Markets Close Lower on the Week, but Not Negative on Momentum

Volatility returns… modestly. The VIX index bounced off the low and put investors on notice the downside is a possibility. The sellers never took control of trading and that gave the buyers more confidence. That said, we still have to be aware of the dangers the current market offers should any negative sentiment build. The week was a negative result for the major indexes, but not enough to send anyone screaming to raise cash, except the doom-and-gloom prognosticators. Thus, we head into next week with the same view… take what the market gives, but keep your stops or exit points clearly in mind.

Economic data is out and improving, earnings are better than forecast, Fed is ready to cut stimulus money, jobs are improving, housing is improving, and global economy is making strides towards improvement… then why the negative vibes from analyst and investors? Everyone can see the distance this market has run since the November lows and worries on the horizon relative to economic growth sustaining an uptrend.

Below we take a tour of what is working and what is not by asset class. The best place to be currently is US stocks and Global stocks. The other five asset classes are suspect on the upside and the risk/reward is too high currently for my taste. Take it one day at a time as this all unfolds.

Sector and Model Notes:

  1. Friday produced the fourth negative day for the week and left some scratching their heads after Thursday. The sideways movement continues with the 1710 on the top side and 1675 on the downside for the S&P 500 index. The challenge currently is attempting to not read too much into the current activity, but let it unfold and not force trades or create premature panic in exiting positions. As we start the trading week take the time to review your positions and manage your risk according to your objectives.
  2. Treasury yields remain at 3.64% on the 30 year bond as the volatility calms short term. Oil jumped higher by 2.2% to end the week. The move put crude back at $105.92 and building a trading range of $103-108. Gold gained $3.60 to $1313.50 after moving lower the last two weeks, however the downtrend remains in play. Dollar held $21.90 support (UUP) Friday, but the downside is clearly a challenge currently. The short dollar/long euro play was taken in the two egg model, and it has played out well thus far.
  3. The global markets traded higher as Europe (IEV) gains strength and hit new 12 month high. China broke below $34.20, but managed to regain its upside mojo on positive economic data. GXC was up 2.1% on Thursday and Friday to bounce off support at $67.50 and leaves the uptrend off thee June low in play. The emerging markets reversed as well from the selling on Wednesday, but needs to break above $40 (EEM) to gain our interest short term. Australia (EWA) was up 3.5% the last two days on stimulus as the central bank cut rates. A move above $24 gets interesting on the upside. All of this news pushed the EAFE index (EFA) above $61.25 resistance on the week and it is the EGG Model play currently. Global markets remain positive and worth owning currently.
  4. Financials are a sector to watch this week as they turned lower to find support at the $20.35 mark. There still hesitancy towards the sector as the government continues to attack the banks and brokers. Bank of America lawsuit, JP Morgan and the SEC over the Whale Trade… and the hits just keep coming. Watch for the sector to maintain it’s upside momentum with volatility. A break below support would be a big negative to the broad markets short term. Looking at using SKF as a hedge against positions if the sector moves lower.
  5. The S&P 500 Model is updated. The stops on our positions are set and we are watching the extend move higher short term. The trade on the Volatility Index (VXX) is a hedge against the current indecision of the index and we are watching 1675 as the level to hold short term.Mange your stops and see how this plays out going forward.
  6. The Sector Rotation Model is updated. This is still a choppy market and one to respect short term. I like our positions in the model, but we have stops set to deal with a shift in momentum on the downside should it take place. We have added to the Watch List for the coming week.
  7. The ONLY ETF Model is dealing with the VXX trade and giving it room to handle the swings in price. We are scanning and looking for the best opportunities in a sideways moving market, but sometimes the best trade is not trading. We are updating the Watch List and being patient going forward.
  8. The ONE EGG Model added the EAFE index or EFA last week. Nice bounce back on Thursday and it held it’s ground on Friday to end the week. The outlook is still positive for Europe adding to the upside opportunity. Australia moved up 3% and Asia was better with China on the upside. Manage the risk, but give some room for the move higher.
  9. New trading week and hopes of more upside from investors. The Fed stimulus issues are still a worry for the markets along with the economic picture in both the US and Global markets. The goal is to be patient and let this all play out accordingly. No speculation and no guessing on direction… follow the trend and respect the risk of the current market environment.

