Futures Shrug Off Fitch US Credit Warning

Stocks finished lower Tuesday as Congress still has failed to rubber-stamp a debt deal that was supposedly agreed upon last week. The Dow and S&P 500 snapped their four-day win streak as be mused investors query: “Could they really let us default?”

Due to the inaction in Congress, Fitch last night warned that it was placing the US’ AAA credit rating on review for a potential downgrade. However, US stock futures are actually slightly higher this morning, reinforcing the idea that most investors don’t think there is a realistic possibility of default.

The rest of the world is looking at us wondering why we are shooting ourselves in the foot, but it appears if we can still get a deal done before Thursday’s deadline, disaster can be averted. The market did drop yesterday, but the S&P still held a portion of Monday’s gains and held above the 8-day EMA. The jitters could increase over the next two days Continued to use the new upper floor of 1692-1695 as short-term support level.

First let’s take a look at a few non-equity assets to see if any pockets of the market are worried about the potential of a default.

Gold (GLD) has been stuck in a clear downtrend despite hiccups in the debt deal negotiations. It did try to bounce off the lower level of $122 yesterday and managed to close in green but the ETF is still trading below all key moving averages. It needs to reclaim $125 area to relieve some selling pressure. Current action doesn’t suggestion expectations of a default.

TLT (bonds) turned weak again after a gap up yesterday, but there is nothing screaming default right now. See if rates tick higher if today drags on without a deal in place. TLT needs to hold Monday’s low of $104.33 to avoid additional damage.

The Dollar Index ETF (UUP) gained 0.37% yesterday as dollar caught some bids – not exactly the type of action you’d see if the dollar were in danger of being discarded as the world reserve currency after a default.UUP has reclaimed the support of both 8-and 21-day moving average and a break above $21.75 could send it higher.

Utilities (XLU) are a safe haven for investors, and showed relative weakness yesterday with a 1.40% drop. This could be a sign that investors are not turning to safe haven defensive plays.

Oil service names are quietly acting well.

The Oil Service ETF (OIH) had a nice three-day rally then healthy digestion yesterday as it held above the 8-day EMA. Holding above $48 could keep its momentum intact for higher prices.

Schlumberger (SLB) is also hovering at highs after a nice breakout at $90.30 on Monday. Holding above $89.50 could keep its short-term uptrend intact.

EOG Natural Resources (EOG) continued to hold higher after it triggered our targeted entry at $174.65 on Friday last week. Some work above the 8-day EMA at $176.50ish would be healthy.

Anadarko Petroleum (APC) is lagging a little bit and still below resistance from prior pivot high of $96.75. The stock is trading above all key moving averages, though, and a break above $96.75 could bring in some buyers.

Devon Energy (DVN) is also holding higher above the 8- and 21-day EMA, although on a more macro chart it is more of a lower-level catch-up play. The longer it stays above $60, the higher the probability it could see higher prices.

Quick Hits

Apple (AAPL) held higher and managed to finish in green despite a choppy trading session in the indices. AAPL has broken higher out of the recent wedge pattern/downtrend but has lacked momentum to pull away from it. A break above yesterday’s high or a pull-back into the 8-day at $491.20 could be a good spot to test new longs.

Yahoo! (YHOO) reported earnings after-hours yesterday. Revenue fell 5%, from $1.2 in the third quarter of 2012 to $1.1 billion while earnings also fell. Despite the disappointing report, Yahoo! said it has reached an agreement with Alibaba in which it will be required to sell 208 million shares when the Chinese Internet and e-commerce company IPOs. The stock was up 0.60% after-hours as a result of the latter news. A break above yesterday’s high of $34.32 could resolve the upper wedge pattern to the upside.

Solar stocks had a nice push right off the open but met some sellers as market continued to be heavily headline-driven. Despite the sell-off, Trina Solar (TSL) still holds above its 8-day EMA, showing relative strength. Yingli Energy (YGE) also managed to log an 0.88% gain. Look into these solars plays once market find its footing.

Walter Energy (WLT) is a laggard play we highlighted in yesterday’s Morning Call that had a nice three-day rally into some intermediate resistance at $16.10. This laggard stock could represent a defined-risk opportunity at these lower levels. A break above yesterday’s high of $16.18 could bring in some buyers.

The Vix ETF (VXX) was up 6% yesterday amid ongoing DC debt deal drama. This added some mixed signals into the already erratic market, but I think you could look to fade this mechanically flawed ETF. If you are going to make that type of trade keep very tight risk management tactics in place, though.

Disclosure: Scott Redler is long AAPL call spread

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