Tug-O-War For Stocks With Jobs and Manufacturing Tomorrow

Thursday – Notes & Research

* NO VIDEO UPDATE TONIGHT DUE TO TRAVEL РNotes Updated Below. 

If you like to pay with a yo-yo you understood today’s market. Open lower, rally to positive, sell lower, rally to positive and sell into the close. Great day for 5 point swings on the S&P 500 index. Not much changed and in effect it was a boring day as we limp into the jobs report and other economic data on Friday. Exxon Mobil, Chevron and Merck also kick o the day on the earnings front. Should be fun.

Market cracks are starting to show? The key levels of support to watch on the S&P 500 index is the 50 day moving average at 1440, the Dow is 13,277 for the 50 day and the NASDAQ is 3042 for the 50 day. There are trendlines and other support zones for the major indexes, but these are where short term I would have my exit points. If you are looking longer them 18+ months then you may want to use the 200 day moving average as an exit point. In the immediate term outlook watch the 20 day moving average.

Small cap stocks fell 1.2% on Wednesday setting the tone for what could lead the market direction going forward. Despite the 0.6% gain on the day still need to watch how this plays going forward.

Transportation stocks fell 1.5% on Wednesday and is another sector that could set the tone for the direction going forward. Traded sideways on Thursday and is a key sector to watch as well.

Jobs report is due tomorrow. How much influence will it have on the markets overall? That depends on how good or bad the data really is. Remember, we have had some not-so positive data this week and if the jobs report supports the slowing effect in the economy I would expect investors to react to negatively to the news. Expectations are for 168,000 new jobs to be added. Anything less may be a challenge for the market reaction.

ISM Manufacturing data is due tomorrow as well. In December the number pushed back above the 50% level showing some surprising growth. The estimate is for most growth to 51%. A number below the 50% level would get a negative reaction from investors.

Economic data will set the tone for Friday’s trading… bottom line.

What else did we learn today?

The Fed is still willing to do whatever it takes to create a recovery. The reality is if they would stop trying to save the economic market from a correction, it would recover faster. Nobody likes to see bad economic times, but they are a part of keeping balance. When we over indulge in one area it has to have  way of balancing itself out. When you interfere with the process it prolongs the correction process. Thus, saving the banks that over indulged in the housing market has resulted in slow painful correction process versus allowing foreclosures and bank failures. Without getting into the right and wrong of such events the pure economics of it have been a painfully slow recovery. Thus, we still have the Fed actively engaged in saving the economy.

The NASDAQ failed to break higher, and it tested lower on the day, closing down 7 points. 2750 is the level to clear on the upside if this is going to add to the upside momentum short term. The longer this takes the more likely we will see a test lower before moving higher.

Has the pullback begun? Are now in the process of seeing the markets correct the overbought conditions so many have discussed? Time will tell, but the more important question is how we are going to handle the process of managing the risk of our portfolios. Determine the risk you are willing to accept going forward and set your stops accordingly.

1) US Equities:

S&P 500 Index / Sectors-to-Watch

The index remains near the 1500 level as the index gave up 4 points to 1498. The uptrend remains in play and the number of analyst calling for a test, pullback or correction continue to grow. Yes, technically the index remains overbought. However, we cannot assume anything and must allow the move to take place without our negative bias. Stops should be managed to the level we are willing to risk on the pullback and be patient as it plays out.

The  leadership shifted in the sectors of the S&P 500  index. We find Energy taking  the lead along with Healthcare. Rotation is healthy for the broad index and keeps the uptrend in play. Consumer Services (XLY) tested lower today, Industrials (XLI) remains near the top. The Financials (XLF) are pushing higher as well, but Basic Materials (XLB) are struggling to regain their momentum near term.  Utilities (XLU) accelerated last week and they broke above resistance today. Technology (XLK) is struggling period on mixed earnings data. Telecom (IYZ) gained 1.1% on the day and back at resistance to break higher. The bottom line for the broad market is the uptrend remains in play and we go with the trend.

The chart below has a starting point of 11/15 which was the pivot point for the current uptrend. Still drifting or melting to the upside on the chart and still attempting to make a move towards the target of 1550-1575 short term.

10 Sectors

The chart below is the 28th of December starting point. The leadership is similar to the chart above but, you can see the acceleration of the Energy and Healthcare sector clearly over the last week plus. The Consumer Services moved lower the last three days, Utilities has overtaken Technology on the upside, while telecom retreated lower today. Technology is the one sector that remain negative or sideways at this time. Basic Materials has moved down and sideways the last couple of days as well. The key is a continuation of the uptrend short term overall.

