Shift of sentiment starts the week lower

Monday – Notes & Research

Welcome back VOLATILITY! Blame Italy, the Fed, Congress or anyone else for that matter, but in the end it comes down to the worries which have been discussed over and over again in media and on Wall Street. Eventually you knew the sellers would get control, and today they did.

What looked like a positive start to the week turned quickly on the news from the Italian elections. Once again this is an outside news event acting on the market. Those events cause volatility extremes which we did see in the Volatility Index today. It was tough to buy any positions at the open as we gapped higher by 0.6-0.8% on the indexes. Thus, as we state let it open and play out. The reversal on the rumored worries about the austerity programs coming under pressure in Italy sent the dollar higher, the euro lower and stocks sold off on the uncertainty.

That brought out more worries in the US relative to the budget cut deadline. Or now known as sequestration. As we stated in our weekend update, “the total cuts are not as dramatic as the media has made them out to be and they will not really impact the operation of government. In fact, one report noted the net spending for the fiscal year would still rise over $15 billion. ¬†The real impact will be psychological and the markets will likely react to the act itself more than the¬†economic¬†impact of the event. Another outside market event that will add to the volatility on the week.” Those worries came with the European worries.

The VIX index jumped more than 30% on the trading day. That sent VXX up more than 13%. This is something we have been worried about and we have been managing a trade in VXX as well, which moved higher on the day.

There is plenty of homework to do as the week progresses. As usual… don’t make any assumption from today and prepare to do battle based on what the market gives going forward.

Economic Data:

The focus is now shifting to the budget cuts of $85 billion if a deal is not made prior to Friday. If we are going to cut any spending in government then this may be the only hope. What is¬†truly¬†sad is we can’t cut $85 billion in spending from a budget that exceeds $3 trillion! Thus, we all look for this to be the economic event of the week.

Data Summary

  • Congress calls for the Senate and White House to come up with a solution. Good luck!
  • Still dealing with the week data from last week. There is plenty of data to be released this week from the durable goods orders to home prices and personal income and spending.

Economy is steadily treading water with little to no growth. The short term outlook for the economy is positive, but just barely. Keep your focus and remain disciplined relative to your stops and exit points. Correction anyone? Famous last works from last week.

1) US Equities:

Market Summary:

  • Was this a buy-the-dip rally? From my perspective yes, but you have to respect the outcome next week relative a follow through on the buying. Not starting off as a bounce… still have to be disciplined going forward.¬†
  • Italy not Congress sets the tone to start the week.
  • Fed is still in the game for now and reassurance from just about all of the Federal Reserve Presidents was posted Thursday and Friday. More comments on Monday.
  • VIX spikes up more than 30% on Monday. Welcome back.
  • S&P 500 index bounced on Friday, but remained below the 1515. The boost from Friday was more psychological than anything. Remain on guard as this all plays out. Today we break below the 1495 support level on the index. That is a big negative going forward.¬†
  • NASDAQ sells off 1.4%. Takes out the 3130 support and testing the uptrend line off the November lows. There is plenty to worry about relative to the indexes downside risk.
  • Small Caps resumed the selling down 2.2% and $88.77 support for IWM.
  • Crude breaks lower breaking the $93 support level short term.
  • VIX Index: Welcome to the new frontier of volatility. We will see if it lasts after the pullback on Friday in the index. The pullback didn’t last from Friday with a big spike higher on Monday.¬†

Technical Outlook:

  • Broad indexes all broke lower Monday following the the gains on Friday to hold above support. The key support of 1495 for the S&P 500 index was broken. If the VIX moved to 19 today. The technical data has been building a case over the last two weeks for a pullback. That is in play currently and we will have to be focused and discipline to capture any of the move.
  • Two days of selling followed by a relief bounce and then the selling resumes. Is this the beginning of a reversal? Watch for the follow through on the downside if the move lower is going to continue short term. Don’t make any assumption and trades on this set up are high risk.

Leadership Opportunities:

  • Big reversal on Monday leaves us watching how it will play out going forward.
  • Energy resumed downside with oil moving lower and the sector dropping 2.6% Monday.
  • Small caps equally sold off more than 2%.
  • Transportation fell 2%

Short Opportunities:

  • Housing isn’t responding well to the recent data. XHB & ITB are were down more than 4% as well on Monday. The sector has dropped nearly 7% off the January highs. TOL posted warnings and others are showing signs of slowing. Worth watching the downside risk.
  • Downside established ¬†in gold (GLD), but the worries in Europe sent the metal up $20 on Monday. Watch the short positions with stop at $1600 on gold.
  • Euro weakening on concerns. This is the TWO EGG play… short euro, long dollar.
  • The short side plays are where the rotation is heading short term. Look for confirmation.

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. The 1495 level was broken and now we have to rethink the short term trendline. The downside break is a big negative for the broad markets short term.

10 Sectors

November 15th Pivot Point for current uptrend. Target 1550-1575 short term. The uptrend off the November low remains in play,  but the downside attempting to take over the up trendline.

10 Sectors

Tracking Sectors of Interest:

Telecom РThe DJ US Telecom index has pulled back, but the defensive nature of the stocks offers some opportunities at the stock level. We have been tracking both AT&T and Verizon as a dividend/growth idea.

  • WATCH: T – Break above resistance at $35.65 is attractive on the upside, plus the 5.1% dividend.
  • WATCH: VZ – Looks just like T on the consolidation and resistance $42.85, plus the 4.6% dividend. The stock has moved higher and held it’s ground today on the selling.

Technology РThe parts are better than the whole. Dig in and find the leaders.

