention earnings reports.

What am I watching?

Semiconductors bounced 1.5% on Monday… can they follow through or is more downside the the outlook? We hit our stops on the play today and lock in some gains. Worth watching to see how the sector reacts from here.

Treasury Bonds – TLT bounced off support at the $120.75 mark. If the momentum builds bad news for stocks. The $124.50 break higher is a trade set up for the bonds again. Fear is the driving factor again. Monday produced some selling in bonds, but this is still worthy of our attention short term.

Natural Gas fell 3.2% on Monday. The test of support may be the next course of action. We are looking for a trade on the move up or down. If FCG moves above $17.95 would be of interest as trade opportunity also.

China broke out despite all the talk. Buyers are putting money to work. FXI cleared $35.70 look for entry on confirmation of the break higher. GXC is more diversified play, but the volume is much lower.

Bank earnings have been positive, but they sold last week. Today Citigroup was positive on earnings and helped pushed others banks forward. KBE, XLF, KIE and KRE all found support and we have to watch and see how this unfolds going forward- the leadership of the sector has been important. More selling will be bad for the overall market.

Small bounce for the NASDAQ 100 index, but the continuation of short play on NASDAQ 100 index is still a possibility.

Gasoline – UGA – Hit against resistance again $61.40 and is testing lower. Watch to see if the economic data finally puts an end to the current rally. The refiners are part of this move as well, but have been struggling of late. Watching the downside, support and reversal.

Apple – (AAPL) Can the stock hold support at the $623 level? If so, a bounce play may develop short term. Small gain today.

Telecom has selling from the large cap stocks. This is pushing the index lower overall, but the Verizon and AT&T charts reflect the primary weakness in the sector. Monitor the opportunities. American Tower (AMT) broke higher and from consolidation today on the Softbank purchase of majority interest in Sprint? Scanning the sector to find the winners… VMED, CCI, FTR and S are the ones that jump off the charts.

Housing (XHB) bounced off support at the $24.50 mark and looks ready to move back towards the high. Downgrades in the sector have not helped, but the upside is still well within grasp for those showing improving earnings.

Below we address the sectors looking forward:

1)  US Equities:

S&P 500 Sectors-to-Watch – The index bounced back above the 1430 support on the close hitting 1440 on the day. 1420 is the key level for the index to hold support. As we discuss below financials sold on Friday dropping 2.5% to push the index below support and make it a challenge for the broad index.

The Scatter Graph below is run from a starting point off the high on 9/14 following the FOMC meeting rally and current high. As you can see we drifted lower and we are testing support again. The leaders turned lower last week, but as seen on the chart they have turned up again. Utilities, Healthcare and Consumer Staples are holding steady currently. The next pivot point we are watching is the high on October 4th and that is showing technology and telecom leading the downside momentum. Utilities and Financials are leading off this pivot point. Watch to see how this play out going forward.

Financials – The sector dropped 1.4% on Friday and we hit our stops on the plays within the sector. We want to watch this during the current rally and let the leadership be defined. KIE, SPDR Insurance ETF is taking the lead within the sector as it consolidates near the highs. Scan for the winners like Citigroup on earnings.

WATCH: KBE – Entry $23.85

Energy –  The sector has been churning on the up and down movement in crude. The support at $72.50 is in play and a move lower invites the downside play as a trade opportunity. Nothing resolved on Monday.

WATCH: XLE – Trading range $72.50 – 74.50 for now. / DUG – Short play on the sector $21.20 entry.

Telecom – Weakness in the big cap stocks continues to drag the sector lower. Looking for a bounce off support near term.

WATCH: IYZ – $25.75 Entry Added – Stop $25 / WATCH: VZ & T weakness as a buying opportunity.

Healthcare – Big day for the sector after hitting our stops last week. Looking for some new leadership in the sector. The pharma companies were the leader today.

WATCH – IHE – moved back near the current high? Leadership?

NASDAQ Index – The index has been under pressure from the large cap technology stocks selling. Raised stop on the downside play to protect some gain. Watch the open in the AM if positive take the profit and watch.

WATCH: – QID – Entry $28.15 – Stop – $28.40

Transportation Index – The transports bounced off support last week at the $86.75 mark on IYT. They were chugging along nicely, but hit some resistance as the broad indexes have been selling. Still looking for this to be an indicator on the upside or downside for the economic picture short term.

WATCH: IYT – Entry $90 – retest of support near the $86.80 mark and bounce.

2)  Currency:

Dollar – The dollar, like stocks, is being pushed up and down based on the daily sentiment towards Europe and the global economic picture. The downside pressure on the dollar has met support currently and bounced. Looking for a clear direction on the buck.

WATCH: UDN – Entry: $27.40 / UUP – Entry $22

3)  Fixed Income:

Treasury Bonds – The upside for the bonds are in focus as the markets reach a point of uncertainty. Looking for money to rotate back into bonds if the risk is rising.

WATCH: TLT – Watch for a break of the downtrend line off the July high. ($124.50 watch for break higher)

High Yield Bonds – Question: Is there are bubble in the High Yield Bond Sector? HYG recently tumbled from $94 to support at $91.60. While the decline was only 2.5%, the show of volatility and risk relative to the price of these bonds was made abundantly clear. Is the party over in the sector or is this a buying opportunity? A break of the near term support would be a exit now and ask questions later event. We have bounced, but there is still a concern for the bond class. $91 Stop is good.

Looks like another run to the upside is developing. The break above $92.70 today was a positive for the bonds.

WATCH: Short play on HYG or JNK if support breaks.

4)  Commodities: Tough sector to own currently with the rise in volatility across the sub-sectors. Watch for shift in direction short term.

WATCH: GLD – Broke support and the short side is a possibility/ SLV – Broke support looking at the downside plays.

WATCH: DBB – Tested lower again as the selling accelerated. No support yet — $18.20?

WATCH: OIL – up/down??? Watch to see if we gain any short term clarity.

WATCH: UNG – Fell 3.2% on Monday – Watch the test of support near $21.50.

5)  Global Markets: The global markets bounced last week off the low at $53 on EFA. It has been testing the support level again along with the 50 day moving average. Break of support brings the short trades into play. Small bounce off support and still watching for clear direction.

WATCH: EFA – Moving lower testing support? / WATCH: EFU – short play on the sector. Entry – $19.85

6)  Real Estate (REITS) – The sector tested the recent high and support at $64 (IYR). Watch your downside risk if you still own this sector. We are looking for upside play if support holds. Testing without any conviction for now.

WATCH: URE – watch for entry / WATCH: SRS – short REIT play. Entry $26

WATHC: REM – Shift in sentiment and broke support at $15 as the downside is gaining momentum. NLY is acting the same short term as money rotates from the sector. Watch for support? rumored dividend cuts on horizon.

7)  Global Fixed Income – Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector.

WATCH: PIMCO Global Advantage Strategy Bond (PAFCX) is hitting new highs and worth watching as a opportunity if we move above the $11.80.

WATCH: Emerging market bonds (EMB) – they continue to move steadily higher. Testing the highs.

WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch how it plays out short term.

Watch: International High Yield Bonds (IHY) – Testing near term support on minor pullback.

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 downside risk determines your long term results. Trade Smart!