Worries still in play for both US and global markets

Tuesday – Notes & Research

Day 2 of the Cyprus catalyst is behind us and the disruption is still in play. I keep going back to the same question, why does this matter? The loan is 10 billion euro and we are trashing global market values in multiples of that number. Where is the logic in this trading? That’s the point… there isn’t any. The selling came in a big wave on Wednesday after the markets started the day higher. I suppose there was some hope of this going away as quietly as it was started. Not that easy I am afraid. Thus we outline below some of the good and some of the bad following the day. The one positive late in the day was the¬†parliament¬†rejected the proposed tax on deposits. But, there is still plenty of issues on the table before this is resolved. Scanning for rotation we continue to see developments on the upside along with some warnings.

  1. Volatility index jumps again on the day hitting a high of 15.25. A close above 15 makes this interesting short term. VXX would be a logical trade on the rise in volatility.
  2. Gold rose again on the fear trade from Cyprus. The resistance at the $156 level remains in play, but we continue to watch if the upside will last or continue higher? I am still a fan of the downside unless this fear issue grows even more short term.
  3. Interest rates dropped on the 30 year bond to 3.12% and the bond rallied 0.7% in return. This is another component to watch for rising fear. Flight to quality or safety is a result of the fear factor.
  4. More selling in China as the data gets worse economically and banking relative to real estate loans. Short side continues to play out for now.
  5. euro breaks support as FXE drops below $128.25 support and in position to test lower.
  6. Oil falls 1.4% in response to the fear over euro. The upside play is still likely, but first we pause for the speculation in Europe to play out.
  7. FOMC meeting results tomorrow and all eyes will be on the guidance given by the Fed relative to QE infinity getting a stop date. This could be market shifting if it is sooner than prognosticated.

Market starts higher and then sells lower… worse progression than Monday. Still need to determine the possible outcome relative to the fear factor being generated over Europe. Stay focused, be disciplined and follow your plan.

Economic Data:

Housing Starts were better than expected at 917,000. Watch the housing sector with XHB and ITB.

Economic Events & Calendar 

1) US Equities:

Three days of struggles for the broad indexes, but the uptrend line is still in play and the outcome be determined moving forward. Cyprus remains in the headlines, but tomorrow the Fed will take center stage.

Sector Rotation Strategy: 

The February 25th low pivot point remains in play, but we are adding the March 14th high as the next potential pivot point on the downside this week. As you can see on the chart the move lower was unanimous until today. The rotation or shift has been to add some positive moves today. XLP, XLU, IYZ and XLV ended with green in the return column. None of them convincing enough to shift the tide back to the upside, but we continue to watch this unfold for now. Not enough on the downside to raise unjust concerns at this point, but we have to manage the risk should the selling gain any traction near term. Patience as there are not conclusions.

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.

SP500Scatter

Sector Rotation of Interest:

Telecom РOn March 1st the sector established a  low and pivot point. It has continued to push higher over the last week making an attempt to head back towards the February highs. Added to the S&P 500 Watch List for entry. The volatility is back and the sector continues to move sideways. Scanning the ETFs the following are worth watching:

  • Verizon (VZ) moving past resistance above the October high.
  • Sprint (S) attempting to break above resistance at $5.95… watch for trade opportunity. Finally made a break above the $6 level. Adding to the watch list. Sector Rotation Model.¬†
  • XTL has not volume, but scanning the holdings gives you good look at the leadership.
  • CBB (still looking to upside), PLCM (upside break), and QCOM (selling, but bounced off support). Watch for the leaders to emerge.

Technology¬†– The sector finally made a move above the top side of the trading range. Oops, didn’t hold the move on the Cyprus volatility and testing range again. Hit stops, but still looking for the upside.

  • Semiconductors (SOXX) Selling and broke the 30 DMA. Watch for reversal to help any leadership.
  • Internet (FDN) trading lower and testing the trend short term. IGN & IGV are testing as well.
  • Watch the topping is stocks in the sector. Uptrend has been very flat relative to other leadership.

Financials РBanks have been leading the upside as the stress test is passed. The selling relative to the Cyprus concerns have been mixed, but muted overall. This could nag the sector and we need to manage our stops and potential downside risk.

  • Jim’s Notes – Banks
  • Banks (KBE &KRE) both tested the move higher. KRE has bounced back faster on the day. Region banks have less exposure to the euro effect.
  • Brokers (IAI) testing the February high on the upside. Off 2.4% the last two days.
  • Insurance (KIE) leading the broad sector higher. Holding up under pressure.

Energy РThe sector hit resistance at the $80 level and is testing the move higher. Watch for support to hold at $78.12.

  • Hit stops on downside swing today. Watching as the sector remains positive.
  • Services stocks fell 2.3% to lead the sector lower.
  • Oil Exploration and Production (XOP) testing lower. Still like the upside here after the pullback.
  • FCG broke higher on the rise in natural gas prices. I like the upside for the commodity and the stocks. Added to Sector Rotation Model and UNG to the ONLY ETF Model.