  • WATCH: GOOG – some consolidation at the high and continued move is worth owning the stock.
  • WATCH: HPQ – in our model and jumped 12% Friday on earnings. raise stop and watch for opportunity to add to the position on any pullback.
  • WATCH: SOXX – the semiconductors need to lead the sector. The solar component is helping the upside. Sold off 1.9% on Monday, watch to see how it plays out short term.

Financials РBounced Friday after some selling hit our stop on XLF. Banks and brokers are the drivers short term. Watch both for the upside opportunities.

  • WATCH: KBE – banks are being driven by those with extensions into the brokerage business. BAC, C, MS, JPM and GS. Sold lower on Monday, but still on watch list.
  • WATCH: IAI – sub-sector play on the brokers.

2) Currency:

Sector Summary:

  • The currency landscape is shifting short term to dollar strength, weakening euro and possible bounce in the yen short term..
  • TWO EGG Model went long the dollar (UUP) and short the euro (EUO) on Tuesday. Solid move higher today in the trade. Adjusting the stops.
  • FXB – the British Pound has dropped to $150.50 support level? This is a new near term low for the Pound. However, the $149.90 close is now lower.
  • FXC – the Canadian Dollar continued lower as well heading towards support at $95.35.

Tracking Currency of Interest:

US Dollar РThe close $22.23  (UUP) after hitting the entry point on Tuesday. Dollar index traded higher as well. Watch the dollar/euro trade short term.


Euro РThe euro (FXE) fell below support at $132.70, and closed at $129.55 on the Italy worries. Manage your risk of the trade.


3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly on the turmoil in stocks. ¬†The question is if the market corrects how much will it impact? We are in the process of finding out now.¬†
  • 30 Year Yield = 3.09% – down 6 basis points — ¬†TLT = $119.33 up $2.30
  • 10 Year Yield = 1.89% – down 7 basis points — IEF = $107.26 up 82 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe move in yields hit the exits for the short side play with TBT Friday. The upside play with TLT hit the entry point today. Watch and manage the volatility.

High Yield Bonds РHYG = 6.55% yield. Support is at $92.75, which has held short term and the fund moving off the lows for now. We will watch to see if support holds and then make a determination. $93.80 resistance in play. A move above that level would bring the fund back into play short term.

Corporate Bonds РLQD = 3.8% yield. The price has found short term support ($118.90). Broke above resistance at the $119.50 level on Thursday was the entry or pivot point. Follow through on the move higher Monday. $119.90 stop.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds continue to move sideways. Found support and bounced back, but still looking for direction. Willing to wait for the right opportunity on the bonds.

Convertible Bonds РCVRT = 2.7% yield. Price had been moving higher on the current rally in stocks. The reversal pushed the bonds lower short term.

4) Commodities:

Sector Summary:

  • Relief bounce in gold Friday, but the downside pressure remained on the metal. Gained $20 on Monday to put the technical data back in good standing for now. Watch for a reversal of trend if this continues.
  • Crude down again on fear globally about economic growth. Closed below support of $93 — Watch downside? Closed at $92.17 Monday.
  • Copper was down 5.3% last week and is testing support at $44.58. Watch to see if the downside accelerates further or there is a bounce play coming?
  • DBA shows some bottoming maybe for soft commodities. They have been on a selling binge the last two weeks. Watch for a trade set up.

Tracking Sectors of Interest:

BAL РA trading range of $52.80-54.40 is in play. A break higher would be a continuation of the move off the November lows. Stalled and trading sideways. Watch and see it this can break higher. Tested lower again on Monday?

UGA РTesting support at $63 watch to see if any opportunity develops short term.

GLD РDownside reversal in play? Watch for confirmation and follow through to take a short term trade on the move.

5) Global Markets:

Sector Summary:

  • Europe bounced and then sold on Italy’s news on the elections.
  • Germany provided the good news with improved business sentiment and EWG was up 1% on Friday. Not enough to interest me to buy, but worth watching.
  • Italy (EWI) still in the news on the elections this weekend. Watch the downside on the results.

Tracking Sectors of Interest:

EFA РBroke support at the $57.62 mark on Monday. The close below the 50 day moving average was another negative for the global ETF. EFU is the short ETF for the play.

IEV¬†– Dropped last week on Spain’s sovereign debt concerns. Moved lower again on Monday’s Italian election worries. Euro down as well on the news. Hit exit points last week and now we wait to see how it plays short term. EPV broke above resistance today at $25.

FXI¬†– China’s PBOC announced they would cut off money relative to the real estate market and repos. This is equivalent to what the Fed announced on Wednesday relative to quantitative easing. The impact was four days of selling. FXI, GXC, etc. all fell nearly 5% on the week. Watch to see how this downside move plays out. If the PBOC is serious the economic impact could be big for China’s market. Watch FXP hit entry today on the Sector Rotation Model.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders found some resistance near the $29.25 (XHB) level and managed to test lower. This has been building as the stocks are ahead of themselves short term. Inventory has shrunk on both existing and new construction, but the worries are rising again. Watch for opportunity in the selling short term. (XHB fell 3.4% on Monday)
  • REM – Mortgage REIT is breaking down with $14.80 support. Held Friday.
  • NLY- Annaly Capital Management finally broke above $15, but testing lower on the emotions in the sector.

Tracking Sectors of Interest:

The pullback test is in play for IYR and $67.25 is support. Selling resumed and hit our stop on Monday.

WATCH РIYR РEntry Р$66.15,  РStop $67  HIT STOP ON MONDAY>

7) Global Fixed Income:

Sector Summary:

  • The sovereign debt issues had faded, but with Spain in the news again, Italy facing disruptive elections this weekend, and France taxing itself out of existence, too many concerns and the safest play is to avoid the asset class for now.

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.