Markets Continue to Build Case for Moving Higher

The VIX index made a move back above 13 on Monday. Doesn’t sound like much, but it is the first sign of any anxiety in more than three weeks for the index. It may turn out to be nothing, but it is worth watching as we move forward. If volatility makes its way back into vogue, the market could test the current trend higher. How much depends on the catalyst for the volatility. Earnings have been the primary force at work, but with the end of the month and plenty of economic data on the way including the jobs report on Friday to start the parade of input. This could all get interesting short term.

Technology continues to be a mixed bag of challenges for the sector. Yahoo earnings after-hours were ahead of expectations, but the guidance was less than expected. Again it is about the guidance and if they are not solid there is no reward for the previous hard work. The stock is trading up 2.6% heading into the trading day and may be the one bright spot on the day in the sector. VMWare announced it is cutting jobs and plans restructuring for the software company. The stock was down more than 14% after-hours on the news. The software sector will feel the impact of that news in trading today. Seagate report a mixed report that sent shares lower nearly 5% in after-hours. Bottom line… the sector continues to be a bag of mixed nuts with no clear direction overall. The hit-and-miss earnings reports are keeping the sector in check for now.

Is there still upside for the broad markets? That is still a growing question from both investors and analyst, and one that will get answered in time. Is the great rotation in play… the move from bonds to stocks? Again a very valid question and one we will see answered in time. To state emphatically that these shifts are happening is pure speculation. What we can see is the yield rising on bonds which is pushing money out of the sector short term. How much and how long is a matter of time. That said, holding bonds for now is becoming a bigger and bigger issue relative to downside risk. I am not a buyer or holder long term. Thus, a¬†strategy¬†for capturing the rotation that looks to have started is important going forward.

As money comes out of bonds, what strategy makes sense? For one, being long or buying stocks as they continue to be  a benefactor for some of the cash leaving. Treasury bonds. REITs and MLPs have been another benefactor of the rotation of money. There is the opportunity to be short Treasury bonds as well. If money is exiting you have selling pressure which is pushing yields higher. The initial target for the ten year Treasury bond is 2.1% and over the next 18-24 months yields could reach 4%. If those levels are achieved the downside risk to the bond is roughly 15%. This is an area of interest going forward and one that will benefit from a defined strategy for capitalizing on the move.

Another area of interest is the transportation sector. We have discussed the leadership from the sector over the last nine weeks, and it continues to move higher. IYT, iShares Transportation index ETF hit our target last week at $104 and is holding the move. There may be a pullback short term, but the upside trend I expect to remain in play. Breaking down the sector we find that the shipping sector (SEA) has been a key component of the move higher. The railroad sector has been equally impressive for the broad sector and hit a new high last week. Trucking jumped to a new high as well. The airlines (FAA) equally have set the upside pace. Bottom line is the sector is hitting on all cylinders. Boring, but profitable is the way I see it currently.

The key to success in this market environment is to trust the upside and watch for any indications what is happening is not sustainable. Watch these sectors as they will determine the outcome of the move off the November lows and opportunity to move towards the 1575 high on the S&P 500 index. The trend remains in play on the upside and until there is reason to believe it is not sustainable we go with the trend.