Research Note for May 22nd

MARKET STORIES:

It was one of those days Thursday where you scratch your head and ask why? Not that you really expect an answer, but it is just soothing to ask. Crude oil rose 3% on the day giving the energy sector a boost of 1% pushing XLE back to the $80.50 mark again after testing the 50 DMA. That helped industrials as well. When the day ended and I looked a the indexes there was nothing to do but yawn. The good news is the markets are acting in an orderly manner, but the bad news is they are not going anywhere and that leads to speculation on what is going to happen. Today is not likely to provide much in terms of answers as we head into a long weekend. Wall Street is likely to empty out early to get a start on the long weekend and enjoy some sun after a cold and wet winter.

The FOMC minutes seemed to lose it’s appeal¬†Thursday, but interest rates did decline on the day as the notes revealed the Fed is not likely to act in June. As we stated in yesterday’s notes the sector looked ready for a rally trade opportunity in TLT… that played out nicely on Thursday. Still look for more upside in the bonds now. TMV moved up more than 4% on the trade.

Commodities in terms of the dollar have been a topic of choice this week. The dollar was flat Thursday and oil rallied. This is a sector we continue to watch with interest relative to trades, but also as it shows that trading the sector has been better than holding it. Both have been volatile, but the trading side of oil has been more profitable.

The view looking forward hasn’t change… it is only taking on more variables that can cause change. The trends are still on the upside… the move on the upside break higher is still valid and we have to let it play out before making any hasty decisions. This remains a trading market without direction. Approach it with caution and risk aversion. Manage¬†your stops and let it unfold. Our favorite word remains… PATIENCE.

NOTE: The following are things to watch and evaluate during¬†the trading day…

  1. TLT bounced off the $118.50 support and now looking at the upside trade. TMF is leveraged ETF.
  2. Semiconductors (SOXX) hit the $96.50 level for entry on Monday if missed last week at $95.50. SWKS, INTC, ALTR, ATML and XLNX are leading. Looking for follow through today on move higher or may take the exit as quickly as we added it.
  3. EWG – in position to move higher. $30.65 entry.
  4. SLV РSilver made a strong move higher and as we stated it looked extended. Test lower could offer another opportunity to add the position to portfolio. $16.40 test level (hit on Tuesday) would be of interest. Looking for how it unfolds today.
  5. Builders (ITB) bottom reversal setup. $27 is of interest (hit entry on Monday) on the upside as the concerns over higher interest rates are digested. Trade only at this point as the new housing starts sparked move higher on Tuesday.
  6. India (PIN) bottom reversal trading opportunity. The long term view is positive for the country, but the selling short term is overdone? Watch with $21.90 entry.
  7. Dollar (UUP)) will upside continue today? The ripple effect in the commodities is of interest on the downside if the buck move back towards the previous highs.
  8. Europe (HEDJ) the hedged equity fund moving higher if #8 continues. The buck will influence the outcome of the fund short term… at the 50 DMA.
  9. Utilities (XLU) rallies back to the top of the range? Break higher gets interesting.
  10. QQQ – NASDAQ 100 index $110.70 entry on break to new high. Watch today for follow through.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) index is holding the new high closing at $213.50.¬†The noise is louder than the activity for the index. As we stated… always take what the market gives. (Added SPY Friday as trade) But, I will equally defend the principle by managing the risk. Need to¬†maintain upside move. New trade stop is $211.70. Older positions remain at the $204.50 level.

NASDAQ 100 Index (QQQ) held above the $109 support, but watching how this unfolds. Need to establish a new high if the sector is to regain the leadership role.¬†Patience and stops at $104.40 on short term positions. Doji on the close Wednesday…¬†moved higher, but still watching how it unfolds.

Russell 2000 Index (IWM) The index held the move above the $123.75 resistance. Monday the move through that level triggered the entry on the index and stop at $122.50. October trendline was broken on the downside and offers some resistance. Need to move through this level and regain the uptrend for the index. Downside below $118.80 is stop on the trade. Doji on the close Wednesday and Thursday.

Volatility Index (VIX)¬†so much for the worry… 12.1 on the index shows the lack of concern relative to the uncertainty in the markets.¬†¬†The buyers continue to be willing to put money to work at each dip. Move and close below the 12¬†mark makes it interesting.

Transportation (IYT) Closed at $152.53 Wednesday… that is through the bottom of the range and support. The sector established the $154 –¬†$157.50 range currently.¬†Not showing much in terms of upside opportunity and the break lower is not a good sign for the broader markets. Look for bounce or the other parts may follow the downside indication. DJ US Airline¬†Index was¬†the big weakness losing more than 8% across the board on capacity expansion discussions. Watching to see how it unfolds.

