Profiting from the good and the bad

Thus far it has been a week of boring trading for the broad market indexes. However, if you have been watching the sectors the activity this week has been interesting on both the upside and downside. That has created some trading opportunities and some set ups to trade looking forward. Below are a few of the leading sectors on both the upside and the downside.

Let’s start our review with the positive or the upside:

  • Energy (XLE) remains the leader in the current cycle. Oil is holding near the $97 level and gasoline has renewed it’s trek higher overall. In fact, a look at the chart of UGA shows a break higher from the consolidation on Thursday. This is a double-edged sword as the consumer will have another pain in the wallet. I filled up with gas this morning and it cost me $3.69 a gallon for regular unleaded. That is 19 cents higher than last week or a five percent increase in the price. Owning UGA over the same period of time returned 3.5%. You have to offset inflation or taxes by making money in your portfolio. I expect gasoline to continue higher for the short term. The refiners will continue to benefit from the spread in Brent Crude vs US Crude.
  • Oil Services (IEZ) was the big winner on Thursday as Pioneer Energy beat earnings and jumped 16%. The upside in the equipment, refiners, drillers and services companies have been the leaders for the sector overall. I would look for further upside in the sector, but don’t chase it from here, let it test or pullback to define a better entry if you are not already invested.
  • Industrials (XLI) broke from the consolidation and moved higher maintaining the current uptrend. Masco (MAS) has been one of the key leaders in the sector as the material and construction company benefits from the improved housing market. General Electric has been pushing higher this week as well. The transportation stocks have been the key leadership off the low in November. This remains one of the positive sectors on the upside with the follow through move to a new high this week.
  • Financiasl crept higher on the week as the banks have led the move to the upside. Bank of America (BAC) moved back above $12, Citigroup (C) broke above the $43 resistance and the regional banks (KRE) have picked up momentum. The brokers (IAI) has been the strongest of the sub-sectors and they continued higher this week as well.

Along with the sunshine there has to be a little rain and the downside has been in play as well in the following sectors:

  • Gold started lower on the week concerned about currency wars developing and it has continued lower all week. The short play on gold has thus been a winning play. The consolidation pattern broke lower and now the key support level of $159 has been broken helping the downside momentum short term. A move below $158 will open the door to the $151 level short term on GLD. Watch the ripple effect to Silver (SLV), gold miners (GDX) and silver miners (SIL). They will feel the pinch of lower gold prices as well, setting up short opportunities.
  • Treasury bond prices have been declining and with interest rates breaking above the 3% level on the 30 year bond and flirting with 2% on the ten year bond, the downside could accelerate further short term. Thus, the winning trade has been TBT or TBF to be short Treasury bonds. This trend is gaining traction and one to watch for the balance of 2013.
  • The yen has establish some new lows over the last three months and remains near the current lows. The euro is now joining the downside party as issues in Spain reemerge. Throw in weak economic data within the euro-zone and you have renewed concern relative to the currency risk in the euro. The downside or short play for the euro is in play and the opposite side of that trade is the long dollar play with UUP. If the currency wars escalate the downside in gold may shift.
  • Natural gas has declined nearly 10% the last two weeks as the rise in inventory is not sitting well with traders. The downside may accelerate if the the supply continues to build. KOLD, the short ETF for natural gas broke higher on Thursday and one to watch going forward.
  • Last, but not least, the newest sector to join the downside is telecom with a decline of more than 2% on IYZ on earnings. The challenges in the sector are relative to cost of infrastructure financing and outlook for profits within the sector. Not looking good unless you are short currently. Watch to see if the downside continues or creates new opportunities.

As you can see there are plenty of opportunities on both sides of the market short term. You must define your strategy in each area prior to putting money to work, manage your risk and remain disciplined.