Sellers Step Up to Erase Friday’s Gains

Monday – Notes & Research

Stocks fall managing to give back all of Friday’s gains and then some Monday. Why the sudden change of sentiment from investors? Uncertainty over Europe as Spanish bond yields were on the rise. This is not a new concern relative to Europe, but it is the first time it has been in the headlines for some time. Friday all three major indexes move through key resistance and broke higher. Today we are right back to where we were on Thursday and in come cases worse. Of course this brings out all the negative comments concerning an overbought market and that the indexes are due for a 3-5% correction or pullback. We will see how this plays out short term.

I stated on Thursday that the cracks in the uptrend were starting to show and we had to protect against the downside risk of the markets. Then the jobs report, ISM Manufacturing, Chicago PMI and the Consumer Confidence reports turn the cracks into opportunities as the broad markets moved higher on the positive news. Now I am back to feeling like I did on Thursday, the cracks are back and the downside risk is back in play.

Factory Orders for December were below expectation growing 1.8% versus the 2.3% expected. The previous number showed a loss of 0.3%, thus the data is going in the right direction. Tomorrow we will see what the ISM Services data shows and if it can continue the trend in the ISM Manufacturing side. Economic data remains somewhat mixed short term.

What other data was helpful on the day?

That animal commercials on the Super Bowl were the most popular, again? If you don’t pay the electric bill they will cut the lights off, even if it is the Super Bowl. Seriously, the shift in sentiment between Friday and today was one of the bigger in some time.

Fixed income is gaining attention as the interest rate continues to climb. Plenty of concern relative to the bond ETFs as well as the sector overall. TLT, iShares 20+ Year Treasury Bond ETF shows the decline of late in the price of the bonds as interest rates have been on the rise. The Treasury bonds are not alone in the assessments of higher interest rates. The sector has produced plenty of support breaks in HYG, IEF, PFF, LQD and others. This is a sector to pay close attention to and manage the downside risk.

The worries in Spain are not helping the European markets. IEV, iShares Europe 350 Index ETF dropped 2.7% today. EFA lost 1.7% and EWP was off 5.4% on the day. Italy (EWI) was off 5.9% as well. These type of drops are eye catching and psyche destroying. Thus, we have to look at the exits if they fail to recover or bounce back. This is now a key component of our watch list for tomorrow.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index remains cleared the 1500 level Friday only to give back two more points than the indexed gained today and close back at 1495. The uptrend remains in play, but the selling caught plenty of attention from investors. All of the talk about being overbought got a glimpse of what can happen if the sentiment turns negative short term.

The  leadership shifted in the sectors of the S&P 500  index. Energy remains the leader, but moving sideways over the last week. Healthcare equally has shifted sideways and put the bounce off the December 28th low on notice relative to a trend change. Consumer Services (XLY), Industrials (XLI), Financials (XLF), Basic Materials (XLB), Utilities (XLU) and Healthcare (XLV) are shifting to sideways movement currently.  Technology (XLK) is struggling period on mixed earnings data. Telecom (IYZ) gained 1.1% on Friday and gave up the same today. The bottom line for the broad market is the short term  trend is being challenged and we have to be patient to see how it unfolds.

The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. The testing of the upside is in play as the markets fine a way to move sideways. The upside outlook is for a move towards the target of 1550-1575 short term.

SP500Scatter

The chart below is the 28th of December starting point. The leadership is similar to the chart above but, you can see the acceleration of the Energy and Healthcare sector clearly over the last week plus. The last week you can see the uncertainty building along with renewed volatility. In the Two EGG Strategy we were pairing a long trade in SPY with VXX. The volatility play would gain enough in volatile days to offset the downside risk in the S&P 500 index. SPY fell 1.1% while VXX climbed 6.9% today. Friday the same trade saw VXX fall 5.1% and SPY gained 1%. Or the last two days have netted a 0.1% loss on SPY and a 1.4% gain on VXX. The point being the volatility trade is working if you can stand the volatility.

SP500Scatter

The VIX index jumps back to 14.6 after falling or testing the 12.7 mark on Firday. Thus, the short term uncertainty seems to be in play again. Still worth watching as this unfolds.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РThe NASDAQ fell back below support as the volatility picks up again. VXN jumped to 15.7 on the day and showing increased sign of stain on the investor.

WATCH: QQQ – clear $67.30 resistance on the close. Entry $67.50 (Added on Friday) Stop = $66.75. HIT STOP TODAY after adding on Friday.

Dow Jones 30 Index РBack below the 14,000 mark on Monday. Failed to confirm a move higher and puts the index back on watch relative to the downside. Need some direction either way.

Small Caps¬†– IWM cleared the $90 mark Friday only to retrace it’s steps and challenge support. Support is $87.50 and if you are unwilling to hold to that level you may not want to stay if the downside follows through.

Midcap Index РTested lower losing 1% on the day. The index continues to hold up well in the face of opposition. Weigh out the risk factor at these levels currently and continuing to hold or exiting positions. A break higher is no guarantee at these levels and the downside risk has to be protected.

Financials РXLF moved above $17.50 resistance finally on Friday and retraced those steps as the ETF sold lower on Monday down 1.1%. Banks (KBE) and regional banks (KRE) both made moves lower as well to set the pace. Hold for now and watch the downside risk of the sector if the broad markets shift momentum.

