Research Notes for July 1st

MARKET OUTLOOK: 

It is officially over and we are starting a new quarter. The sad news is the quarter my may very well be over, but the lingering effects of talking about what transpired is going to be with us for awhile. Economic data, earning reports and future guidance will all be part of the memories we get to discuss from the first half of the year. It promises to be interesting going forward.

Tuesday saw some relief from the doom-and-gloom of Monday. The consensus remains relative to Greece and the default relative to the EU and the IMF. There is more at work than Greece. The bankruptcy threat from Puerto Rico is a greater threat to the US markets than Greece. The fear factor has been building relative to the markets being overbought, economic data being too weak, earnings slowing too much and not enough wage growth to keep the markets moving higher. The issues with Greece are a catalyst of a deeper problem relative to how investors think.

Below I cover all the major indexes and what transpired of interest from Tuesday’s trading. The leaders, the laggards and what we hold.¬†It¬†is imperative that we remember the overall theme of this market currently is a lack of clarity which leads to a lack of conviction and sometimes selling. The offspring being volatility driven by news. Use discipline as your friend in the management of¬†your¬†portfolio and remember that cash is a sector. It is more important to fight another today, than to die fighting the wrong battle.

Have a great day.

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

  1. China (FXP) short side of the country ETF is back in play with the downside confirmed on Friday. FXI is broke the $46.60 support level offering a trade in FXP or YANG. Continued lower on Monday and short trade played out well Bounce on Tuesday worth watching with a stop at the break even of $46.50.
  2. Agriculture (DBA) Moved back to the top end of the base trading range. $22.80 breakout is worth trading. Target on the move would be $23.65. Added the position and now looking at the trade square in the eyes. WEAT Рbroke from the consolidation at $11 to lead the sector. Nice follow through. SOYB Рmoving higher as well with an impressive move off the low (nice follow through as well). CORN Рbroke from consolidation as well (nice follow thorugh also). The commodities finished higher on Tuesday again.
  3. Semiconductors (SOXX) hit the short entry on break below the $95.15 support. $92.60 target on the downside and SOXS was the trade on the move lower. Stop at $93 if the support turns into a bounce off the current lows. Followed through and hit the target on Monday. Watch how it unfolds today and manage your stops.
  4. REITs (DRV) short side of the trade is still in play and a continuation with the move above $27.90. IYR continues to be under pressure from the rise in interest rates. The dividend assets are getting pushed down on the expectation of the Fed hiking rates near term. Continued lower and recommend adjusting your stops.
  5. Treasury Bonds (TLT) big bounce on flight to safety trade against Greece news. I am more inclined to believe the downside returns for bonds after the fear subsides. TMV would be worth watching as this unfolds. $34.10 entry.
  6. Crude oil moved lower in response to the global fear of Greece and the EU. short side trade? Watching to see how this does with support  at the $58 level of support. Not yet with the commodity bouncing off support in the trading range.
  7. Energy (XLE) is attempting  to accelerate the downside move as crude tests lower. ERY is the short side trade for the sector which broke higher on Friday. $20.40 entry point as the ETF move higher on the decline in crude impacting the stocks further. Stop at the $20 mark. Modest bounce withe move higher in crude prices. downside pressure still on for now. Stop would be move above the $76 mark on XLE.
  8. Volatility index (VXX) jumped on the Greece news and hit the entry point Monday at the $18.55 mark. This can calm as quickly as it rises… set your stops and see how it unfolds. Put stop at $19.50 today.
  9. Dow Jones Average (DIA) the drop below the $17.700 mark on Monday left the downside in play. The break fo the 200 DMA and support opens a short opportunity for the index. DOG is the short ETF. $22.85 was entry point on the move. Trade only at this point driven by Greece and fear. Stop $22.60.
  10. Biotech (BIB) bounced back from the selling on Monday. Watching for opportunity at the $90.50 entry point on a follow through on the reversal and holding the 50 DMA.

Below I outline the major indexes, sector¬†stories¬†and management of existing positions.¬†Stay focused, stay disciplined and don’t chase rabbits down a hole.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) Greece pushes the index down 2.1% Monday and closed on the 200 DMA.¬†Keep your stop on positions at the $204.50 level.¬†Modest bounce on Tuesday, but the downside risk is still in play for the broad index. Need of leadership has been the challenge facing the markets for awhile. Clarity would help as well with the current outlook for stocks… Neither happening today.

