David Chojnacki S1F Market Technician
Poor Claims numbers helped the Market open to the downside. The sell-off continued throughout the session, however, the indices closed off their lows of the session. The losses were moderate, with the Nasdaq100, seeing a significant move to the downside. At the close, the DJIA was down 0.5%, the S&P gave up 0.67% and the Nasdaq100, the big loser, down 1.4%. Breadth was just slightly negative, 1.3 to 1, on above average volume. Once again, we saw weakness on heavier volume. RSI's pulled back a bit, with all three major indices now in the 40's. ROC(10's) declined and are in negative territory for all three. MACD's remain below signal. The Nasdaq100 was the big loser, with weakness in Techs. AAPL continued its slide and closed below 400 for the first time since Dec. of 2011. The DJIA moved below its 20D-SMA(14616) in the session. The S&P has now tested the 1540 support area several times and closed just above that level yesterday. It did close below its 50D-SMA(1543). We note that 1540 is a key level of support and a breakdown could see further short term weakness. The S&P now has support at the 1540 and 1530-25 levels. Upside resistance can be found at 1550 and 1556, near term. The Nasdaq100, which dropped through some key support, is now only 19 points from its 200D-SMA(2722). Look for near term Nasdaq100 support at 2737 and 2730-25. Near term upside resistance now sets up as 2750 and 2762. The VIX continued its move off low levels and closed up 6.3% to 17.56. Earnings reports continue. Europe is up moderately in early trade. U.S. Futures are pointing to an opening to the upside.
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TODAY'S DATE, UNLESS OTHERWISE INDICATED
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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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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.