Is market prepared to continue higher?

Friday – Notes & Research

The Federal Reserve attempts to put investors at ease with multiple comments to ease the sting of the FOMC minutes. The conclusion now is they will continue the funding of Treasury purchases going forward and the market rallied back on Friday. I love when volatility steps into the market driven by news. The reaction to the Fed actions is expected when you consider it is the one piece driving the markets currently. The economic data is certainly not adding much to the growth side of the markets. Some will be happy heading into the weekend with the bounce, but I think it only stirs the pot of what to expect going forward.

This the week of the budget cut deadline. Or now known as sequestration. The total cuts are not as dramatic as the media has made them out to be and they will not really impact the operation of government. In fact, one report noted the net spending for the fiscal year would still rise over $15 billion.  The real impact will be psychological and the markets will likely react to the act itself more than the economic impact of the event. Another outside market event that will add to the volatility on the week.

Scanning the comments from investors, analyst and money managers today provided plenty of humor as the differences were as diverse as VXX from yesterday to today. The bottom line is keep your focus, manage your risk and know where the exits are before the fire starts.

There is plenty of homework to do this weekend. I will update this page further on Sunday to add additional research. Also the Research Picks Watch List Table will be updated and published on Sunday. Next week promises to be interesting!

Economic Data:

This was not the best of weeks for the reports, but as we saw on Friday all that seems to matter is that the Fed remain engaged in putting money into the system. We can attempt to give Hewlett Packard credit for the gains on Friday, but the comments from Bernanke and the 12 dwarfs over the last 48 hours are what calmed the markets for now.

Data Summary

  • The disagreement among the Fed Presidents was evident in the FOMC notes. The general idea is they think the Fed should slow or stop the rate of purchases of Treasury and mortgage backed securities. That was a shock to the market and the selling ensued. If you take away the punch bowl the party will stock quick enough. The next meeting is March 20th and there will be plenty of¬†discussion¬†on alternative methods to handle the existing problem. This has to be watched going forward for the simple reason it will impact the markets overall.
  • The Philly Fed was minus 12.5 versus up 1.6 expected. Now that is a disappointment the investment community. The Northeast continues to struggle with manufacturing. However, add this to the Fed speculation and you have another catalyst for selling today.
  • The Leading Economic indicators (LEI) were up 0.2% versus 0.3% expected. Confirms that forward looking data isn’t expecting much in terms of growth. Consumer expectations were the biggest drag on the index.
  • Producer Price Index (PPI) rises 0.2% and below the 0.4% expected. The core was up 0.2% and in line with expectations. Inflation remains under control at the producer level for now.
  • Consumer Price Index (CPI) was flat for January. The core was up 0.3% and above the 0.2% expected. Gasoline prices were a part of the move higher.
  • House starts fell short of the 914,000 expected with 890,000 report. Apartments were the difference in the data reported for January.
  • Home Builders Index fell to 46 from January’s 47 level. Estimates were for a rise to 49. Disappointing number for the sector. XHB fell 0.4% on the news Tuesday, but declined 4.5% on Wednesday.
  • Existing home sales were 4.92 million versus 4.95 million expected. There were gains of 0.4% in January sales despite the short fall against expectations.

Economy is steadily treading water with little to no growth. The short term outlook remains positive, but just barely. Keep your focus and remain disciplined relative to your stops and exit points. Correction anyone?

1) US Equities:

Market Summary:

  • Was this a buy-the-dip rally? From my perspective yes, but you have to respect the outcome next week relative a follow through on the buying.
  • Earnings from HPQ and AIG set the tone for the buyers. Note, earnings were good, but guidance was not great. Regardless investors used the news as a catalyst to buy.
  • Fed is still in the game for now and reassurance from just about all of the Federal Reserve Presidents was posted Thursday and Friday.
  • Comments from the Fed helped shift the sentiment back to positive on Friday. The VIX index moved back below the 15 level and the S&P 500 index gained 0.6% recover half of the selling on Thursday. We still have to be on guard against the downside short term.
  • S&P 500 index bounced on Friday, but remained below the 1515. The boost from Friday was more psychological than anything. Remain on guard as this all plays out.
  • NASDAQ index on Friday, but remains a challenge for investors. The index has been the weakest link on the move higher and it can fall faster in the void of good news.
  • Small Caps recover half of Thursday’s drop. Need to move above the $91 level before any interest.
  • Crude breaks lower on the week and leaves the upside in doubt.
  • VIX Index: Welcome to the new frontier of volatility. We will see if it lasts after the pullback on Friday in the index.

