Wednesday – Notes & Research
The downside momentum gains as the indexes break support levels we discussed last night. Where does this leave us relative to the downside? Too soon to tell, but the first shot has been fired and the buyers are going to have to make a decision on how convinced they are the upside will resume. Be extremely patient on this transition in progress.
S&P 500 index next support is 1597, NASDAQ next level 3371and the Dow next level of support is 14,841. If these level are taken out the downside opens up further short term.
Investors and analyst with a selling bias currently are starting to speak out. The news headlines are focusing more on the downside risk present in the market and short term they may have an impact. The move on Wednesday was the first real selling and we will all have to see how it dealt with short term.
We will have to be patient here and see how this plays out tomorrow.
Sector Moves of Note:
- The VIX moved above 17.5 again on Tuesday and closed at 17.5. Watching VXX and SVXY as opportunity depending on how the current movement settles out. VXX has been the trade intraday and today it closed above the $20 level.
- Gold can’t make a decision on direction. The move back to $136.51 on GLD Monday gave way to a 1% decline to $135.23 on Tuesday. Give it room to decide is all we can do for now. GDX failed to make the move above the $30.50 level as well. Patience is a virtue.
- Natural gas has moved down to support at $21.15 again. Watch the downside and KOLD entry at $18.30 if UNG breaks support. Still watching for the trade to develop. Sector Rotation Model.
- Semiconductors (SOXX) sector made a move to new high, but continues to test the move. The test lower is in play and we are watching for leadership to hold on the upside. If it breaks lower it will only add to the momentum in utilities, consumer staples and industrials. The more sectors that roll over the worse it will be short term.
- Consumer Staples was the first big break lower for the major sectors. The drop below support at $40.75 was a big negative and move for the sector. Short setup if it continues below the $40 level. Watch to see if support holds.
- Healthcare was another break lower as XLV failed to hold $48.70. Watching to see if the $47.25 support holds.
- Financials break down and SKF (short trade) put itself in play short term. Watch $23.85 as an entry point.
We talk about downside risk management all of the time. Choppy markets create many headaches for investors as the direction is hashed out. Today is just another example of how the sellers are attempting to wrestle control of the market direction short term.. Manage your risk, you should have exited positions that are not working, and looking for what is working moving forward, if that is the short side, so be it, but most of all be patient.
ISM Manufacturing drops below 50% and shows contraction similar to what we experienced in November… When the current rally started. Not a good start to the data release on the economy.
Trade deficit below expectations. Home prices rise 12.1% year-over-year.
1) US Equities:
Major market indexes sold further on the day as the downside was put into play. The April 18th chart below is the last low in the test off the April 11th high. Added line on the high for May 21st to track as the current high or pivot point. The second chart below shows the May 21st pivot point chart and the leadership on the downside. It gives some clarity to what you are seeing on the April 18th chart.
Utilities, Telecom, Consumer Staples, Energy and Consumer Services are leading the downside move. Healthcare jumped into the picture as all ten sectors are pointing lower at this point. This activity is empowering the sellers and may accelerate. Stops are key and the upside plays are now the short ETFs.
April 18th Pivot Point:
May 21st Pivot Point:
The current trend started on November 15th and has been tested by the the ‘fiscal cliff” issue bottoming on December 28th, The February 25th low pivot point was prompted by FOMC rumor of withdrawing stimulus, Cyprus on March 14th and the April test on economic worries. The current shift off the May 21st high is a result of the Fed’s potential withdrawal of stimulus going forward. The original target for the move was 1550-1575 which has been obtained and exceeded by nearly 100 points is now being tested on the downside. Watch and don’t be fooled by the analyst… charts don’t lie. 1597 is the key support and brings the trend line into play for the intermediate term trend. (pink trendline on the SPY white line)
Sector Rotation of Interest:
Technology (XLK) – The pullback from the move higher tested $31.40 as support. If support holds $31.45 it would validate some leadership for the sector in the current pullback. Otherwise the shorts will be looking for the opportunity. Developing a wedge consolidation pattern at the end of the chart. Broke support and now we have to see if the short side becomes the better trade.
Consumer Staples (XLP) – This was the first big break lower for the major sectors. The drop below support at $40.75 was a big negative and move for the sector. Short setup if it continues below the $40 level. The move is a result of higher interest rates and pressure on these stocks, not to mention the valuations were ahead of themselves. Bounce off support is being tested again at the $40 mark.
