Pullback, Test, or Just Another Buying Opportunity?

Wednesday – Notes & Research

It is May 1st… Sell in May and go away! Maybe that explains the selling versus all the data points being worse again for April. No, I am not going to write about that, other than to say it is the first day of May and let the selling begin.

The reports are passing off the disappointing economic data on ‘sequestration’ or simply put, budget cuts. Those cuts were $85 billion for the 2013 budget? That eroded 12,000 jobs in the ADP Employment report? Cut the ISM manufacturing from 54.2 to 50.2 or a 4% drop? Reduced construction spending 1.7% from 1.2% growth last month? $85 billion doesn’t add up to that amount of slippage in the data. The budget cuts are not the blame for all this activity or lack there of. It is a lack of growth that gets the credit. The new regulations, new mandated healthcare and taxes would receive the majority of the blame, but that isn’t what anyone want to discuss… it has to be the government cuts! BS is all I can say. You can fix the problem until you admit what the problem is.

FOMC meeting is done, and the more things change the more they stay the same. No real changes and no change to the market following the announcement. Thus, tomorrow investors will make a decision what works… selling and taking profits or digging in and building more positions. Selling has the upper hand at the close today, cut that can change overnight.

Why the selling response today? That is the question we all want answered. 1)  economic indicators pointing to slower growth in April continued. 2)  earnings disappointment from some bellwether companies. 3) global economic data shows continued weakness in China. 4) Valuations are rich and need everything to go according to plan. Watch how this plays going forward. If the selling continues we have some positions to exit.

Below are our revised notes relative to the trading outlook from the watch list, and what I saw of interest for next week.

Sector Moves of Note:

  1. Gold opened down 2% as traders are willing to lock in their short term gains? We did, hitting stops today as the pullback hit the metal. Fear of ECB cutting rates playing into a strong dollar and weaker euro had gold moving lower from the open. Watch to see if the can catch support and continue higher? I am still favoring the downside as this bounce plays out. 1475 resistance and 1430 trade target on the downside.
  2. Gold miners dropped 2.2% and back to trading lower for now. Watching, but not playing the sector.
  3. Silver down 2.6% and not looking good other than short. ZSL is the short play.
  4. Oil opened down more than 2% as the selling gained momentum to follow up from yesterday. Imagine that slower economic data is believed to create lower demand for oil! Again, speculation is driving the price of commodities. Watch and play according to your risk tolerance. We were looking at DTO with an entry of 43.80, but it gapped higher at the open to $45.40. We passed on the trade, but still watching what will work here. More in the AM.
  5. NASDAQ 100 held up better than the rest down only 0.4% on the day. Watch to see how Apple play here along with MSFT, INTC, GOOG and others. Stop goes at the $70 mark on QQQ and if it tests and holds it give a point of entry or to add to the existing position.
  6. China economic data disappointed again this morning and GXC tested support at $70. Held the 50 DMA and still in position to move higher. If breaks support here it could set up a trade with FXP.
  7. Emerging markets (EEM) tested back to the break out level ($42.80) and held. Watch for the upside opportunity to add to the position if we follow through tomorrow or we take our exit on a reversal of the breakout.
  8. Small Cap breakout was the worst reversal of them all today. Watch for the bounce on IWM at $91.75. If it moves back to the upside I am willing to take a trade. Downside break of support could offer a short play, but the lack clarity makes either trade a high risk move. Decision in the AM.
  9. Pattern Set Ups from this mornings post: 1)  ARRY Рbroke lower (failed) 2)  DDD Рtested the break higher and held.  3)  FOSL Рfailed to breakout  4)  RL Рtested the breakout and held watch for move higher. 5)  JPM Рfailed with reversal.  6)  OIH РStill testing the down trending channel upside. More tomorrow.
  10. Europe held the move higher and is testing at the $41.50 level of resistance. Looking for a move to continue if the data provides the catalyst.

Tomorrow promises to be another day of fun filled data. Selling got everyone’s attention today and we now could see some more data relative to the direction overall near term. Take what this market gives and and manage your risk.

Economic Data:

ISM Manufacturing data for April was 50.7 and below expectations. Not surprising since everything else is slowing. The forward looking new orders were higher at 52.3 and production climbed to 53.5 giving some good news in the report, but ¬†employment fell to 50.2 from 54.2 in March. That doesn’t help with the employment data for Friday’s report.

Construction spending fell 1.7% vs 0.7% growth expected. The blame… a slowing in government projects. Home construction was up 0.7%, but the nonresidential fell 2.9%. Thus, the housing market continues to show modest growth, but the¬†commercial sector is still weak. Again this is a statement on the job front as well.

