Fed Cuts Spark Rally? What’s Next?

The FOMC meeting finally comes to a close and the market response is positive. As we discussed on Wednesday the relief is relative to clarity short term from the Fed and future actions. It is also important to remember that the results of these actions will not be seen in the economic data until February when the January data is released. Thus, speculation is what will drive the market relative to the Fed and how other perceive the data going forward. One worry down and plenty more on the horizon for investors.
The broad market trends remain on the upside and with the holidays and year end now in play, I don’t expect this to change and there are not likely to be any major changes until January. Thus, we will take what the market has to offer and keep our time horizons short for now. We will continue to use the pattern trade list to for these trades and use swing trades to supplement the longer term views until we have certainty relative to the economy.
Our Holiday Schedule:
Today, December 20th is our last video update until the new year. I am taking some down time to relax, enjoy family, go skiing and detox from a year of changes and growth. I will be planning next years strategy and approach.
The Daily Trading Notes will be update each day as they are currently.
Jim’s Notes will be updated as time permits (general market comments and outlook).
Tables and Models will be updated daily as they are currently.
Watch for our some changes in the new year relative to how we are posting research. It promises to simple! My mission is to make this process simple and transparent for everyone. We will be launching a new webinar/video series on trading in January as well.
I want to wish everyone a very Merry Christmas or Holiday Season… I look forward to a very prosperous and exciting NEW YEAR!
Economic Data & Outlook:

The economic data was lost in the fun of the FOMC meeting this week. The changes to the stimulus were simple and the outlook positive from the Fed. That will set the tone and heighten the awareness of the data going forward. The belief is if the data weakens the Fed will not cut further until the economy shows steady growth. We will focus on this as well and track how it progresses going forward.

Jobless claims were higher than expected for the third straight week. This is putting some concern in the jobs report for December. Some key data points this week of interest were, productivity up 3% was a positive. Industrial production grew 1.1% and better than expected. Consumer price index showed inflation up more than expected on the core and one thing to add to the worry list. Philly Fed was much worse than expected along with the Empire state index, another bad sign to add to the worry list. Home builders index was better than expected, housing starts better than expected, existing home sales weaker than expected and offset the positives in the sector. Last, but not least, the GDP for 3rd quarter was revised higher yet again to 4.1% growth! I know not believable based on the other data being released.

Plenty to watch and plenty to worry about, but for now all things seem to be steady as we go. The challenges lie in the forward looking data for the economy and only time will tell.

The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

Sectors to Watch:

  1. S&P 500 index held support at 1775 and the bounce on Wednesday put the index back at the previous highs and Friday the index closed at 1819, a new high. The optimism about the Fed is spilling over to stocks and next wee we will watch to see if Santa shows up to rally stocks further. Added to the S&P 500 model.
  2. NASDAQ remains in the uptrend, closed at 4098 and hitting a new high. This has been the stronger of the major indexes, but it did close with a doji candle Thursday, but the rally returned from Wednesday to close the week. Technology and large cap stocks have been the leaders and both are in position to move higher.
  3. Small Caps (IWM) the Russell 2000 index hit resistance at the 1133 level and tested on Thursday. Still in position to continue the move higher with the uptrend remaining in play. There was an opportunity to add to the IWM position on Wednesday, but we had not posted the trade. A follow through of the test and confirmation of a move above the 1133 level hit on Friday. Reasserting leadership in the small caps.
  4. Financials (XLF) are back at the top of the trading range and resistance. Looking for a move through the previous high to continue the uptrend. The sector didn’t participate on Friday and remains challenged by the regulations and lawsuits. The regional banks (KRE) and brokers (IAI) were leading the sector and the insurance stocks (KIE) are making a move as well. ¬†Patience with the move going forward.
  5. Energy (XLE) bounced off support of $84.80 and moved through the buy point at $86.15. The sector has been mixed of late and a test of the move and confirmation move higher would be a good sign for energy. The refiners remain the strongest sub-sector currently.
  6. Technology (XLK) tested the 30 DMA and bounced back to the previous high. A move above the $34.95 level would be a positive and set up a ‘J’- hook pattern. The upside is the opportunity and a reversal lower would negate the opportunity. The semiconductor sector (SOXX) is leading the upside and followed through on the move above the top end of the trading range.
  7. This has been a week fixated on the Fed and what actions they would take towards stimulus.The conclusion of the FOMC did provide some clarity near term relative to the Fed actions. The challenge is the next three months to see what the impact of those actions will be and what future action they will take. All of the same worries are in play with the holidays next up for investors to deal with. Sales reports for December will add to the mix going forward. For now Be patient and take what the market gives.

The models are updated and our short term view continues to dominate the process currently. Last week remained focused on the FOMC meeting and the reaction by investors. The news from the Fed took some of the fear out and restored some confidence in the uptrend. I am not changing my focus from the events as they unfold and the opportunities they give as a result. The pattern list is where we are posting most trades short term as a result of the current market environment. With the holiday shortening the trading week and the lack of volume the week between Christmas and New Years we will keep our focus on what lies in front of us in the new year and not just the next two weeks. Manage the risk on trades more aggressively and monitor your longer term holdings with trailing stops to account for any rise in volatility.