10 Sectors

The VIX index closed above 14 and again shows some of the movement we saw on Monday. The VXX trade is looking positive for those will to accept the risk of the trade. This is the first sign of a move higher in three weeks. It may be nothing, but it is shaping up to start the volatility in stocks short term. Still worth watching as this unfolds.

WATCH: VXX – Entry $24.30 trade. Hit Entry on Thursday.

Click on link above to see the S&P 500 Mode Watch List and Model

Tracking the Indexes and Sectors of Interest:

NASDAQ Index РThe index caught the Apple Flu last week, but found some stability as Apple bounced. 3130 held support and we moved back to 3153 on the day.  3160 is the resistance level we need to rise above. The NASDAQ 100 index attempted to break above the 2750 resistance, but retreated again into the close. I still like the upside for the index short term.

WATCH: QQQ – clear $67.30 resistance on the close. Entry $67.50 (Still unable to clear resistance)

Dow Jones 30 Index Р13,954 on the close today and the infamous 14,000 level is near again.  Be patient for now with the trend and manage your exit points. Made no run at it today!

Small Caps jumped $87.50 on IWM to continue to lead the broad markets. Wednesday was the first crack in the armor as the index fell 1.2% to lead the downside. It did manage to recover half of the loss on Thursday, but still key sector to watch going forward. Support is $87.50 and if you are unwilling to hold to the level you may not want to stay if the downside follows through tomorrow.

Midcap Index showed equal moves above the $105 level on IJH. Watching the exhaustion building,  but they continue to hold the move higher. Weigh out the risk factor at these levels currently and continuing to hold existing positions. IJH tested lower, but holding near the highs short term.

Financials РXLF moved above $17.20 and continues to test the move higher. Banks (KBE) and regional banks (KRE) both tested the moves higher and are holding near the high. Hold for now and watch the downside risk of the sector if the broad markets shift momentum.

WATCH: Entry $17.20 XLF. Stop @ $17

Basic Materials¬†– XLB ¬†hit a new high and is still in a strong uptrend. This remains one of the leading sectors on the upside, but we are seeing some consolidation near the high. Watch for any adjustments short term. We could see a test of support short term before any move higher… see today’s move lower for the index testing $39.

Retail РXRT had pushed to the $67 resistance or new high. We continue to watch the leadership and protect against the downside risk. One stock to watch near term is JCP to move back above the $19.50 and higher as the upside still looks ready to be in favor fundamentally. (The stock broke higher Tuesday gaining more than 9% on the return of sales) No not revenue sales, but discounts on merchandise. That was loved by all and investors jumped into the stock. Gave some up on Wednesday and Thursday testing the move higher. The broad sector is looking tired and tight stops are recommended on XRT with the resistance at the high.

2) Currency:

US Dollar РThe dollar remains volatile on a daily basis. The buck retreated to support at $21.70 on UUP again, and is testing the low at $21.61. The test lower is a negative short term and the short trade with UDN is back in play.

WATCH: UDN – Entry $27.45

Euro РThe euro was testing lower on the rally in the dollar, but that reversed on the dollar weakness and is now above the previous high. Let this play out on the upside. Nice move to new high at $134.59 today.

WATCH: FXE – $130.80 Entry. IN PLAY – Stop = $132.25 Raise Stop

Japanese Yen¬†– Has the yen found the near term low… yest? FXY moved to a new low at $107.80 and is holding for now. I am not convinced the bottom is in yet for the yen. The devaluation is an attempt to stimulate exports for Japan. Still volatile, but the downside still wants to continue based on this move? Short Yen anyone? (YCS)

3) Fixed Income:

Treasury Bonds РThe yield on the 10 year jumped Friday to 1.98% and the 30 year to 3.17%. The downside risk in Treasury bonds is in play as the talk shifts to rising rates with the Fed stepping out of the way as unemployment data improves along with the housing market. TBT is in the model currently to take advantage of the move lower.

High Yield Bonds РBig drop in the bonds today and looking at stops near the $93.75 mark for now. Hit the stop levels on Thursday and the next level of support is at $92.75. Manage your exit points should the bond reverse lower.

Corporate Bonds РLQD, iShares Investment Corporate Bond ETF is struggling to hold support near the $120.40 level (broke the last two days and sitting on the 200 day moving average). The downtrend started in October and has not settled yet again at support. Short play on LQD hit entry on Friday and them pushed lower to close down on the day. Downside pressure is building.