Economic Data & Outlook:

What data there was this week was positive relative to the outlook and current data. The ISM Services data was better than expected to start the week, but was overshadowed by the concerns about the Fed cutting stimulus. Trade deficit positive. Consumer credit fell (for me positive). Jobless claims positive. Wholesale inventories fell again and positive. The data is in line and positive for now, but investors are fixated on the Fed cutting stimulus and that has put the broad market indexes in a sideways motion.

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

Economic Events & Calendar

1) US Equities:

The S&P 500 index ended the week down 1% or 18 points. The index accomplished hitting new highs last week , but the worry over the Fed cut into the upside as the leaders moved sideways to lower. The 1% drop wasn’t as bad as the headline made the action out to be. The index did close lower four of the five trading days this week.

Leadership in Financials (XLF) took a break with a loss of 1.8% and leading the downside for the index. The Consumer Services sector struggled as well down 1% with the July Sales Report disappointing. Industrials were lower as well which was reflected in the DOW losing 1.5% on the week. The balance of the sectors were off almost equal to the index of 1% on the downside. Real Estate (IYR) was the only positive sector up 0.2%.

The June 24th pivot point is where we are watching currently as the bottom has been established along with a new high. Lasting rallies tend to have significant leadership with a defined rationale behind it. What we are looking at is broad movement with all the sectors in tow. There is nothing wrong with making money in the index until which time there is separation or defined leadership of the market overall.

June 24th Low Pivot Point

Scatter 624

The shift back to the previous trend is worth looking at the chart off the November pivot point again as a refresher of what is in play currently. Note the previous leadership from financials and consumer discretionary is back in play.

November Pivot Point Low (click to enlarge the chart)

SP500Scatter

Sector Rotation of Interest:

Downside Rotation:¬†The reversal in financials, industrials, consumer discretionary, utilities and energy didn’t help the direction at all on the week. No real damage done, but warnings were definitely sounded with the results. No breaks in trendlines, but this does put us on warning to watch for the downside to gain momentum if the sellers gain control.

Sideways Trend: This would define the broad markets overall to me currently. This provides an opportunity if the uptrend continues and a short opportunity if the sellers gain control.

Upside Rotation: No real upside rotation, but real estate (IYR) did bounce off support short term.

The S&P 500 Model: We remain invested and watching the volatility retreat to the previous low short term for further indication the buyers are back for now. One day at a time as we move forward. Adjust and manage our short term risk in light of the overall objective.

2) Currency:

The dollar made a new high on July 9th and has been leading the rest of the world with a move lower. The Krona, Franc and the Euro have been leading relative to currency. The Yen continues to move higher as well. We positioned the TWO EGG Model this week in the short dollar (UDN), long euro (FXE) play and it has done well. The dollar weakness will continue as long as the view is to devalue the currency in the hopes of stimulating the economy. It has never worked before in history, but some believe it will work this time… NOT!

Currency

Sector Watch:

  • UUP¬†– Broke $22.10 support and entry point for the downside trade in UDN.
  • FXE¬†– The long euro trade has been well defined with the move holding above the 10 DMA and trending. The $131.60 resistance is what to watch this week. A break higher would worth trading.

3)  Tracking the Bond Sectors:

Sector Summary:

The bond market overall has experienced a sell off that is a directly a result of yields rising. The shift this week in yields lower gives some breathing room, but it also begs the question concerning future rates? The Fed talk of cutting stimulus gets the blame for the move higher in yields, but they also get credit for talking enough to get rates to settle in the trading range of 3.52-3.76% on the 30 year bond. For now that is a positive, but will the upside resume? That is up to the Fed actions and how aggressive they get with the stimulus cuts. For now we are at peace, but that doesn’t mean I am interested in owning bonds at this point. In fact, I am willing to wait and see.

