Friday Erases Losses From the Week?

The talk all week in the media revolved around the number of days the index had been down. The challenge is they were negative, but the drop only amounted to a 1.2% drop on the close Thursday. Friday’s move essentially erased that in one day. The fear was the FOMC action relative to stimulus. With the jobs report not being an upside blowout the buyers stepped back in and the rest can be seen on the chart. Speculation is a beautiful thing when it goes in your favor… however, when the words are not met with actions the results is a relief bounce. That was Friday.
The trends remain on the upside for the broad markets overall. The leadership from the financials, healthcare, consumer services and industrials remain. Technology posted another solid week to put itself among the leaders. The semiconductors finally making a move to a new high from the consolidation pattern over the last eight weeks. Global markets bounced back with the US. For now we can say all is well and the bias remains with the buyers. The coming week will be one of decision time. Do we go higher with the holiday spirit or do we test lower again on fear of the stimulus cuts? We will see the key is to remain patient and let this all unfold.
The trend is higher and we always stick with the trend and manage our exits accordingly.
State of the Market:

The S&P 500 index posted five consecutive down days losing 1.2%! The headlines read as if they were down 10%. The bounce on Friday essentially erased the move lower. Support at the 30 DMA held and the upside remains in play. The volatility will stay until the FOMC meeting offers some clarity relative to the cuts in stimulus. The index closes back above the 1800 mark and closes even on the week.  The trend is higher and we go with the trend for now. Looking to see how the index responds to Friday.

The NASDAQ tested the 4000 mark and closed  at 4062 up 3 points for the week. This puts the composite remains in a leadership role relative to the upside momentum with the other indexes, after a small test this week. Upside remains in play. Be respective of the extended move, but take what the market gives.

The Dow was attempting to make a move above the next level of  16,100 mark, tested support at the 13,800 level and the 30 DMA instead. This test ended with a bounce on Friday, but still closed down 66 points for the week and back above the 16,000 mark.  That is worth our attention to start the trading week to see what if any response investors have.

Russell 2000 Small Cap index led the test lower with the 30 DMA being support. The index ended down 11 points or 1% to close the week. Watch to see if the leadership role returns or the leadership on the downside take root.

The volatility index started to move higher, but the move on Friday erased any ideas of the downside taking over the short term trend… at least for now. Watch the VIX this week for some insight to investors beliefs as this all unfolds.

Economic Data & Outlook:

The economy remains steady with some solid improvement thus far in November. The Friday jobs report brought some buyers back to the table as the numbers were better than expected, but too hot as to push the Fed into action at the next FOMC meeting. There were some troublesome numbers in the data this past week with the build in inventories pushing Q3 GDP to 3.6%. The air is likely to deflate in that balloon with the holiday sales pushing inventories lower. Auto inventory build up was a negative for that sector. The new home sales were not believable and the housing sector didn’t get any benefit we will have to wait for next months report to see if they return to normal levels. Overall the trend in the data remains the same… improving, but no real growth to speak of with confidence.

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

Economic Events & Calendar

Sectors to Watch:

  1. NASDAQ remains in the best shape of the major indexes. It remains in a set up to continue the uptrend. 10 DMA is holding and the Semiconductors broke to new high and in position to lead the index to the upside. Biotech bounced following a testing of support and remains a key sector in the index as well. Move above $86 for QQQ would be a positive short term.
  2. Small Caps (IWM) tested back to the 30 DMA and reversed with a solid bounce.  Held the $111.30 support and in position to continue the uptrend. Still looking for the upside to continue off the test lower. $112.25 level was point to add to position.
  3. Mid Cap (IJH) never made the break higher and tested the $128.50 support. The move on Friday did put the index back at the high of the current range and in position to break higher short term. Still like the upside trade and will adjust our entry as this plays out.
  4. Semiconductors (SOXX) gapped higher at the open Friday and hit the entry point on the upside. Look for a test or confirmation move on Monday. Patience is a virtue.
  5. Financials (XLF) the give back of the break higher has come on worry. Imagine with government wanting to fix the problem that investors would be worried about the outcome to earnings. The pinata of the financial crisis that continues five year later. The renewed talk about increasing the demands of too big to fail is spooking the sector again. Nice bounce on Friday and still watching for a follow through on the upside.
  6. Healthcare (XLV) is still in strong uptrend, but the move lower was of interest. $54.80 was the level that I wanted to hold and add to the position. The test was closed to $54.20, but it did bounce back above the 10 DMA. Uptrend still intact and looking for some clarity near term.
  7. Real Estate REITs (IYR) broke support at the $63, tested to $62, held and bounced back above $63 to close the week. This is a sector for the patient investor with a longer term outlook. The dividend of 4% plus the potential upside longer term is worth watching. SRS is a way to hedge the position or trade the downside as this plays out.
  8. Retail (XRT) didn’t bounce on Friday as the retail remains under pressure from the sales results for the start of the holiday season. Speculation is again in the headlines. Tested back to the first level of support near $86.25 and holding. The big question, like the rest of the market, can it follow through on the upside? I am still of the belief the individual stocks are where the winners will reside despite the overall data. You will have to do some work to dig and find the best opportunities.
  9. Crude oil (OIL) – Another sector where speculation is driving price. The outlook for increased demand pushes the price back towards $98 and resistance. Downtrend off the September high was broken, moved through the top of the trading range/base also… must be a trend reversal? Technically yes, but we have to watch how this bounce plays out going forward. Moved to $22.90ish resistance and in position to test or continue higher. As long as the speculation story has legs the upside is in play.
  10. Bonds continue to be at risk of interest rate creeping higher as the Fed moves towards cuts in stimulus, at least that is the analyst opinion in play. Yields made a move higher and the resistance at 3.93% is in play. If the 30 year yield gets through this level our target of 4% by year end is clearly in view. We have a position in TBT in response to this move and if you own bonds you can hedge your position with this ETF. Of note: BND had a head-and-shoulder pattern forming and a below below $80.40 and this offers more evidence on the downside going forward.

