Running in Place as Worries Build

Monday – Notes & Research

Stocks trade in a narrow range to start the week. Not much in terms of change, but we are still seeing signs of concern from investors. If the uncertainty or clarity about the future becomes a bigger issue for investors, the markets will react by trading sideways or moving lower. Fear, worry or whatever other adjective we would like to use keeps things from progressing according to plan. Keep your focus and be disciplined.

US retail were up 0.1%. If you take out the gasoline sales the data was better than on the surface. Goods and services data was better than expected and showed consumers spending on more than necessities. The expectations were for a 0.6% decline in sales. Thus, making the no growth number look even better. Gasoline sales fell again dropping 4.7% in April. That is the second month in a row they have dropped significantly.

The rumors, speculation, anticpation or whatever you would like to add to that about the Fed’s exit plan. The market want clarity and this issue is growing into a concern for investors. The more worries and speculation that arises from what Bernanke will do going forward the worse it is for stocks. Thus, be aware of this issue, if it rises in concern watch the voltility index and the direction of the broad markets to shift or at best move sideways.

The VIX index has picked up intraday the last four days of trading, but that has not equated into any significant increase in the index overall. The intraday swings shows the dynamics of what is taking place between the buyers and sellers.

Sector Moves of Note:

  1. S&P 500 index closed at 16. The trend is still in play, but the worries are coming back. How they play out short term will determine the short term direction and potential volatility.
  2. The dollar moved back near the highs as the central banks around the world continue to focus on devaluation. Hitting near the $22.65 level today, watch a continued move from the buck.
  3. Healthcare followed through on the upside breakout today. The biotech (XBI) was a big contributor gaining more than 2% on the day. This was on our sectors to watch update this morning.
  4. Consumer staples is on the list to watch as well heading into the summer months. The¬†consolidation¬†or narrow trading range is looking for a catalyst on the upside currently. Solid retail sales data announced today for April and giving some hope going forward that growth isn’t completely dead.
  5. Energy stocks remain under pressure as the gasoline sales continue to lag as a result of the price falling. The amount of usage is the roughly the same the issue is price decline due to the lower cost of oil currently.
  6. Utilities sold lower last week, but managed to close flat Friday and at support at $39.65. The sold lower today a swell and managed to bounce back modestly. Still looking for a bounce off support despite the calls to sell all utility stocks.
  7. Global markets are struggling as EFA, EEM and IEV retrace recent moves higher. They have been tracking along with the US markets, and the current stall is pushing those markets lower. Stops raised and watch how this plays out near term.
  8. Bonds continue to struggle with jumps in yield as confidence builds. 30 year yield jumped to 3.12 off the 2.82% level just two weeks ago. This shows confidence building in the economy to push yields higher. Is this the bond rotation everyone predicted in January? Not convinced of that, but we are seeing some short term rotation.

The market continues to grind it out each day. The question is where will the buyers lose faith in the upside run and allow the sellers to dominate the trend for awhile. Take it one day at a time and remain disciplined with your stops.

Economic Data:

Retail sales were up 0.1% for April and well ahead of expectations. Business inventories were better than expected and auto sales were solid. Overall not bad, but the worries over the decline gasoline sales and futures spending are still in play.

Economic Events & Calendar

1) US Equities:

The broad indexes hold the move higher this week and the upside remains in play.

The April 18th chart below is the last low in the test off the April 11th high. Leaders are consolidating, but remain positive. Materials, technology, energy, consumer services and financials off this pivot point. Telecom and healthcare are adding to the upside as well. The laggards are consumer staples and utilities. Still some rotation in process, but that has slowed as the outlook gets focused on the Fed.

0418 SP

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.

0225 SP

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.

1228 SP

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.

SP Scatter

Sector Rotation of Interest:

Technology (XLK) – Break above the $30 level was the entry point and it has followed through nicely on the upside. Getting extended and we need to protect the downside. Target remains $31.65. Hit the target intraday and testing the upside. Adjust your stops and remain focused.

Consumer Staples (XLP) – the downside relative to earnings and warnings from the big cap stocks is and remains a concern. Even with the solid gains on the week for broad index, the sector struggled. Keep your stop tight and watch how the trend plays out next week. $40.75 is the short term perspective stop. The upside continuation play would be a positive for the broad markets.

Healthcare (XLV) – the biotech and pharmaceuticals stalled from earnings are weighing on the sector. $46.80 support level held and solid bounce, but still showing some weakness. Protecting the gain is the priority. Keep stops at the $46.80 mark and let it go for now. Friday moved to the top end of the range again and looks prepared to break higher. Monday it did follow through and break higher with the help of the biotech stocks.

Energy (XLE) – Moved above the $80 level and held into to end the week. All positive for now, but watching the downside risk. Watch to see if there is any upside follow through as it is happy to consolidate near the $80 level.

Telecom (IYZ) – Moving higher, but consolidating near the high. Still like the uptrend here and we moved above the $26.90 level and now looking for a move on the upside going forward. $26.10 remains the exit point. Uptrend working higher for now.

