Market Snaps Back From Early Week Selling

This was a week of testing for the broad markets. We started the week with the sellers attempting to gain control in the fight for market direction. However, the buyers weren’t willing to relinquish control as they stepped in to push the broad I indexes back near the previous highs to close the week. Why the shift in momentum? Simply a factor of economic data, anticipation of continued accommodation from the Fed, and the FOMC minutes put in perspective what actions the Fed will deploy moving forward. Bottom line… just enough optimism to keep the buyers engaged.
Yellen was approved by the Senate Finance committee and will likely be approved as the new head of the Federal Reserve. The biggest question mark will be if she cuts stimulus as Bernanke has wanted early next year or in December. The flood of money has not worked for the economy, but the wealth effect int he upper 1% has benefited from the run in stock prices. This will be one key issue facing investors heading into 2014.
Economic growth is the biggest question we face as a country of investors and workers. GDP remains in the 2% range and we have not seen any real jobs creation to speak of. Investors Business Daily did study that showed since August 2009 temporary jobs have 57% versus 4% for all other categories. If and when the stimulus from the Fed stops, these numbers will show up clearly relative to the economy and in turn the price of stocks. My opinion… this is why the Fed has not let go of the stimulus and they have pegged it to the jobs data.
Enough speculating… let’s look at the numbers for the week.

State of the Market:

The S&P 500 index post seventh week of upside and closes above the 1800 mark and added seven points this week. The upside target was achieved and now we watch the upside. Can it continue or does this start a slide towards support or our test zone of 1657-1730. The trend is higher and we go with the trend for now. Remember this is Thanksgiving week and traditionally the market works its way higher.

The NASDAQ continued upward clearing the previous highs at 3965 and closing  3991. This puts the composite back in the flow of the upside momentum with the other indexes, after lagging for a couple of week. Upside remains in play. volume lighter on the week, but that has not really mattered in this trend.

The Dow moved above the 16,000 mark to keep the uptrend in play. Like the S&P 500 index just another milestone in a market that continues to find reasons to buy. Adjust your stops accordingly and let it go.

Russell 2000 Small Cap index didn’t want to be left out and cleared the high as well. After a couple of sluggish weeks the index is back on the upside move. Friday made the move above the 1120 mark. Watch to see how it follow through this week.

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 when fear rises.

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 with PPI showing low inflation, retail sales up modestly, homes sales up and the one negative was another rise in business inventories. Will the Fed cut back on the stimulus of $85 billion per month potentially as soon as December? Time will tell soon enough.

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

Economic Events & Calendar

Sectors to Watch:

  1. Financials finally broke above the $20.85 resistance and has finally followed through. The leadership is large banks (KBE), but regional banks (KRE) and insurance (KIE) have added to the upside along with the brokers (IAI). The sector leadership has been key to the S&P 500 index breaking above 1800.
  2. Healthcare has been a topic on everyone’s lips. I just finished travel for four days and the topic of choice, in planes, trains and automobiles? Health insurance and the impact of the Affordable Healthcare Act. Let’s just leave it that not everyone is happy. The break above $91 for IHF put the providers back on the buy list as they are climbing on positive outlook. Digging into the ETF shows the best opportunities going forward.
  3. Real Estate REITs remain on the downside, but testing support again at the $63 level on IYR. If it bounces off this level could be good for a trade up to $66.25. A break lower and SRS, short trade remains the play. Worth watch this week.
  4. Biotech (IBB) big break from consolidation pattern to gain 3%. GILD was part of the push, but the sector overall has been is solid uptrend. Look for test and continuation of the move higher. Scanning IBB for insight to the move is worth the trip.
  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. $1200 is my current target and then we will see how it responds from there. This is nothing more than a supply and demand issue. The demand is and has been declining as speculation escapes the sector. Eventually it will bottom and the long opportunity will emerge, but for now not that interested.
  6. Retail is still in an uptrend after testing this week. This is a sector worth scanning for the leadership heading into the holiday season. RAD, at the top of the current trading range. WMT breaking to new high. COST breaking higher from a pennant pattern. AMZN, M, CVS also breaking higher. I like the individual stock picks in the sector for the best upside short term.
  7. Crude oil is hitting resistance near the $95.30 mark. Building a base with the question of moving higher? Or continuing the downside trend? A move above $22.40 on OIL would be of interest on the long side going forward. Gasoline is pushing higher hitting the next level of resistance near $59 on UGA.
  8. It is no mystery that I have not been a fan of gold. Short has been the play for some time now and it isn’t looking much better following last week. GLL is still the fund of choice on the downside play. Goldminers (GDX) is another component of gold that is hurting on the downside. The test of the lows at $22 is worth watching. DUST is short side of the trade should it break lower.
  9. Bonds continue to be at risk of interest rate creeping higher as the Fed pushed towards cuts in stimulus. They did bounce last week on the Yellen effect, but we will have to see if that last versus the stimulus cut threat? Thus, a longer term play with TBF may be in order. Added to the Watch list for Sector Rotation Model.
  10. The dollar bounced and then fell back to end the week. A reverse head-and-shoulder pattern on UUP shows some hope for the upside of the dollar along with the hope of the Fed following though on stimulus cuts. Watch and see how this plays out moving 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. The early selling last week followed by a move back towards the highs is the exact action that keeps us from building larger positions. We have added positions from the watch list. We have added to the watch list. We start the week looking for the upside to continue as we head into the holiday season. We are still adding 1/2 position sizes with the entries hit as the risk remains elevated from our view. 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 last week the shift to selling early in the week produced more in the global markets. The vertical mark stack continues with the US still in a leadership role. China is the one standout on the chart as the data from the reform and hope efforts of the Chinese government results in a rally. Watch to see how that works out. Not willing at this point to add the position in China. The commodities based countries continue to struggle as well currently.

The big question mark for this chart will be stimulus cuts if the arrive in December. The trickle effect to the global economies from the US printing money has been obvious. What happens going forward will be a factor of the Fed and any cuts they produce in the short term.

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. This week we finally get some separation as consumer services, industrials, healthcare and financials take on some leadership. We will watch for a follow through this week to confirm the break above 1800 in the index and the sector to breakaway. The downside in utilities and telecom continue as the interest rate issue comes back midweek. Be patient with the move higher and let the confirmation take root.

500 Scatter Rot

2) Currency:

The dollar is drifting lower on the Yellen effect and stimulus. The yen made a continued move lower this week and reinforced the short yen trade with YCS. The ECB interest rate cut 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 watching to see how it plays from here.

The upside moves to watch this week are BZF, FXS, FXE, FXF, FXB.

The downside moves to watch this week are FXA, YCS, FXC, UUP

currency

3)  Tracking the Bond/Fixed Income Sectors:

The sector looks to be pricing in a cut in stimulus for December? This is the big question mark hanging over bonds currently and one that will be addressed shortly. Yields spiked to 3.93% last week on the belief the Fed will cut stimulus in December. The 3.83% close on Friday showed some calming in the sector, but this issue won’t be over until the meeting in December. Still not a fan of owning or trading this sector currently as the noise is too loud with the approaching meeting and change in Fed Chairperson.

Bonds

Treasury Bonds РTLT or IEF traded last week, but bounced to end the week. No positions currently, too much volatility for my taste in owning bonds.

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 РLQD = 3.9% yield. No positions currently. Volatility on yield move this week.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Moving sideways for now.

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 lower and sideways. This week natural gas (UNG) and gasoline (UGA) made a move off the low earlier in the week. Both are worth watching this week to see if any trade opportunities develop.

DBB, base metals moved above the short term consolidation at the lows near $16 on Friday. Look for a confirmation and dig to see what is driving the move from the commodities. Zinc and Steel are the leaders in the sector, but copper made a move off the lows last week to take note of.

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). We are looking for some separation, but until the volatility and follow the leader mentality changes I am willing to stay out.

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) РThe sector has become erratic and volatile relative to tracking every rumor on interest rates and the Fed. The test of support at $63 is in play currently. As seen on the chart below not much has change in view of the leadership. HST, which is leisure properties continues to be the bright spot, but it is trading sideways. Still not interested in the sector overall. Looking for rates/yields to level out before this becomes attractive.

REITs

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.¬†