Market Break Higher to End Solid Week

The positive vibes from the jobs report last week continued this week in trading as the markets move higher with the S&P 500 index pushing closer to our target of 1800. The question on everyone’s lips that I am hearing, “why?” On Friday I had the pleasure of speaking at the AAII National Conference in Orlando and the consensus is concern about the current levels we have reach in the broad indexes. Thus, we continue our theme of taking what the market gives and managing our risk as we go forward. This is resulting in some choppy trading, but the downside risk is alive and well.

The latest move on the Affordable Healthcare Act is keeping the media busy with how it will all come out. The delay is seen as a positive by some economist to allow investors more discretionary income by not having the impact of higher cost or out of pocket expenses. This will be one of the key stories heading into 2014.

With all three major indexes breaking out to new highs last week we have to be on guard short term. There is no volatility (VIX) to speak of in the broad markets and that is a concern, as investors are becoming less and less concern with risk. The voiced opinions stated above are the opposite of the actions being taken in the markets. That is the norm, truth be told, investors have a tendency to say one thing and their actions show different convictions. Don’t allow the emotions of the market to dictate yours… stay focused and disciplined.

State of the Market:

The S&P 500 index added twenty-nine points this week versus the eleven added the last two weeks. Our upside target remains 1800 and our support or test zone is 1657-1730, should the sellers make another attempt to push the markets lower. Trend is higher and we go with the trend for now.

The NASDAQ continued upward clearing the previous highs at 3965 and closing  3922. This puts the composite back in the flow of the upside momentum with the other indexes, after lagging the last couple of week. Upside is in play.

The Dow moved above the 15,700 resistance and has not looked back closing at 15,961 on Friday. Raise stops on plays in DIA and continue to monitor the short term risk

Russell 2000 Small Cap index showed the most sluggishness of the major indexes and we are looking for a move back above the previous highs. Friday made the move above the 110.50 mark on IWM. Watch for confirmation and a continuation of the move higher.

There is plenty of talk about the current level of the market and the impact on any stimulus cuts in December. Until the Fed actually acts investor activity is nothing more than speculation looking for validation. Be patient and disciplined in your approach to the market near term. Remember, cash is a sector.

Economic Data & Outlook:

The economy is showing what has come to be accepted as normal – slow growth. I would have to say the data supports what we have been seeing with steady growth and some modest hiccups along the way. The numbers remain positive and the Q3 GDP was better than expected and all seems to be going the way of the Fed as they look to cut back on the stimulus of $85 billion per month potentially as soon as December.

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

Economic Events & Calendar

Sectors to Watch:

  1. Financials have taken the long way back to the $20.85 resistance again this week. They finally made the break above the entry on Thursday and added to the S&P 500 Model. Still have to manage the risk and watch to see how it follow through to start the week. Sector Rotation Model as well.
  2. The two interest sensitive sectors to watch this week were utilities and telecom. Both suffered on the rise in yield of Treasury bonds.  They are not attractive as shorts and we hit our stops on both during the volatility. XLU broke higher on the bounce off the selling and Telecom remains flat.
  3. Emerging Markets are worried about the Federal Reserve cutting stimulus and had the sector moving lower. Wednesday the ETF tested lower and managed to rally back to positive territory? Our question then was if this is the beginning of a bounce or just noise? Bounce is the answer, and it gave a trade signal as the buyers were willing to put money to work in the sector. Looking foran initial move to $42 as we closed on the 200 DMA tonight. ONLY ETF Watch List.
  4. Dollar (UUP) made a move higher above the $21.75 resistance as other currency reacts to the Fed on stimulus. Watching to see if the current test builds or the upside continues short term. YCS moving higher on the short yen trade.
  5. Gold offered a short signal on Friday with support at $121.75 on GLD. The test of the support at $121.75 held and it has bounced. Watch to see if the downside continues to trade towards the $114 level or this bounce is something more to produce on the upside.
  6. Real Estate (IYR) has been the big negative currently as higher interest rate pressure the sector. After making a move above the 200 DMA the sector sold back to support at $63.15. Got the bounce off the support on Wednesday and nice follow through on Thursday. Watching for an entry and trade on the ONLY ETF Model.
  7. Gasoline (UGA) is moving higher off the bottom reversal. The ETF is thinly traded and makes it difficult to recommend. The first entry was $56 and $57.50 is the next entry level which was cleared Thursday. Alternative to the ETF is the refiners VLO, PSX or TSO.
  8. Oil & Gas exploration ETF XOP is attempting to reverse off the lows or support. $69.50 is an attractive entry point for the trade. XLE is in position to break above resistance as well at $87.20.