Technical Outlook:

  • Broad indexes are broke lower this week, but managed with the gains on Friday to hold above support. The key support is 1495 for the S&P 500 index. If the VIX holds above 15 next week we are setting up for more downside short term. The technical data has been building a case over the last two weeks for a pullback. If the two day 3% downside move qualifies as a pullback, everyone should be ready to buy on the reversal.
  • Two days of selling followed by a relief bounce. Watch for the follow through on the upside if the trend is going to continue short term. Don’t make any assumption and trades on this set up are high risk.

Leadership Opportunities:

  • See sectors below for more specifics. This will be an key week for the market to hold support levels and resume the upside move. Otherwise we look for further consolidation or resumed selling.¬†
  • Energy got a gut punch from crude falling to $93 this week. Still a leader for the broad market and worth our attention as the week unfolds.
  • Small caps bounced back from the selling Friday. Watch IWM
  • Transportation held support near $104 on IYT.
  • NASDAQ 100 tested support at $66.25 on QQQ.
  • The Dow, helped by HPQ, held support at $138.50 on DIA.

Short Opportunities:

  • Housing isn’t responding well to the recent data. XHB & ITB are down nearly 6% off the highs. TOL posted warnings and others are showing signs of slowing. Worth watching the downside risk.
  • Downside established ¬†in gold (GLD). Hit entry on GLL and it has accelerated lower. manage your stops. Small consolidation may only serve as accelerator for the selling.
  • Euro weakening on concerns. This is the TWO EGG play… short euro, long dollar.
  • Uptrend line is still in play, but the selling is putting pressure on the current move. Watching for bounce on Friday’s move.

December 28th Pivot Point for uptrend following the Fiscal Cliff pullback test.

Scatter1228

November 15th Pivot Point for current uptrend. Target 1550-1575 short term.

SP500Scatter

Tracking Sectors of Interest:

Telecom РThe DJ US Telecom index has pulled back, but the defensive nature of the stocks offers some opportunities at the stock level. We have been tracking both AT&T and Verizon as a dividend/growth idea.

  • WATCH: T – Break above resistance at $35.65 is attractive on the upside, plus the 5.1% dividend.
  • WATCH: VZ – Looks just like T on the consolidation and resistance $42.85, plus the 4.6% dividend.

Technology – The parts are better than the whole. Dig in and find the leaders.

  • WATCH: GOOG – some consolidation at the high and continued move is worth owning the stock.
  • WATCH: HPQ – in our model and jumped 12% Friday on earnings. raise stop and watch for opportunity to add to the position on any pullback.
  • WATCH: SOXX – the semiconductors need to lead the sector. The solar component is helping the upside. FSLR and WFR have been pushing higher even with the recent selling.

Financials – Bounced Friday after some selling hit our stop on XLF. Banks and brokers are the drivers short term. Watch both for the upside opportunities.

  • WATCH: KBE – banks are being driven by those with extensions into the brokerage business. BAC, C, MS, JPM and GS.¬†
  • WATCH: IAI – sub-sector play on the brokers.

2) Currency:

Sector Summary:

  • The currency landscape is shifting short term to dollar strength, weakening euro and possible bounce in the yen short term..
  • TWO EGG Model went long the dollar (UUP) and short the euro (EUO) on Tuesday. Solid move higher today in the trade. Adjusting the stops.
  • FXB – the British Pound has dropped to $150.50 support level? This is a new near term low for the Pound.
  • FXC – the Canadian Dollar continued lower as well heading towards support at $95.35.

Tracking Currency of Interest:

US Dollar РThe close $22.23  (UUP) after hitting the entry point on Tuesday. Dollar index traded higher as well. Watch the dollar/euro trade short term.

WATCH: UUP – TWO EGG MODEL

Euro РThe euro (FXE) fell below support at $132.70, and closed at $130.81 to end the week. Manage your risk of the trade.

