Monday, November 12th
Interesting day of watching paint dry. There wasn’t much in the way of progress on the upside bounce as many analyst are dealing with the uncertainty of politics in Washington. There is hope of a resolution between the parties, but there is also the seed of doubt planted by the media. For now it is one day at a time. Too much risk on the table short term.
Two things to consider on the day… first, the leadership in the ETF scans today was a mixed bag of nothing important. Volatility shifted lower pushing SVXY up more than 6 percent. Natural gas leveraged fund jumped more than 5 percent, biotech gained 1.7 percent and utilities dumped 1.2 percent again on the day. Second, No leadership… only speculation plays are producing anything positive. The downside plays are still worth watching, but we need a confirmation on the downside support to gain another leg lower. Stay focused and disciplined for now.
Risk/reward as we discussed this morning is the key. Too much risk still present short term as the speculation trades are rampant. Nothing wrong with it if that is the way you want to trade, but it doesn’t fit our strategy. Thus, we will remain patient here and let the direction define itself near term.
Below we are outlining the reality of the current trends and the opportunities short term.
What am I watching?
Softer talk from Obama and Republicans calms market. Now we have to wait until the Friday meeting to see if a deal can be done on the fiscal budget and taxes. Fingers crossed and don’t expect much from the markets in the meantime.
The volatility index pushed towards the recent highs last week and today fell back below 17? Faith in the deal is evolving relative to the fear factor. Watch SVXY on the upside this week as trade opportunity.
Dividend stocks continue to struggle as investors worry about the hike in taxes. Utilities (XLU), Telecom (IYZ), Staples (XLP), and REITs (IYR) have dropped on the worry. XLU is the fund to watch for a bounce once this settles out. Oversold is oversold and it may fall further. $34.15 support is the level to watch.
1) US Equities:
S&P 500 Index / Sectors-to-Watch –
The index held the 200 day moving average again, but it is not overly convincing short term. The issues surrounding the market are keeping it in check for now. 1357 remains the key support level near term to hold. The intermediate term uptrend line is coming into play off the November 2011 low. Patience as this all unfolds.
The Scatter Graph below starting point is 10/17 which is the current pivot point off the most recent high. The move lower turned sideways for two weeks and then renewed the trek lower. The downside leadership in Utilities and Telecom accelerated thanks to the concerns over the dividend taxation. The chart shows the downside leadership in Telecom, Energy, Technology, Utilities and Financials. The majority of sectors are selling lower and the downside is in play.
ProShares Short S&P 500 index ETF is the trade to hold for now relative to the index. Entry $35.20 on the break above resistance. Stop $34.80 on a reversal short term. Hit the Entry on the pullback test Friday. Manage the risk and expect some volatility in the trade.
Breaking the Sectors Down:
Financials – Fell to $15.50 support on XLF. A break of this level is the entry on SKF (short financials). Downside still in play with a stall for now.
WATCH: SKF – Entry 37.85 – Stop 36.90 Mange the leverage volatility.
XLU – No Support and more selling on Friday. $34.15 is the level to watch for now.
XLK – No support yet. Watching the $28 level to hold?
XLV – 38.85 support level to watch. Break lower negative, bounce opportunity?
XLB – 35.55 support level to watch. Global picture has an impact on the sector.
IYZ – 23 support level to watch. Dividend tax rumors hitting the sector.
XLE – 68.80 support level to watch. Broke 200 day and demand story pushing sector lower.
XLI – at the bottom of the trading range support at 36. Watch and let this play out short term.
XLP – attempting to hold the 200 day moving average. Could play the bounce off support if it holds.
XLY – 45.20 support level to watch. Consumer is still in play with retail stocks holding up into the holidays.
On my Watch List looking forward:
Short opportunities are building in each of the sectors, but we are technically oversold. Thus, we have to be cautious how we build any short positions. We have discussed all the data and negative outlook for fundamentals. They have validated those issues the last two quarters, but now the fiscal cliff and the election are coming together to provide the catalyst on the downside. Patience is the key word to follow.
