Thursday, May 30, 2013

This Sector is Setting Up to Take a Dive in the Next Month

In trending markets, investors and traders alike have a tendency to forget how quickly corrections and other countertrend moves can appear out of seemingly nowhere, and how sharp these moves can be. Case in point: the utilities sector, , as evidenced by the Utilities Select Sector SPDR (NYSE: XLU), which rose 18.6% from the start of the year through April 30, followed by a swift down move in the past four weeks.

As the broader U.S. stock market rallied in 2013, fueled by global central bank monetary policy posturing and improving economic data, investors in search of income piled money into dividend-paying stocks and sectors, such as the utilities.

All of this changed rather quickly in early May, when investors began fretting over a potential backing off of quantitative easing, resulting in bond prices falling and yields rising. They began quickly moving out of dividend-paying stocks such as utilities in preparation for a higher-yield environment.

On the chart of the 10-year U.S. Treasury note, the sharp rise in yields starting in early May is visible. Yields rose almost 40 basis points and are now just over 2% and near the year's highs from March.
Treasurys Chart
On the multi-year chart of XLU, it appears to be in good shape to reach higher prices over time, but given its year-to-date gains, is likely somewhat overbought in the medium term. The recent correction puts XLU a little more than 6% off its late April highs and right back into the uptrending channel (blue parallel lines) that dates back to the 2009 lows.

The sharp correction is yet another example of a chart gone vertical that ultimately gives way to the law of gravity -- what goes up must come down. Note how XLU topped just as it peeked out of the longer-standing channel.
XLU Weekly Chart
The daily chart below gives us more clarity on the near-term support and resistance zones that swing traders should focus on.

First, note that last week's 3.7% drop took XLU below its 50-day simple moving average for the first time since the start of 2013, when the rally that began in November kicked into high gear.

The recent sell-off also resulted in XLU closing last week right at the August 2012 highs, which acted as resistance until late March. By definition, previous resistance levels should act as first meaningful support, and thus, the $38.50 area should be watched for a bounce.

Given the sharp drop from the high-momentum top in late April, the odds now favor further selling after a potential initial bounce attempt. As markets often take the path of maximum frustration for investors, a bounce from last Friday's closing levels may just be enough to confuse the crowd. Therefore, a bounce into previous mini support (now potential resistance) near $39.50 could offer traders looking to short XLU a defined level to trade against.  

The 50% and 61.8% Fibonacci retracement areas of the November 2012 to April 2013 uptrend stand out as potential downside targets.
XLU Daily Chart
Recommended Trade Setup:
-- Short XLU between $39.50 and $40.30
-- Set stop-loss at $41
-- Set initial target at $37.65 for a potential 5%-7% gain in 4-8 weeks
-- Set secondary target at $36.85 for a potential 7%-9% gain in 4-8 weeks
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Dunkin Brands Group Inc (NASDAQ: DNKN)

Dunkin Brands Group, Inc., together with its subsidiaries, owns, operates, and franchises quick service restaurants under the Dunkin Donuts and Baskin-Robbins brands worldwide. The company operates in four segments, including Dunkin' Donuts U.S., Dunkin' Donuts International, Baskin-Robbins International, and Baskin-Robbins U.S. Its restaurants offer coffee, donuts, bagels, ice cream, frozen beverages, baked goods, and related products. As of March 30, 2013, the company had approximately 10,500 Dunkin Donuts restaurants in 38 states and the District of Columbia, and 31 other countries; and approximately 7,000 Baskin-Robbins restaurants in 44 states and the District of Columbia, and 45 other countries. It also leases restaurant properties. Dunkin Brands Group, Inc. is headquartered in Canton, Massachusetts.
To review Dunkin’s stock, please take a look at the 1-year chart of DNKN (Dunkin Brands Group, Inc.) below with my added notations:
1-year chart of DNKN (Dunkin Brands Group, Inc.) DNKN has been working its way slowly higher since bottoming at $28 in August. In January and April the stock hit $40 as resistance (blue), which was also a 52-week high resistance. After the stock finally pushed above that resistance in May, DNKN has already tested the $40 level as support once, and it appears to be pulling back down to it again.
The Tale of the Tape: DNKN broke out to a new 52-week high and now seems to be pulling back. A long trade could be made at $40 with a stop placed below that level. A break below $40 would negate the forecast for a continued move higher.
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S&P Dividend Yield Below 10-Yr Treasury Yield (1.93% vs. 2.19%); Looking for Value?