NASDAQ 100 Index (QQQ) Set the tone for the selling on Friday. Semiconductors were the challenge for the index, but that was compounded on Monday with the Greece issues. Our stop remains at $104.40 on short term positions (3-9 month horizon). Patience as this all unfolds. Holding at the $106.75 for now watching.

Russell 2000 Index (IWM) Moved below support, sold off 2.5% and below the 50 DMA on Monday.  The stop $123.60. Holding above the $123.75 support level and watching for now.

Volatility Index (VIX) Closed at 12.2 last Tuesday testing the previous lows, but bounced back to 14.4 on Friday and closed at 18.9 on Monday. That qualifies as volatility.  We hit the post on the trade with VXX if moves above $17.95. We would now make the stop $19.50 today and watch how it unfolds to start the day. The worst of the fear may be over for now.

Transportation (IYT) Broke below the¬†$148.50 support on Thursday… tested it on Friday? The sector is confused and the lack of clarity is still causing downside pressure despite the move on Friday. Looking for downside confirmation. 50 DMA crossed below the 200 DMA as technical sell and it is still in play.¬†The index is in a downtrend¬†short term. Monday solidified the downside break losing 2%. Short side in play. Bounce attempt on Tuesday was not successful.

Dollar (UUP) The¬†dollar sold dollar is holding near the $24.88 support and volatilty remains on the uncertainty in in the EU with Greece. Dollar index (DXY) held¬†support at the¬†93.25 key level¬†and bounced back on dollar rally… too many moving parts.

Crude Oil (OIL) Remains in the trading range and speculation is day to day on the commodity.¬†Until it gains some clarity not willing to put money at risk. It remains a supply/demand story and nothing more from my view. $61.61 is top side of the range. Closed Friday at $59.81 and Tuesday¬†at $59.03… Still well within the current trading range.

SECTOR STORIES: 

Treasury bond (TLT) The FOMC meeting shed some light on the Fed’s intentions to hike rates prior to year end. That puts pressure on yields to move higher and bond prices lower. That is the current transition in place and the downtrend off the February high is well established currently. TBT hit entry at the $50.25 mark, stop $48.75. Rally in the bond as yields fall on fear of Greece default.¬†Sold today on rates moving higher after the calm resides.

Vietnam (VNM) attempting a bottom and trend reversal. (technical setup only as the emerging markets are under selling pressure short term.)  The ETF cleared the $17.90 mark to end the week and held the move on Friday. Entry $18 on move higher. Stop $17.70. Held $18 support and bounced nicely on Monday and Tuesday.

Homebuilders (ITB) double bottom consolidation pattern setting up to break higher on the momentum in the news behind the housing market (technical setup and trade). Fundamental data starting to confirm the upside move with improved numbers in sales for May. Hit¬†our¬†$27.40 entry. Stop $26.50.¬†Hitting against resistance at the $28.10 mark… watch and manage your risk. Good data on Monday, bad market… watch and manage with upside still play based on the data. More positive data on Tuesday… watch for reversal higher.

Healthcare (XLV) The sector has been in a consolidation pattern which we have tracked for the last five weeks. We finally hit the entry with the move above $75.50.¬†Stop $73.50. ACA news from the Supreme Court driving some upside … IHF was the benefactor as the decision confirmed government payments to the providers. Best source of income available for the providers. Down 2.4% on market news Monday… monitoring the options for what course of action to take. Still watching the subsectors for opportunities as this settles. XPH, IBB, IHF, IHI.

Regional Banks (KRE) – broke higher from the trading range short term and this time nice follow through.¬†After a small test back towards the $41.85 entry hit¬†and the upside was in favor of rates moving higher. $43.75 is the stop.¬†Speculation selling last¬†week as doubts about the Fed crept into the sector. My view is fast money rotated to faster moving sectors. This left consolidation near the highs and now looking for the upside to resume.¬†Selling on Monday with Greece issues and bounce failed to hold on Tuesday… watching.

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 would be of help for the trend to continue upside move. Trend fundamentally on the consumer is flat and that is keeping things in check for now. $74.50 exit point on the downside. Nice upside over the last week, but starting a smaller and tighter trading range at the new high? ¬†Now back at the bottom of the range with news from Greece? Still watching.

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