Treading Water and Waiting For the Fed

Wednessday, September 12th

Germany votes to allow the ECB to use bonds! Good news for the euro and Europe. Apple announces iPhone 5 and other product changes. Import price up on oil and wholesale inventories have bigger rise than expected. Overall the data was as expected with the Fed on deck tomorrow. It will be the deciding factor more than likely on how the market moves going forward. Buy in the rumor… sell on the news? We will find out tomorrow.

The major indexes hold steady with small gains on the day and mixed volume in trading. Technology was the leading sector up 0.5% on the day, but overall not much in the way movement.

Bonds were lower as yields jumpe to 2.92% on the 30 year bond. This is a warning shot for yields to rise further an potentially the correction to begin in bonds. We have to watch to see how this plays out.

Plenty to watch and understand as this week progresses. Set your stops accordingly and keep moving forward.

Below we discuss all the moves that were made today and the impact and importance to each sector.

1)  US Equities:

S&P 500 Sectors-to-Watch РThe index is holding above the 1420 level as we conclude the FOMC meeting on Thursday. Investors remain timid towards the outcome of the current market environment. 1420 is a test of the breakout from last week, and 1395 is support. The stimulus remains the driving factor short term and most are watching to see how it plays out.

WATCH: SPY – Entry $142.50 – Stop $142.30 (Raise Stop)

The leadership shift over the last week continues for the broad index:

Basic Materials РThe sector has taken on a role of leadership of late, but has started to flat line over the last three trading days. Based on the stimulus in China it has produced a move higher in the materials sector. The question is will it last? Does China actually follow through? Watch and look for the opportunities in XLB. Resistance at the $37 mark short term and looking for the breakout to establish or add to the position.

WATCH: XLB – Entry $37

Financials – The sector tested the move higher Monday, but was back on the upside today. The trend higher remains in play and we are digesting the move higher. The relief relative to Europe helped push the sector higher short term. Banks and brokers have been leading the move higher. IAI moved above resistance $22.85 and looking for a catalyst move to continue the uptrend.

WATCH – XLF – Entry @ 14.55 – Stop 15.35 (on the close) — WATCH: KBE – Entry – 22.80 – Stop – 23.10 (Raise Stop)

Energy –¬† From uncertainty to leadership of the S&P 500 index. The selling in XLE tested support at the $70.40 level and held. The bounce on Thursday and Friday put the ETF back above the $73 resistance. The move confirmed the break on Tuesday. UNG fell 3.74% last Thursday and Friday, but finds renewed strength to jump above $19.40 resistance and the 200 day moving average! Gained 13.1% this week? UGA hit a new high, but tested lower on Wednesday¬†– tighten your stops on the play. OIL is back near the top of the short term trading range. The mixed results are all swirling around the demand versus hope of higher demand.

WATCH: HES – Entry $51 – Stop $53.26 (Raised Stop)

Telecom РThe test of support is over and the upside back in play. Hit a new high and is taking on leadership to the index as seen on the chart above. This remains a key sector for investors to take advantage of short term.

WATCH: IYZ – Entry $24.40 – Stop $24.50 (Raised Stop)

Healthcare РThe sector has been trading sideways. We dropped to support at $38.40 and held. Moved up to $39 and stalled, but we finally move through the resistance and pushed higher.  IHF moved up nicely off the lows and hit new highs and is testing the move. XPH moved off the lows as well, but stalled near the $61 mark.

WATCH – XLV – Entry @ 38.10 & $39 — Stop $38.80 (Raise Stop)

Biotech – The sector broke from the consolidation and was worth the trade on the upside play. The sector is helping drive the healthcare higher as well. Solid move to the upside and we have raised our stop to protect the gains.

WATCH РXBI РEntry at $89  РStop $90.40

Consumer Services – The consumer services sector has the retail stocks support relative to the trend higher. XLY and XRT are both moving higher short term. Digging in and looking for the leaders has been the best play. JC Penny’s broke above our entry point and continues higher with the sector overall. Take the upside, but protect against the downside short term.

WATCH: XLY – Entry 44.50 – Stop 46.20 (Raise Stop) / JCP – Entry 25.50 – Stop 27.81 (Raise Stop)

Semiconductors – The sector has been testing lower and the downside leadership has been from Intel. The sector remains weaker, and the bounce in the broad index didn’t hold and the sellers are back. Watch and manage the play short term. SMH hit our stop and we took the exit. Intel reversed again on Friday and the downside play is working. The announcement to withdraw their earnings guidance pushed the stock even lower.

WATCH: Short Intel (INTC) – 24.55 – Stop – 24

NASDAQ Index – The upside momentum has been as a result of the technology stocks, but the downside risk in in the semiconductor stocks. The momentum is shifting to the downside. The trend is up for now, but manage your risk.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 68.25 Watch the move lower to hold support.

