Research Notes for May 19th

MARKET STORIES:

The markets start sluggish and gain some drive as the day moves forward. All but the NASDAQ now resides at a new high. The drift to the new found levels is not overly convincing, but it is enough to keep our focus on the buy side as the sellers are sitting this dance out. In February the markets attempted to move higher, but failed to find the vision necessary to hold the gains and tested lower in March and April. The upside is in motion once again, but the magic seems to be missing… that said, take what the market gives and manage the future risk as it unfolds.

Sentiment is still Fed focused as we saw the bond yields rise again after a quick decline last week. Fear from the bond side is still in play, but for now investors look resigned to the fact the Fed will hike rates… sooner versus¬†later. If this is true, I should have long term positions in my portfolio with that bias built in. That would be an avoidance of interest sensitive assets and more global stocks. That is why I am trading less and focused more on what has a better long term outlook despite the short term choppy view.

Energy is one of those sectors with a solid long term outlook, but will experience weeks of volatility and lack of direction. The time horizon is vital as we look forward and what we hold in our portfolio. Know what you believe and invest accordingly.

Going forward my view is simple… 1) Trade what the market gives short term. Example, SOXX broke higher through resistance Monday with entry at $96.50 and offers some short term upside. Take it. 2) Invest longer term within your beliefs or views on what will unfold economically both in the US and globally. Example, stimulus in the global markets favors stocks in the global markets. EFA offers me a diversified investment in that belief and thus owning it long term will benefit my portfolio. 3) ¬†The Russell Small Cap index broke above the 1242.50 resistance Monday offering an upside trade, take it. Don’t make this more complex than it needs to be. Invest within the knowledge, belief, and risk tolerance you have as an individual and continue to gather facts to either validate or invalidate what you are invested in now. Track the trend and know what you believe.

The challenges facing investors isn’t over short term. The move to a new high is great, but we still have to manage our risk and understand the opportunities and weakness as they present themselves… one day at a time.

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

  1. Treasury Yields higher… bonds lower. TLT breaks $119 and the downside will accelerate again… Set up for short entry in TBT.
  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.
  3. EWG – in position to move higher. $30.65 entry.
  4. XME – metals and mining are in solid uptrend off the March low and progressing towards resistance at the $29.85 mark. Gold and silver leading the way currently, but the base metals are picking up as well.
  5. SLV – Silver is continuing higher and may be extended. Test lower would offer another opportunity to add the position to portfolio. $16.40 test level would be of interest.
  6. GDX – gold miners made move through resistance and follow through on the upside would be of interest for short term trading opportunity. Gapped above the $20.30 level Wednesday. Gapped again on Thursday, but that receded back to the $20.83 mark… Still looking for entry point on the on the move… $20.80 of interest again.
  7. Builders (ITB) bottom reversal setup. $27 is of interest on the upside as the concerns over higher interest rates are digested. Trade only at this point as the clarity looking forward is clouded by the Fed decision.
  8. 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. MONDAY: tested lower again and watching how it tests the $85.40 mark.
  9. 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.
  10. BP – Bounced 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. I we hold support near this level and rise willing to add the positions with a 18+ month outlook. 5.6% dividend payment.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) index hit new high closing at $213.10. The noise is louder than the activity for the index. The conviction level of the move is lacking, but moving higher. I will 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.

NASDAQ 100 Index (QQQ) moved higher early bounce and managed to close at  to $110.06. 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.

Russell 2000 Index (IWM) The index closed at $123.65 and at the 50 DMA and resistance on Friday. Monday the move through that level triggered the entry on the index and stop at $122.50. October trendline was broken on the downside, but it is back in play on the close. Need to move through this level and regain the uptrend for the index. Downside below $118.80 is stop on the trade. Need a follow through day for the index.

Volatility Index (VIX)¬†so much for the worry… 12.7¬†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 $153.42 last week and bounced¬†back to $156.72 on Monday… still not convincing for now. The sector established the $154 –¬†$157.50 range currently.¬†Not showing much in terms of upside opportunity and hanging on by a fingernail to support.

Dollar (UUP) is shifting gears on the downside with the break of support and modest recovery. Why the shift in sentiment? Speculation about the global economies looking better than the US. Watch as downside still micro trend. UDN entry hit at $22.45.

Crude Oil (OIL) sitting on resistance at $12.40. Trading positions only as the supply/demand issues remain. Moved towards the $13 mark last week, but unable to maintain the upside movement. Still lacks direction.

SECTOR STORIES: 

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…

Natural Gas (UNG) bottom reversal cleared the $14.50 resistance level next to conquer $15.14. UGAZ is leveraged version of the trade.

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 vomit from analyst. Focus on what you believe. Stop $23.80. Break above $24.80 willing to add to the position short term. Watch to add today.

Healthcare (XLV) РFound support at the $71.25 mark and continuing to bounce around. Some negatives from all the sub-sectors as well. Cleared $73.25 resistance and watching for possible addition to positions. Entry $74.75 to add to holdings.

Russia (RSX) Modest selling at resistance on Monday… still in the uptrend and look for a break higher and to continue the¬†modest upside pace for now.¬†$18.75 support. $18.70 stop. Patience. Clearing $20.75 is¬†of interest to add to positions. $20.75 entry on Friday. (current position at $17.25.)

Bonds¬†(TLT)¬†broke support at¬†$129.20 and triggered the exit. The downside play hit stops on Friday’s bounce. $121 exit point.¬†This is what we discussed on the over sold status of the bond. Watching as the downside play will be back as the Fed has not hiked rates yet. $124 target on the bounce… then we look to Short (TBT) the bond again. MONDAY: failed to move higher as the sellers reemerged and $119 break is add point for TBT.

Energy (XLE) Testing support at the $80.50 mark. Long term willing to add positions at $82.50 and stop at $77.25. 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 upside opportunity building. Entry on test or $92 continuation upside (ADDED Monday). Stop at $88 and looking for target move of $104.

Emerging Markets (EEM) Tested support at the $42.50 ish level and bounced again. The sector is digesting the move higher and dealing with the uncertainty in the US markets. Long term hold. Short term $43 trade entry on the upside.

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.

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.

Sectors that remain of interest… GLD, SLV, IGN, SOCL, IWM… Despite the volatility and renewed uncertainty facing these sectors we continue to track the activity. Getting some¬†follow through to the gains last week, but nothing is for certain in the current environment. Take what the market gives, but maintain your discipline.

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