The Downside Returns for an Encore

Wednesday – Notes & Research

The downside resumed today and that pushed the S&P 500 index down to the up trendline yet again at 1552 support. That level was broken intrady, but it pus the index in a position to accelerate to the downside with 1500 as the target if we break this level of support. The challenge for most indexes at this point is they are sitting on or broke support today. That put the buyers in a precarious position. Do they give up control to the sellers and allow a trend shift or step in and push the markets higher again. The sellers gained some boldness on the move Monday, thus the challenge is on and our job short term is to see who wins.

The longer term outlook for the broad index is worrisome as well. The current flow of economic data is putting the belief that the economic picture will improve in the second half of the year into a serious concern mode. The uptrend in growth is being challenged by the March data and the first half of April is not showing any bullish signs of improvement. That said, 1497 is he level I would take at least half of my long term play off the table and the other half on the break of the 200 day moving average. That assumes you are willing to accept the risk levels accordingly. Hedging your portfolio is an option as well to protect against the downside short term.

Now is where you make money… by keeping your gains or protecting them relative to the risk of the markets. Don’t assume we will bounce at any support level! Manage the risk according to what you know, what you believe and set your stops in line with those levels. You can always buy positions back! If you are worried about the tax liability design a strategy that will protect your from the downside, but not trigger the tax liability now. Money management, from view, is more about managing your gains than trying to find stocks or sectors that will go up in value. Yet, most research is done relative to the entry points and not the exit points. Take time to plan your strategy and trade your plan.

Sector Moves of Note:

  1. Commodities continue to set the tone on the downside as oil falls another 2% on the day. Gold held above the Monday low, base metals moved lower again, but above the Monday low and the agriculture (DBA) sector was up slightly on teh day. DBC hit a new low to close at $25.52. Not over yet and we continue be patient and let it all play our for now.
  2. Apple was the big headline taking tech lower as well as the broad markets. The stock dropped below the $400 level and closed at $402.80 down 5.5%. Why all the attention to a stock that has already dropped nearly 43% from the high in September. The impact to far reaching touch of Apple to other stocks and retail. XRT was down 1.5%, XLK was off 2.05% and the stocks around Apple were down as well. All of this is a warning to the investor, plain and simple.
  3. Transports are still showing some short term weakness and this will weigh on the broad markets as it is barometer for the economy. Back to support near $105 today and we have to watch how this plays out short term.
  4. Financials up 1.5% Despite the decline by Goldman Sachs following earnings today. Citigroup was rewarded a day later following positive earnings up 4% on the day. KBE & KRE both held support near the recent lows. I still like this sector with a longer term time horizon to deal with the short term volatility.
  5. Talk of a prolonged Europe depression sent the country ETFs lower and that is impacting the global outlook as well. EFA tested support today and IEV fell 2.8%and closed at teh lower level of support.
  6. VIX index jumped to 18 today after push lower on yesterday’s buying. This puts the index back ¬†above the Monday high. The anxiety over earnings and growth are in full bloom as earnings continue to set the short term tone for the broad markets.
  7. S&P 500 index closed at the 1552 mark and on the downtrend line. Watch to see if the downside gains a foothold short term to the 1538 level or below. One day, one news item, at a time.

The markets opened lower and never really looked back slowly progressing to close down on the day.  The trendline support was broken intraday but closed on that level in the end. That sets up an interesting day for tomorrow. No clear indication of selling continuing at this point, but for now protect your positions and let this play out. The short plays for trades are setting up as well.

Economic Data:

The Fed Beige Book only excitement on the day and it didn’t even make a headline as investor worries mounted.

Economic Events & Calendar 

1) US Equities:

The chart of the broad index is starting to look more like a heart monitor than the market. The ups and downs since March 14th have made me sea sick. Not much has changed in terms of the leaders and the laggards, but the activity day to day to get here has been a little rough. The index was at 1563 on August 14th and it closed at 1552 today. Not much in terms of overall change, but it now lower, but not enough to create a trend reversal. The consolidation or digestion of the move is in play and we will take all of that into consideration.

