Looking at the asset classes for leadership

Market Story & Outlook:

Current Story of the market remains positive outlook relative to modest growth of 2-3% and positive earnings built on share buy backs by corporations and stagnant wages. While the latter part of that comment is a stab and what we are doing to get the earnings it is also a statement that the consumer is unable to drive the economy as it does when wages are rising and unemployment is low. We will have to let that part of the story unfold over time and determine what impact it will or will not have.

Crude oil is continues to a disruption as prices decline below the $80 level. A good old fashion price war between OPEC and the rest of the world to determine who can out last who at lower prices. The worries overlap into the job creation component of the equation as it has been the most active sector in the US for job growth. Take that away and the picture gets even cloudier on the outlook.

Retail as we head into the holiday season is another sector we want to see good things from. The earnings started today with Macy’s reporting better than expected numbers bumping the sector better than 1.5%. This is one sector that could help going forward with some key leadership if the consumer shows up for the holiday season.

The Fed still wants to engineer a positive ending for the global markets, US markets, bond markets and every other interested market. It just isn’t going to happen that way and the sooner they rip the band-aide off the sooner the healing process will begin. Still looking for the hike in interest rates in the US, but it has been slowed on belief the Fed will delay until the second half of 2015.

Each week it is good to take a step back and look at the broad view of the market. This allows you to dig into the asset classes of interest and know which to avoid. The current market cycle remains US driven. Simply put the US markets are driving the bulk of the profits and currently offer the best risk/reward relative to the investment markets overall. For that reason we remain cool towards investing outside the US, but continue to look for the opportunities throughout the world as we have seen a move higher in some of the country ETFs. Below we briefly discuss each of the seven asset classes in reference to the scatter graphs using Telechart 2000 software. You can watch a quick video here on using our desktop within their software or email Don@JimsNotes.com for more information.

Charting the 7 Asset Classes:

As you can see on the chart below the US stocks have been leading the move to the upside of the last low or pivot point on October 15th. The chart of the seven asset classes reflect what I stated above about the US markets continue to lead the upside. For now all things are good relative to the upside working higher for stocks and bonds are working lower as interest rate rise modestly. Key points outlined below.

7 Assest Classes

Points of Interest:

  1. US stocks have bounced off the low on October 15th and essentially completed a ‘V’ bottom from the correction and hit new highs.
  2. Treasury bonds continue to move opposite US stocks showing a normal market flow.
  3. Commodities are struggling against the dollar and demand issues. There has been some movement in part of the sector which are noted below in the section for commodities.
  4. REITs moved higher, but have started a move sideways with some topping signs short term..
  5. The EAFE index is tagging along with the US markets, but has turned sideways as well of late.
  6. Emerging Markets continue to struggle relative to the strong dollar and weak commodities.
  7. US dollar is leading the upside move in currencies.

1) US Equities:

Using the latest pivot point (October 15th)¬†The overall trend is up for the broad index. The leadership is coming from healthcare and industrials with financials and technology gaining some upside ground the last week of trading. The rotation in leadership has helped the index push back to previous highs and complete the ‘V’ bottom that has been in play the last two month. Earnings remain a driver as well as the Fed.¬†Watch, manage your risk with stops and look for other sectors to join in the push higher.

SP500Scatter

Points of Interest:

  1. Healthcare is driving, but biotech has stalled on the upside leaving some question marks currently. There is some topping in the sector and worth our attention moving forward to protect the gain in the move. Be patient as this unfolds.
  2. Energy moved lower on the downside move in crude oil prices. The break below the $80 level is not helping short term as it has injected some uncertainty into the broad markets as a result. Building negative momentum short term.
  3. Financials made a renewed move to the upside and are assisting in the current move higher of the broad index.
  4. Technology is waffling as the semiconductors and other components stall in momentum. The internet and social media sectors are finding some short term interest from buyers. Still like the push higher as it has helped the broader index move higher.
  5. Utilities came under fire on concerns of valuations and interest rates. Watch the downside risk short term.
  6. Consumer staples are moving higher and gaining strength as money rotates to the defensive sector.
  7. Retail made a move on earnings season starting positive, watch for the follow through from data

2) Currency:

We are working off the June 30th bottom for the dollar we can see the solid uptrend for the dollar. After some short term test relative to the buck, it has continued to be the clear leader on the currency currently.

Currency

Points of Interest:

  1. The renewed move higher for the buck has all the other currencies heading lower. Some modest stall again the last few days, but all is still positive for the buck.

