Friday – Notes & Research
What about the correction that analyst and investors continue to write about? Is the correction coming? The answer would have to be yes, at some point in time. However, the old saying, “a watched pot never boils.” seems to apply to these situation the best. Market technicians will tell you that the market is currently overbought. In a perfect world we would find the necessary stocks to pullback and adjust accordingly to keep the market in balance. However, we don’t live in a perfect world and nothing about the stock market is logical short term. We would all like to shape it to be so, but the reality is day-to-day it is simply an emotional game played with very high stakes.
Stepping back from the daily views and looking at a chart of the S&P 500 index starting in September the index closed at 1465 at the high. On January 4th the index closed at 1466, meaning it had accomplish essentially nothing over that period. Today the index is at 1500 or a gain of 35 point or 2.5% in January. If that is overbought then we will have to deal with what comes short term. Perspective and logic are better seen over the longer term versus compressing the view and creating emotions we really don’t need to help our decision making. The market could use a rest, pullback, mini-correction, etc. but you have to let it play out. In order to get the selling many are looking for there will have to be a catalyst. Until that takes place keep moving forward.
The S&P 500 Index did close above 1500 taking the path of charging forward without giving it much thought. No test, no pullback or fear whatsoever, just straight ahead through resistance and melting higher.
What else did we learn today?
New home sales disappointed on Friday falling short of expectations as sales fell 7.3% in December. Evidently that doesn’t matter as XHB climbed 0.7% on the news. The reason for the move higher is sales were up 8.8% from the same period the prior year. Thus, the trend is higher and that is good news. Home prices rose 1.4% in December and 13.9% year-over-year. The sector is improving and that makes investors happy for now.
Evidently $450 isn’t support for Apple! The stock dropped another $6 or 1.4% on the day. If you want to be long the stock you have to find the bottom first. For now that has not happened. If you are short the stock today gave you a clear stop at $460.
Earnings from Proctor & Gamble and Starbucks helped push the broad indexes higher on Friday. PG was up nearly 4% and broke from nearly five month trading range. That was a positive for the stock and the sector. This is one to watch going forward. SBUX was up 4.1% and broke through the $55.80 resistance and is set to challenge the high of $62.
As we close the books on another week, plenty of questions remain relative to the upside. As you know I hate to speculate without just cause, and that leaves scratching my head at the 1502 close on the S&P 500 index on Friday. There is no reason to doubt the move to this level, but I find myself constantly looking at the chart wandering what the catalyst is for the continued move higher? Just as importantly, what is the catalyst for the chart/trend to reverse? I am not fearful of the climb, but at the same time I not overly confidence in the current move higher. Thus, we take what the market gives and keep moving forward.
Very mixed picture for earnings on Thursday! Manage your risk tomorrow.
1) US Equities:
The index attempted to break above the 1500 level on Thursday and failed. It attempted to do so again on Friday and passed. Relative to the decision I referenced in yesterday’s update the decision time is at hand and investors took the go higher road without question. There is still plenty of room for a pullback or test in this move to the upside. Thus, next week we will be watching how the index and investors hold or retrace the move.
At the end of the week the leadership looks the same. Filtering through the sectors of the S&P 500 index we find Energy in the lead after a big week on the upside. Consumer Services (XLY), Industrials (XLI) and Healthcare (XLV) are moving higher as well. The Financials (XLF) and Basic Materials (XLB) made a move to new high, but are struggling to regain their momentum. Utilities (XLU) had a good week and moved higher to regain some strength. Technology (XLK) is struggling with Apple’s earnings results, but there are still some signs of hope in the sub-sectors. The bottom line for the broad market is the uptrend remains in play and is working higher.
The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. Still moving sideways with a drift to the upside on the chart and still attempting to make a move towards the target of 1550 short term. The short term chart below (second chart) show the leadership off the lows on December 28th.
The chart below is the 28th of December starting point looking at the current leadership on the renewed push higher. Energy established itself as one of the new leaders this week along with Consumer Services, Industrials, and Healthcare. Technology is the one sector that remain negative or sideways at this time. If Apple will find support the sector is still in a position to accelerate higher. .
The VIX index closed the week at 12.6 on the close. No signs of anxiety yet and the overbought signs remain, but ineffective at this point. This is a time for being cautious not selling and being focused on what lies ahead.
Click on link above to see the S&P 500 Mode Watch List and Model
Tracking the Indexes and Sectors of Interest:
NASDAQ Index – The index has the Apple Flu. The index dropped as Apple stock fell near 13% on Thursday and Friday. 3130 held support on Thursday and we moved back to 3150 on Friday. Positive end to the week and we look forward to what the new week holds. The NASDAQ 100 index gained 0.5%% on Friday and remains below the $67.30 resistance. I still like the upside for the index if Apple will settle on support short term.
WATCH: QQQ – cleared $67.30 resistance on the close. Look for test and entry in the position.
Dow Jones 30 Index – 13,620 level cleared on the upside was a positive. Move to a new high the last six trading days. 14,000 level is back in plain sight.
Small Caps jumped $87.50 on IWM to continue to lead the broad markets. And, Midcap Indexes showed equal moves above the $105 level on IJH. Watching the exhaustion building in both, but on Friday they renewed the trek higher. Weigh out the risk factor at these levels currently and continuing to hold existing positions. consider taking some off the table here.
