10 Things of Importance (REVISED)

This weekend I posted a the outline below of 10 Things of Importance… tonight I want to revise them based on today’s activity. Obviously the selling today put a downside stamp on the broad indexes and showed the sellers were will to step it up a notch. There was plenty of blame to go around, but it is important to note that stops during this type of market remove the decision process from you! It is too easy to second guess exit point when the markets are moving lower and out minds are looking for a bounce. As we have stated in tonight video update the emotions are now taking control of the market and this is where it gets ugly quick. I have use the red text below to highlight the updated portion of the post for your reading pleasure. It is important to use risk management principles versus listening to the analyst who are stating don’t worry, be happy, this too will pass and the upside will resume. That may prove to be a true statement, but the brain damage done to the investor in the process of the selling and then the following bounce are huge. Overcoming that obstacle is a bigger challenge than using predefined exit and re-entry points. Be patient as your manage your money in accordance with your goals and objectives. 

Sunday, February 2, 2014

January closes on the downside with all the major indexes in the red. The worries relative to the emerging markets have been the headline the last two weeks. The challenge is indirectly related to the Federal Reserve cutting stimulus. The perception is a stronger dollar will impact these markets. Whatever the rationale or justification for the current volatility it has resulted in a modest downside and choppy markets. The worries go beyond the headlines and fall all the way to each individual investor or portfolio manager on Wall Street. We all have our own opinions and forecasts as to what we believe is driving the markets in the current microtrend and place trades accordingly. The key is to be focused on what you believe and trade it relative to what the market does. Be humble enough to admit if you are wrong versus taking big losses as a result of wanting to be right versus disciplined.

Below I have outlined ten things of importance for our portfolio looking forward. Each is based on what is in the media, the charts, the fundamentals and my notes. The objective is to give you some guidance, but also food for thought. Each offers some opportunity if it develops moving forward. Trading, from my view, is all about ideas that create opportunities both short and long term. I am not a prophet and I don’t have a crystal ball for predicting what will take place in the markets, what I do have is a strategy to capture ideas, put my money to work in those ideas, if they work make money and exit with manageable losses if they don’t. The ultimate decision making factor… the market. Therefore, discipline plays a key role in being successful at putting your money at risk in volatile markets.

