Worry is Becoming the New Buzzword

Friday, August 24th

Worry is the word showing up in the headlines this week. What’s changed? That’s the problem… nothing. At the heart of this rally is stimulus promises from the ECB and Fed. The European Central Banks head, Draghi started this with the save the euro cry. Since that time we have rallied higher, but no changes from either party, only lip service. As the confidence in some form of stimulus fades, worry steps in and the markets get rattled. Given the opportunity investors will start to add all the other worries of the fiscal cliff, jobs, GDP, etc, but it still comes down to the hope of stimulus being the catalyst.

That said, the markets weren’t as bad as the headlines made them out, it is what could happen if the snowball starts rolling downhill that worries investors. Ballard, the St. Louis Central Bank President, stated that “Europe is in real trouble” and not prepared to deal with the current crisis. Wow! Not profound, but it is the first time you have heard that uttered from any Fed official. The reality of his comments is bringing European issues back to the forefront of the markets. As we know, that has been the anchor around the markets ankles for the last two years.

So, we end the week with a mixed market outlook and have to adjust our view looking forward. What is in store for the financial markets as well as economic growth? The questions have been in play, but the stimulus has overshadowed the willingness to address them. They now push to the surface and how the market deals with them will determine our direction short term.

Sectors below are updated based forward looking opportunities.

1)  US Equities:

S&P 500 Sectors-to-Watch – This week the S&P 500 index moved above the March highs hitting 1426 intraday Tuesday, but broke the first support level at 1405 on Thursday. Then we closed higher on Friday at 1411. The negative sentiment is showing some early signs of building, but we can’t throw out the upside just yet. Bull markets or uptrend don’t die easily. We will need more issues and worries to kick in before the bottom falls out of the trend.

The market leadership shifted to commodities on the week, but we still have some work to do relative ture leadership in the broad markets. One thing is certain, it is time to adjust our stops, sell some positions and watch how this plays out short term. There is plenty of news and data swirling around the world.

Energy – Uptrend remains in play off the June lows and resistance is in play at $73 on XLE.  Oil services (OIH) is moved above short term resistance at $41.15. Crude moved above $97 and hit resistance on Tuesday at $97.80, it fell to $96 today off 1.3% as the rumor mill begins to weigh on prices. UGA hit resistance at the March highs near $59, but held the move through that level today. Watch for a continuation of the upside if the dollar remains weaker. The hurricane heading into the Gulf of Mexico will play a role this week as well!

WATCH: XLE – Entry @ 69.25. Stop 71.30 —– OIH – Entry $41.50 Stop – $40.20

Financials – The sector pulled back from the move higher and in position to test support at $15. Still looking for some upside leadership from the sector going forward. Raised stop to break even on the trade. Any concerns with the sovereign debt issues will weigh on the sector.

WATCH – XLF – Entry @ 14.55 – Stop 14.80

Healthcare – The sector continues to trade sideways. We dropped to support at $38.40 and held. Hold positions and manage the risk.  IHF moved up nicely off the lows and XPH is a drag on the progress, but bounced on Friday. Watch the stop and manage your exits.

WATCH – XLV – Entry @ 38.10. Stop $38.20

Consumer Services – The consumer services stocks have been fragmented to winners and losers. Dig into the ETF for the leaders. The gaming stocks have started to move higher with others making a move. The retail stocks remains a stock picking sector. Still holding support for now.

WATCH: XLY – Entry 44.50 – Stop 44.50

Basic Materials – broke above $35.75 resistance to continue the uptrend off the June bottom. Watch the miners and metals as they remain under pressure. Watch and manage the trade short term.

WATCH: XLB – Entry 35.80 – Stop 35.45

NASDAQ Index – Broke below the 3065 level today, but the upside remains in play. The upside momentum has been as a result of the technology stocks. However, the accelerated run higher has been slowing, watch the trendline and the current valuation. The play continues up for now, but manage your risk.

WATCH: – QQQ Entry @ 65.25 Friday. Stop 67.40

Small Cap Russell 2000 Index – The upside move off the July 30th bottom was positive, but we starting to give the move back as the downside gains momentum for small caps.