The models still face the challenge of dealing with the buyers versus the sellers. ¬†The AAII sentiment report shows the bulls at excessive levels. The market has every reason to adjust, test, pullback, sell off, or whatever downside phrase you like, but it hasn’t manage to do so to this point. The last week it made a solid move above resistance and showed more positive on the upside. We are still adding 1/2 position sizes with the entries hit as the risk remains elevated. Manage your risk on trades more aggressively and monitor your longer term holdings.

Breaking Down the 7 Asset Classes:

As you can see on the Scatter Chart, the latest low posted on October 9th shows the move higher in the US markets as well as the EAFE index. However, at the end of the chart you can see the US market turn higher again along with the EAFE index. Emerging markets made a turn back to the upside follow the comments from Yellen on stimulus. This will be one of the deciding factors for the sector moving forward. The dollar turned higher, but has stalled on the FOMC comments this week. Watching the uptick from this week as we go forward. This is still a vertical market relative to the US leading the way.

Asset Classes

1) US Equities:

Looking at our sector rotation chart below with the October 9th pivot point, the sectors have been trading in step with the index, except for Utilities, but they did managed to turn back to the upside this week. The leadership is the index itself as the sectors continue to be clustered and trading in unison. We will hold and see how this progresses in the coming week.

500 Scatter Rot

2) Currency:

The dollar is drifting lower on the Yellen effect and stimulus. The yen made a move lower this week and reinforced the short yen trade with YCS. The ECB interest rate cut last week also helped the dollar against the euro, the rumors of  the ECB stimulus starting similar to the US worries investors for now? Watch to see if the low and reversal last week is a return to the upside or just a tired bounce. UUP moved above the $21.75 resistance and continue to hold that level for now.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

Sector Summary:

The sector was moving sideways, but thanks to the FOMC meeting they started heading lower on the rumor of stimulus cuts as rates rise. The chart below shows the reversal in the fixed income or interest sensitive assets off the selling, but all this is validating is the lack of direction or understanding short term concerning Fed’s future actions. Real estate sold lower and managed a small bounce to end the week. Convertible bonds made a bounce as well, but there are still too many questions hanging over the sector.

Bonds

Treasury Bonds РTLT or IEF found a new low last week, but remains a big question mark. No positions currently, too much volatility for my taste in owning bonds.

High Yield Bonds¬†– HYG = 6.4% yield. Bouncing off the $91.25 support and held to close back above the 200 DMA. 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 РLQD = 3.9% yield. No positions currently. bounced on yield move this week.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Moving lower again.

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 put stops at $45.50. Not much in terms of reaction to the Fed.

4) Commodities –¬†The chart below shows that commodities continue to work sideways. Sugar (SGG) continues to move lower, but gasoline (UGA) and natural gas (UNG) have turned higher. This remains a trading sector with no real trend to speak of throughout the sector.

Commodities Rotation Chart:

DBC rotat

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. No real leadership in the global markets as the picture remains suspect at best. Europe bounced to end the week and reverse the drift lower. Trading sector only as the risk remains too high.

EFA 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) РThe sector has become erratic and volatile relative to tracking every rumor on interest rates and the Fed. Covered our short on the support reversal and now looking to see if the upside gains any momentum.

Sector Summary:

  • IYR¬†– Current dividend is 4%. Short the sector above.
  • RWO¬†–¬†SPDR Global Real Estate ETF¬†– Not willing to deal with this volatility currently. 4.7% dividend on the ETF worth watching for play. Uptrend is in play.

7) Global Fixed Income:

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

  • PAFCX – 1% dividend. Trending lower again and at the 50 DMA.
  • 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. Negative reaction to the Fed. this is 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.

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.¬†