Stocks erase the negative start to the week

Wednesday – Notes & Research

Volatility retraced back below the 15 level on Wednesday and puts things back on an even keel. The assumption that the index will move even higher on the budget issues facing the country at the end of the week, is starting to fade. But, as the chart shows it doesn’t take much to spike at the current levels.

VIX

The focus today shifted to the data. Durable good orders fell 5.2%, but most of that came from aircraft. The numbers minus aircraft showed that orders were generally strong and in some cases suggested business investments were picking up. Machinery orders picked up 13.5% and that was a positive as companies tend to expand in expectation of higher orders. This was the first positive economic report in several weeks.

Retail continues to disappoint and today we added Target to the list as their guidance on revenue was lower than expected. This is just another announcement in a trail of many. Is the consumer finally done? XRT continues to trade near the recent highs despite the news. XLY is within 1% of the current high as well. All the talk about taxes going up, gasoline prices hurting, and negative guidance from retailers, hasn’t dampened the interest in the sector.

I am sticking with my views and continue to dig in to gain some insight into the current activity. This is not the kind of market I like, nor do I like the risk of this environment. The following are my key concerns:

  1. How do investors accept the budget cuts, assuming no deals are cut. The hype is leaning towards selling and I am not convinced that is the case after the initial reaction.
  2. What will the Fed do at the March FOMC meeting. No real changes expected to QE infinity, but will the shorten the timeline or adjust any method of delivery.
  3. Italian elections have now become important enough to what the impact on the euro and the EU. Despite all the rhetoric, Europe does matter to the global economy.
  4. Can the economy really recover? Earnings grow? Revenue increase? Simple thing that make the market more palatable to investors.

Today brought some hope to these issues and we will continue to monitor the opportunities, but most importantly we are willing to be patient and let the volatility play out short term.

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 and Senate leaders are set to meet with the White House on Friday to discuss the cuts. Glad to see they are planning in advance.
  • Durable goods orders drop 5.2%, but without transportation they actually grew by 1.9%. That news helped push the broad markets higher on Wednesday.
  • Pending home sales rose 4.5% versus the decline of 1.9% last month. That helped the homebuilder stocks move up 2.1% on the day. On Tuesday New Home Sales were 437,000… 53,000 ahead of expectation. Two positive reports for the housing sector after a disappointing January.
  • Consumer confidence jumped to 69.2 following a 58.4 reading in January. Nice jump for the consumer.

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:

  • NASDAQ moved back above 3160 on Wednesday, but still a fragile recovery from the selling.
  • JCP report a big miss after hours and the stock tumbled. TGT gave disappointing guidance and fell. The retail sector overall however, remains in positive territory. Watch to see if the sector can continue the upside despite the negative news.
  • Bernanke testifies again and says same keeps setting the record straight that QE benefits are clear and the risks are¬†manageable. I don’t know about you, but I feel much better following his testimony with that valuable input.
  • Senators sticking with the belief that sequester cuts will take place at the weeks end. Without the Republicans giving in to more tax increases the deal seems dead. Thus, what how this impacts the economic picture? The did schedule a meeting with the White House on Friday just to have one more head bashing session between the “leaders”.
  • S&P 500 index bounced back above the 1495 level Tuesday, and 1515 on Wednesday and life is good again. The challenge is the index remains down by 1% over the last eight days. We are not out of the woods yet. We will continue to take this one day at a time.

Technical Outlook:

  • Broad index failed to hold the key support of 1495 for the S&P 500 index was broken on Monday. That changed yesterday and today as the index moved back above the 1515 level was recovered in trading today and leaves the question of direction still, from my view.
  • What about the tech bell weather… APPLE? Is it time for the bounce to solidify? Still could make or break the current trends in tech as well as the NASDAQ.
  • NASDAQ, S&P 500 and S&P 600 are all holding their uptrends off the November 15th lows. That is a positive technically for the broad markets currently.