Consumer Discretionary РBroke above the $51 resistance on XLY hitting the entry point. The consumers are leading the broader market indexes. The stall is with the broad markets, patience short term.

2) Currency:

Sector Watch:

  • Dollar jumped on euro news again today and moves back to the previous high. The move higher puts the buck back in the upside trend. UUP closed at $22.61. Still watching support at the $22.35 mark on the downside. Manage your stops.
  • FXB¬†– the British Pound jumped big last week and held¬†the¬†move. Watch for move above¬†the¬†$150 level
  • FXC¬†– the Canadian Dollar is attempting to hold support at $95.35. Bounced nicely to end the week.
  • FXY¬†– yen is still in bottoming mode. ¬†Watch for a base to build short term if the direction is to switch.
  • FXA¬†– Australian dollar bouncing as stocks continue higher leading the way. Got the break higher Tuesday breaking the downtrend line. Nice gain and follow through on Thursday. — Added to the¬†ONLYETF Watch List.¬†
  • FXE¬†– ¬†The euro is testing support on the downside again? Broke support at the $128.15 level for now? Watch.

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 = 3.13% – down 5¬†basis points — ¬†TLT = $117.43 up 79 cents
  • 10 Year Yield =1.91% – down 5 basis points — IEF = $106.98 up 33 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. Watch and protect on the downside. Estimates are for 2.75% on the 10 year bond by year end? Bounce in motion for the bond off the lows for now.

High Yield Bonds РHYG = 6.55% yield. Support held at $92.75. Let it run as investors remain in love with junk bonds. 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. If we break lower, being short is the opportunity. Patience as this plays out. holding support on¬†Tuesday.

Municipal Bonds РMUB = 2.8% tax-free yield. The price of the bonds broke the support at $111.30 mark week and the selling continued Monday. 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 Watch:

  • The commodity sub-sectors are finding some signs of life along with volatility in the sectors. Watch and play the leadership. GSG attempting to build a base on the parts moving. Hitting the 200 day moving average as short term resistance? Not for the faint of heart.
  • UNG (natural gas) made the big move higher breaking out and following through on the upside. Higher again on the day, closing near the highs. The trade entry point was hit. SEE¬†ONLYETF Model Portfolio
  • Crude tested support at $89.30 last week and closed at $92.10 for the day.¬†ONLYETF Model Portfolio¬†The upside is still in play. Tested the $22 resistance on OIL.
  • GLD – Gold gained on the alternative asset choice. The gain put the metal back near the $156 level. Downside is still the outlook with a potential short term bounce in progress.
  • DBA and DBB ¬†both broke lower today – watch the downside¬†acceleration.

Commodities Rotation Chart:

Commodity

Tracking Commodities Sectors of Interest:

  • BAL¬†– A trading range of $52.80-54.40 is in play. Cleared resistance at the upper end of the range at $54.40 and continues to move higher. Let it run and keep your stops at $54.50 or¬†break-even. Holding near the highs on the breakout trade.

5) Global Markets: 

Global Mkt

Country Watch:

  • Global markets tested lower on the Cyprus news to start the week. China and Europe led the downside and the That set the tone for the sector and we continue to watch for the leadership to rise from the ashes.
  • FXI¬†– China’s continues to lead the downside relative to the global markets. FXP is the play for a downside trade on the move currently. Watch to see if it bounces with the balance of the global index. Bad news from economic picture and the lending issues for a inflationary housing market.
  • IEV¬†– Europe has struggled the last few days, but still need to see how this plays out short term. No assumptions just patience to see where we go from here.
  • Japan (EWJ) broke higher, tested, and continued to move higher. Got the move above $10.20 and still moving to the¬†upside. Watch the top at $10.55 level. Broke higher to end the week watch as this starts the next leg up.
  • Australia (EWA) making a move higher the last week as well. Uptrend accelerating.
  • EFA¬†– The long term uptrend remains in play and support has held and the fund has moved back to resistance at the $59.30 level. Watch the ripple effect of Europe short term as this plays out.
  • EEM¬†– emerging markets continue to struggle. My view they don’t get better until the commodities flatten out or increase in price near term. Got uglier on Tuesday with more selling.

6) Real Estate (REITS):

Tracking Real Estate Sectors of Interest:

Real Estate Index (REITS) РThe pullback test is in play for IYR and $67.25 support held. Tested lower today as markets adjust to Cyprus fears. ADDED: Sector Rotation Model & S&P 500 Model.

Sector Summary:

  • Homebuilders bounced off support at $27. Housing starts were better than expected leading the index higher. Watch and play accordingly. Added to the Sector Rotation Model. XHB holding near the new closing high.
  • REM – Mortgage REIT held $14.80 support. Test lower today to $15.60 watch and adjust your stop.
  • NLY- Annaly Capital Management finally broke above $15, and is testing¬†the¬†$15.20 support currently on the upside move.

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.