Sellers show up, but no conviction on downside

Wednesday was another day of chop with more on the sell side market in play, but not enough to change anything near term. The move gives us reason to be on our guard and manage our risk. Some rotation taking place in response to the interest rates creeping slightly higher as REITs, Utilities and Bonds head lower. This is a current rotation that is worth our attention as it addresses one key discrepancy in the broad markets. If rates rise and stocks continue to rally overall the belief would be the economy is improving. That would be a positive sign for the longer term outlook for the markets overall. Remain diligent and patient as this all unfolds.

The data returns tomorrow with the May retail sales. That should keep it interesting at least for the day. The headlines are full of worries about the current levels of the broad indexes. Not my argument, but we do have to manage our risk relative to the sentiment and trend of stocks. First, evaluate your time frame for each position. Second, set your stops according to the time frame you have defined and third, monitor and make adjustments moving forward. Know where the exits are before the fire starts and you will be better prepared mentally and figuratively.

Practice patience.

Notes to Note:

  • The Volatility or VIX index¬†jumped in early trading, but gave it all back again as the day advance. Then back near the high of the day. Now that is a different twist for investors. We have still not made¬†a serious¬†push towards¬†the¬†12 level and has failed to make any serious move towards the worry side as well, but there are some signs of movement surfacing. Today we closed back at 11.7.
  • REITs (IYR) showing weakness the last three days. Broke¬†support at the $71.30 level and something to watch if the downside gains momentum. Worry is coming from rates making a push on the upside the last few days. The concern is if they continue rise more leading the sector lower. Hit our stops¬†. The short side (SRS) is on my watch list now.
  • Crude oil inventories showed higher demand for the month, but doesn’t validate the hike in oil prices. The challenge is the level of speculation in the commodity already. How much higher can crude climb? Time will tell and the money is long crude. IEO gas and exploration ETF is hitting new highs as the higher price of oil is playing into the move higher in stocks.
  • Interest rates on the thirty-year bond is rising again and now at 3.47% and the ten-year is at 2.64% with both up nearly 20 basis points off the recent lows. That has investors nervous in bonds and it is raising the short interest in TBF and TBX.
  • Semiconductors (SOX) was up 0.5% to lead technology on the day. Since breaking higher on May 23rd the index has not had a negative day. Watch and raise stops on the positions.
  • Small caps (IWM)¬†tested the break higher the last two days, but is holding above the $115 level. Move above $117 would be a continuation of the upside and follow through to the breakout from consolidation above $113.
  • Home Construction (ITB) dropped 1.6% on the day and is erasing the move higher off the May lows. Why the worries? Rumors, headlines and analyst still on negative side of housing. They are projecting negative housing near term. Watch the test.
  • Emerging market bonds (EMB) tested lower breaking below¬†the 10 DMA¬†andtechnically has set up a potential double top. If interest rates in the US are rising it does have some effect on the emerging market bonds. Watch to see if the downside develops further.
  • Commodities (DBC) remain on the weak side of the chart. Base metals (DBB) were¬†bouncing with zinc and steel attempting to move higher. Aluminum had different plans dropping 3.9% today and taking the the broad sector lower as a result. Not a sector I like long or short at this time.
  • First day in several weeks we have seen short ETFs moving into the top performing sectors. If this continues a test lower will be a reality, but one day does not make for a trend.

Chart Notes:

The chart below is a comparison chart of the ten sectors that make up the S&P 500 index and the index itself. The goal of the chart is to see what is leading and what is losing. As you can see the last week has seen some rotation on the downside with Utilities and Telecom setting the pace on the downside. The other sector are testing along with the index overall. Industrials accelerated as Boeing and Jacobs Engineering set the pace lower. We are looking for rotation on the downside. Thus far that has not occurred except in the interest sensitive sectors. We will keep watching going forward for clear indications in either direction.

SP500Scatter

The gold miners (GDX) have established a bottom off the May lows. They consolidated and then started a methodical move to the upside. The move today above $23.20 is a positive reversal break and some follow through on the upside could offer a upside trading opportunity. The miners are playing catch up with bounce in the price of gold. This move needs to validate on the upside before exposing principle. GDXJ is also moving higher in the sector.

GDX

The choppy moves the last three days would be considered consolidation currently and we are watching to see how it progresses from here. The May sales report will be out tomorrow and could be the next data point of note moving forward. Take what the market gives and keep pushing forward. Manage your stops to control our downside risk.