Stock market updates- 6 Stocks I’m Buying Into This Stock Market Pullback

6 Stocks I’m Buying Into This Stock Market Pullback

Okay, so we are getting some traction lower within the short term trading horizon. Note that I highlighted my concerns with equity money flows last week.

The move lower is nothing to write home about just yet but it is allowing me to add some to existing long positions, while starting a couple new ones.

So what do I like here?

Note that I typically start positions at 1/4 size with few exceptions. That said, I’m starting JetBlue Airways (NASDAQ:JBLU) at a 1/2 size position today.

This has been a weak move lower so far in the broad markets. It’s currently around 10 to 1 lower early on but not in the size which would be indicative of panic. It’s important to remember that markets do fall on an absence of buyers.

 

My current trading plan/actions:

I’m adding to positions in Merck (NYSE:MRK), Abbott Laboratories (NYSE:ABT), Baxter International(NYSE:BAX), 20+ Year Treasury Bond ETF (NASDAQ:TLT)

I’m starting longs in JetBlue Airways (NASDAQ:JBLU), Freeport McMoRan (NYSE:FCX), Halliburton (NYSE:HAL)

 

Remember, these are my opinion and my analysis.  Here’s a look at the charts:

JetBlue – JBLU 60Min Chart

 

JetBlue – JBLU Daily Chart

 

Freeport McMoRan – FCX Monthly Chart

 

Halliburton – HAL 60Min Chart

halliburton stock chart hal trading analysis january 30

 

20+ Year Treasury Bonds ETF – TLT Monthly Chart

 

Do not allow your political ideology to cloud your trading investment decisions! Look at markets for what they are not what they should be.  Thanks for reading.

 

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.

Stock market updates – Money Flows Highlight Elevated Risk In U.S. Equities

January 25, 2017

Will this sideways consolidation of the so called Trump rally lead to another leg higher or will it fail and take S&P 500 (NYSEARCA:SPY) and the broader markets materially lower? Stock market updates 

That is the question of the day and maybe of the year. The market seems to have taken a wait and see attitude at the current levels waiting to see the pace and tenor of the Trump administration’s rollback of regulations and Obama era executive orders.

As I look at quantitative readings, there has been a material slow down in money flow to the market as far back as mid November 2016. The contradiction of weakening internals and climbing index levels is a tough concept for young traders to grasp. So as fewer and fewer stocks continue to propel the broad indices, the market becomes much more vulnerable to sharper pull backs.

Of course, this vulnerability doesn’t always materialize into pullbacks, sharp or otherwise, but as traders, our number one job is to manage risk and managing risk goes beyond positional risk but to portfolio risk in general. In short, I consider this a generally “risky” broad market environment. Again, that opinion is supported by quantitative readings as stocks are being sold more aggressively into highs than they have been bought into lows.

The result of this type of market action is cumulative and tends to reach a point where rotation runs its course and market participants run out of attractive sectors where to put capital to work. Defensive sectors and Treasuries (NASDAQ:TLT) begin to outperform as the broad equity market corrects. We seem to be nearing such point now.

S&P 500 Chart

spy s&p 500 chart analysis traders january 24

 

20+Year Treasury Bonds Chart

tlt-20-year-treasury-bond-chart-etf-trading-january-25

 

How much and how far remains to be seen. I believe this pullback, if indeed one materializes shortly, will be a buying opportunity in select sectors that I feel are going to outperform this year such as Big Cap Healthcare (NYSEARCA:XLV) and Pharma.

Health Care Sector ETF (XLV)

xlv-health-care-etf-stock-trading-chart-january-25

 

Thanks for reading.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.

Markets- The “Nothing Matters” Equity Markets

The “Nothing Matters” Market

The “nothing matters” calls from pundits seem to be picking up steam. Low volume? doesn’t matter, low VIX? doesn’t matter, participation rates? doesn’t matter, market structure issues? doesn’t matter, corporate profits?? Doesn’t matter…. According to what many pundits out there seem to be saying, none of the above matters because the Federal Reserve has said they will ease for as long as necessary to get unemployment to 5.5% and the economy moving again…

In general terms, fighting the Fed has been a losing proposition going back to the period following the Great Depression but in all fairness, we have not seen Fed intervention to this magnitude before. Fair to say that we are in unchartered waters in this regard and while future generations will be able to look and analyze the “causes and effects” of these extraordinary economic times, we, at the present moment can only define the “causes” and speculate on the  “effects”.

Nonetheless, I am not ready to buy into the “nothing matters” argument.

Trading volume for example has been on the soft side for some time now. There are many reasons for this such as the higher average price of stocks these days but the real issue when considering volume is its composition and general participation.