ADP Employment Index showed 119,000 private sector jobs added and below the 150,000 expected. Federal spending cuts again gets the blame. If we cut the budget by what amounts to $85 billion in 2013 how does it get the credit for all this slowing economically? $85 is what he Fed is allocation per month to stimulus????? Somebody explain the math?

Economic Events & Calendar 

1) US Equities:

Each test of the high has meet with some selling or resistance. My bias remains to the downside, but trend has held with the buyers stepping in at each buying opportunity. Here we are again! Do we work our way back to test the 1538 level or bounce tomorrow. Watch, listen and then act according to your strategy, don’t assume. ¬†The data continues to show weakness in the economy, but the buyers keep stepping in with the belief it will be better long term. The next test is here and we watch to see how it plays out.

The April 11th chart below starts on the high as a potential pivot point lower, but failed to on the downside with a bounce on April 18th low (vertical line). Leaders remain telecom, utilities, and technology. Energy made a solid move off its low on April 17th. ¬†Two concerns remain consumer staples (XLP) and healthcare (XLV). Both have struggled on earnings reports and the test is in play. Today’s selling puts a big question mark in front of the micro trend.

Scatter 411

Sector Rotation Strategy: 

The February 25th low pivot point remains in play relative to the trend. However, the volatility of the sideways trading is showing in the chart starting on April 11th, thus the chart above. Uptrend still in play, but the continued test leave plenty to worry about.

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher. The trend remains higher, but the short term volatility is picking up. Watch the downside risk and protect your gains appropriately.

Scatter1228

November 15th Pivot Point is the start of the current uptrend. Target 1550-1575 was attained and now there is pressure to test the move. The trend has overcome two attempted moves lower to maintain the uptrend. Watch the trendline as the support on the current pullback. A break of the uptrend brings downside options back into play for the short term.

SP500Scatter

Sector Rotation of Interest:

Technology (XLK) –¬†Broke above the $30 level again. The key has been to buy the position as it moved and we have added to the S&P 500 as a trade. Solid leadership on the trading day for the sector. Wednesday reversed the move higher from Tuesday and testing the upside. Watch for continuation or pullback.

Consumer Staples (XLP) Рthe downside relative to earnings and warnings from the big cap stock this week is a concern. Tighten stops and watch how the trend plays out next week. Started off on positive note, but the sector is still lagging from earnings impact. Watch and manage the downside risk.

Healthcare (XLV) Рthe biotech stall from earnings is weighing on the sector for now. $46.80 support is level I am watching now (hit on Wednesday). Protect the gains is the priority. Large cap biotech took a hit and slowed the progress. Watch to see if we can regain the upside momentum. Tuesday PFE added to the misery downside with disappointing guidance. Exit on break of support.

Industrial (XLI) Рgot a bounce from earnings this week and now at resistance near the $41.50 level. A break higher would be worth trading short term. Shift in commodities is the reason for the move. Watch the commodity emphasis on the sector. If fades pass, if it builds buy. Tuesday showing some sideways consolidation. watch 50 DMA. Took exit on the break of support. This was a trade.

Energy (XLE) Рtesting the move and resistance. Watch for a move above $77.50 as possible buy point on the upside. Need crude to behave and the earnings to be positive in the sector. All positive for now, watching the downside risk. Tested lower on Wednesday watch and protect the downside risk.

Telecom (IYZ) РMoving higher, but test on Friday with an inside trading day. Still like the uptrend here and consolidating. Set your stops according to risk you will accept short term.

We are still looking for that clearly defined leadership for the broad markets. One day at a time and stay focused on the objective of each position as well as  the overall portfolio.

2) Currency:

Since the high on March 27th the dollar has essentially moved sideways. But, starting April 23rd the dollar has been steadily declining. The chart below shows the trek lower in the dollar. At the same time the euro (FXE), the yen (FCY), the Krona (FXS) and the Canadian dollar (FXC) have all started to move higher. Looking for a trend to develop short term. UDN is in play from the break of support on the dollar.

Currency

Sector Watch:

  • FXE¬†– ¬†The euro is attempting to provide some upside leadership short term. FXE $130.75 trade entry. Hit entry today, but watch the current volatility.

