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I have been investing for over 40 years, evolving from investor to trader. The bear part comes from my degree from Cal: Go Bears! From 1982 to 2000, I managed a 17% return trading mutual funds on the basis of relative strength. This success was, of course, helped by an historic bull market, but... More
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  • ETF Blog 4/7: Volatility And Upcoming Earnings Fog The Picture 0 comments
    Apr 6, 2014 12:54 PM | about stocks: IWM

    Market Moving News (Summary of 19 Articles)

    Store sales statistics are off, but may be due to the effects of a late Easter. February construction outlays moved up 0.1%, following a decline of 0.2% the month before. Weather remains a factor.

    Texas factory activity increased for the eleventh month in a row in March. The production index rose from 10.8 to 17.1, indicating output grew at a stronger pace than in February. The raw materials price index edged up to 23.1, above the 2013 level. Finished goods prices came in at 7.3. Looking ahead, 38% of respondents anticipate higher raw materials and 33% expect higher finished goods prices.

    Manufacturing is mixed. Markit's manufacturing PMI for final March is 55.5, vs. February's 57.1. Factory orders bounced back strongly in February, up 1.6%, powered by a 13.4% upswing in commercial aircraft orders. Excluding transportation, orders were up 0.7% following 0.1% declines in the prior two months.

    The economy remains slightly positive. The Chicago PMI was 55.9 for its lowest reading since August, down from 59.8 in February and the trade deficit in widened to $42.3 billion in February from $39.3 billion in January. The services PMI got a weather-related lift in March, rising 2.0 points to 53.5. ISM's non-manufacturing index is up 1.5 points to 53.1. The report's employment index jumped back 6.1 points from February's low to 53.6. New orders rose 2.1 points to a moderate 53.4 level.

    Housing is neutral. Mortgage purchase applications rose 1.0% March 28 week. The year-on-year rate remained at minus 17.0%, as mortgage rates are less favorable than this time last year. Refinancing applications fell 3.0% in the week. The 30-year conforming rate was unchanged at 4.56%.

    Job growth is improving but not much as forecast. Total nonfarm payroll jobs rose 192,000 in March, vs. expectations of 206,000, after a 197,000 boost in February and a 144,000 increase in January. Gallup's Job Creation Index, based on employee reports of hiring and layoff activity at their workplaces, reached a six-year high of plus 23 in March, nearly tying the plus 24 recorded in March 2008. Layoff announcements in March totaled only 34,399, well down from February's 41,835, one of the lowest numbers of the recovery. Initial claims rose 16,000 in the March 29 week, but the 4-week average is little changed at 319,500, 20,000 below the prior month.


    Consumer confidence climbed last week from an almost two-month low. The Bloomberg Consumer Comfort Index rose to minus 30 in the period ended March 30 from minus 31.5. An index of the buying climate rose to minus 37, from minus 39. The consumers' views on their personal finances climbed to 0.5 from minus 2.3 the prior week.

    The VIX

    (click to enlarge)

    The VIX popped higher on Friday's sell-off, but only to 14, suggesting that changes in the market are not the result of panic selling.

    The Market

    (click to enlarge)

    The market rose most of the week, gapping up at the opening, enduring sell-offs to mid-day, and recovering to new highs; however on Friday, after making an all-time high, it sold off sharply, on high volume, but not broadly, as is shown below. The intra-day volatility remains high, an indication of continued uncertainty.

    Small Caps and Nasdaq 100

    (click to enlarge)

    (click to enlarge)

    Friday's real damage was done to the Nasdaq stocks, most of which are recent tech highfliers. The Russell 2000 lost 2.3% and the large caps in the Nasdaq 100 fell 2.7%. These charts resemble a bearish chart pattern called a "broadening top," which shows falling prices with successively higher volatility. Friday was something of a blow off, but the pattern suggests a further drop to previous support (108 on the IWM and 84 on the Q's).

    Core Sectors

    (click to enlarge)

    The core sectors chart reveals the rotation suggested by the disparity among the major indexes. Energy (NYSEARCA:XLE), real estate (NYSEARCA:IYR) and emerging markets (NYSEARCA:EEM) held value, while tech (NYSEARCA:XLK) and small caps (NYSEARCA:IWM) led the downward charge.

    Best Relative Strength

    (click to enlarge)

    Among the 36 ETF's I follow, those exceeding IWM include Brazil (NYSEARCA:EWZ), semiconductors (NYSEARCA:SMH) and the afore-mentioned emerging markets and energy.

    Trades Last Week

    Sold: SMH, IHI, IBB, SSO

    IBB experienced a partial crash on Friday, losing 6.7% from its midweek high. SMH held strong, but finally hit my stop on Friday. The Friday break could be a buying opportunity and I will stay on top of it next week.

    I currently hold no positions.

    Conclusion and Action

    The economy continues to grind higher, but at a slow pace, and sentiment is slightly more positive. The market, however is listening to different voices. Thursday's and Friday's action was a tech bubble deflation that may have legs next week. I'll stay away as long as IWM drops further or stays flat, and I will closely watch SMH and IBB. Energy can be a difficult play, as it is strongly influenced by geopolitical issues, but I will monitor XLE.

    Earnings announcements begin next week. If tech sector reports are good, they could reverse the Nasdaq direction. Other than waiting for stronger indexes, I have no plans to go long.

    Have a great week!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: IWM
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