David Chojnacki S1F Market Technician
The Market opened to the downside and continued that slide until late morning. Buyers stepped in before noon and we had a slow melt-up through the PM hours and into the close, taking the major averages off their lows of the day. At the close, the DJIA slipped 0.4%, the S&P gave up 4.7 points, and the Nasdaq100 lost 5.5 points. Breadth was just slightly negative, 1.1 to 1, on below average volume. RSI's dropped in the session, but remain in the upper 50's and near 60. ROC(10's) were mixed in the session, with the DJIA and S&P moving down and the Nasddaq100 advancing. All three remain in positive territory. MACD's remained above signal. For the fourth session in a row, the major indices continue to consolidate in a narrow range. The S&P remains within several points of the new high it established on Jan 2. The indices traded in a narrow and technical range, as they continue to digest the gains of the first two sessions of the new year. The S&P and Nasdaq100 are once again finding resistance at key levels, namely 1465 and 2725 respectively. The Nasdaq100 traded a few points above 2725 in the session, but by the close had settled 7 points below. 2725 and 2734 will provide near term resistance. The Nasdaq100 should find near term support at 2712 and 2700. For the S&P, the September closing high of 1465 continues to provide near term resistance. Expect 1465 and 1475 to provide near term resistance. Support continues to set up at 1450 and 1435. The VIX was down for the sixth session in a row, reaching levels that go back to September 2012. It closed yesterday at 13.62, off 1.2%. Alcoa started fourth quarter earnings last night with fairly good numbers. Over-night futures traders have the major indices pointing slightly to the upside on that news. European markets are mixed this morning. Little economic news today, but earnings reports will continue after the bell. Tomorrow we get Claims numbers.
Major Economic Reports Today
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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 value by 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 capital markets 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. 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