WATCH: EUO: TWO EGG MODEL

3) Fixed Income:

Sector Summary:

  • Yields continue are shifting slightly on the turmoil in stocks. ¬†The question is if the market corrects how much will it impact? We are in the process of finding out now.¬†
  • 30 Year Yield = 3.15% – down 1 basis points — ¬†TLT = $117.03 down 2 cents
  • 10 Year Yield = 1.96% – down 1 basis points — IEF = $106.44 up 4 cents

Tracking Bond Sectors of Interest:

Treasury Bonds РThe move in yields hit the exits for the short side play with TBT. The upside play with TLT is starting to be attractive short term for a defensive move.

High Yield Bonds РHYG = 6.55% yield. Support is at $92.75, which has held short term and the fund moving off the lows for now. We will watch to see if support holds and then make a determination. $93.80 resistance in play. A move above that level would bring the fund back into play short term.

Corporate Bonds РLQD = 3.8% yield. The price has found short term support ($118.90). Broke above resistance at the $119.50 level on Thursday. Held the move and we will watch for a trade opportunity short term.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds continue to move sideways. Found support and bounced back, but still looking for direction. Willing to wait for the right opportunity on the bonds.

Convertible Bonds РCVRT = 2.7% yield. Price had been moving higher on the current rally in stocks. The reversal pushed the bonds lower short term.

4) Commodities:

Sector Summary:

  • Relief bounce in gold, but the downside pressure remains on the metal. Trying to find support at the $1570 level.
  • Crude down again on fear globally about economic growth. Closed on support of $93 — Watch downside? Held at $93.40 Friday.
  • Copper was down 5.3% on the week and testing support at $44.58. Watch to see if the downside accelerates further?
  • DBA shows some bottoming maybe for soft commodities. They have been on a selling binge the last two weeks. Watch for a trade set up.

Tracking Sectors of Interest:

BAL РA trading range of $52.80-54.40 is in play. A break higher would be a continuation of the move off the November lows. Stalled and trading sideways. Watch and see it this can break higher.

UGA РTesting support at $63 watch to see if any opportunity develops short term. Bounce 1.3% on Friday.

GLD РDownside follow through on the metal. This is the accelerated selling we discussed and we will monitor to see how low it will fall. GLL short trade working from the Research Table. Raise stop and manage the risk.

5) Global Markets:

Sector Summary:

  • Europe bounced 1.4% on Friday to stem some of the selling.
  • Germany provided the good news with improved business sentiment and EWG was up 1% on Friday. Not enough to interest me to buy, but worth watching.
  • Italy (EWI) still in the news on the elections this weekend. Watch the downside on the results.

Tracking Sectors of Interest:

EFA РDropped last week on Spain and this week on US markets. The support levels at $58.15 broke on Thursday and bounced back on Friday. Watch for the next opportunity.

IEV¬†– Dropped last week on Spain’s sovereign debt concerns. Testing the first level of support at $40. ¬†Euro-zone GDP data didn’t help the situation. Hit exit points and now we wait to see how it plays short term. 1.5% bounce on Friday worth keeping our eye on.

FXI¬†– China’s PBOC announced they would cut off money relative to the real estate market and repos. This is equivalent to what the Fed announced on Wednesday relative to quantitative easing. The impact was four days of selling. FXI, GXC, etc. all fell nearly 5% on the week. Watch to see how this downside move plays out. If the PBOC is serious the economic impact could be big for China’s market. Watch FXP.

6) Real Estate (REITS):

Sector Summary:

  • Homebuilders found some resistance near the $29.25 (XHB) level and managed to test lower. This has been building as the stocks are ahead of themselves short term. Inventory has shrunk on both existing and new construction, but the worries are rising again. Watch for opportunity in the selling short term.
  • REM – Mortgage REIT is breaking down with $14.80 support. Held Friday.
  • NLY- Annaly Capital Management finally broke above $15, but testing lower on the emotions in the sector.

Tracking Sectors of Interest:

The pullback test is in play for IYR and $67.25 is support. Small bounce on Friday so we hold and see how it plays.

WATCH РIYR РEntry Р$66.15,  РStop $67  Risk rising on the trade.

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.

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.