  • 30 Year Yield = 3.63% – down 5 basis points for week ¬†—¬† TLT = $107.19 up 66 cents for week.
  • 10 Year Yield = 2.58% –¬† down 2 basis point for week ¬†— IEF = $102.10 up 28 cents for week.

Treasury Bonds РThe yield on the 10 year were essentially flat and after testing support at the $100.80 mark they have bounced back to the 20 DMA. Plenty of work to do before we are willing to take any position in bonds.

High Yield Bonds РHYG = 6.7% yield. Holding the $91.30 support and looking for a bounce back to the upside. Watching to see if there is any trade opportunity in the high yield bonds. Adding to the Sector Rotation Model Watch List.

Corporate Bonds РLQD = 3.8% yield. No positions currently. Bounced and hit against resistance near $115.50 and testing lower again. The sector is still not worth the risk.

Municipal Bonds РMUB = 2.8% tax-free yield. No positions currently. Detroit bankruptcy and other concerns impacting the sector short term. Watch $103 as support level.

Convertible Bonds РCWB = 3.6% yield. Bounced and made move above the $42.80 entry. Continues to move in the uptrend established off the $41.50 low. Manage the move higher. Raise the stop to $44.10.

4) Commodities –¬†Sector Summary: Not worth the risk of ownership, but they did manage to bounce on Friday? Each attempt to bounce has only led to further disappointment. Until there is sound reason to own the sector willing to sit it out.

  • Commodity Index¬†(DBC) – The outlook for commodities remains sideways to down. Unless it can find momentum to move through the $26 level… pass. Gold was up to help the overall sector outlook.
  • Natural Gas¬†– (UNG) Short is the play.
  • Crude Oil¬†– (OIL) ¬†Broke lower on the week and tested support at the $24 level on Tested lower and gapped higher on Friday? Why? China’s data was positive and crude jumped 2.5% on the day and erased some of the losses for the week. Watch for a move above $25 as opportunity short term.
  • Gasoline¬†– (UGA) Pushed lower to the 200 DMA and bounced with oil on Friday. Watch a move above $60?
  • Gold –¬†(GLD) Tested support at $123.15 and bounced? Is it ready to move towards the $137 target? Watch.
  • Palladium¬†– (PALL) – Consolidated near the $70.50 support and bounced back towards the high.

Commodities Rotation Chart:

Back to trending sideways without much in terms of direction for the asset class.

Commodity

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

5) Global Markets: 

Global markets have followed the US markets off the June 24th pivot point. Now they are starting to gain momentum on their own accord and economic data. The positive comments from analyst and money flow have accelerated this week. Europe (IEV), China (GXC), Australia (EWA) and Emerging Markets have accelerated their respective moves higher. This puts us in the scan mode of finding opportunities.

Watch IEV, FEZ, EWK, EWH, EWN and EWG on the upside. EFA continues to be sideways with a upside move the last week.

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.

Country Watch:

  • FXI– Moving above $34.70 entry point again on the upside. Looking for more upside short term.
  • IEV¬†– Move above $41.90 adding point for the ETF. Looking for $42.75 resistance short term.
  • EEM – Bounced off $38.50 and still looking for a move above the $40 level.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke down and bounced with the markets off the June 24th low. Moved back below the 200 DMA and holding $65 as support? There is no reason to own this sector currently and we are willing to sit it out for now and let a trend develop short term.

Sector Summary:

7) Global Fixed Income:

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

  • PAFCX – Bounced off the lows and trading sideways.
  • PICB – 3.1% dividend. No reason to own currently. Formed bottom and trending sideways.
  • EMB – 4.3% dividend yield. Bounced off the low and trending sideways.
  • PCY – current dividend yield is 4.8%. Bounced off the low and trending sideways.

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.¬†