  1. The buyers are still engaged. Albeit they don’t have huge conviction, but they have still been willing to step in at support and buy. Friday showed the buyers come in after a very negative open and pushed the major indexes back to break-even or positive until the last hour of trading. Another sign is $10.2 billion flowed into equity mutual funds to end the week of January 29th, according to Thompson Reuters. Until the buyers are unwilling to step in and hold up the markets we have to respect there position. The buyers were willing to step well to the side today and let the sellers have their way. The break of support and acceleration to the next level in just one day of trading is indication the momentum has swung toward the sellers. Watch to see if the buyers respond in any way tomorrow. If not, more downside to come. 
  2. The sellers are alive and well. Three of the highest volume days in January were on selling, not buying. Thus, the decline in the indexes as a result during the month. As stated in number one, the buyers have been willing to step in at key support levels, but the bigger question is for now long? If all the worries grow in belief, the sellers will take control from the buyers and establish a new trend short term. They now made the highest volume day in February selling. The move today breaks the trendline off the November 2012 low and is in the process of establishing a trend change. The micro trend (0-13 weeks) is now on the downslope. This puts short trades into play and the short selling has accelerated. That will add volatility (VIX) to the broad indexes short term. 
  3. S&P 500 Index is holding support at the 1775 mark. It is still above the 100 day moving average and sitting on the up trendline off the November 2012 lows. Thus, the intermediate trend is in jeopardy of being broken. From my view that would embolden the sellers, giving them the upper hand short term as stated in number two. I would use this index as an indicator of the trend. The index took out the 1775 level without a blink today and not buyers stepped in to reverse the course of action today. Trendline off the November 2012 low was broken. 10 DMA broke through the 50 DMA showing downside acceleration. 200 DMA is at 1707 and the index moved below 1745 on the close today as well. 1730 may offer some support, but it will depend on the emotions attached to the move going forward. 
  4. The buyers are still counting on the upside growth being fed by continued stock buybacks, more mergers and acquisitions, IPOs and capital expenditures. The one glaring element missing from this list is revenue growth due to economic expansion of the consumer. The argument put forth sounds good as a news clip on TV, but the reality is, it is getting harder to produce. Thus, the buyers are hoping for a continuation of what got us to this point over the last 18+ months. If they are right the next leg higher will be easily identified in earnings and financial filings. Pay attention to the data points moving forward. To my point of economic expansion… ISM manufacturing data today was a BIG BUST! reported 51.3% versus the 56.5% posted in December, and well below the 56% expected by analyst. The economic data was a disappointment in December and the ISM data today for January shows a further slowing. That fear is what drove today’s downside. To quote a famous line from the elections, “it’s the economy stupid!”
  5. Europe was prophesied as the winner for 2014. It started out okay, but has now retreated to the key support level tracking once again with the US markets. I am not against Europe, but looking at the data, it doesn’t support the wishful thinking of the analyst pounding this drum. $44.61 on IEV is the key level to hold. The key factor to Europe on the surface is China. If China gets their act together Europe will benefit. If they continue to struggle it is not good for Europe. For now… as the US markets go… so goes Europe. Followed the US lower and the break of support only adds to the downside story in the global markets. The blame of the emerging markets for the current shift in direction is as good as any other reason, but the developed markets are struggling equally as much. Still not interested in the global markets short term.
  6. Earnings are still the key from my perspective looking forward, in other words guidance. Hitting their numbers is important as seen in the case of Facebook. Missing as seen with Apple is not good. However, The real plus in Facebook’s numbers was the guidance. The real downer in Apple’s case was the guidance. Remember stocks prices trade looking forward, economic data  reports looking back. It is clarity of the outlook that matters the most in the numbers in this type of market environment. If the ISM manufacturing data on Monday is bad… that is two consecutive months of retraction in growth. The prognosis will turn negative. A negative outlook in manufacturing will impact the guidance in stocks from that sector of the economy. Thus, the domino effect of data. January’s economic reports will have added weight due to the weaker numbers in December. Throw earnings guidance on top and you could build a case for the sellers to continue to take the broad markets lower. As stated above the economic data isn’t helping at all today. ISM lower and the construction spending was well off the November growth of 0.8% and in December was only 0.1%. That doesn’t bode well for the January report based on the current trend in the data. 
  7. Volatility Index points to uncertainty to confirm what we are seeing in the numbers. A simple rule of thumb is for a reversal in selling (buyers gain momentum) to have a chance the index needs to reverse three points off the high. That would put the VIX at 15-16 currently. It closed at 18.6 on Friday and held up all of last week. This is just one of the indicators to watch and is not a guarantee to predict anything, just another part of the puzzle. VIX continued the climb higher hitting the 21.4 level today. That matches the October high and based on the close may still not have peaked yet. The move through this level could open the way to 27+ on the index. If that is true there will be plenty of more selling to come. VXX has been a great trade on the current volatility. 
  8. Telecom price wars are starting to hit full stride. AT&T announced Friday they would reduce their price plans for phones. T-Mobile started the price wars and they are heating up. This is not good for the margins in the sector and that will adjust earnings projections going forward. Yes, you have to factor in acquisition cost of customers, but the life-cycle of those customers are becoming shorter with a short contract duration. Anyway you cut it, the outlook in the sector is not getting brighter. The winner will likely be the consumer and the parts manufacturers. The tower providers could stand to win as well with the higher usage. The biggest concern is saturation in the mobile phone market with estimates approaching 70% of phones are now “smart” phones. A weaker consumer is only driving this activity faster. See number ten below. Between the market selling and the rumors this sector remains under pressure. IYZ fell 3.3% on the day. The losses were unanimous across the stocks, but watching how AT&T (-4.1%), Verizon (-3.3%), Sprint (-5.1%) and CBB (-3.2%) for opportunities going forward as these stocks find support. 
  9. Money rotation to defensive sectors. Utilities (XLU) broke through $38.86 resistance and confirm the reversal off the last low in December. REITs (IYR) have cleared the next level of resistance at $64.75 and keeping the uptrend off the December low in play. Treasury Bonds (TLT) has pushed back to the 200 DMA and the October high. The point being money is seeking some degree of safety short term. If this accelerates the pressure will be on the downside for the higher risk sectors of stocks. Rotation continued today with XLU down 0.8% after moving to the previous high at $39.50. Money is rotating still to bonds (TLT +1%) and cash. As money flow rises so does fear. Look for climax sell off intraday with some reversal buying on volume as a trading opportunity on the upside. 
  10. The consumer is contracting, not expanding. A look at XRT shows the damage from the holiday sales period. The decline of 10.3% has broken below the 200 DMA with the 10 DMA close to moving below the 200. Jobs are the primary challenge (my view) and stagnate income is the second. We are not creating quality jobs, we are creating part-time jobs. Any wonder why the White House wants to raise minimum wage? The regulations, taxes, and welfare created over the last five years are choking the economy. Job expansion comes from small business not conglomerates. Expansion comes from new technology. Look at the energy sector for a simple example. Jobs are being added with the expansion in drilling processes and renewable energy technology. Solar is expanding and creating opportunities, etc. When the focus shifts from giving out handouts to creating new businesses we will see this trend reverse, but not until. XRT fell 3% today as the selling accelerated. Job report is Friday and the excuse of winter weather is already be laid out as a justification for a bad number for January. If jobs are bad and the rest of the economic data this week is bad… the downside isn’t over. The consumer is the economy in the US and we have to see some type of rebound if this market is to regain any upside momentum. 

I want to restate that I am not making predictions in this outline, but merely looking for opportunities and  a disciplined method to capture the resulting move. In each point above there is a sector that is impacted good or bad. The follow through in those sectors, good or bad, creates and investment opportunity. Scanning and following market movements without actionable ideas results in missed opportunities for your portfolio. Build a watch list based on your ideas and beliefs and then track how to benefit from the resulting moves. Be disciplined and focused as you navigate the choppy waters that are the market.

As posted in the weekend update there were short trade opportunities as result of the movement the last two weeks. We did put some of these trades into play today and we continue to look for support to hold the sellers at bay. Until that takes place the downside is now the micro trend for the broad markets. Manage the risk accordingly and please don’t make any assumptions currently about direction. Take what is there and protect against the downside risk.