In the past, market volume was comprised of much more retail based, individual investors along with traditional institutional volume and since the early ‘00s, the high frequency and algorithmic traders. Today the retail investor is missing in action, institutions are trading much more in Dark Pools of liquidity outside of the NYSE and high frequency and algorithmic traders make up between 60 and 70% of all trading volume. No matter how you slice it, volume and participation matter.

I think corporate profits also matter

as do the multiples that investors are willing to pay in this environment. I think we are living in a “show me market” where higher valuations will only come about through profit expansion. Analysts and investors will be very careful to pay much higher multiples in this environment of uncertainty and lack of visibility.

While there is room for some multiples expansion and I do think investors will pay slightly higher multiples soon, I don’t buy the “parabolic” move higher in equity prices many are forecasting. I think the fact that we are still fighting to ignite some measure of inflation after so many of these easing programs should raise a red flag that investors are not going to drink the “magic potion” and buy risk assets indiscriminately as perhaps the Fed wants them to.

Market structure matters. Although I think I am pretty well versed in these structural issues, there are many out there that are much more in tune to the pitfalls of these deficiencies. If you are on Twitter, I strongly recommend you follow Eric Scott Hunsader @nanexllc for real insight into the issues plaguing the market today in regards to structure.

Complacency also matters

when complacency reaches extreme levels, the market tends punish those who disregard it. When too many participants forget that markets can go also down , the market has a way to remind folks of how things work.

There are several ways to measure complacency in the market place but the simplest yet effective method is to analyze the action in the cash VIX over the near and intermediate timeframes. Comparisons to periods too far in the past are meaningless because of the many other variables that need to be considered.

The cash VIX gives us a good picture of investor’s appetite for protection using SPX near term put options (30 days out). The VIX presents a picture of what investors are willing to pay in premium over historical volatility for the next 30 days. Complacency is subjective. One trader may look at a VIX reading of 15 and compare it to an actual statistical volatility reading of 10 and have an opinion that markets are not complacent while others can view it as the market discounting the importance of risks ahead.

One objective way to view this

is to take a historical view of how markets have performed at different VIX readings over a specific period of time. Again we want to stay within an intermediate timeframe to get an accurate picture and I like to compare cyclical periods within established longer term trends.

The most recent cycle comprises the bullish period from 2009 to the present. Below are charts of the SPYs and the VIX, weekly charts going back 5 years. So in brief, the VIX is another one of those indicators that shows true trader sentiment because it is backed by up with actions and not only words.

Within a look back period of five years, these levels below 14 have meant complacency and the market has punished that complacency by backing away every single time. Why does it back away? Because when traders are not properly hedged, they are apt to sell positions quickly at any sign of trouble. When traders are properly hedged, they are apt to be more patient with their thesis before changing course. Can the VIX push even lower ? Absolutely yes .

Historical volatility

(real, actual vol) has been very low and many interpret this as a confirmation that volatility is properly priced or even perhaps expensive at these current levels. By this definition, they could be correct. My take is that within this specific look back period, it is undeniable that the market has had trouble dealing with volatility at these low levels. Could it be different this time? Yes but I don’t believe so.

Markets are extended here and the market is complacent to risks. Volatility is very underpriced and the market may be under hedged to deal with a very weak earnings cycle ahead or any shock event. The bullish technical regression channel from June 4th is intact and we should eventually resolve higher, but I am not yet convinced that everything just doesn’t matter anymore…

 

 

Market- Quadruple Witching Expirations Cycle.

Market- Quadruple Witching Expirations Cycle.

The quadruple expiration cycle is going keep markets pegged to levels between 1450 and 1460 heading into tomorrow, and we should see real volatility pick up a bit into next week as we get past this cycle. We should get a better idea next week whether or not real money is ready to come into this market following the QE3 announcement or if the extended nature of the rally will force weak hands to back away and bring markets out of this very overbought near term condition. My take is for this to resolve in favor of a moderate move lower before an eventual reversal.

There are several indicators/studies out that strongly suggest bullish sentiment, particularly retail level sentiment, is at extremely “giddy” levels which historically suggests a move lower is eminent. Some indices are more overbought than others such as the Russell 2000 Small Caps index (RUT/IWM) and sectors such as the homebuilders (XLH) and broad industrials (XLI). In contrast, the transports which should be accompanying the rally have diverged in a major way over this past week. The rails in particular have been very weak following major downward revisions and lower guidance from several of the big players. The energy complex has also reversed course this week and is leading the move to the downside. Crude oil in particular has been wacked this week in a very strange tape.

