How Do You Spell Relief = BUDGET

The drama is over, the deal is good for 90 days and the speculation on the 2014 elections are in full swing. The free spending, regulation creating, finger pointing politicians are worried they may no get reelected over the recent drama. Not my worry, what they do however, does have an impact on the markets and the reception so far has been positive. All the major indexes have rallied back to new highs, excluding the Dow, and all the talk remains on the positive side. From my view there will always be plenty to worry about relative to the economic picture, spending, the Fed and earnings. For now we will take a deep breath and spend the weekend looking for the best opportunities going forward. The following is my review of the major asset classes and the opportunities that each shows going forward.

State of the Market:

The S&P 500 index closed at 1744 and broke through the top side of the wedge. This could be bullish looking forward, but it also shows the index could be ahead of it self near term. Since hitting the August highs nothing has been normal about this market trend. I would look for a test of the move higher and use that as the entry point for now. 1710 is my target on the test. If we continue higher then we look at adding near the 1740 a third to half position and add later on a test or pullback. Be patient in both directions and look to build the positions with 3-6 month time horizon.

The NASDAQ showed a breakaway gap on Friday on Google’s earnings up 13%. The index is now at 3914 heading higher based on the move last week. The break above 3820 was the opportunity we missed, but there was too much noise or risk around the move for my taste. A test of the current move would provide an opportunity to put money to work short term. We posted QQQ on the pattern trading model and we own a small position there, but still looking to add a position.

Russell 2000 Small Cap index tested the break above resistance and then moved back to the upside. IWM was in play, but we hit our stop and now it is higher. That is the way it goes sometimes. The upside is in play and we will watch for a test or opportunity in the sector going forward. Midcap (IJH) is in the same position on the upside.

The Dow has been a different story for the major index. It did make a move back above the 15,100 level, but it has struggled. The earnings from IBM didn’t help this week and there is plenty of work left to be done. A move back above the 15,425 mark is where we need to go get to short term. The rise tide lifts all boats story may apply here, but not willing to jump in just yet.

There is plenty of talk about it being time to be short the market? While some believe that is the play, I am not convinced that is going to be the outcome of the current activities. We have to be patient and let the noise and events impacting the market play out and then we will have a clearer picture of what actions to take. Patience remains the best course of action going forward.

As we look towards next weeks trading we have to be mindful of all that is still ahead! There are two potential drivers, first is earnings. As we saw last week a stock like IBM or Google can have significant impact on the broad market indexes. Thus, we have to be mindful of what is ahead and the potential impact on the sector and the broad market indexes. Second, economic data is going to be released for those numbers that were delayed, and we are only two weeks away from the October data as well as the Q3 GDP reports. Both will offer interesting twists to the current environment. Remember the Fed is still in play as well with the potential cuts to stimulus.

Economic Data & Outlook:

We continue to get limited data points due to the delay of government shutdown. Watch this week as we get back on track with the reports.

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

Economic Events & Calendar

Sector Notes:

  1. The broad market is in rally mode off the budget settlement. I will attempt to rationalize the move or state why it doesn’t make sense. When news and emotions are in control you just go with the trend and pray. We will look to the upside again next week with some checks and balances put in place by traders. Watch the data as discussed above and keep your stops at the risk level you are willing to accept.
  2. Financials (XLF) – The $20.85 mark was recaptured on the bounce to end the week and if we hold look for upside trade in the sector. XLF entry at $29. KBE cleared the $31.45 resistance and offers a entry point if we hold. KRE is in position to break to a new high with entry at $37.55. They have been lagging KIE and IAI.
  3. Real Estate (IYR) The sector has struggled, but finally made a move higher last week. A move above the 200 day moving average would provide an entry point and break higher for the sector.
  4. I will post more on the tables and the trading notes for Monday relative to the sectors overall. Need to do some more digging for the opportunities.

Breaking Down the 7 Asset Classes:

As you can see on the Scatter Chart, since the Jun 24th pivot point, it has been up and down without much in terms of leadership. In early September the Emerging Markets (light blue) made a move to take on some leadership, but since that point emerging markets, the EAFE and the US markets have been leading the way higher. Note the bottom of the chart the Orange (IYR) line is real estate making a solid contribution on the week.

Asset Classes

1) US Equities:

Looking at our sector rotation chart below with the October 9th pivot point, the sectors were trading in step with the index again as the broad markets fail to break away from the one for all mentality. This is not a bad thing, but lends itself to just buying the broad index or the leading stocks. Telecom remains one of the bright spots with a break higher along with financials, energy and technology. As we head into the new week of trading looking for defined leadership to emerge.