Small Cap Russell 2000 Index РThe upside move off the July 30th bottom was positive, but we struggled with resistance at the $81.75 level. The move higher is positive, but we have stalled again.  The key is to protect the gains we have and see how this plays out short term.

WATCH: IWM -Entry 79.60 – Stop – 83.20

Volatility Index – The index broke low lower last week, but returned with some attitude to start the week. The VIX should move lower if the rally is going to continue, but the recent volatility increase my have different plans short term.

WATCH: VXX – looking for a reversal.

2)  Currency:

Dollar – The dollar started lower on the FOMC rumors and the ECB stimulus is helping push the dollar lower as well. The risk for the dollar has been stimulus from the Fed and the ECB. We remain short the dollar as the downside continues to the greenback.

WATCH: UDN – Entry $26.40. – Stop $27

3)  Fixed Income:

Treasury Bonds – The bond had reversed course on the stimulus from the Fed short term. Breaking support again at the $124.50 level again. Watch TBF for a short play.

WATCH: TBF – 29.30 Entry (Tuesday) – Stop – $28.80

4)  Commodities:

Crude Oil – Testing near the move higher as the fear factor steps up on the stimulus packages not materializing. The risk trades are coming off and that is impacting the commodities. Manage risk of the play and mange your stops.

WATCH: OIL – Entry 20.75 – Stop 22.95 (stop on the close)

Gasoline – Can’t decide as it trades near the high… up or down? The upside is still in play, but watch oil prices and if they stall at resistance. Watching for a test short term on the steep move higher. Made move back above the $60 mark again… Watch and manage your stops.

WATCH: UGA – Entry at 52.75 – Stop 58.50 (Stop on the close)

5)¬† Global Markets: The global markets responded to the ECB stimulus and Germany’s approval. The EAFE index tested support near term and bounced. Risk is on as the index gains relative to the US heading higher.

WATCH: EFA – Entry 52 – Stop – $53 (Raise Stop)

Brazil Small Cap – Bought on the move to the channel top at $37.50 with potential move higher. Solid move and follow through on the upside breakout prompted the entry at $37.60. Manage the trade and Raise Stop to $39.40 on move higher.

WATCH: BRF – Entry 37.60 – Stop – 39.40

6)  Real Estate (REITS) РThe sector remains near the current highs. I like the outlook long term, and short term we have made a move back to the top end of the trading range. IYR made the move through the top end of the trading range and hit a new high. Still scanning and looking for the best opportunities.  Mortgage REITs (REM) bounced off the selling and headed back to a new high. The uptrend remains in play. Yield on the fund is above 11% currently.

WATCH: IYR – Entry $65.30 – Stop $65.30 (Raise Stop)

7)  Global Fixed Income РThe issues with sovereign debt in Europe keeps us out of the asset class currently. Emerging market bonds (EMB) tested lower and bounced off support to move higher. Passed on the opportunity due to risk/reward. International Corporate Bonds (PICB) and International High Yield Bonds (IHY) remain in a long term uptrend and moved higher on Friday. Hold positions and manage your downside risk.

WEDNESDAY Outlook:

IEV – Europe is climbing on the stimulus/bailout of the euro and sovereign debt by the ECB.

Tomorrow is the FOMC decision on on what they will do or not do relative stimulus. There will be plenty of speculation over the next two days as to what action if any the Fed will take. Key to the week is the outcome.

China (FXI) big reversal off the jump higher on Friday. Calmed in trading on Tuesday, but still have to watch for the upside move. The move resumed higher today and looking for the follow through on China.

What am I watching:   1) MSFT РBreak above $31 would be a break from the consolidation pattern. Hit on Thursday, but pulled back into the consolidation. 2) Facebook (FB) is approaching our target of $15. Bounced 7% last week.  Watch the upside for a break above $19.70 as an entry point. The move back to the upside is going to take some conviction to buy. Got the move higher on Wednesday nad expect a move to $24 short term. 3)  Financials to provide the key leadership higher. BAC, C, MS, JPM, etc are on my watch list. 4) DBB Рthe base metals have picked up in response to the stimulus from China? They have run fast and may want to wait for a test on entry. JJC shows the jump in copper worth watching. 5) TBT РShort Treasury play is attempting to break higher as yields fall. If the Fed acts on the stimulus it could be an issue. Watch for possible move higher short term. (Got the break higher on Wednesday as trade opportunity)  6) UNG and FCG are moving higher as natural gas continues to climb on inventory data. Watch for move back to $22.50.

Watch and play according to your risk tolerance. 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 downside risk determines your long term results. Trade smart.