WATCH: IWM -Entry 79.60 – Stop – 80.10

Volatility Index – The index hit new low at 13.46 on Friday, but jumped above 16 on selling, but finished the week at 15. The lower volatility has been a question mark looking forward. Watch for ECB or the Fed to be the tie breaker for the VIX. It may be by lack of follow through versus any action taken.

WATCH: SVXY – Reversing on the volatility.  VXX – $11.85 Entry if rally continues in the VIX.

2)  Currency:

Dollar – The dollar got thumped on the FOMC stimulus grab. The risk for the dollar has been stimulus from the Fed and the ECB. The lack of activity from the central banks has been better for the dollar, but now they are rumbling again and sending the buck down. This is working well for our short play currently.

WATCH: UDN – Entry $26.40. – Stop $26.40 break-even.

3)  Fixed Income:

Treasury Bonds – The bond has reversed course on the stimulus from the Fed short term. The yield has moved to 2.78% on the thirty year bond, pushing prices higher on the bond. The move to 1.66% on the ten year pushed prices higher as IEF and TLT both bounced off the lows. TLT cleared $124.40 as a potential entry point.

WATCH: TLT $125 if we hold above the $124.40 mark.

4)  Commodities:

Crude Oil – Testing near the highs as investors worry again about global growth. Manage risk of the play and mange your stops. Weaker dollar is providing a catalyst for the price to move higher, but if sentiment shifts that will not matter short term.

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

Gasoline – Lost 1.5% on Friday. 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. Held move above the $59 level today.

WATCH: UGA – Entry at 52.75 – Stop 57.80

Coal – If we break the $24 level we take the exit for now.

WATCH: KOL – Entry $25.20 – Stop $24 HIT STOP

Resources and Commodities Strategy – Turned sideways for now, watch and honor the stop.

WATCH: BCX – Entry $13.95   Stop $13.95. Manage the risk

5)  Global Markets: The global markets responded to the ECB stimulus anticipation on Tuesday. The EAFE index is attempting to hold the gains, but some negative sentiment from no action is in play. Watch and manage any opportunities short term. If there is no activity near term from the ECB the downside risk will grow for the market.

WATCH: EFA – Entry $50.50 – Stop $51.70

Sweden – Failed to hold the move higher and has dropped to support. Honor the exit point here.

WATCH: EWD – $28.35 entry. Stop – $27.30

Mexico – Moved against resistance again and still looking for a break out move on the index. Watch the volatility and manage the position.

WATCH: EWW – Entry $62.25 Friday. Stop $61.50

Brazil Small Cap (BRF) channel top $37.50 with potential move higher. Posted on last Wednesday for the opportunity in the global markets moving higher. Solid move higher on Thursday to follow through on the upside breakout. The entry was at $37.60. Manage the trade and Raise Stop to $37.60 (break-even).

6)  Real Estate (REITS) – The sector remains near the current highs. Double top (IYR) set up on the downside short term. I like the outlook long term, but short term we remain on hold. Still scanning and looking for the best opportunities.

WATCH: IYR test of support at $63.60 let the opportunity develop.

7)  Global Fixed Income – The 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.


Moves from our Watch List: 1)  Silver Miners (SIL) broke above $19.50 resistance on Monday hitting the entry at $19.75, set stop at break-even now. 2) GDXJ – Junior Gold Minders ETF breaking above the $20.25 resistance. Follow through on Monday with entry at $20.50. Stop break-even.

What am I watching:   1) Mortgage REITs (REM) bounced off the selling and headed back towards the previous high and remain in an uptrend test of the move.  2) Downside risk in the broad indexes. SH, Proshares short S&P 500 index ETF is holding lows near $34.75, and entry would be a move above $35 at $35.15. (HIT ENTRY THURSDAY).  3) Dow is the downside loser for the broad index… added DXD to the OnlyETF model today.  4) Watch SKF (short financial) play if the banks repeat what they did today.

The S&P 500 index broke 1405 bounced back on Friday. The NASDAQ broke 3065 bounced back on Friday. Dow broke 13,190 bounced, but not enough. A break brings the short side into play based on the emotions from investors. This is a trade if we follow through. The upside play will die easily with the stimulus story still in play.

Weaker dollar… stronger commodities (Watch precious metals) – gold and silver made big moves expect a test lower. Bounced Friday, but watch to see how it plays out short term.

VXX – volatility fell on Friday and we are looking to see if the selling returns. .

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.