Too Much Emphasis on the Cliff!

Wednesday, November 14th

Small rally early steady selling the rest of the day as the major indexes continue to leak lower on worries about the budget deficit and tax hikes. Nobody likes the implication of a tax hike and the potential impact on the economy and jobs. Plenty to worry about and that unto itself is keeping investors on the sidelines. We have to remain patient and take what the market gives one day at a time. Until the buyers are willing to exert themselves the trend remain down.

The scan list of the more than 1300 ETFs are only turning up 83 funds today that meet the simple criteria. The one with the greatest impact on the scan is the price is above the 50 day moving average. This shows the downtrend taking root as the short ETFs are the one populating the scan. Thus, we see the sellers remain in control of the overall market direction for now.

Risk/reward as we discussed is the key. The risk of being long is too high currently and today the short side gained some clarity with the confirmation move lower on the broad indexes.  We remain patient here and let the direction define itself near term taking what the market gives.

What am I watching?

Break of support on the NASDAQ index below 2858… next up 2835?

Cisco attempted to help the tech sector, but that didn’t work against the downstream flow today. XLK is close to retracing 100% of the move off the June 4th low. ETF model put SSG into play on the move in semi’s lower.

The volatility index pushed towards the recent highs again today showing some fear creeping back into the broad markets, but still not accelerating. Maybe today is the move that make a difference. VXX could come back into play as a trade short term. Watching tomorrow for a move above the entry point on the ETF model.

We have been adding short plays to the Rotator model as well and we have a to watch the downside short term and manage our risk as well as targets.

1) US Equities:

S&P 500 Index / Sectors-to-Watch –

The index broke the 200 day moving average Tuesday and confirmed the next leg lower today. The selling closed below our target on the initial break of the 1400 level support. Now we have to manage the trade for what it will do from here. We discussed yesterday the break of the 200 day could accelerate the downside and we did see that today along with more worry short term over the tax and spend government in place. 1357 broke and now we watch 1335 as support.

Volume returned on the selling today with above average selling. The VIX index accelerated higher as well and is still within the current trading range. A break above the 18.80 level would be another negative for the broad index.

The Scatter Graph below has a starting point of 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 has been in Utilities and Telecom, but technology, basic materials and energy have joined the party. The majority of sectors are selling lower and the downside is accelerating. If we move the pivot point close to 11/6 the financials are in the picture on the downside as a leader along with industrials. That reflects those two sectors catching up with the others. They are all point down currently.

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 on the chart. Stop $34.80 on a reversal short term. Took the entry 11/9. Manage the risk and expect some volatility in the trade.

Breaking the Sectors Down:

Financials – Fell below $15.50 support on XLF. Downside accelerated today as sellers stepped up the pace. Watch and manage the risk of the trade.

WATCH: SKF – (11/9) Entry 37.85 – Stop 36.90 Mange the leverage volatility.

XLU – Support at $34.15 is the level to watch for now.

XLK – No support yet. Watching the $28 level to hold? Failed Wednesday $27.52 Then $27?

XLV – 38.75 support level to watch. Break lower negative, bounce opportunity? closed on it Wednesday.

XLB – 34.77 support level to watch. Global picture is adding to the impact on the sector.

IYZ –¬†200 day moving¬†average¬†support level to watch. Dividend tax rumors hitting the sector.

XLE – 68.24 support level to watch. Broke 200 day and demand story pushing sector lower.

XLI Р35.18 as it broke through the bottom of the trading range support at 36. Watch and let this play out short term.

XLP Р34.10 after breaking below the 200 day moving average.

XLY – 200 day moving average support level to watch.

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 results are coming together to provide the catalyst on the downside. Manage the short plays as they tend to move faster and end sooner than the upside plays.

The VIX index (S&P 500 Volatility Index) signal some¬†fear today? And it was enough to catch the attention of investors. Watch the fear factor… acceleration is a negative for the overall markets.

NASDAQ Index РConfirmation on the break below 2660 raising short interest. QQQ support was $63.15 and was taken out on Tuesday with a confirmation of the move on Wednesday? A break lower was good for adding a small position in QID.

WATCH: – QID – Entry $31.45 / Stop $31.20 – (11/9) Manage the volatility of the play.

2) Currency:

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 on fear in Europe.

Euro – Watching for the oversold conditions to produce a bounce and the dollar to potentially¬†decline as the “fiscal cliff” issue gains momentum. Watch for a play to develop in the euro near term. $127 Entry – held support level short term.

3) Fixed Income: Yields are dropping.. Again! There was a big shift on the 30 year bond down to 2.274% and the 10 year bond fell to 1.58%. 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 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 (11/12). Entry $121.15 / Stop $120.70

High Yield Bonds – We discussed the downside risk several months ago, but the rally negated any entry points to be short the bonds. However, we hit the point of exit on the bonds with the break of $91.80 on HYG. Watch for a confirmation on the downside, and at $91.50 short the sector (HYG or JNK). Broke the 200 day moving average today.

WATCH: HYG – short play at $91.50 (11/9). Entry $91.50 / Stop $$92.25

4) Commodities: The commodity sector continues to be a challenge and not clear leadership. Natural gas held the move higher from Tuesday. PALL moved higher on the day and worth watching further. PTM was higher on the day as well reversing the selling. Metals offering some upside short term.

WATCH: GLD РHoling the $167 support.  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 – Entry $31.50 / Stop $31 – Looking for upside momentum through resistance.

WATCH: DBB – Selling gave way to hope with a bounce off the near term lows. Sitting on support. ENTRY – $18.25 (Tuesday)

WATCH: OIL – Cleared $21 entry on the bounce last week, but failed to follow through. Watch for follow through…

WATCH: UGA – Entry $56.25 / Stop $54.80 – Fell again today to support.

WATCH: UNG – Held move higher.

5) Global Markets: The NASDAQ Global Market Index broke below the 200 day moving average last week and the downside has accelerated losing another 2% on Wednesday. The EAFE index broke support of the 200 day, ASIA is holding up thanks in part to the rally in China and Latin America continues to trade near the low from the summer. Still no clear direction in the global markets as the risk remains high.

WATCH: EFA –¬†Broke¬†support at the 200 day moving average. Broke $53 support – short set up in play. EFU – Entry $19.85 / Stop $$19.70 Watch the volatility in the global markets.

WATCH: EEM – Testing support at the 200 day moving average, but broke support today. EEV – Entry is $25.80 / Stop $25.50. Emerging markets broke lower from the sideways channel for the entry.

6) Real Estate (REITS) – The sector tested support at $64 (IYR). We broke support last week and took out the 200 day moving average. The downside is in play for now. The downside accelerated in NLY and REM as well. Short is the play.

WATCH: Volatility within the trading range (broke lower added position 11/9). SRS – Entry 26.35 / Stop 26.60

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. Greece back on the table along with Europe. Watch and protect the downside risk in the sector near term.

WATCH: Emerging market bonds (EMB) – testing and moving sideways and holding the 50 day moving average.

WATCH: International Corporate Bonds (PICB) – Testing and remains in trading range at the 50 day moving average.

Watch: International High Yield Bonds (IHY) – Testing support? Break of $25.81 exit point.

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 of your portfolio.