The economy remains steady with some solid improvements in November. That is getting lost in the stimulus worries with the Fed. Retail sales were good for November, but the worries overshadowed the results. PPI was in line for November and the risk of inflation remains muted. Weekly jobless claims rose well above expectations, but was written off relative to the reporting software. Overall the economic data still points to a 2% GDP which is turning into the norm. Next week is all about the FOMC meeting. There will be plenty of housing data as well to digest relative to the health of that sector and the impact of higher interest rates.
The calendar link below will take you to the data expectations for next week.
Sectors to Watch:
- S&P 500 index closed below the 1800 level again and the question now is can it hold support at 1775 mark or does it move lower? The fear factor is in play and will determine the near term outcome. Is this a short set up for the index? Technically, yes. How much downside is the primary question and the risk of the trade is worth evaluating. Watching SDS at $32.20 entry. There were upside leaders in the index on the week with Adobe up 9.5%, Scripps Network was up 9.1%, Sysco was up 5.7% all on earnings reports. WYNN gained 5% on the week following through on a break higher from a micro downtrend line. Watch to see how this week plays out relative to the downside and the FOMC meeting.
- NASDAQ closed at 4000 after bouncing off the near term support at 3993. The same risk is facing this major index, the FOMC meeting. biotech, semiconductors, and large cap stocks are the sectors moving the index overall. Scanning the top 100 stocks by performance on the week the list is full on biotech and technology stocks, but most are micro or small cap stocks. The large cap or NASDAQ 100 list will have more influence on the index overall. Apple was down nearly 1% on Friday and broke support near the current high. This is where my attention is currently. Facebook was the winner on the week up 11.2% on the news of being added to the S&P 500 index. ADBE, TSLA, WYNN, NFLX and MU all posted solid gains as well on the week.
- Small Caps Russell 2000 Index tested the 50 DMA as support and caught a lot of attention on the week. The short term trendline is now in play and a break of the support at both points would be a clear short signal for the index going forward. Relative Strength moved into negative territory and all data points south. This is where you have to patient and know that an event like the FOMC meeting could change all of the negative sentiment.
- Healthcare (XLV), Financials (XLF), Semiconductors (SMH), Industrails (XLI), Consumer Staples (XLP), Energy (XLE), and others are sitting at decision points. Do they break lower? If so, is the only catalyst the Fed? Are there other influences baring on stocks? What will be the catalyst to the micro trend direction? There is plenty to digest and deal with going forward. The challenge comes in being patient and letting the trend building events take place. The FOMC is an event that can be short term in reaction or it could build the downtrend based on the Feds outlook to curb stimulus over time versus short term.This is all why patience and playing some gold makes total sense to me. Don’t chase the market or attempt to speculate on what you believe it will do. Let it gain clarity and the trend develop then take what it gives.
- Commodities (DBC) the ETF has turned lower as oil and other commodities shifted directions on the Fed speculations. However, natural gas (UNG) has continued to spike higher. UGA and UHN moved lower as well. This remains a questionable and speculative sector looking forward.
- The global markets look similar to the US charts as they are sitting on support with some breaking lower last week. EFA, IEV and EWG all broke support and are poised to move lower if the US markets have a negative reaction to the FOMC meeting. Emerging markets are near support as well on the downside.
- Bottom line… Watching the FOMC meeting. It will offer some direction relative to the short term. If the Fed is cooperative they will give some insight on how they will approach the stimulus cuts. The 85 billion dollars is not likely to go away in one big chop. It would be easier than the slow death they will likely build into the stimulus cuts. Too much to consider and not enough clarity offered by the Fed. Thus, it becomes the event of the week and maybe next year.
