Friday – Notes & Research
The market continues to be volatile on the week and we are focused on risk avoidance more than telling the market what it should be doing. The bounce back on Friday made little to no sense, but then it is the market. Thus, we are digging and looking for what will make money.
The S&P 500 index attempted to move back above the uptrend line and the previous support of 1553. Didn’t quite get there, but as we stated on Thursday night as it close on support at 1538, it needs to bounce or the downside accelerates. Both are key decision points for the index, but Friday also showed there is still plenty of willingness to buy into this market regardless of the news or earnings results. Watching to see how this plays through the chop and then we will commit to the direction.
Most sectors that were sitting on support bounced on Friday. That creates multiple outcomes going into next week. That means we have to be patient, not assume and follow the resulting trend. The up and downs of the week got all the emotions flowing and that will make for more fun next week.
Earnings at best were mixed, but the buyers were willing to jump on the good news stocks and push them higher along with the index. Economic data remained disappointing with little in terms of good news to cheer about. The motto remains… one day at a time.
Sector Moves of Note:
- Semiconductors held support and we are watching for a boost from the sector along with Small and Mid Cap stocks. Some rotation towards the growth sectors is needed if the broad indexes are going to make another run higher.
- TIPS bonds have been falling as we noted in the update this morning. They bounced today as Bill Gross decided they were a good buying opportunity. Not one to disagree with the bond King, but the downside risk in the bond remains from my view for now.
- Gold sitting and digesting the gap lower. Looking for a trade to fill the gap off the low or a base.
- DBA – Agriculture is building a base and I like what could develop into an upside trade short term.
- Utilities (XLU) continue move higher as the defensive sectors hold tight in the current selling.
- Transports are still showing some short term weakness, but have held support above the $104.70 level. The sector is a barometer for the economy going forward. And based on this weeks activity in the sector it is acting just like the economy… confused.
- Financials are testing support at $17.80 and made it back to the 50 day moving average. This is another sector in need of a catalyst. Earnings were more of a disappointment than a focus. Longer term view is the play, but you have to believe in the sector had be disciplined in managing any positions.
- Europe is testing the support at $39 on IEV. If it breaks we look to short Europe. If we bounce, watch and determine the strength of the buyers.
- VIX index fell back to 15 after hitting 18 on Thursday. The volatility is in a vacuum. It is short lived as the buyers step in and restore confidence at each turn. SVXY was still the trade off the $78 support level. It has been too choppy to trade currently, but still looking for the opportunity
I am still scanning and digging into this weeks activity. The fundamental data is not in line with the charts and something will have to give in time. The trend in the deflationary stocks is still moving higher which points to the money flow. The other sectors of the market are lagging with no indication of improving near term. You have to play what works and for now we will maintain our positions and our patience and keep going forward.
Look for the updated charts and data on Sunday night for next week.
The jobless claims moved higher as one more negative for the markets. Philly Fed falls again missing expectations and Leading Indicators were worse than expected. The misses keep coming! Bad news is building on itself.
1) US Equities:
The fundamentals are not support the charts plain and simple. That said, the deflationary activity of the data is impacting the markets on the upside. At some point this will all come together and the direction will be better defined than the last six weeks. We have maintained our three pivot points on the charts below until the uptrend off the November low is broken.
Sector Rotation Strategy:
The February 25th low pivot point remains in play. However, the volatility of the sideways trading is making crazy. The index was at 1563 on August 14th and it closed at 1550 today.
December 28th Pivot Point for uptrend following the Fiscal Cliff pullback chart below. The trend has continued to push higher after the February 25th test. With today’s developments we have to protect against the downside and look to lock in gains if our positions are short term. Longer term holdings will be managed accordingly.
November 15th Pivot Point is the start of the current uptrend. Target 1550-1575 was attained and now there is pressure to test the move. The trend has overcome two attempted moves lower to maintain the uptrend. The move on Monday now makes it four attempts to break lower. Watch the trendline as the support on the current pullback. A break of the uptrend brings downside options back into play for the short term.
Sector Rotation of Interest:
Consumer Staples continues to defy gravity and moves higher. The 10 day moving average is the trailing the uptrend for the sector and we hold and watch for now.
Utilities are in the same mode. Remember the current theme is deflation and that favors the defensive sectors. They continue in an uptrend and we maintain our positions with the trend.
Telecom is building a flag pattern off the vertical move higher. Hold and add to positions if we can clear the $26.10 level on IYZ.
The other seven sectors of the S&P 500 index are on the watch and see list.
- UUP – The Dollar broke the support at $22.35 mark on the downside Tuesday and reversed on worries in Europe again. Still willing to watch and see how it holds up short term.
- FXB – the British Pound jumped two weeks ago, held the move at the $149 level. The currency is now in an uptrend off the low and moving through the current resistance at $151.50. Wednesday it sold back near the support at $150.50. For now we just have to be patient and let the pound work through the directional challenge it was facing. Took the entry on the move and the target is $152.50. $150.40 stop in place on the trade.