The VIX index (S&P 500 Volatility Index) didn’t signal fear again today? In fact, the index retraced lower as investors seem content to watch and see how the meeting go this week over the deficit and budget. Watch and be patient as this all plays out short term.
NASDAQ Index – Confirmation on the break below 2660. QQQ support is $63.15 and we have tested it the last three days. A break lower is good for adding a small position in QID.
WATCH: – QID – Entry $31.45 / Stop $31.20 – Manage the volatility of the play.
Dollar – The dollar bounce continues as the weaker outlook in Europe is hitting the euro. The play continues on the upside short term for the buck.
WATCH: UUP – Entry – $22.05 – Stop $21.90 Creeping higher day by day.
Euro – Watching for the oversold conditions to produce a bounce and dollar to decline as the “fiscal cliff” issue gains momentum. Watch for a play to develop in the euro near term. $125.80 support level to watch short term.
NOTE: The YEN moved higher the last couple of days as bounce off support? Worthy of watching. 200 day MA resistance.
3) Fixed Income: Yields are dropping!There was a big shift on the 30 year bond down to 2.74%, 10 year bond fell to 1.61% We are moving back towards the summer lows as the fear factor jumps… money moves to higher ground.
Treasury Bonds – TLT break above the downtrend line as bond rally. Watch to see how this plays out short term with $120.80 support. $124.60 is resistance (broke well above on fear rally). Investors have not been able to decide on direction, but the fear generated today put the bonds back in play short term.
WATCH: TLT – $123.60 entry (11/7) – Stop $125.15
Emerging Market Bonds – the reversal off the high has reached short term support at $120.80. A move below the 50 day moving average would be a negative technically. Watch for the downside opportunity or a bounce off support as a trading opportunity.
WATCH: Tested support again at $120.80 and bounced on Monday. Entry $121.15 / Stop $120.70
High Yield Bonds – We discussed the downside risk several months ago, but the recent rally negated any entry points short the bonds. However, we are not at the point of exit on the bonds with the break of $91.80 on HYG. Watch for a confirmation on the downside at $91.50 to short the sector.
WATCH: HYG – short play at $91.50 Entry / Stop $$92.25
4) Commodities: The commodity sector continues to be a challenge for the
WATCH: GLD – Hitting against the $167 resistance for now. Watch to see if upside can gain any momentum. Hit entry opportunity at $167.20. Still opportunity on the upside fear in stocks.
WATCH: SLV – Break above the $31.50 entry point. (HIT ENTRY FRIDAY)
WATCH: DBB – Selling gave way to hope on the hurricane speculation. Bounce trade? Sitting on support. Clear $18.2o on volume could be interesting. ENTRY – $18.25 watch patiently.
WATCH: OIL – Cleared $21 entry on the bounce last week, but failed to follow through. Watch for follow through…
WATCH: UGA – Cleared $56.25 entry point on Tuesday. Still looking for the upside conviction.
WATCH: UNG – I still like the Short play? KOLD ($22.30 Entry Friday)
5) Global Markets: The global markets are starting to trade in sympathy with the US markets. Watch and let this play out short term. If you have not set your stops it is key to do so.
WATCH: EFA – Testing support at the 50 day moving average. Broke lower, now $53 support – short set up. Testing the downside play opportunity watch on Monday for entry.
WATCH: EEM – Testing support at the 200 day moving average. Back to the bottom of trading range. $40.70 break.
6) Real Estate (REITS) – The sector tested the recent high and support at $64 (IYR). The sector broke support last week and bounced back this week. The downside is still the play to watch.
WATCH: IYR – Attempting to break lower through support? Volatile within the trading range. SRS – Entry 26.35 Friday
7) Global Fixed Income – Uncertainty about the sovereign debt issues remain. Thus, the lack of willingness to accept much in the way of risk from this sector.
WATCH: PIMCO Global Advantage Strategy Bond (PAFCX). Pulling back and testing lower.
WATCH: Emerging market bonds (EMB) – testing the move higher with a pullback.
WATCH: International Corporate Bonds (PICB) – Testing near the highs, watch and remains in trading range.
Watch: International High Yield Bonds (IHY) – Testing support? Watch downside risk.
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