Financials – XLF moved above $17 and continues to the test the move higher. Banks (KBE) and regional banks (KRE) both tested the moves higher on Wednesday. Hold for now and watch the downside risk of the sector if the broad markets shift momentum.
WATCH: Entry above $17.20 on XLF. Hit ENTRY today with move to $17.30. Stop @ $17
Basic Materials – XLB hit a new high and is still in a strong uptrend. This remains one of the leading sectors on the upside. Watch for any adjustments short term.
Retail – XRT had pushed to the $65.60 resistance or new high. Thursday the ETF continued the upside run breaking higher. The scans from the sector last week turned up some stocks worth watching. PSUN (holding the break above $1.92), WAG (new high), CVS (new high), URBN (uptrend in play), ANF (testing the high).
US Dollar – The dollar remains volatile on a daily basis. The buck retreated to support at $21.70 on UUP. The test lower was a negative for the upside short term, but still watching to see how it plays out and follows the move higher off the $21.70 support?
Euro – The euro was testing lower on the rally in the dollar, but that reversed on the dollar weakness and is now above the previous high. Let this play out on the upside. Could add to the position on the test of support at $131.50. Nice move to new high at $133.55 on Friday.
WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $131
Japanese Yen – Has the yen found the near term low? FXY bounced off the $108.80 low, but revisited that level on Thursday again. The question is will the bounce hold this time or continue lower? The devaluation is an attempt to stimulate exports for Japan. Still volatile, but the downside still wants to continue based on this move? Short Yen anyone? (YCS) YES! The downside move to $107.82 on the day.
3) Fixed Income:
Treasury Bonds – The yield on the 10 year jumped Friday to 1.91% and the 30 year to 3.1%. 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. $117.50 support on TLT.
High Yield Bonds – Testing the highs and resistance near $95 on HYG, with the upside continuing to melt higher for now. Look for support holding at $92.75. Continued to creep higher.
Corporate Bonds – LQD, iShares Investment Corporate Bond ETF is struggling to hold support near the $120.40 level. The downtrend started in October and has not settled yet again at support. This is worth watching as a short opportunity as well as an indication of the risk being added by investors to portfolios.
WATCH: LQD – Short @ 120.25 if breaks support.
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. Traders sector for now.
UNG – Down 2.3% on Thursday as the inventory data reverses. The bottom line for the commodity is volatility based on news and speculation. Winter demand remains mild, but the cold weather could push prices higher near term. Watch to see how this play out next week.
OIL – Oil has been trading lower as the reports on oil are mixed. The close at $95.80 is push back back below the $96 level. Watch the downside risk relative to an emotional reaction from investors and the speculation on demand… I don’t like the way this is shaping up short term. Manage your stop.
WATCH: ENTRY OIL is $21.70. Raise stop to 22.45.
UGA – Gasoline tested support $56.80 held and has moved higher and breaking above resistance at the $59.35. The inventory data fell unexpectedly on Thursday pushing the price higher. Watch as this may make a move toward the $62 target short term.
WATCH: ENTRY: $58 UGA – Stop = $59.25
GLD – Downgrade from Goldman Sachs sent the metal lower on Thursday. Since September 2011 Gold has not eclipsed any of it’s previous highs. GLD resistance is at $175. We tested $159 on GLD and the metal bounced. The downtrend line remains in play and investors obviously cannot make up their collective minds on direction short term. Watch the stop below.
WATCH: GLD – Entry $163 – Stop $160.
DBB – Base Metals broke support, tested $18.60 low and now is attempting to move to the upside. A move through the $19.25 level would be the key short term. Be patient as the ETF has decided to test the support levels one more time?
Palladium (PALL) broke above the $69.50 high and heading higher. Cleared the $71.80 resistance on Friday.
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 – The uptrend short term continues, following a small test short term the fund has moved back above the previous high. Stick with the uptrend play for now as it holds support. Friday added a solid break higher to $59.03.
WATCH: IEV – Europe continues to rally as investors believe the worst is over. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). 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. Solid progress on Friday gaining 1.3% to $41.19.
WATCH: FXI – China has firmly established the uptrend off the November low. However, the volatility of the move has picked up on economic data from China. Watch as a consolidation pattern is building on the chart. Lost 1% on Friday to test the lower end of the consolidation. Watch to add to positions. ENTRY: $42 FXI – Stop = $40.
WATCH: EEM – Emerging markets have been doing well. The chart shows a consolidation pattern developing similar to FXI, but there are other single country ETFs doing well. EPHE, THD, EPU, EPI, TUR, EWW and others are worth watching. Watch the test lower for the sector.
6) Real Estate (REITS):
The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading as the cliff issues are resolved short term.
WATCH: IYR – Look for reasonable entry. $64.90. 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.
ENTRY $66.15, Stop $65.75
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) – Looking for support and an entry opportunity from the selling. Looking for a move above the $122.10 level for the entry.
WATCH: Emerging market Sovereign Debt (PCY) – Testing support near the $31 mark short term. Watch to see if this breaks lower or offers and entry on the bounce. Pays a 4.6% dividend as well.
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 broke higher and they are testing the current high again. 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.