Dollar (UUP) is shifted gears on the downside with the break of support, but the rally in the buck over Europe is of interest as it offers a reversal opportunity. Why the shift in sentiment? Speculation about the global economies and the bond buying program in Europe. $25.10 level to clear on upside to the dollar.

Crude Oil (OIL) Trading positions only as the supply/demand issues remain. Tuesday reintroduced the upside risk of the dollar. Moved towards the $11.75 support level and held.¬†I am not willing¬†to jump on the short side of this until the dollar or supply validates the risk of owning oil short term. Thursday rally shows why the short side trade was wrong, at least for now… up 3.6% on the day.

SECTOR STORIES: 

Alibaba (BABA) upside gap on earning is holding. Still plenty of debate on the outcome, but the consolidation on the move higher gives entry for trade at $88.60. Watching how it unfolds following the volatility on Tuesday. Breakout and entry at $88.60. Added 3.5% to the gains on Thursday.

Regional Banks (KRE) – breaking higher from the trading range short term. $41.85 entry level. Hit entry on Tuesday and I like the upside if rates hold the move higher. Finding it’s way higher near term.¬†$40.70 is the stop…¬†No strength to speak of short term.

Software (IGV) leading tech. Watch the micro term pattern setups¬†as the break higher¬†for the sector and¬†moved above the $100 level.¬†Keeping the uptrend in play… manage positions. Scan for the leaders they are easy to spot.

Consumer Discretionary (XLY)  Need to hold support at the $74.50 level if the upside has a chance of keeping the trend moving higher. Consumer is not spending (April report lower than expected and still no clarity for the sector overall). Sentiment is declining (consumer sentiment report May). Thus, a trading range that if it can clear $77 on the upside may add to the position. $74.50 exit point.

Financials (XLF) This sector is all about Fed speculation. Will they raise interest rates¬†or not. Manage the risk and look to see how this plays out with the uncertainty in play still. This is one sector in favor of higher rates.¬†If that is true, we would want to hold long term positions… wide stops and ignore the volatility based on speculation¬†from analyst. Focus on what you believe. Stop $23.80. Break above $24.80 willing to add to the position short term. Added on Monday. Gave back gains last two days.

Healthcare (XLV) РFound support at the $71.25 mark and cleared $73.25 resistance and watching for possible addition to positions. Entry $74.75 added to holdings. Heading towards new high as the confidence returns to the sector.

Russia (RSX) Hit stops on Wednesday and reversal on Thursday? Yes, I know it is crazy. Watching to see if this becomes an opportunity going forward again.

Bonds¬†(TLT)¬†We bounced off the $118.50 support on Wednesday? The upside follow through on Thursday would say yes… Watch $120.50 for upside trade.

Energy (XLE) Broke support at the $80.50 mark. Recovered that level on Thurday and looking for confirm to add positions. Long term willing to add positions now as this unfolds. Refiners are moving again with VLO, TSO and others moving higher. Take the long term approach overall, but continue to dig in and look for the trading opportunities as they unfold.

  1. Tesoro (TSO) breaking through resistance at $90.40 and testing the move. Entry on test or $92 continuation upside (ADDED Monday). Stop at $88 and looking for target move of $104.
  2. BP РBounced off the January low and has been working higher. I like the move above the $42 resistance and the 200 DMA. This is a long term view for growth. If we hold support near this level ($42) and moves higher I am willing to add the positions with a 18+ month outlook. 5.6% dividend payment. Nice follow through to the test and hold of support.

Retail (XRT) – the consolidation at the highs showed¬†some weakness and¬†it broke support ($100.25).¬†Data isn’t helping, revenue, earnings, you name it has not helped build confidence in the consumer.¬†Could set up reversal back to the upside or short trade on break of $96.50 level. Let it unfold… $99.60 is resistance… move back above the $100 mark gets interesting. Stock pickers sector as the earnings are hit and miss driving direction. BBY earnings added boost the sector on Thursday.

Industrials (XLI) – if (and that is a big if) the global economies continue to recover and growth takes root… industrial stocks should rise from the dead. This story will take time to validate, but it is one worth our attention as we move forward.¬†Trading range and downtrend off the February high are the key issues for entry. ($56.80 level to watch.) Hit the entry point with move last week… still plenty of long term opportunity.

Semiconductors (SOXX) this is still messy charts, but turning into a trading range and looking for the break higher ($96 for entry/hit Monday) if the trend is to resume. Manage the risk of the volatility in the sector. Moved higher on Tuesday only to retreat. Watching how it plays out today. $95 stop on noise.

  1. INTC – $33.50 is breakout for the stocks and willing to add again for the upside move.
  2. NXPI – nice move to break from the trading range and test the March high. looking for follow through and opportunity.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese Proverb.