So lots of mixed signals! What usually accompanies these times of conflicting messages is volatility which has been missing in action. The reasons for this lack of volatility in my opinion is that current market participants are confident that markets are out of the woods because of the Fed QE announcements as well as the ECBs Open Market Transactions (OMT) plan. Like I said the other day, I think the bulk of the Initial reaction to these announcements has already been priced into the market and this last gasp higher is part of a blow off move which needs to be digested. As always is the case, these last few “stragglers to the party” get caught behind and left to clean up the mess!

With that being said, the price action of late has to be respected and the consequences of what the Fed has proposed to do need to be properly digested by investors. Make no mistake about it, the Fed is going to do whatever they can to deflate the dollar versus the major currencies and that will in turn boost the precious metals, materials and commodities in general. Housing related stocks will do better in this environment which in theory should stimulate overall economic activity. We have to keep in mind that this plan of action has not worked so far, (the Fed themselves will agree on this point) after several attempts over the past 4 years and it is very likely that this will not have the desired effect as well. Perhaps the Fed knows this as well and is just buying time till after the elections for lawmakers to try (key word) and get fiscal policy right. If you read my updates regularly, you know what I think about those odds… Nonetheless, considering the time of year, when we clear the elections cycle, there could be a huge “Beta Chase” move higher into year-end as money managers and portfolio/hedge fund managers try to catch up to their benchmarks. The major pit fall to this scenario is the so called “Fiscal Cliff” and how that battle shapes up into year end.

So to recap, my favorite sectors here are the mega caps versus small caps and in particular the large cap material plays and the global commodity related plays in general. I also like the home builders on the Fed’s focus on buying MBS (mortgage backed securities). Not liking the action in the rails, energy, financials and emerging markets in general. The weaker dollar could have very detrimental effects on emerging markets as the Fed attempts to export inflation.

 

Markets- To QE or not QE

Markets- To QE or not QE

The Federal Reserve’s FOMC is really walking a tight rope on additional QE at this juncture. There are several reasons why the Fed could introduce a new easing program based on pure economic indications particularly in regards to the recent employment figures but there are are also several important considerations for not moving at this upcoming meeting. The reasons why have been talked about at nauseum over the past several weeks and months by yours truly and many others so let’s consider why they may not move here even if their recent “modis operandi” suggest they will.

The most glaring reason would be the proximity of the Presidential elections. The Fed, as a supposedly non-political entity, needs to worry about being perceived as partisan and many analysts and economists say that a major announcement of monetary policy this close to the elctions would perhaps cloud the issue particularly when the challenger has made no bones about the fact that he is opposed to the current course of action. In my opinion this is an issue that could weigh on the decision simply because the economy while not robust and gangbusters, is not in crisis mode. The Fed may opt to instead adopt even stronger dovish language and extend the timeframe for an exit of ZIRP well into 2015. Considering that they are still in the middle of their last TWIST operation, the Fed may decide to wait until after the program ends in December before announcing any additional measures

Another possible consideration is that the Fed may want at some point to throw the ball back to the lawmakers. The Fed knows that they will not be able to do the heavy lifting alone without fiscal policy measures and staying on the sidelines for a few months may send the message that lawmakers need to get their act together. The gridlock in Washington is an issue that the Fed has repeatedly warned about and at some point, they are going to run out of monetary policy options. The Fed has warned that the efficacy of these programs are dimished with each additional traunch. The Fed has to be concerned about the “addictive” nature of these stimulus measures on the market.

The S&P 500 is trading at near 4 year highs. If the Fed was planning on disappointing the market due to any of the reasons above, would they not perhaps choose to do it while there is ample cushion to the downside? Don’t forget that the Fed has managed to pile on about 160 S&P handles simply jawboning this market higher over the past 3 months. If the Fed wants to send a first shot across the bow of  lawmakers, this would be a good opportunity to do it.

The Fed could decide that if the German courts rule in favor of the ESM, the program would remove quite a bit of the uncertainty currently plaguing the Euro Zone which obviously reflects back to our economy. The ECB policy announcement was the big market mover last week and if markets could hold on to these gains, the fed may feel some more time is warranted before announcing additional easing measures here at home. The US dollar took a beating with the ECB policy announcement which sort of does the job for the Fed.

Finally, the Fed may choose to keep powder dry for any fallout from the Fiscal cliff later this year. Should they announce a program now and juice markets higher, they will be hard pressed to adopt any additional measures should President Obama win the elections and be at laggerheads with congressional Republicans on issues of sequestration and the expiration of the Bush era tax cuts at year’s end.

So while many economists and analysts feel the likelyhood of a robust QE program this week is a “done deal”, I am not so sure. Is it probable that they move here? Perhaps, but it is certainly not a done deal. Caution is advised.