Healthcare (XLV) – This was another break lower in the major sectors as XLV failed to hold $48.75. Watching to see how Monday plays out, but the $47.93 level is the key support. Watch to see how it follows through and if any opportunities result from the move. All of the subsectors worked lower within their respective consolidation ranges. Breaking down with the next key level $47.20.
Energy (XLE) – Big pullback on Friday as crude and natural gas broke lower. The $80 support is in play and the downside from there is the big question mark. Gave up support on selling Wednesday… Watch.
From the May 17th high we have seen the dollar gradually decline. The last six trading days the downside has accelerated and we added UDN (Two Egg Model) as a position.
- UDN – The dollar has been trading sideways and has now move lower breaking the uptrend. Added UDN as the down dollar play for now. Two EGG Model.
- FXE – Added a play on the currency against the dollar at $128.50. Sector Rotation Model.
3) Tracking Bond Sectors of Interest:
- 30 Year Yield = 3.26% – down 3 basis points — TLT = $115.29 up $1.57.
- 10 Year Yield = 2.10% – down 3 basis point — IEF = $105.57 up 51 cents.
Treasury Bonds – Complete reversal on the yield has pushed the bond lower and broke below the previous low. Not a place to be other than short the bond. TBT. Hitting against March highs again at $69. Raise your stops and look for a short term rally in bonds and a test back to $66.50 on TBT. Came close to the stop on selling the last couple of days.
High Yield Bonds – HYG = 6.5% yield. No positions currently as it plays out.
Corporate Bonds – LQD = 3.6% yield. No positions currently. Downside risk in play.
Municipal Bonds – MUB = 2.8% tax-free yield. No positions currently. Downside risk in play.
Convertible Bonds – CWB = 3.6% yield. No positions currently. Starting to trade sideways.
4) Commodities – Sector Summary:
- Commodity Index (DBC) – Developed into a trading range and just need to practice patience short term.
- Natural Gas – (UNG) Testing the $21.15 support level short term. No plays currently
- Crude Oil – (OIL) Reversed testing support again at the $21.20 level. No direction with worries globally and domestically for demand have weighed down price and direction short term.
- Gold – (GLD) Cooked in a squat. Can make up its mind up or down. Looking for break above the $137 level.
- Palladium – PALL – Move above $73.70 is worth a trade on the continuation of the upside. $72.65 stop, $$77 target. Patience for the metal to break higher.
Commodities Rotation Chart:
I have moved the starting point forward on the chart to May 1st as a potential uptrend. As you can see that didn’t happen and DBC has moved sideways since the start point. PALL is moving higher and leading the metals. Base metals (DBB) made a near term move back to the upside. The balance of the sector is vertically challenged. Corn has moved lower of late negating any trade short term. Be patient and let the winners define themselves before going into sector. Natural Gas (UNG) is holding steady near support.
DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.
5) Global Markets:
Global markets have shifted to the downside over global economic slowing. The May 21st pivot point lower has been more dramatic than the US markets, but the pivot correlates to the struggles starting in the US markets. The Asian connection is hurting the overall index. The chart below shows the shift over the last week plus on the downside. We don’t own any positions in the global markets and for now I am still willing to sit on the sidelines. EWJ leading the downside move with some volatility.
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.
- FXP– Added short play on China as the downside has been the leader. Sector Rotation Model.
- EWJ – Leading lower as fast as it did to the upside. Still looking for an upside move from the country. Watch for bounce play to follow through as this unfolds.
6) Real Estate (REITS):
Real Estate Index (REITS) – The sector broke the uptrend and signaled exits. Moved to Cash versus holding the sector short term. Shorts are dangerous here, but technically that is the call.
- IYR – Hit our stop at $73.50 and has continued to move lower. Out for now.
- RWO – SPDR Global Real Estate ETF hit stop and watching for now.
- 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. Watch the downside currently in play with rising rates.
7) Global Fixed Income:
Sector Summary: Complete reversal low and uninterested in the sector currently.
- Watching these funds for a bottom.
- PAFCX – Spike to the downside.
- PICB – Breaking aggressively lower short term. 3.1% dividend.
- EMB – Breaking lower still no support. 4.3% dividend yield.
- PCY – Big downside move and break of support. The current dividend yield is 4.8%.
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.