Volatility index РVolatility returned with a jump to 17.2 in the VIX index on Monday. That was the end of that as the index moved back to 14 on Tuesday. But not to be outdone it peaked at 18 on Wednesday on broad based selling again. This could be the start of some short term challenges for the index on the upside and investors on the downside.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play. The last three days have established a new potential pivot point on the downside to join the March 14th (Cypress and budget) high. Today’s move is testing the low from Monday and the trendline. This activity keeps the trend in a sideways trek, with a downward bias.

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher after the February 25th test. With today’s developments we have to protect against the downside and look to lock in gains if our positions are short term. Longer term holdings will be managed accordingly.

Scatter1228

November 15th Pivot Point is the start of the current uptrend. Target 1550-1575 was attained and now there is pressure to test the move. The trend has overcome two attempted moves lower to maintain the uptrend. The move on Monday now makes it four attempts to break lower. Watch the trendline as the support on the current pullback. A break of the uptrend brings downside options back into play for the short term.  

SP500Scatter

Sector Rotation of Interest:

Financials¬†– Earnings, analyst and fear add up to more selling in the sector. Watching the $18 level for now and a close below becomes the next challenge for the sector. Weakness in the regional earnings data today didn’t help nor did the miss from Bank of America this morning.

Transports¬†– (4/15 post) – IYT sold off tested support and bounced. Resumed selling on Monday and is now below the trendline. You have to transport goods to sell them… thus leading indicator. Not looking to own near term, but more as an indicator of direction short term.

4/17 post – erased the bounce from Wednesday and testing the low from Monday again. We have exited our positions and we will continue monitor as a outlook for the broad markets.

Healthcare –¬†(4/12 post) –¬†Hit a new high on XLV and held to end the week. We raised the stop in the models, but want to still give it some room for volatility. The outlook remains positive and the news relative to reimbursement helps the bottom line fundamentals as the technical data deals with the volatility. IHF, XPH, XBI and IHI all remain in a positive uptrend for the sector near term. Holding near the highs currently.

4/17 post – tested lower and held on a bad trading day. Watch the downside and let it play out short term.

Small Cap – Dropped below the low on Monday and we are watching to find support near term.

Telecom РHit our stop on the sector today with the selling relative to the broad market. This locked in the short term gain and will continue to monitor how this advances from here.

Technology РThe sector reversed lower on the selling today and we took the exit. Too much uncertainty relative to the sector and we will let the trend develop some conviction for now.

2) Currency:

Sector Watch:

  • UUP¬†– The Dollar broke the support at $22.35 mark on the downside Tuesday. Hit our exits and today bounces back to $22.47 or up 1%. Go figure… we will watch for now.
  • FXB¬†– the British Pound jumped two weeks ago, held¬†the¬†move at the $149 level. The currency is now in an uptrend off the low and moving through the current resistance at $151.50. Wednesday it sold back near the support at $150.50. For now we just have to be patient and let the pound work through the directional challenge it was facing. Took the entry on the move and the target is $152.50. $150.40 stop in place on the trade.
  • FXE¬†– ¬†The euro made gains on the week against the dollar and is in position to break higher. ¬†We were looking for an entry on the upside, but for now we will just watch to see how the short term volatility plays out.

3) Fixed Income:

Sector Summary:

  • The volatility we are all looking for in stocks has found its way to bonds. The yield moved higher after the selling last week, but resumed the downside in the yield and the upside for the bond. ¬†The fear factor is back in play for the bond and puts both TLT and IEF in play again short term.¬†
  • 30 Year Yield = 2.88% – ¬†down 2 basis points — ¬†TLT = $122.79 up 81 cents
  • 10 Year Yield = 1.7% – down 1 basis point — IEF = $108.58 up 20 cents

Tracking Bond Sectors of Interest:

Treasury Bonds¬†–¬†Yields on the 30 year Treasury is back to 2.9% as the pressure on stocks fueled the rally in bonds. Economic data, some need for safety, you state the reason, but the great rotation from bonds has not¬†occurred¬† At each sign of trouble money tends to flow back into the sector versus out. Expect more volatility in the price of the bonds a the worriers and the optimist duke it out.

High Yield Bonds РHYG = 6.5% yield. Support remains at $92.75. Move back towards the previous highs near the $95 level. Manage the position for the dividend as the growth side is uncertain short term. I expect the trading range to remain near term. Use $92.75 as the stop. OR TBF to hedge your position when volatility picks up on the downside.