WATCH: LQD РShort @ 120.25 Entry.  Stop Р$120.40

4) Commodities:

The commodity sector continues to be a challenge relative to direction short term. There are sub-sectors attempting to make moves to the upside, but you have to manage your risk. This remains a traders sector for now.

UNG РNice bounce of 2.2% after some big selling the last four days on Wednesday. Inventory data helped to hold support for now. The bottom line for natural gas is volatility based on news and speculation.

OIL¬†– Crude broke from the short term consolidation and continued to hold the upside. The close at $97.52 is positive for the commodity. Watch the downside risk relative to an emotional reaction from investors and the speculation on demand… I like what we got today with the follow through, but the risk is still in play short term. Manage your stop. Watch as the inventory data showed more build up in supply.

WATCH: ENTRY OIL is $21.70. Raise stop to 22.70.

UGA РGasoline tested support $56.80 held and has moved higher and breaking above resistance  at the $59.35. The inventory data fell unexpectedly last week pushing the price higher. Wednesday the data showed another draw down in supply pushing the price higher again. As we stated the news could spark a move toward the $62 target short term. It did just that with the close at $63.71 today.

WATCH: ENTRY: $58 UGA – Stop = $61.50 Raise stop.

GLD РDowngraded from Goldman Sachs sent the metal lower last week. Hit support at $160.20 Monday and small bounce Tuesday. A nice bounce of 0.7% on Wednesday help the metal hold support. But, more selling on Thursday on the give back. The short side is still attractive is we move below $160. Be patient here and see how it plays out.

WATCH: GLD – Entry $163 – Stop $160.

DBB РBase Metals broke support, tested $18.60 low and now is attempting to move to the upside. Wednesday it did finally break higher from the consolidation with a gap higher of nearly 2%. The driver was copper jumping 1.7%. Nickle was up more than 2% as well. Watch for follow through on the upside as we held the move today.

Palladium (PALL) broke above the $69.50 high and heading higher. Cleared the $71.80 resistance and now at new high of $73,64.

Platinum (PPLT) remain the better bet on the precious metal side. Platinum is testing the consolidation pattern on the upside. Need to break above $167.

5) Global Markets:

The NASDAQ Global Market Index (NQGM) broke above 970 on the index and has moved to 1025. The global markets remains a positive among investors short term. Money flow into the country ETFs has improved along with the upside gain.

WATCH: EFA РThe uptrend short term continues, following a small test short term the fund has moved back above the previous high. Stick with the uptrend play for now as it holds support. $58.25 support for now. Still tracking higher.

WATCH: IEV – Europe continues to rally as investors believe the worst is over. Why? Simply put the backing of the EU and the ECB (similar to the Fed in the US in 2009). The confidence that there is a back stop has brought investors back to the table. Looking at the daily chart for the last year we can see the break above resistance and the trend higher remains in play. Upside target is $45.50 going forward.

WATCH: FXI – China has firmly established the uptrend off the November low. However, the volatility of the move has picked up on economic data from China. Watch as a consolidation pattern is building on the chart. Test of support at $40.85 is in play and bounced today. Watch to add to position on pullback test and bounce if it develops.

ENTRY: $42 FXI – Stop = $40.

WATCH: EEM – Emerging markets have been doing well. The chart shows a consolidation pattern that is breaking lower as we closed below the 30 DMA. $43.50 is the support level to watch for now. Bounced on Tuesday with a 1.1% gain.

6) Real Estate (REITS):

The sector broke support tested lower and then reversed along with the broad indexes. The fear generated by the fiscal cliff issues sent the sector lower. The reversal is worth trading as the cliff issues are resolved short term.

WATCH: IYR – Look for reasonable entry. $64.90. The break above $66.12 was the entry point of the move above resistance. Still moving higher short term. Watch for potential test of support in the move. Started Wednesday and testing lower.

ENTRY Р$66.15,  РStop $67

WATCH: REM, NLY & SJT – all three are in a position to break higher.

7) Global Fixed Income:

The sovereign debt issues are fading as the global outlook improves. Still plenty to be concerned about relative to growth, but the fixed income side is attractive for now. High yield bonds and corporate bonds are gaining momentum short term.

WATCH: Emerging market bonds (EMB) – Exited play on Monday’s break of support.

WATCH: Emerging market Sovereign Debt (PCY) – Exited play on Monday on break of support.

WATCH: International High Yield Bonds (IHY) – Tested support at $25.75 and bounced and hit new high and still moving up. HOLD.

WATCH: PAFCX – bounced off support near the $11.66 mark. Holding within the trading range for now. HOLD.

WATCH: PICB – International Corporate bonds are testing the support at $29.20. HOLD.

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.