3)  Bond/Fixed Income:

You can see on the graph below the Vanguard Total Bond ETF has almost flatlined since the last pivot point on September 17th. Because of the ‘V’ bottom move in stocks the bonds show the tale of two cities. The Treasury bonds move higher as fear rose and the convertible and high yield bonds moved lower. Risk/reward is the primary mover when this happens, but there was the fear of higher rates behind the move. For now Fixed income has settled, but the Fed¬†news and actions will keep bond investors on their toes.

Bonds

Points of Interest:

  1. Treasury bonds have moved lower as stocks have bounced higher. Watch interest rate movement relative to Treasury bonds going forward. A move higher will push the value of the bond lower.
  2. Preferred stocks (PFF) have picked up as the markets bounce back and the dividend yields become attractive with interest rate risk on the back burner and a positive outlook for stocks currently.
  3. High Yield bonds bounced back along with stocks after selling lower. I would look to exit these positions as the values hit back at previous levels.
  4. Utilities will move lower if yields creep higher… note the move at end of the chart (green line) stops are a much here.
  5. REITs will move lower as well if yields move higher. Tighten your stops and protect your gains.

4) Commodities:

The commodity index (DBC) made a second pivot lower on September 1st and has not looked back since. It is important to note the bottoming attempting to take root the last two weeks failed and the downside resumed. This has been a result of the dollar being stronger and the demand being lower. Until this reverses near term the downside remains in play and not much on the horizon that would change this direction other than for a trade.

Points of Interest:

  1. Crude oil has moved front and center as the commodity broke support at the $80 level and has put investors on edge relative to the impact for the stock sector. Look for the commodity to hold the $75 level as support near term. Patience could be rewarded with a upside trade as this bottoms.
  2. Natural Gas has moved up nicely off the lows and is facing some near term selling back to support. Cold winter expected and that favors the commodity short term. Watch and manage any trades in the commodity or stocks.
  3. Gold broke support at $114.50 last week and the downside remains in play with some consolidating near the lows. Watch for how this unfolds it may offer some trading opportunities. Silver is the downside leader.
  4. The water index (FIW) has continued the reversal and shifting trend higher. Moved back to the previous high at $34.

Commodity

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

5) Global Markets: 

The global markets have shifted in conjunction with the US markets at least as far as the EAFE index is concerned. As we can define on the chart the big move in Japan is testing lower following the stimulus surprise. This is still a weak asset class and the leadership is not present. It is content to follow the US equity markets for now. Still willing to practice patience as this unfolds.

Points of Interest:

  1. Japan (EWJ) spiked to highs on the stimulus. Now needs to find its way and determine how much of an impact that will have short term. Easy come, easy go.
  2. Emerging markets bounced, but failed to confirm and is testing lower again .
  3. Europe offers the best outlook short term as it is doing better economically short term, but not enough to change the short term outlook.
  4. China flirting with a move higher, but has failed to follow through to this point. Upside trade works if we get some follow through.
  5. Canada has moved slightly higher, but still no convinced the move gains traction.

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):

The REITs moved off the October 7th low and started a new upside move. The upside remains in play, but the one concern is interest rates and any hike would have a short term impact. For now positive and continues to move higher.

Points of Interest:

  1. Plenty of reversion to the mean as the sector worries about interest rates and investor momentum. Stocks are offering a better opportunity if you can stomach the risk.
  2. MLPs bounced back from the sharp selling, but have equal risk to manage as energy commodities struggle for price stability. The sector is heavily influenced by the energy sector and should be watched as that is facing pricing pressure short term.
  3. Mortgage REITs have been moving sideways in light of interest rates and threat of moving higher? Worth watching.

Real Estate IYR

7) Global Fixed Income:

Using the Vanguard Total International Bond Index Fund as a bench mark we find it is still leading over the higher risk assets in the sector.

Points of Interest:

  1. VTIFX – Flat lining as the interest rates globally flatten out, but still leading component in our survey.
  2. PAFCX Р1% dividend. Traded down nearly 4% the last month and starting to base again. Still not interested in risk.
  3. PICB Р3.1% dividend. Still too much risk int he fund for the trade as downside in play.
  4. EMB – 4.5% dividend yield. Bounce off the lows first of October and has moved up nicely short term. Testing currently as emerging markets struggle against the dollar.
  5. PCY Рcurrent dividend yield is 4.8%. Bounced as well off the lows the first of October and upside move in play. Testing the trend micro term.

Intl fixed income

Watch and trade¬†according to your risk tolerance. 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.