Leadership Opportunities:

  • The last shall be first… XLB up 3.2% last two days after a 5% decline over the last week. Watch to see if it follows through on the bounce.
  • Utilities, Consumer Services and Consumer Staples have held up the best short term. That shows the defensive stocks with the current leadership. Not the best leadership, but better than none.
  • Healthcare is still on our radar for the upside and worth watching if the reversal builds any steam.
  • Look for technology and financials regain some leadership if the upside trend is going to hold.

Short Opportunities:

  • Two day rally has taken many of these off the table, but you still have to watch the bonds. TLT or the inverse TBT could set up a short term opportunity. Below I discuss the paired trade of long IEI and short TLT on the outlook that interest rates will rise longer term.
  • Watch commodities not acting well here, but if the dollar weakens on a equity rally you have to look at the short dollar, long commodities trade.

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. The 1495 level was broken Monday and we have to watch the pivot off the low from Monday. Patience is key as this unfolds.

Scatter1228

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.

SP500Scatter

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 broken above resistance at the $44.80 level and moved higher.

Technology РThe trading range remains in play and holding support.

  • WATCH: GOOG – some consolidation at the high. Watch for move higher short term.
  • WATCH: HPQ – in our model and moved higher 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. $57.30 support needs to hold.

Financials РHit our stop, but still looking for the upside opportunity in the sector. The sector should still benefit on the upside if we and when the volatility dies further.

  • 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. Small reversal on the day – exited our play on the dollar and short euro today.
  • 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 buck was slightly weaker on the day. Watch support at $22.20 level, if it breaks look at a downside play.

Euro РThe euro (FXE) bounced off the support at $129.50 and ready to break above the $130.50 resistance level short term. Watch for upside opportunity if this holds.

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 = 3.1% – up 3 basis points — ¬†TLT = $118.29 down 35 cents
  • 10 Year Yield = 1.9% – down 2 basis points — IEF = $107.01 down 5 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РReversing again on the rally in stocks.

I am starting to like the long IEI vs the short TLT paired trade longer term. Working on the idea of the trade currently.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. Let it run as investors remain in love with junk bonds.

Corporate Bonds РLQD = 3.8% yield. The price has found short term support ($118.90). Broke above resistance at the $119.50 level and the entry or pivot point. Follow through on the move higher Monday. $120 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:

  • Bounce in gold reversed after a move to $156.17 on GLD . Down 1% on the day and back at $154.57. Still an issue with the downside short term.
  • Crude flat on the day, but still down following the selling on Monday. Closed below support of $93 — Watch downside? Closed at $92.85.
  • Copper was down 5.3% last week and is testing support at $44.58. Watch to see if the bottoming over the last three days plays out on the upside.
  • DBB bounce some support at $18.60 again. Could offer another trade if the metals like copper bounce. held on today… barely.

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 and back near the high on Wednesday?

UGA¬†– Testing support at $63 … failed as it move to $61.65 on the close. Short play? Look for support and a bounce more than the short side.

5) Global Markets:

Sector Summary:

  • Europe bounced and held the lows – that is the good news.
  • Japan (EWJ) bounced back after some more testing. Looking for a break above $10.20.
  • Italy (EWI) still in the news and the downside is at support of $12. Bounce held of the break lower on Wednesday. Still interesting short term. The upside bounce may come into play?

Tracking Sectors of Interest:

EFA РBroke support at the $57.62 mark on Monday and traded back above that level on Wednesday. The close above the 50 day moving average was another positive for the global ETF. Still not interested short term.

IEV РAttempting to bounce of the support at $38. Watch as this plays out. Any talk currently is pure speculation, let the trend speak on direction short term.

FXI РTook the short play in FXP and watching the bounce off support near the $37.75 (FXI) on Wednesday. protect the downside against any bounce short term.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders bounced on news from HD on Tuesday, positive New Home Sales on Tuesday and impressive pending home sales on Wednesday. Watch the upside reversal on XHB.
  • REM – Mortgage REIT held $14.80 support. Nice bounce on Wednesday.
  • NLY- Annaly Capital Management finally broke above $15, but testing lower on the emotions in the sector, but made a solid push higher today.

Tracking Sectors of Interest:

The pullback test is in play for IYR and $67.25 is support. Moving back towards the high at $68.50.

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.