 

Market- “Sterilized, Conditional and Unlimited ECB Bond Buying Program”

Market- “Sterilized, Conditional and Unlimited ECB Bond Buying Program”

I had high hopes for today’s ECB announcement and I was disappointed that Mario Draghi and the ECB central bankers chose to use a sterilized bond purchase plan and failed to lower rates. A sterilized purchase plan, particularly one that is conditional, even if “unlimited” in size, is basically taking from “Peter to give to Paul”. Because they are not expanding their balance sheet, the ECB is basically going to divert funds away from the performing countries to support failing ones.

The German courts will decide on the legality of the ESM (European Stability Mechanism) in the next week or so. I am not an Economist nor do I play one on TV but in my humble opinion, the EU needs to allow the ECB to expand their balance sheet. Europe needs growth and they need both monetary and fiscal actions that support economic expansion. To tie these emergency efforts to austerity is not going to help get these economies moving which is what is desperately needed across the European continent .

The market’s initial reaction primarily focused on the words “unlimited” and “bond buying” and risk assets took off to the races. I had anticipated this initial reaction yesterday and reason why we added the bullish call spread on the DIA and It may very well be that we rally for a couple of days. The mega caps of the DOW should outperform if that is indeed the case. The weaker shorts are covering positions in mass today and it remains to be seen if there is some “buy in” from investors over the next few days. From a technical standpoint, I still think there may be some downside ahead before the next major leg higher.

We have not made a test of support at the bottom rails of this channel since early August and we are very much short term overbought with the SPX well within 3 standard deviations above its 40 period MAs on the hourly charts. It remains to be seen if the “conditional” and “sterilized” terms which in my opinion are bearish aspects of the ECB announcement, get some more play over the next couple of sessions.

Headlines abound with the NFP (Jobs report) out tomorrow, the Fed next week along with the German court decision on the legality of the ESM which could theoretically put all of today’s gains in question. Tomorrow’s NFP number is expected to come in at around +120,000 jobs. Again it is very much a day by day market as traders react to the headlines “du jour”.

 

 

Markets – Technicals, Volume, Participation and Complacency Do Matter

Markets – Technicals, Volume, Participation and Complacency Do Matter

August is behind us as is the summer trading season and for 2012, instead of a summer crash, Mr. Market brought us a low volume and low volatility rally. The trading action evolved into a neat trading channel from the lows put in on June 4th through the recent highs put in on August 21st. The one standard deviation regression channel on the chart below tells the story best as we have traded within it for nearly three months now. The narrowing of volatility towards the end of the month really kept the trading action compact and since early August, exclusively above the midpoint of the channel which was only broken again over the past couple of days.

The market should again straddle the 1400 SPX and 13000 Dow levels going into a short holiday week full of economic headlines. The biggie obviously will be what the ECB brings to market to deal with the run on sovereign bonds of countries such as Spain and Italy. These nations cannot endure such high rates for much longer and are in dire need of a bailout. We have already begun to get some details and it seems that the ECB will be buying short term bonds of these nations to keep short term borrowing costs low. There are many hurdles to overcome as the legality of this program will be challenged particularly by the Germans. The details of what these countries are going to have to “give up” to get this ECB assistance is still a huge murky subject . Presumably we can expect the ECB to ask for “the first born” and it remains to be seen if Spain and others are willing to give up so much control. As was the case with the Fed last week, we seem to find “balance” at the 1395 to 1403 level in the broad market SPX going into these headlines.

This weekend and into today we got a very clear look at the ever slowing global growth picture. Pretty much across the board, the economic data is pointing to a pullback in manufacturing. Not exactly what the market wanted to see heading into September… or is it?… The slowing pace of manufacturing should make the case for easing that much more clear for the Fed and ECB which should (in today’s upside down market) be interpreted as bullish for risk assets. Well, today at least, markets are looking at the data very cautiously and perhaps positing that the central banks are behind the curve here as the slowing global economy has picked up some steam to the downside.

The recent global economic data does not portend well to upcoming Q3 corporate earnings season. There appears to have been a strong slowdown in economic activity over the past couple of months and clearly these will be reflected in the upcoming earnings cycle. Over the next few weeks, I expect quite a bit of analysts to come in and adjust earnings expectations lower for the quarter and for year-end.

So, in the very near term, I am still bearish. Not as bearish as I was at SPY 143.09 on August 21st but I think we are certainly headed lower within this established trading pattern to test supports at SPY 137.50 and slightly higher. Where we go from there really depends on very precise binary outcomes to some of these upcoming headlines so to speculate too far ahead at this moment would be just that, speculation.