Sellers Step Back in to Make it Interesting

Wednesday – Notes & Research

Where did the buyers go? This is not a good sign for the current direction of the broad indexes. An up and down, day to day volatility is leading to something as the buyers and the sellers fight it out. Today it was rambling about a strong consumer confidence number not being good for the markets. With the index hitting a five-year high, history shows the markets do worse after a big jump higher than a big move lower. Thus, it would indicate that the indicator more of a contrarian indicator for stocks. Glad we could clear up today’s activity with that study. (Consumer Confidence & Stock Returns)

Another reason for the decline today… Yes, the worry over the Fed withdrawing stimulus sooner rather than later was back. There was a bonus fear of slower global growth? Really, who makes this stuff up. Both fears have been on the table for awhile. The global growth concern is an overlap of the Fed worry. The global withdrawal of increased money supply is how it is now being postured and the concerns are further slowing in the global economies. It all makes sense, but it is nothing new, but maybe one step closer to reality.

Healthcare, Consumer Staples, Utilities and Consumer Discretionary were the leaders on the downside, with each giving up more than 1% on the day. Financials were the only sector to close positive on the day. There is plenty to worry about looking forward, but we have to be patient and let this all unfold versus attempting to force any positions short term.

Sector Moves of Note:

  1. XHB dropped 2.1% on the day and shows some of the weakness in the homebuilders of late. $30.50 is key support for the sector and we need to watch on the downside.
  2. Small caps was a sector we have discussed needing leadership from short term if the upside is to remain in play. Today the index sold early and bounced back. Scanning and looking for the leadership show biotech, financial and energy are helping keep the sector in consideration for the upside.
  3. Bond yields jump on the 30 year to 3.27% and the 10 year is at 2.12%. Short bonds is still the play for now, but a bounce may be in order short term as money rotates relative to fear.
  4. LQD, MUB and HYG continued their drop today adding to the downside break of trends. If you are not heading for the exits already, you should seriously consider this movement.
  5. Healthcare joined the selling Wednesday dropping 1.4% in value. Watch.
  6. Real Estate and Utilities remain under pressure as rates continue to rise. The impact is being felt to all interest sensitive assets. Stops were hit, but we continue to watch the outcome as well as the next opportunities in the sectors near term.

Sit back, protect your downside and let the direction work itself out.

Economic Data:

No data released today. Still feeling the effect of a positive Consumer Confidence and rising home price.

Economic Events & Calendar

1) US Equities:

Major market indexes drop at the open, and close lower on the day. As stated above watch, listen and then act. I am not convinced the current activity isn’t building up to something bigger on the downside. No need to speculate, just let it play out one day at a time.

The April 18th chart below is the last low in the test off the April 11th high. You can see the selling impact at the end of the chart and who the biggest losers were. We have to be patient and let this play out going forward. Added line on the high for April 21st to track as the current high or pivot point if the downside continues as it has four of the last five trading days.

Losers & Laggards: Utilities, Consumer Staples, Telecom, Healthcare

Leaders: Financials, Energy, Industrials, Basic Materials, Technology, Consumer Discretionary.

Scatter 418

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 original target for the move was 1550-1575 which has been obtained. The uptrend remains in play, but the extended move has brought equal concern to the current highs as seen in Trading the last week.


Sector Rotation of Interest:

Technology (XLK) – The pullback from the move higher tested $31.40 as support and held for now. HPQ was up 17%  last week as held and continues to be one of the leaders in the sector. If support holds $31.45 looking for a trade on the upside. Otherwise the shorts will be looking for the opportunity.

Consumer Staples (XLP) – Moved to new high and tested support or breakout point for the trading range. Watch to see if holds or prompts more selling. $40.75 is the short term… as we saw today. The stop remains a break of support at the $40.75 level. Patience as this plays out.

Healthcare (XLV) – The sector broke from the consolidation or trading range to the upside. The test remains in play and a break below the support at $48.75 is the exit point for short term positions. Track to see how this plays out short term and mange your stops.

Energy (XLE) – Moved above the $80 level and has now tested the breakout level. All positive for now, but watching the downside risk in the current consolidation moves. Still in uptrend and still in play. Manage your risk and let this play out.

Telecom (IYZ) – Big test lower losing 2% on Wednesday. The seller took control on the renewed interest rate fears attacking this and other sectors. Hit stop and out of the positions.

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 accelerated back to the previous high and higher. It is now testing those near term highs. The chart below shows the path of the dollar against the other currencies.


Sector Watch:

  • UUP –  The dollar has been trading sideways and looking for an upside catalyst to continue the current move. The other currencies continue to struggle. The yen, the aussie dollar, Brazil, etc. are trending lower. Not a place to put money to work currently.

Tracking Bond Sectors of Interest:

Sector Summary:

  • 30 Year Yield = 3.27% – down 2 basis points —  TLT = $115.11 up $1.27.
  • 10 Year Yield = 2.12% –  down 1 basis point — IEF = $105.56 up 39 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. Watch and be patient as this plays out. Raise your stops on the TBT or TBF position.

High Yield Bonds – HYG = 6.5% yield. Support at $94.75 broke and out of the position. Wednesday more downside.

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. Price had been moving higher on the rally in stocks. Hit stops and on the sidelines for now.

4) Commodities – Sector Summary:

  • Commodity Index (DBC) – Hitting resistance at $26.50, tested lower and can’t seem to regain the upside fr now.  Watch and be patient as the sector tests near term support.
  • Natural Gas – (UNG) Testing the $22 support level short term. No plays currently
  • Crude Oil – (OIL)  Reversed testing support again at the $21.60 level. Weaker dollar didn’t help on Monday. Crude closed lower at $93.11. No direction as the 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. Sitting near the low.
  • 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. DBC has moved sideways since April 15th start point. PALL is moving higher and leading the metals. The balance of the sector is vertically challenged. CORN since May 21st has been trekking higher and one to watch. (CORN break above $41 positive.) Watch for $42.25 to hold on CORN. Be patient and let the winners define themselves before going into sector.


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 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.

Global Mkt

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 have trading sideways to down. EFA is a good barometer for trading the developed markets and VWO for the emerging markets. Attempting to turn higher the last few days and worth tracking for specific opportunities.

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.

Sector Summary:

  • 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.