The models are updated and with our short term view dominating the process currently we are heavy in cash as a result of hitting stops and managing our discipline. Last week was filled with news that has put stocks in a tug-o-war of the data versus any actions to be taken by the Fed in light of the data. Throw in the holiday trend play and we have seen ups and downs in a shallow range, making trading tough short term. My focus is to watch the news/events as they unfold and the reaction from investors, then take what the market offers. We are looking for the upside to continue as we move forward. 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 on the upside. The US markets continue to be the leader on the upside. The EAFE index has joined in mirroring the upside moves and other have been a volatile mess with the downside the trend.

Real Estate (IYR) has attempted to find a bottom, US markets continue to lead the upside, bonds are challenged by the Fed stimulus cuts… maybe, Oil and natural gas bounce in commodities, global bonds are pushing sideways at best, US bonds are rattled by the Fed and a short play, and global equities are still playing follow the leader.

Asset Classes

1) US Equities:

Looking at our sector rotation chart below with the bounce on November 20th as a pivot point, the sectors have been trading in step with the index. The sectors trading above the index are consumer services, industrials, healthcare and technology don’t really qualify as leadership, but technology is showing the most promise short term. The “test” lower (1.2%) over five days ended on Friday with a bounce of 1.1% essentially erasing the five day “test”.  This remains a nervous market overall. The fear of the stimulus cuts is hampering the positives from the Economic data improving in November. Take it one day at a time and keep your stops in place. Technical data is driving the entries and exits for now. Until which time the emotions of the Fed cloud are removed the fundamentals are talking points to the media.

500 Scatter Rot

2) Currency:

The dollar is drifting lower on the Yellen/Fed effect and uncertainty in 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.

currency

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 the next FOMC meeting. Yields continued higher to close at 3.91% on the week. This is putting too much downside pressure on bonds and interest sensitive assets to want to venture into the asset class at this point for me.

Bonds

Treasury Bonds – TLT or IEF traded last week lower and moved off the low on Friday to close the week. 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 on the recent 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 put stops at $45.50. The trade has now become a risk free dividend of 3.6%.

4) Commodities – The commodities continue to work lower and sideways, but as the chart shows the pivot point on November 20th is holding slightly higher. Last week natural gas (UNG) made a move off the low and it followed through with a break higher this week. Nice move to lead the commodities. Crude oil (OIL) has also bounced off the lows to challenge the $98 resistance level. Gasoline (UGA) has flattened out after a big jump higher. The balance of the sector is not in good shape with precious metals, base metals and agriculture struggling to find any buyers. The set ups here are trades at best and not for the faint of heart.

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 until things change economically that will remain true. All the country ETFs bounced along with the US move and fell with the US markets. No real leadership in the global markets except for the recent surge in China (FXI), but that has now turned sideways. Europe (IEV) is trading in unison with the US, but looking for a turn higher with all the analyst talk being positive towards the country. We are looking for some separation, but until the volatility and follow the leader mentality changes I am willing to stay out.

Emerging Markets (EEM) continue to be volatile, but India (PIN) stands out with a solid move to the upside.

Germany (EWG) was leading among the European countries, but stalled this week. Watch for some opportunities there. Taiwan (EWT) is attempting to break higher from some consolidation and Mexico (EWW) is making a move higher as well.

country rotation

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 on Friday . As seen on the chart below EQR jumped into the lead after reversing course, HST and SPG both remain leaders as well. the Bottom Reversal is setting up for a trade, but I would like the see the longer term outlook improve as well going forward. The set ups are trades, but this is a dividend driven sector. Balance the risk accordingly.

IYR

7) Global Fixed Income:

Sector Summary: Bounced off the lows and trending sideways. No interest currently.

  • 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 reversal?
  • PCY – current dividend yield is 4.8%. Trading lower. Looking for bottom reversal.

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.