The Manufacturing Data Send Markets Lower

Monday – Notes & Research

I stated in the weekend notes that investors had three days to think about the markets… That was too long as the broad indexes face some selling to start the week. I know we get to blame the economic data, but it still goes to the issues of a catalyst being needed to push the markets higher or lower. The ISM Manufacturing data slumping in March was enough to push the major indexes lower. Falling from 54.2% in February to 51.4% in March did nothing to help the upside on Monday. However, the bigger question will be if it is enough to break the upside trend.

Construction spending rose in February, but with investors looking a March period it did little to offset the worries from the manufacturing sector. The first quarter PMI data was strong as it averaged 54.6 which was the best in two years. It provided little consolation for the broad markets in return.

As we stated in our notes this morning this week will be all about the economic data… good or bad.

Scanning the sectors for rotation we continue to see developments in the making.

  1. The bigger of the reactions today came from the NASDAQ index which dropped 0.8% in response to the economic data. That was nearly twice the drop from the S&P 500 and Dow.
  2. Healthcare has been one of the primary leaders for the broad market and continued to hold its own again today in trading. The Pharma stocks were under pressure early, but held their own in the end. Watching the sector to continue the upward trek.
  3. Gold was up $4, closing at $1600 yet again. Plenty of analyst still beating the drum for the move higher.
  4. Oil rallied back to close near the $97 level off just 0.2% for the day.
  5. Europe (IEV) remained under pressure as the US markets react to the economic data. The trendline is still the level to watch with the fund closed near the line. Support remain near the $38.40 to 38.75 level. A break below that would open the way to a short play. EPV is the leveraged short play on Europe.
  6. Volatility index closed at 13.7 up 8%, but it didn’t really cause any challenges on the emotional front. Still confidence in the upside for now, despite the economic data.
  7. Interest rates dropped again with some money in a state of rotation to safety. The 30 year bond is at 3.08% and doesn’t seem to buying into the markets optimism wholeheartedly. This is an area to watch for clues on how investors really feel about stocks.
  8. On Thursday we commented on the downside in corn not being a flash crash, but a decline of in CORN of 7% on the day. Today it fell an additional 2% to add to the worries in the commodity. WEAT down 5.3 Thursday fell an additional 2.9% today. Inventory reports showed more build up than analyst expected and the worries continue to escalate. Commodities remain under pressure.

Easy come, easy go for the S&P 500 index closing at 1560. The technology stocks were the leader on the downside Monday and the pressure continues to mount on the large cap stocks even though they fared better than the broad NASDAQ composite index. We continue to monitor this one day at a time. Watch list has several downside ETFs posted as the downside risk continues to build.

Economic Data:

Big week for data in store. Starts on negative note as stated above with the ISM Manufacturing sector falling below expectations. The balance of the week will bring plenty of additional input from the US economy. The data should keep it interesting.

Economic Events & Calendar 

1) US Equities:

The back and forth of the indexes continue as investor worries build.  Last week all eyes were on the 1565 level for the S&P 500 index to hit a new high. With that accomplished the index fell lower to start the week. The swings have not been big enough to spike the volatility index to any degree nor has it created much in terms of speculation of late. Thus, remain patient and let this all unfold going forward. One day at a time remains the theme.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play. We added the March 14th high as the next potential pivot point on the downside. The move last week pulled the index back above the close on the 14th keeping the upside in play, but today pulled the index back below the level of the 14th. We will watch to see how this plays out. The consumer discretionary (XLY) and Healthcare (XLV) switched place of  leadership short term and Utilties (XLU) in a positive trek to the upside. Stay focused and protect the downside risk.

Scatter 225

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test. The trend has continued to push higher after the February 25th test. See above.

Scatter1228

November 15th Pivot Point for current uptrend. Target 1550-1575. The uptrend off the November low remains in play. The trend has now overcome two attempted moves lower to maintain the uptrend. Interesting note that the healthcare sector is move closer to crossing above the financials as the leader off the low.

SP500Scatter

Sector Rotation of Interest:

Healthcare –¬†Continued to a new high above the $45 mark on XLV. Good point to add to position if you don’t own the sector already. This was the post in this mornings notes to break the sector down and look for the opportunities. March 18th was the pivot point off the recent pullback and XLV is leading all the sub-sectors! that is very unusual. IHF has had strong push the last two days breaking above the previous high at $76.

Small Cap –¬†IJR made a move back to the previous higher, continues to consolidate in a sideways trading range. If we are to move higher in the broad indexes, I would argue we need to see some leadership from the index short term. Monday gave up 1% and pushed the index lower. BRea of support and the downside could accelerate short term.

Midcap¬†– IJH moved to a new high on a solid break higher on Thursday. The move through the $114.50 level was a positive for the index. The follow through didn’t happen today with the index down. more than 1%. Still looking for upside here if the broad market is to gain upside momentum.

Utilities РThe sector has been a clear leader on the upside after clearing resistance at the $38.30 level. Some give back on Monday, but still one of the key leaders for the broad index.

Downside Pressure¬†– Industrials (XLI), Telecom (IYZ), Basic Materials (XLB), Financials (XLF) and Technology (XLK) are struggling to keep on their rally caps. They have not broke trends nor have they turned lower, but they are testing the recent moves relative to the trendlines. Watch… no cheating on placing shorts or selling positions before the downside validates the direction. Monday added to the pressure and pushed some of the other sectors enough to be considered if they don’t bounce back.