Corporate Bonds РLQD = 3.6% yield.  The jump higher was in response to the rotation of assets towards safety or defensive to the stock market. This is not likely a new trend for the bond, but it starting to act like one. Use stop at the $120.50 level to protect the upside gains.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds found a bottom built a small base and produced a upside trade opportunity. Watch the current resistance at the $110 level. Moving back towards the resistance at the $111.50 mark. This is a tax-free dividend play with limited upside from growth.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the rally in stocks. Testing the highs again near the $42.50 level. Watch stops and protect your gains.

4) Commodities –¬†Sector Summary:

  • The¬†commodity index¬†continued lower with the move lower in both gold and oil setting the markets on edge. It has not looked back and with the acceleration of the decline on Friday and Monday with gold dropping to the to $1361. DBC broke support at $26.80 and continued to track lower closing at 25..52 today. ¬†Without any good news… the downside remained in play along with a small bounce.
  • Natural Gas¬†– UNG made the big move higher, but then moved sideways the last three weeks and now a follow through on the upside to end the week. After testing the move higher it is resuming the trek higher currently. Part of the consolidating came from the seasonal transition. For now the commodity continues to drift higher and we will stay with the trade for now with our stops in place.
  • Crude Oil¬†– Crude tested lower last week and has followed that same trend this week. Crude closed today at $86.40 dropping 2.6%. This takes out the $87.35 support and brings $84.50 into play for now. What does this mean looking forward?¬†Downside in play on lack of demand. Not short or long currently, but watching to see who offers the best alternative looking forward. SCO is the 2 times short ETF from ProShares.
  • Gold –¬†The metal showed no signs of an upside bounce on the day. $1377 ¬†is the close and that remains above the Monday close. Thus, some consolidation for two days. We continue to hold GLL (our short play on gold) for now and we are managing the stops accordingly.

Commodities Rotation Chart:

Natural gas still leading despite the test of the upside. Looking at the chart below you will note that the other nine ETFs of commodities have all turned lower the last week. 

Commodity

5) Global Markets:  

Global markets drop on slower economic data in China, Europe and the US. They tested lower on the news in Europe and Ching keep the markets in check. Monday reversed the upside momentum and now we have to watch how the downside unfolds short term. One day at a time.  The downside accelerated on Wednesday and that brings the sideways range back into play for now.   

Global Mkt

Country Watch:

  • FXI¬†– Wanted to move higher on the week, traded lower on the week to this point. Downtrend is still in play off the February highs and that is to be respected if the bounce off the low fails to produce a reversal. Still watching the downside or support at this level.
  • EFA¬†– Faded and then tested the breakout level. The volatility in the global markets isn’t going away. Watch and let the move validate before making any commitments to the sector.¬†Willing to watch for now to see if any leadership evolves from the global markets.¬†Closed below the 50 day moving average, but holding above the $58 mark for now.

6) Real Estate (REITS):

Real Estate Index (REITS) РIYR tested $70.73 support on Wednesday. Watch the top here to see if any opportunity develops in the REITs on the test lower. Be patient for now.

Sector Summary:

  • Most of the REITs are extended short term on the upside, thus the test in IYR.
  • Scanning IYR we find the charts look very similar on the upside. SFI, VNO, PLD, LXP, FR, KRC, ARE and HST show some consolidation and potential upside worth putting on a watch list short term and find the opportunities.
  • Mortgage REITs are selling back towards support and worth watching. NLY, REM, MVBS, IVR, WMC and MBG.
  • RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Watch for test of the move if markets struggle.

7) Global Fixed Income:

Sector Summary: Tested lower on Monday with the rest of the world markets.

  • The sovereign debt issues are fading again and opening the upside potential as the issues find relief. This offers some short term trading opportunities, but you still have to be¬†aggressive¬†in managing your exposure.
  • There are some funds moving in favorable direction of late.
  • PAFCX – Bounced off low with the movement in yields going lower. Holds $11.60 worth owning short term.
  • PICB – hit support traded sideways and now breaking higher. Entry $28.95 + 3.1% dividend.
  • EMB – Big recovery and interesting in watching. 4.3% dividend yield. Entry $120.25
  • PCY – Big recovery as well off the low for short term play. Entry $30.60. 4.8% dividend yield.

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.