by Mike “Mish” Shedlock
MISH’S Global Economic Trend Analysis

In an email note today economist Steen Jakobsen notes the “S&P Dividend Yield is Below the 10-Yr Treasury Yield (1.93% vs. 2.19%)”
S&P Dividend Yield
[...] Steen asks “Why own stocks at lofty PE of 18 when you can get better yield and a free put option via fixed income’?
Curve Watchers Anonymous notes this chart of US treasury yields.
US Treasury Yields Over Time
Continue Reading at…
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Why Mark Carney’s Canadian success story may be about to fall apart

No Bank of England governor has ever been installed in office with quite so much advance hype as Mark Carney. When he moves from running to the Bank of Canada to his new office in Threadneedle Street, expectations will be running high. Carney arrives with a reputation as a master of economic strategy, a man who can single-handedly steer an economy through the most treacherous of waters, and get a country growing again with a few deft strokes of monetary magic.

Certainly, George Osborne has invested his hopes in him. During Carney’s time as governor in Canada, the country was ‘acknowledged to have weathered the economic storm better than any other major western economy’, he said on announcing the appointment. Most of the financial commentators were happy to sing from the same hymn sheet. A brilliant technocrat, well worth the £874,000 a year the British taxpayer will pay him to run the economy, they chorused. No one has any doubt he is by far the best man for the job.

But is Carney really everything he is cracked up to be? Or is it that no one really knows very much about the Canadian economy — and certainly not enough to question how well it has performed since Carney was installed in 2008? Just as he is packing his bags, there are worrying signs that the Canadian economy is coming off the rails. Increasingly it looks as if he is getting out before it crashes. (more)

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MoCS: Little-Known Indicator Helps Traders Stay Ahead of the Market

The Momentum of Comparative Strength (MoCS) indicator transforms relative strength (RS) into a momentum tool and helps traders identify changes in the trend of RS. This indicator was created by Christopher Hendrix, CMT, and introduced in an article in the November 2006 issue of SFO Magazine.

MoCS replaces price with RS in the standard Moving Average Convergence/Divergence (MACD) formula. MACD is one of the most popular technical indicators. It calculates the momentum of the price by taking the difference between a short-term and long-term moving average (MA) of the closing prices. Changes in the direction of momentum often precede price trend changes.
The formula for MoCS is:

MoCS = [12-period EMA of (Tradable/Market Index)] – [26-period EMA (Tradable/Market Index)]

-- EMA is an exponential moving average
-- Tradable is the closing price of the stock, ETF, mutual fund or derivative being traded
-- Market Index is the closing price of a broad market index, like the S&P 500 index (it could be the Barclays Capital Aggregate Bond Index if you are trading bond ETFs or the CRB Index for a group of futures-based ETFs)

The values shown are the default values for MACD and work well in MoCS calculations. However, simple moving averages could be used instead of EMAs and individual traders can use any time period they choose. This indicator can be used with daily, weekly, monthly or intraday charts.
Both MACD and MoCS can also be applied with the addition of a signal line, usually a 9-period EMA of the indicator, to generate trading signals. When MoCS crosses above the signal line, a buy signal is given. Sell signals are given when the MoCS indicator falls below the signal line.

How Traders Use It
Traders can use MoCS as a fully defined trading system or as one input in deciding whether to buy or sell. The indicator is shown below on a daily chart of iShares Russell 2000 Index (NYSE: IWM). The histogram in the middle of the chart uses the formula shown above with the S&P 500 used as the market index. In the bottom of the chart, the 9-day signal line (dark red line) is applied to the MoCS.
Momentum of Comparative Strength (MoCS)
Back-testing covering more than five years starting in 2007 shows that this indicator can be profitable on both long and short trades when used as a histogram or with a signal line on IWM.

