David Chojnacki S1F Market Technician
The Market got off to a good start at the open and maintained a steady move to the upside throughout the session. There was some sell-off late PM, but the S&P and Nasdaq100 closed in new high territory. The only negative to the session was that the highs came on very weak volume. At the close, the DJIA and S&P added 0.7%. The Nasdaq100 was up 0.9%. Breadth was decidedly positive, 2 to 1, on little volume. RSI's pushed over 60 for the DJIA and S&P, with the Nasdaq100 ending at 59.2. ROC(10's) are positive, but declined in the session as the slow-down in momentum continues. While the S&P and Nasdaq100 closed with new recent closing highs, the DJIA closed 47 points below its high. The MACD for the DJIA remains below signal, while the other major indices continue above. The VIX was up 0.7%, diverging from the action of the major indices. IWM (small caps) has not moved back to new highs and all though it has rebounded from a recent pullback, we note that its 20D-SMA is crossing below its 50D-SMA. The melt up in equities continues as it remains the favorite place for cash right now. We would look for confirmation of a break-out to new highs, to add to equity positions. The S&P now has near term support at 1588 and 1576. Near term resistance to the upside is now 1597-1600 and 1612. The Nasdaq100 continued its strong move closing 2 points above its closing high. It remains 12 points below its intra-day of 2878. Look for 2864 and 2850 levels to provide near term support. Upside resistance now sets up as 2875-78 and 2888. Earnings reports continue and we get more key economic numbers today(see above). Europe is mixed in early trade. Our Futures are pointing slightly lower versus fair value.
Major Economic Reports Today
Employment Cost Index-8:30am Case Shiller 20-city Index-9:00am Chicago PMI-9:45am Consumer Confidence-10:00am
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Data sources include ETF Database, ETFTrends.com, IndexUniverse.com, Google Finance, and Bloomberg data and at times other data sources are utilized. Leveraged, Inverse & Leveraged Inverse Conclusions and Risks 1) Leveraged, Inverse, and Leveraged Inverse (L&LI) ETFs generally capture a high percentage of their expected daily returns, particularly on a net asset value basis. 2) L&LI ETFs are not appropriate for all investors. However, we believe they can be appropriate tools for some investors looking to make short-term tactical trades if they perceive a high likelihood of a strong market move occurring in a relatively short time period. In strong trending markets, being on the right side of the "trade" with L or LI ETFs can lead to very strong returns. 3) Investors should not expect these ETFs to deliver total returns linked to their benchmarks over any period other than daily. The effects of compounding and the daily re-leveraging or de-leveraging that occurs with L&LI
ETFs can lead to unexpected results over the long term. As a result, we believe longer-term investors should consider regularly rebalancing positions. 4) Trendless markets, particularly those with a high level of volatility, can lead to substantial relative underperformance of L&LI ETFs. 2) Leveraged and Leveraged Inverse (L&LI) ETFs typically utilize futures and equity swap agreements. The use of these derivative instruments increases risk and enhances the possibility of tracking error.
Relative to traditional ETFs, leveraged, inverse and leveraged inverse ETFs typically have higher costs and lower tax efficiency. 3) The effects of compounding can lead to significant deviations from traditional benchmarks over longer time periods. For example, if $100,000 is invested in an index that increases in value by 10% on day one and then decreases in valueby 10% on day two, the investment will be worth $110,000 at the end of day one and $99,000 after day two. However, the value of a security that doubles the daily performance of the index would be worth $120,000 on day one and $96,000 after day two. Thus, the index is down 1% after two days, a doubling of which would be down 2%. However, the security attempting to double the return of the index is down 4%. Investors should consider carefully the potential impact over longer periods. MLP and MLP ETF Risks Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance on the capitalmarkets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity volume risk.
For tax purposes, MLP ETFs are taxed as C corporations and will be obligated to pay federal and state corporate income taxes on their taxable income, unlike traditional ETFs, which are structured as registered investment companies. These ETFs are likely to exhibit tracking error relative to their index as a result of accounting for deferred tax assets or liabilities (see funds' prospectuses). The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund's value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP fund's after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. Commodity ETF Risks Commodity ETFs may be subject to greater volatility than traditionalETFs and can be affected by increased volatility of commodities prices or indexes as well as changes in supply-and-demand relationships, interest rates, monetary and other governmental policies, or factors affecting a particular sector or commodity. Currency ETF Risks Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. ETFs mentioned at times may have material exposure to small cap and/or international securities that may have higher levels of risk and volatility than other ETFs.
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