The models are updated and our short term view is dominating the process currently. This week continue to focus on and speculate about the FOMC meeting next week. The news has put stocks in a tug-o-war of the cut versus no cuts in stimulus crowds. On Wednesday the cut side got the upper hand and more selling in the broad markets was the result. This triggered some stops and brought others close. My focus remains watching the events as they unfold and the reaction from investors, then take what the market offers. The pattern list is where we are posting most trades short term as a result of the current market environment. Technical trades and avoidance of speculation on news. We will not likely add much in front of the FOMC meeting. However, we will evaluate how to play the other side of the announcement. 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, but we have turned sideways and this week the markets turned lower. How this plays out next week is really a subject of the FOMC meeting. All eyes are on the Fed. Do they cut stimulus going forward? If so, how much? etc. etc. etc. The US markets continue to be the leader as we saw this week the rest of the charts are following along. The EAFE index has joined in mirroring the upside moves and other have been a volatile mess with the downside the trend. The key for now is patience. Anything more is speculation. One day at a time.
1) US Equities:
Looking at our sector rotation chart below with the bounce on November 20th as a pivot point. Monday December 9th, this week the index took a pivot lower. The index can’t find direction in light of the FOMC meeting next week and the potential cuts to stimulus on the horizon. The leaders made a reversal with technology, consumer services, healthcare, financials and industrials all move back near the index itself. That is not a good sign looking forward. Downside opportunities are building as trades with key support levels now in play.
That said, this all comes down to what the Fed does on Wednesday. I hate when events become this big relative to the markets overall. The lack of clarity creates emotional reactions in the charts. The best play is to remain defensive, keep your stops in place and let this play out. There will be some opportunities following the announcement. Remember, basing a trade on the outcome of an event is like betting on the winner of the Superbowl or Red at the Roulette table in Vegas.
The dollar is drifting lower with the uncertainty in Fed stimulus. The yen made a continued move lower this week and reinforced the short yen trade with YCS. The euro is making progress on the upside as it gains against the dollar on talks of an improving economic picture in Europe. UUP is trading lower and until the Fed cuts stimulus that is likely to be the direction of choice.
3) Tracking the Bond/Fixed Income Sectors:
The sector has been pricing in a cut to stimulus for December? This is the big question mark hanging over bonds currently and one that will be addressed shortly by the Fed at next weeks FOMC meeting. Yields were slightly lower on the week closing 3.87% Friday. This is putting too much uncertainty in the bond sector and interest sensitive assets. Willing to wait it out and see how if develops short term.
Treasury Bonds – TLT or IEF are still holding support near the current lows and a break lower would open the short trades again. 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) on the anticipation events with the Fed impacting bond prices.
Corporate Bonds – LQD = 3.9% yield. No positions currently. Volatility on yields moving and not worth the risk.
Municipal Bonds – MUB = 2.9% tax-free yield. No positions currently. Moving lower as money flows continue out of the sector.
Convertible Bonds – CWB = 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 November 20th and we are using that currently to track the upside. The clear winner is natural gas (UNG). The weather in the northeast has sparked a rally in the commodity and it has gone vertical. Nice trade, but I would be extremely cautious short term. The natural gas stocks (FCG) have not followed suit and I would watch the combination for clues going forward.
Copper (JJC) made a move higher of late breaking above the $39.50 resistance point. This could get interesting as well for an upside opportunity. But, like natural gas the stocks have not responded in kind.
Gold reversed after a gap higher earlier in the week. Still watching for any trade opportunities.
Commodities Rotation Chart:
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 that is trading lower. The pivot point at the last high on October 22nd is in play currently. The ten country ETFs are trading lower with the major index. FXI, China had broken higher, but that reversed this week. EWA, Australia accelerated lower and PIN, India reversed to give back gains. Nothing is setting up on the buy side and the short side is nearing break points for potential trades.
IEV, Europe broke short term support and held this week. EPV is the short ETF. EWG, Germany moved lower along with others. Watch to see if the downside plays out short term. Watch for trades on the tables.
Emerging Markets (EEM) continue to be volatile and is approaching support to set up a potential short trade.
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) – The 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 line for two days only to revese. As seen on the chart below they are all tracking lower along with the index. I was hoping things would settle and last weeks bottom reversal would set the tone, but that failed and we are still moving lower. The chart is working on a bottom, but until their is some clarity I will wait and see. A Break below support at $61 on IYR would trigger the short trade again with SRS.
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 lower again, but ready to bounce. 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?
- PCY – current dividend yield is 4.8%. Trading lower. Looking for bottom.
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.