- FXE – The euro made gains on the week against the dollar and is in position to break higher. We were looking for an entry on the upside, but for now we will just watch to see how the short term volatility plays out.
3) Fixed Income:
- 30 Year Yield = 2.86% – down 2 basis points — TLT = $123.09 up 30 cents
- 10 Year Yield = 1.68% – down 2 basis points — IEF = $108.64 up 6 cents
Tracking Bond Sectors of Interest:
Treasury Bonds – Yields on the 30 year Treasury is finally flattening out. The economic data, flight to safety, or many other reasons have pushed money back into the bond short term. If the volatility in stocks returns look for more rotation into bonds short term. For now be patient and let this play out.
High Yield Bonds – HYG = 6.5% yield. Support remains at $92.75. Move back towards the previous highs near the $95 level. Manage the position for the dividend as the growth side is uncertain short term. I expect the trading range to remain near term. Use $92.75 as the stop. OR TBF to hedge your position when volatility picks up on the downside.
Corporate Bonds – LQD = 3.6% yield. The jump higher was in response to the rotation of assets towards safety or defensive to the stock market. This is not likely a new trend for the bond, but it starting to act like one. Use stop at the $120.50 level to protect the upside gains.
Municipal Bonds – MUB = 2.8% tax-free yield. The price of the bonds found a bottom built a small base and produced a upside trade opportunity. Watch the current resistance at the $110 level. Moving back towards the resistance at the $111.50 mark. This is a tax-free dividend play with limited upside from growth.
Convertible Bonds – CWB = 3.6% yield. Price had been moving higher on the rally in stocks. Tested the highs last week and this week we are testing support? Trading range and dividend collection.
4) Commodities – Sector Summary:
- The commodity index continued holding above the $25.50 level with oil attempting to bounce and base metals testing lows again. The downside for the sector remains and until it defines support it doesn’t make sense. DBC broke support and attempting to build support closing at 25.79 today. Without any good news… the downside remained in play.
- Natural Gas – UNG made the big move higher closing up 5% on Thursday. For now the commodity continues to move higher and we will stay with the trade for now with our stops in place.
- Crude Oil – Crude broke lower and is still looking to establish support. For now we are willing to sit on the sidelines and let the support or base build before putting money at risk.
- Gold – The metal has tried to bounce, but each move stalls. Looking for GLD to clear $136.85 for any upside trade.
Commodities Rotation Chart:
5) Global Markets:
Global markets drop on slower economic data in China, Europe and the US. They tested lower on the news in Europe and China keep the markets in check. Scanning our watch list of Country ETFs there are some interesting moves on Friday to watch.
THD, broke higher from consolidation. EWT, bounced back toward the recent highs. EPHE, wants to break to new high again. INDY, moved above $24.20 resistance. IDX, consolidation and break higher? EIDO, consolidation and break higher?
- FXI – Big bounce on Friday off the support levels near $34.75. A move above $36.63 would be of interest for a trade opportunity, but still plenty of uncertainty relative to the outlook for China. Use that level as a guide for any trades on the upside short term.
- EFA – Tested lower this week as the global markets continue to show anxiety similar to the US markets. Still no interested in the risk exposure and we will track for some clarity moving forward.
6) Real Estate (REITS):
Real Estate Index (REITS) – IYR tested $70.73 support on Wednesday. VNQI and AMJ both gain more than 2% in Friday’s trading.
- Most of the REITs are extended short term on the upside, thus the test in IYR. Watch and manage your stops.
- Scanning IYR we find the charts look very similar on the upside. SFI, VNO, PLD, LXP, FR, KRC, ARE and HST show some consolidation and potential upside worth putting on a watch list short term and find the opportunities.
- Mortgage REITs are selling back towards support and worth watching. NLY, REM, IVR, WMC and MBG.
- RWO – SPDR Global Real Estate ETF is in a positive uptrend and hit a new high. Watch for test of the move if markets struggle.
- REITs and MLPs mixed in the same ETF with MDIV is a good alternative to picking through all the choices. This mult-assets income fund pays a 5% dividend.
7) Global Fixed Income:
Sector Summary: Tested lower on Monday with the rest of the world markets.
- The sovereign debt issues are fading again and opening the upside potential as the issues find relief. This offers some short term trading opportunities, but you still have to be aggressive in managing your exposure.
- There are some funds moving in favorable direction of late.
- PAFCX – Bounced off low with the movement in yields going lower. Holds $11.60 worth owning short term.
- PICB – hit support traded sideways and now breaking higher. Entry $28.95 + 3.1% dividend.
- EMB – Big recovery and interesting in watching. 4.3% dividend yield. Entry $120.25
- PCY – Big recovery as well off the low for short term play. Entry $30.60. 4.8% dividend yield.
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.