MoCS can also be used to confirm RS signals. RS is often shown as a percentile value ranging from 1 to 100. Traders can buy when RS crosses above 80 and sell when RS falls back under 80. They could also add MoCS as a confirming indicator and only take buy signals when MoCS is positive, a strategy that could help avoid losing trades.

Why It Matters To Traders
By combining momentum and relative strength, MoCS relies on two time-tested and reliable concepts. MoCS offers very clear and testable trading signals.

An advantage of MoCS over other RS methods is that it can easily be applied to any security and adapted to whatever market a trader prefers. Traditional RS measures are applied to the broad stock market while MoCS can be calculated with bond or commodity indexes. It requires less data than traditional RS ranking systems and is simpler to calculate than traditional RS measures.
MoCS also incorporates momentum, which could be an advantage over RS. Many traders find that price-based momentum indicators turn before changes in the price trend occur. RS has a tendency to lag price movements and MoCS can provide signals before RS changes direction.

For example, this indicator can help traders avoid stocks that suffer big drops on earnings misses since momentum often slows in these stocks ahead of the earnings announcement. The chart of (NASDAQ: PCLN) below offers an example.
MoCS shows the value of applying indicator analysis to RS. A similar approach, substituting RS for price, can be taken with any indicator formula and traders seeking an edge may find this to be a profitable way to stay ahead of the market. 
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We’re ‘Hyper-Bullish’ About This Stock: CHK

A few months ago, we told you to buy Chesapeake Energy (NYSE: CHK) for exposure to the natural gas market.

If we were bullish then, we’re hyper-bullish now.

Since Chesapeake’s Founder and CEO, Aubrey McClendon, resigned, the case for buying the company has only gotten stronger.

Reasons include:
* Better leadership
* A stronger cash position
* Insider buying
* Analyst upgrades
* And higher natural gas prices I’ll start with the leadership change…

Chesapeake is among the top five largest players in the natural gas space, and it also has significant oil operations. But it was severely undermined by McClendon’s risk-taking and questionable behavior.  (more)

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Mortgage rates surge as Fed tapering fears mount: MBA

Worries the Federal Reserve may begin to slow its stimulus efforts sent U.S. mortgage rates last week to their highest level in a year, drying up demand for home refinancings, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said interest rates on fixed 30-year mortgage rates surged 12 basis points to average 3.90 percent in the week ended May 24. It was the highest level since May of last year and the biggest jump in 14 months.

The rise sent the seasonally adjusted index of mortgage application activity down 8.8 percent as refinancing applications tumbled 12.3 percent. It was the biggest drop in refinance applications this year as demand fell to the lowest level since December.

The refinance share of total mortgage activity decreased to 71 percent of applications from 74 percent the week before.

Still, the gauge of loan requests for home purchases, a leading indicator of home sales, rose 2.6 percent, suggesting potential homeowners may have sought to lock in a still-low rate.

Fed chairman Ben Bernanke said last week the Fed could scale back the pace of its bond purchases at one of the "next few meetings" if the economic recovery looked set to maintain forward momentum.

The comments sowed concerns among investors that the Fed's ultra-loose policy could end sooner than expected.

Encouraging economic data last week also contributed to that view as home sales rose and durable goods orders improved.

"Rates rose in response to stronger economic data and an increasing chance that the Fed may soon begin to taper their asset purchases," Mike Fratantoni, MBA's vice president of research and economics, said in a statement.

The Fed is currently buying $85 billion a month in bonds and mortgage-backed securities as it seeks to keep borrowing rates low.

The low rates have helped the housing market, luring in buyers off the sidelines. The recovery in housing has been gaining traction since last year and data on Tuesday showed home prices saw their biggest annual increase in nearly seven years in March.

Rates had already been on the rise before Bernanke's comments and have gained 31 basis points since the start of the month.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.
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