2) Currency:

Sector Watch:

  • Dollar was back to a new high on euro news Wednesday, but gave up the gains on Thursday. ¬†UUP closed at $22.60. Still watching support at the $22.35 mark on the downside. Manage your stops.
  • FXB¬†– the British Pound jumped two weeks ago and held¬†the¬†move. After testing lower last week. Held the $149 level and proceeded back near the current resistance, look for a follow through move on the push higher. Took the entry on the move and the target is $152.50. $149 stop in place on the trade.
  • FXC¬†– the Canadian Dollar held support at $95.35. Bounced nicely to breakout, retraced to the consolidation zone and heading higher again. $98.50 is the level to watch.
  • FXY¬†– yen is still in bottoming mode, but the upside is building one day at a time. ¬†Watch for a base to build short term if the direction is to switch. $104.50 is the level to watch for a upside play on the bounce. Hit the $104.50 level on the open. Watch to add a position as a short term trading opportunity. YCL is the leveraged play on the upside, but volume is very thin.
  • FXA¬†– Australian dollar bouncing as stocks continue higher leading the way. Big test today? Watch to see if it recovers or take your profit on the position at $104.25. Took the gain and watching today.
  • FXE¬†– ¬†The euro is testing support on the downside again? Broke support at the $128.15 level and closed below the ¬†200 DMA. Small bounce off the low worth watching as the downside is still in play.

3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly higher as stocks hold gains. ¬†The question is if the market corrects how much will it impact? Patience as the downside in bonds continues.
  • 30 Year Yield = 3.08% – ¬†down 2 basis points — ¬†TLT = $118.36 up 60 cents
  • 10 Year Yield =1.83% – down 2 basis points — IEF = $107.47 up 13 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe volatility in the bond sector has risen short term and it is causing grief for investors. The bounce lower in yields is the fear factor in play. That would make this move temporary and the trade is to short the bond on the rally higher. Be patient and let it develop.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. heading to the previous highs near $95. The first decline that go our attention on the day. it fell 0.4%, but is was more than that earlier in the trading day. Let it run as investors remain in love with junk bonds, but you have to protect the downside risk. . I expect the trading range to remain near term.

Corporate Bonds¬†– LQD = 3.8% yield. The price has found short term support ($118.90)… again. Downtrend line remains in play. Big jump Thursday gave way to some selling today. Be patient and let this direction play out.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds broke support and the chart is attempting to bottom or build a base. The downside risk remains and this is a sector of the bond market to avoid for now.

Convertible Bonds РCWB = 3.6% yield. Price had been moving higher on the current rally in stocks. Starting to see some selling off the highs. Watch stops and protect your gains.

4) Commodities:

Sector Summary:

  • The commodity sub-sectors are flat lining and no real progress overall. Still watching and waiting to see if anything other than the energy commodities will pick up momentum. Oil is moving higher along with natural gas and gasoline. In fact we need to watch UGA short term.
  • Soft commodities fell again today on the inventory data last week as discussed. DBA fell showing the weakness on the data. Corn, Wheat and Soybeans were all off on the day. Selling¬†opportunity¬†or buying? Watch the response to the selling and be prepared to be short each of the grains based on the response.
  • UNG (natural gas) made the big move higher breaking out and following through on the upside. Hit resistance and has been testing the move. Watch and see if this holds the upside momentum.¬†Consolidating near the current high.
  • Crude tested support at $89.30 last week and closed at $96.89 for the day.¬†ONLYETF Model Portfolio¬†The upside is still in play. Cleared the $22 resistance on OIL – watch and manage the risk of the move.
  • GLD – Gold continues in the consolidation range and looking for the upside. Not likely to happen with the current events in play.

Commodities Rotation Chart:     

Commodity

5) Global Markets:  

Global markets tested lower on the new in Europe, volatility is yawning, as the global markets continue to bounce up and down. We are a long way from being out of the woods on this issue. Take the positive today for what is… a move higher following some selling. Patience as this all plays out short term.¬†

Global Mkt

Country Watch:

  • FXI¬†– China continues to lead the downside relative to the global markets. Watch the base that is building short term. Downtrend in play… news not enough to change direction short term.
  • Japan (EWJ) broke higher, tested, and continued to move higher. Big gap lower on the open and no recovery. Watch to see how this reacts tomorrow.
  • EFA¬†– The long term uptrend remains in play and support has held, but the sideways motion remains in play. The ¬†30 DMA broke today. Watch the ripple effect of Europe short term as this plays out.
  • EEM¬†– emerging markets continue to struggle. Small bounce of the lows last week, but still questionable on any move to the upside.
  • EWW¬†– Mexico is breaking higher again. Watch for the upside opportunity to follow through.

6) Real Estate (REITS):

Real Estate Index (REITS) РIYR Settling into a trading range near the high of $68.50-69.50. Sector Rotation Model Broke to the upside today Рlook for follow through tomorrow.

Sector Summary:

  • XHB – Homebuilders moved to new high on the housing starts Wednesday, retraced some today, but still remains a positive sector. Be patient and manage your stops if the downside resumes.
  • REM – Mortgage REIT continues to push higher in the trend – let it run is the only thing to do with trailing stop.
  • NLY- Annaly Capital Management – continues the upside trek with some daily volatility. gained 2.5% on Friday to clear the 200 DMA. Hold and let it run.

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.
  • Some basing is starting to take place and we continue to scan and look for opportunities in the sector.

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.