3) Fixed Income:

Sector Summary:

  • 30 Year Yield = 2.84% – ¬†down 4 basis points — ¬†TLT = $124.01 up $1
  • 10 Year Yield = 1.63% – down 4 basis points — IEF = $109.05 up 22 cents

Tracking Bond Sectors of Interest:

Treasury Bonds¬†–¬†Yields on the 30 year Treasury are falling again as fear rises? Concerns? Debt? Whatever the motivation money is flowing into bonds and is a indicator of money leaving risk assets like stocks.

High Yield Bonds РHYG = 6.5% yield. Support remains at $92.75. Move back above the previous highs at the $95 level. Manage the position for the dividend as the growth side is uncertain short term. Use $92.75 as the stop. The risk is rising with each step the fund takes. The spread to treasury bonds continues to shrink and the risk/reward is high. Wednesday decline shows the risk of the sector short term. Manage your stops.

Corporate Bonds РLQD = 3.6% yield.  They jump higher again this week as money finds its way to bonds. Use stop at the $120.50 level to protect the upside gains. Otherwise keep collecting the dividend.

Municipal Bonds РMUB = 2.8% tax-free yield. Moving back in an uptrend ever so gradually. Collect your dividends and let it ride for now. Still climbing steadily.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the rally in stocks. Broke to a new high and steady as she goes. Keep and practice dividend collection.

4) Commodities –¬†Sector Summary:

  • The¬†commodity index¬†dumped lower on gold and oil selling. This is the reason the sector is a trade… too much short term uncertainty and speculation driving prices. Watch and be patient as any trades will be plain to the eye.
  • Natural Gas¬†– UNG posted nice gain on Monday is followed by selling on Tuesday and Wednesday gave up the gains from early in the day. Still attempting to move higher short term with some volatility.
  • Crude Oil¬†– Crude moved lower today again and setting up short play (see above)
  • Gold –¬†The metal has bounced to begin filling the gap short term. GLD is moving higher. Watch and see how it plays out short term.

Commodities Rotation Chart:

I have moved the starting point forward on the chart. DBC has moved sideways since April 15th start point and gold, oil and precious metals have move higher. Watching for some leadership to develop going forward.

Commodity

5) Global Markets:  

Global markets are trading in tandem with the US. No reason to be moving higher, but content to do so. China, Europe and Australia have taken on the leadership since the 18th of April. Watch and take what the market gives. Today they traded lower with the US markets.

Global Mkt

Country Watch:

  • FXI¬†– See trade set up above.
  • EFA¬†– Held support and broke above the previous high of $60.85. Follow through has been positive.
  • EWI¬†(Italy) The move above $12.60 was the entry and where we added the trade to the ONLYETF Model on a upside break above resistance. Still moving higher and we will manage the play going forward. Testing the break higher on Monday, watch and adjust your stop.

6) Real Estate (REITS):

Real Estate Index (REITS) РIYR tested $70.73 support and is now back at the high of $72.50 and breaking higher Tuesday. Gave the gains back on Wednesday? Watch as uptrend is still in play.

Sector Summary:

  • Most of the REITs are extended short term on the upside, thus the test in IYR. Watch and manage your stops. But, let it run as high as it intends to go.
  • Scanning IYR we find the charts look very similar on the upside. SFI (breakout), VNO (at top of range again), PLD (breakout and retraced), LXP (broke higher and¬†trekking¬†nicely), FR (breakout and move higher), KRC (break higher today), ARE (nice move to top of range) and HST (breakout today) . The moves have all followed through over the last two week on the upside.
  • Mortgage REITs are selling back towards support and worth watching. NLY, REM, IVR, WMC and MBG. Moving slightly higher and allowing investors to collect the dividend.
  • RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Watch for test of the move if markets struggle. Solid uptrend remains in play.
  • REITs and MLPs mixed in the same ETF with MDIV is a good alternative to picking through all the choices. This mult-assets income fund pays a 5% dividend.

7) Global Fixed Income:

Sector Summary: Making another move to the upside short term.

  • There are some funds moving in favorable direction of late.
  • PAFCX – Bounced off low with the movement in yields going lower. Holds $11.60 worth owning short term. The bounce remains in an uptrend and the dividend is the play.
  • PICB – hit support traded sideways and broke higher. Entry $28.95 + 3.1% dividend. The upside previous high is now in play. Watch and adjust your stop to $29.15
  • EMB – Big recovery and interesting in watching. 4.3% dividend yield. Entry $120.25. Breaking higher following the consolidation adjust your stop to $120.50 and go forward collecting the dividend.
  • PCY – Big recovery as well off the low for short term play. Entry $30.60. 4.8% dividend yield. Breaking higher as well. Raise stop to $30.70 and collect the dividend.

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 losse