109 Scatter

2) Currency:

The dollar got crushed by the Fed stimulus addiction, but held some support and continues to move sideways for now. Regardless it is still in a downtrend and not likely to change anytime soon or at least until the Fed stops pumping money into the system.

The other currencies remain sideways with the exception of Brazil (BZF), which made a nice move higher as they continue to make stride in turning their economy around. Other currencies did move up on the settlement of the budget with the dollar getting weaker. No real plays here for now.

currency

3)  Tracking the Bond/Fixed Income Sectors:

Sector Summary:

The sector has turned sideways with a boost on the settlement in Washington to the sectors overall. Once the debt ceiling and budget were out of the headlines bonds rose as the Fed decision on the stimulus (9/18) came back into play. Be patient and let any opportunity develop. Note the big jump in the REIT ETF IYR as rates settled along with REM the mortgage REIT ETF.

Bonds

Treasury Bonds – TLT or IEF hitting resistance as yields flatten out. No positions currently,  but worth watching if the upside continues through $107 on TLT.

High Yield Bonds – HYG = 6.4% yield. Bouncing off the $91.25 support and may have some interest if we can hold steady and manage the risk of the trade short term. Gave an entry signal at $92.30 and moved above the 200 DMA on Friday. Don’t own the bonds, but the trade has played out nicely on the upside… stop at break-even on the trade.

Corporate Bonds – LQD = 3.9% yield. No positions currently. Broke higher on the resolution to the budget with entry at $113.75. I would have a stop at break-even on any position short term.

Municipal Bonds – MUB = 2.9% tax-free yield. No positions currently. No holding currently. Bouncing off the 50 DMA and holding short term. Still no interested in a position currently risk remains high.

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.

***Fixed annuities have finally returned to the 3% guarantee mark (five years). The best five year CD currently is 2.1%. As these yields grow they will attract more money. I view that as a positive for stability in the markets overall.

4) Commodities – The chart below shows the progress of the sector since the high on June 19th and it is essentially sideways with specific components showing volatility on either side of neutral. In some cases that has been the same commodity. From my perspective this is a commodity picking and trading sector for now. The outlook isn’t changing for now and if you are going to make money it will be from short term trade setups and they will come with their own degree of risk.

Gold (GLD) made an interesting gap higher on Thursday? It held for the most part on Friday, but I am still not convinced it will hold this level going forward. Watching for a trading range to develop of $123.50-128.50. If we clear the 50 DMA on the upside this gets interesting. For now watch and see how it unfolds.

Natural Gas (UNG) made a solid move to the upside, but stalled at resistance of $19.75.

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. This week they moved higher along with the US markets in response to the budget deal. EFA, IEV, and EWA made solid moves to the upside. EWZ and PIN continued their respective recoveries in relationship to their country outlook improving economically. Overall I expect the global markets to continue to trade in unison with the US for now. Thus, any trades in these countries should be done with an outlook of the how the US markets will perform going forward.

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 bounced on the Fed decision and has tested back on concerns in the markets overall.  With the budget risk behind and interest rates moving lower it is acting as a catalyst for the sector. The move back to the resistance of the 200 DMA is in play. The break above the $65.25 level was the entry, but a follow through will give an additional signal to add to the sector on the upside.  RWO is the international Real Estate fund and it is moving higher as well.

REM – Mortgage REIT ETF is moving on the upside as well. The fund cleared the $12.15 resistance and a move to $12.80 is the first target and from there it will depend on interest rates and the housing sector.

Sector Summary:

  • IYR – Found a bottom? Current dividend is 4%. No positions.
  • RWO – SPDR Global Real Estate ETF – Trended lower and bounced off support near the $41.75 mark. Some resistance at the 20 day moving average? Dividend is currently 4.7%.

7) Global Fixed Income:

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

  • PAFCX – 1% dividend. Trending lower, but bounced off the $10.80 mark and going higher now. $11.20 entry point on upside play. Hit entry and moving higher for now.
  • PICB – 3.1% dividend. 27.80 support and bounce above $28.70 trade opportunity. Hit entry and adjusted stop to the entry. zero risk trade on dividend.
  • EMB – 4.5% dividend yield. Bounced with the Fed decision. Testing with the emerging markets moving. Hit the entry at $111 and held. Watch manage your risk moving forward.
  • PCY – current dividend yield is 4.8%. Possible trade above the $27.70 level. Got the move and looking for the upside to hold with stop at $27.20.

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.