Utilities (XLU) – breaking down short term on some selling. The fund managed to hold support at the $39.60 and the 50 day moving average. Watch how this plays out short term. If the bounce holds looking to add some shares at this level of the test.

2) Currency:

Since the high on March 27th the dollar has essentially moved sideways to down. Starting April 23rd the dollar steadily declined until bouncing on May 1st. It has not accelerated back to the previous high and looks ready to move higher. The chart below shows the path of the dollar.

Currency

Sector Watch:

  • UUP –¬† The dollar has been trading sideways and the bounce the last three trading days and ¬†puts the buck back near the previous high. The balance of the currency market has accomplished sideways to downside moves.

3) Fixed Income:

Sector Summary:

  • 30 Year Yield = 3.12% – up 2 basis points —¬† TLT = $117.84 down 91 cents
  • 10 Year Yield = 1.92% –¬† up 2 basis points — IEF = $107.11 down 22 cents

Tracking Bond Sectors of Interest:

Treasury Bonds – Yields on the 30 year Treasury was falling, but that trend has shifted to the rising aggressively on the improved equity outlook. The rise in rates has sent the value of the bonds lower and the downside is in play. The trade with TBF has done well of late as a short play on the bond. The ETF is not bumping against resistance and we need to raise the stops to protect the gains.

High Yield Bonds – HYG = 6.5% yield. Support at $94.75. Moved up to $96.25 and met with some selling on the shift in yields and risk. Manage the position for the dividend as the growth side is uncertain short term. Use $94.75 as the stop. The last two days move shows the risk in the bonds currently.

Corporate Bonds РLQD = 3.6% yield.  Bonds have dumped with the rise in rates short term. Hit the stop at $120.80 as the selling accelerated. HIT STOP on Friday, watch to see how low it retreats.

Municipal Bonds – MUB = 2.8% tax-free yield. Shifting gradually lower as the risk relative rates is in play. Collect your dividends and let it ride for now.

Convertible Bonds – CWB = 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:

  • Commodity Index (DBC) – Moved back to resistance at $26.50. Need a break higher to play the sector overall. Big test lower on Friday as gold sold lower.
  • Natural Gas – (UNG) posted a big loss last week and still no bounce. $21.17 support. No play currently. Watching for support to catch.
  • Crude Oil – (OIL) Crude moved up on speculation of improving economy? Yes, that is called speculation. Watching the downside opportunity on the move. Some clarity is still the call. Close below $ 95 support would be the downside catalyst. Closed on the number today, watch to see how it unfolds tomorrow.
  • Gold – (GLD) Looks content to stay in the trading range developed the lats couple of weeks. No need to rush anything in the metal short term.
  • Gasoline – (UGA) Resistance is at $56.80 now. Watch to see if it can follow through on the upside move. Tested again on Monday, but still upside if the commodity decides to run.

Commodities Rotation Chart:

I have moved the starting point forward on the chart. DBC has moved sideways since April 15th start point. 1) UNG Рdumped lower the last week. and continues to look for support.  Watch $21.15 support? maybe a short setup  2)  PALL is movinb back towards the high as the driver in the sector 3)  JJC Рcopper jumped on positive analyst comments and is stalling for now. 4)  OIL -jumped on economic data, but looking toppy short term. 5)  UGA РGasoline moved with oil finally? This is getting interesting for some short term trades posted above.

DBC rotat

DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

Global markets have been trading in tandem with the US, but the downside in the global markets has been worthy of note the last couple of days. Japan is still moving higher in the chart below, but the others are drifting in line with the US and some are falling like India and China. Still high level of risk in the global markets short term.

EFA Rotation

EFA – iShares EAFE Index ETF (click to view) 10 Developed Countries making up Europe (66.6%), Australia (8.9%) and Far East (24.5%). (Weighting of fund) Not most balanced, but give indication of global markets.

Country Watch:

  • Most of the country charts are starting to group together. They are tracking along with the US markets of late. EFA is a good barometer for trading the developed markets and VWO for the emerging markets.

6) Real Estate (REITS):

Real Estate Index (REITS) – The sector continues in the uptrend overall. My rating is a HOLD currently. Holding above the 10 DMA for now. Let the trend run its course.

Sector Summary:

  • IYR – Support is $70.50 and our stop is at the same level. Still moving up gradually and we continue to hold and collect our dividend as well.
  • REM – Mortgage REIT continue to struggle. The downside remains a concern and we continue to look for the opportunities, but not interested currently in owning the sector. Monday broke support at $15.10 and now at the 200 DMA.¬†
  • RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Manage your stops accordingly.
  • MDIV – First Trust Multi- Asset Income ETF is a good alternative to picking through all the choices of income funds. This multi-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. Sharp turn lower on Friday with stop at $11.60.
  • PICB – hit support traded sideways and broke higher. Entry $28.95 + 3.1% dividend. Turned lower as the money rotates out of the sector.
  • EMB – Big recovery and interesting in watching. 4.3% dividend yield. Hit stop on reversal lower at $120.25.
  • 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. Hit stop on Monday.

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 losses.