Breaking Down the 7 Asset Classes:

As you can see on the Scatter Chart the resumption of the uptrend on November 7th is still progressing. We did manage a rally in the US markets to recapture the highs and keep the trend moving. EAFE bounced as well and is still trading in relationship to the US markets. EMB bounced the last two weeks off the low and remains steady. Commodities are moving in a mixed rotation. Bonds are bottoming for now. Emerging markets continue to suffer as the Fed cuts stimulus. The key for now is patience and conviction enough to play what is trending and avoid what is not.

7 Assest Classes

1) US Equities:

Looking at our sector rotation chart below with the bounce on November 20th as the most recent pivot point. The index can’t find direction in light of the FOMC meeting and Fed action. The answers on Wednesday as you can see as well pushed stocks higher initially, but then they separated by outlook with Utilities, Consumer Durables and Basic Materials giving up some of the initial gains. Industrials, Healthcare, Consumer Services, Telecom, Financials and Energy adding to the upside bounce to end the week.

Looking for the clarity in leadership as we are adding position to the models.

SP500Scatter

2) Currency:

The dollar shifted on the FOMC announcement, but remains in a sideways movement. The reaction from Japan was for the yen to continue to fall. The euro move lower as well on the dollars perceived strength. Watch FXA and FXS to bounce of the near term selling. Overall still moving sideways on the buck.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

The sector has been pricing in a cut to stimulus for December, and now that it has obtained the facts from the FOMC meeting, we will see if it continues not to panic. How fast rates will move to the upside is directly correlated to the cuts in stimulus. For now we just have to set back and let it all unfold. Yields were slightly flat on the week closing 3.85%. The uncertainty remains in the bond sector and interest sensitive assets. Willing to wait it out and see how if develops short term.

Bonds

Treasury Bonds РTLT or IEF are still holding support near the current lows and maintaining a short term trading range. They attempted to break lower and accelerate the rate shift, but that has calmed considerably. No positions currently, too much volatility for my taste in owning bonds. The only trade here is to short the bond with TBF or PST.

High Yield Bonds¬†– HYG = 6.4% yield. Bounced off the $91.25 support and held to close back above the 200 DMA, barely. Don’t own the bonds, and I would move my stops to break even ($91.25) to protect any downside reversal.

Corporate Bonds РLQD = 3.9% yield. No positions currently. Two week rally in play off the low at $113.20.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Moving sideways as money flows continue out of the sector on worries about the state of municipalities.

Convertible Bonds РCWB = 3.6% yield. bounced off $43.75 support and $44.80 entry point. Watching the upside and volatility. This is the one bright spot in the fixed income class. Continued trek higher and stops at $45.50. The trade has now become a risk free dividend of 3.6%.

4) Commodities –¬†The commodity index (DBC) made modest pivot higher on the week and we continue see mixed interest in the sector. The clear winner is natural gas (UNG). The weather in the northeast sparked a rally in the commodity and now testing the move higher. The natural gas stocks (FCG) have not followed suit and I would watch the combination for clues going forward. Bounced on Wednesday and followed through with a move above the $19.15 level to spark some interest.

Copper (JJC), Crude Oil (OIL) and Gasoline (UGA have made a move higher of late and worth watching going forward.

Gold reversed and gapped lower to test the support at the $114 level on GLD. Still like the short side with GLL.

Commodities Rotation Chart:

Commodity

DBC –¬†PowerShares Commodity Index ETF¬†(click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

The global markets remain tied to the US and currently they are bouncing off last weeks selling. The pivot point at the last high on October 22nd is in play currently. The ten country ETFs have been trading lower with the EAFE index, but shifted gears this week.

EAFE, IEV, PIN, EWA, RBL and EWC have attempted to reverse the selling this week. If the news remains positive the upside for these ETFs would be worth a trade opportunity. Watch to see how they open on Monday and follow the leaders.

EEM, FXI, ILF, EWZ and EWJ are treking lower in response to economic data and investor avoidance. Looking at potential short plays in these country ETFs and others.

Global Mkt

EFA –¬†iShares EAFE Index ETF¬†(click to view)¬†10 Developed Countries making up Europe (66.6%), Australia (8.9%) and Far East (24.5%). (Weighting of fund) Not most balanced, but give indication of global markets.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector has become erratic and volatile relative to tracking every rumor on interest rates and the Fed. The break of support at $63 is in play currently, but we did manage to close back above the $63 mark for now. As seen on the chart some leaders are emerging in the index. I continue to look for where the opportunity in the sector lies, but we will have to be patient and let this play out moving forward.

HST, SPG, BXP and REM all bounced and show some positive upside finally. Looking for each to break through resistance level to continue the upside leadership.

Real Estate IYR

7) Global Fixed Income:

Sector Summary: Bounced off the lows and trending sideways. Any positions are for the dividend play only.

  • PAFCX – 1% dividend. Trending sidways and testing the bottom of the range? Money market alternative with volatility.
  • PICB – 3.1% dividend. 27.80 support and bounced. $28.70 entry. Hit entry and adjusted stop to the entry. zero risk trade on dividend. This a dividend play, hold the stop at break-even and see how it plays out from here.
  • EMB – 4.5% dividend yield. Looking for bottom? Move above $109 is of interest to own the position.
  • PCY – current dividend yield is 4.8%. Trading lower. Looking for bottom and move above the $27.20 mark.

Watch and play according to your risk tolerance on any position taken. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your risk will limit the downside losses.¬†