WATCH: Entry $17.20 XLF. Stop @ $17.20

Basic Materials РXLB  hit a new high and is still in a uptrend. This remains one of the leading sectors on the upside, but we are seeing some consolidation near the high. Watch for any adjustments short term. We could see a test of support short term before any move higher.

Retail РXRT had pushed to the $67 resistance or new high only to retrace back towards the low on Monday. We continue to watch the leadership and protect against the downside risk. The broad sector is looking tired as it consolidates near the recent high. Keep your stops at levels that match the risk you are willing to accept.

2) Currency:

US Dollar РThe dollar remains in a downtrend, but got a bounce today on the worries about Europe (IEV). The buck retreated to rose to $21.71 on UUP again. The test lower found support at the worries about Europe arise. Watch the bounce for evidence of a continued move higher.

WATCH: UDN – Entry $27.45

Euro РThe euro was testing lower on the rally in the dollar, but this is only one day and we will have to see if the trend reverses relative to the dollar.  Let this play out on the upside.

WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $133.30 Raise Stop

Japanese Yen¬†– Has the yen found the near term low… yet? FXY moved to a new low at $105.70, but has bounced again off the low. I am not convinced the bottom is in yet for the yen. The devaluation is an attempt to stimulate exports for Japan. Short Yen (YCS) exit if the bounce finds reason.

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year jumped Friday to 1.97% and the 30 year to 3.17%. The downside risk in Treasury bonds is in play as the talk shifts to rising rates with the Fed stepping out of the way as unemployment data improves along with the housing market. TBT is in the model currently to take advantage of the move lower. Watch if the sentiment change on Monday continues.

High Yield Bonds РBig drop in the bonds this week and hit our stop at $93.75 (HYG). Hit the stop levels on Thursday and the next level of support is at $92.75. Manage your exit points if you have not already done so.

Corporate Bonds РLQD, iShares Investment Corporate Bond ETF was struggling to hold support near the $120.40 level. Broke support and the 200 day moving average. The downtrend started in October and has not settled yet at support. Short play on LQD hit entry and we have continued to push lower to close at $118.74 on Friday. Downside pressure is building on fixed income.

WATCH: LQD РShort @ 120.25 Entry.  Stop Р$119.75

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. There are sub-sectors attempting to make moves to the upside, but you have to manage your risk. This remains a traders sector for now.

UNG РConsolidating near the $18.25 level. Inventory data helped to hold support for now at $18.25 on UNG. The bottom line for natural gas is volatility based on news and speculation. Not willing to own or trade currently.

OIL¬†– Crude broke below the $22.90 level and puts the move higher in question. The close at $96.13 was off 1.7% on Monday. Watch the downside risk relative to an emotional reaction from investors and the speculation on demand… I like the current follow through on the upside, but the risk is still in play short term. Manage your stop. Watch as the inventory data as it showed more build up in supply.

WATCH: ENTRY OIL is $21.70. Raise stop to 22.70.

UGA РGasoline tested support $56.80 held and has moved higher and breaking above resistance  at the $59.35. The inventory data fell unexpectedly pushing the price higher. Wednesday the data showed another draw down in supply pushing the price higher again.

WATCH: ENTRY: $58 UGA – Stop = $62.75 Raise stop.

GLD РStill in a consolidation wedge and downtrend off the October high. Watch and play accordingly.

DBB РBase Metals broke support, tested $18.60 low and now is attempting to move to the upside. Wednesday it did finally break higher from the consolidation with a gap higher of nearly 2%. The driver was copper and Nickle gaining upside momentum. Held and followed through on the week. Watch for the continuation of the play higher.

Palladium (PALL) broke above the $69.50 high and heading higher. Cleared the $71.80 resistance and now at new high of $73,64.

Platinum (PPLT) remain the better bet on the precious metal side. Platinum is testing the consolidation pattern on the upside. Need to break above $167.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above 970 on the index and has moved to 1025. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain.

WATCH: EFA – Dropped 1.8% on Monday. The uptrend short term continues, but we have to see how this plays out on Tuesday. Stick with the uptrend play for now as it holds support. $58.25 support was tested today.

WATCH: IEV – Dropped 2.7% Monday as the selling was over concern in Spain. European rally may unravel some before this is over. One day at a time. Don’t assume anything and keep your focus going forward. The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance and the trend higher remains in play. Upside target is $45.50 going forward.

WATCH: FXI – China has established the uptrend off the November low. However, the volatility of the move has picked up on economic data from China and the move below $40.75 was a big negative. Watch as a consolidation pattern is building on the chart broke lower. A confirmation of the break of support at $40.85 is in play and bounced back to the upside short term.

ENTRY: $42 FXI – Stop = $40.

WATCH: EEM – Emerging markets have been doing well. The chart shows a consolidation pattern that is still in play and may shift back to an upside bias if the news improves in the US. $43.50 is the support level, and upside breakout would be a move above $44.80.

6) Real Estate (REITS):

WATCH: IYR – The break above $66.12 was the entry point of the move above resistance. Still moving higher short term. Watch for potential test of support in the move. Started Wednesday and bounced some on Friday. Be patient as this plays out short term.

ENTRY Р$66.15,  РStop $67

WATCH: REM, NLY & SJT – all three are in a position to break higher.

7) Global Fixed Income:

The sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – Exited play on Monday’s break of support.

WATCH: Emerging market Sovereign Debt (PCY) – Exited play on Monday on break of support.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high and still moving up. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding within the trading range for now. HOLD.

WATCH: PICB – International Corporate bonds are testing the support at $29.20. HOLD.

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.