Markets Remain Uncertain Short Term

Market complexity continues to muddy the waters for investors. Last week the news du jour was the Fed cutting stimulus and the emotional response pushing volatility higher. This week the Fed was out in force doing damage control and the markets rally back… and all is well. The answers are not as simple as the Fed and what actions they take or do not take currently. It is the reaction to the comments from the Fed that is pushing markets, not the actual action taking place. There is an extreme difference between the two. Thus, we have to step back, evaluate the reality from the reaction and make our decisions accordingly.

Interest rates have reacted equally to the Fed speculation as yields have risen significantly over the last month. Yields settled this week, but they did not retract from the emotional response.  The 30 year yield peaked at 3.61% and closed the week at 3.49%. That is well above the 2.84% from just four weeks ago. This remains an issue and one that is closely tied to the Fed activities and economic growth/stability

Throw in the issue facing the economy, US politics, geopolitical issues and global economic worries and you understand why volatility has picked up along with the lack of clarity looking forward. Until that clarity returns expect more of the same for the broad markets. Below we evaluate the impact and outlook for each asset class and how we want to find the opportunities for putting money to work next week.

Sector Moves of Note:

  1. The Bank ETF (KBE) and Regional Bank ETF (KRE), both sub-sectors of the financials have held up well during the selling and we posted bounce trades in both that have done well. I would protect the downside or take some profit if the reversal sets up into next week. The regional banks stocks continue to look positive short term. RF, HBAN and MTT all added to the upside and remain positive looking forward.
  2. Volatility (VIX) spiked on the selling and set up the upside trade in SVXY. Like the bank stocks look to take profit or hedge the trade with VXX. If the downside picks up again I would rotate money to VXX.
  3. Interest rates have continued to spike higher, but they have leveled off in the last three days of trading. We looked to add on the rates reversal, but the that has not panned out as yet. XLU – Utilities has taken the brunt of the impact from higher rates, but they manage a small bounce off the lows and $38.25 is resistance. IYR – REITs are equally lower and bounced off the low with a target of $68.50. HYG, TLT, IEF, LQD, ITB and FRA are other components hit by the push higher in rates and each as bounced. The opportunity we discussed last week did play out on the upside and this week the question revolves around a follow through on the move. look for the opportunities in each moving forward.
  4. The commodities are all over. The lack of a trend in the sector makes it a dangerous place to play. Natural gas (UNG) remains a short play as described in the daily updates last week. Crude oil bounced off $93.20 level and moved to $97.30 resistance. Look for a move back towards support and to remain in the trading rangel. DBA accelerated lower on Friday and introduced a short play on the sector. DBB attempted to bounce higher on Friday, but failed to hold the move. Gold broke lower on the week as well working towards teh 1167 support and did manage a 3% bounce on Friday from the oversold status. Watching for a trade opportunity. Commodities remain a dangerous sector to play on the upside as most continue to find a way to work lower.
  5. The global markets remain a challenge despite the small bounce this week. China’s economy is questionable, Japan is volatile, Europe is not recovering and sovereign debt remains a big question mark and emerging markets finally showed some support with a bounce this week. This is nothing more than a trade for now. If the US markets take the lead on the upside there could be some opportunities on the move higher, otherwise short remains the opportunity in FXP, EEV and EPV. Take it one day at a time and we will look for the trade opportunities.
  6. The dollar has moved higher on the Fed announcement and hitting resistance at $22.60. We continue to trade the yen short, the euro short and the dollar long.
  7. Don’t assume anything at this point. If the buyers were willing to step in and push the markets higher off the recent lows. ¬†The uncertainty remains relative to direction and we remain focused on discipline versus chasing trades.

Economic Data & Outlook:

The durable goods data was weaker than expected and Chicago PMI was well below expectation. First quarter GDP fell to 1.8%.  All adding up to negative data for the economic picture. ISM Manufacturing and Services reports are due this week and they will be watched closely for a rebound from the negative reports for May.

Jobless claims were the same as last week and holding steady for now. Personal income was better than expected rising 0.5%. Consumer spending was in line with expectations. This week we have the jobs report for June on Friday (155k new jobs expected in the report). Next week will shift the focus to the jobs data as another indicator for growth on the horizon.

Home prices rose 12.1% year-over-year and new home sales beat estimates. Pending home sales were better than expected as well, climbing 6.7%. All of the housing data helped push the consumer confidence reading above 81.

There will be plenty of data to digest this week as June comes to a close and we get to see how the economy performed. If it misses the mark it will add a negative impact on the markets. The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

1) US Equities:

The break of support bounced and moved back to resistance this week. The May 21st pivot point to the downside is still in play despite the bounce off the new lows. We move back within the target range of 1610-1630 we laid out in last weeks update, hitting intraday high of 1620 and closing at 1606. This brings up to the downside test we have discussed all week. Monday will give us some insight to investors sentiment as it is decision time relative to the downside plays. The move lower off the May 21st high is being tested with the bounce. If the major indexes find their way above key resistance and reestablish the uptrend then we will believe the downside acceleration is off and the sideways trading range is on. Thus, we will post both upside and downside play opportunities on the watch list.

Based on the bounce starting on Tuesday last week, Financials, Healthcare and Consumer Discretionary are the leaders on the upside. Also accelerating off the lows was Utilities and Telecom. The other five sectors tracked along with the broad index. The broad index was up 2.1% from Tuesday through Friday’s close. The laggards were positive, but failed to outperform the broad index itself.

Decision time for the broad index and the micro downtrend in play off the May 21st high. This week may set the tone, despite the fact it is a holiday week.

May 21st Pivot Point:

10 Sectors

Sector Rotation of Interest:

Downside Rotation:¬†The downside reversed on the week and giving some hope to sector like Utilities, Telecom, Energy and Basic Materials. The remain in a short term downtrend, but the bounce allows for opportunities to add short plays if the bounce doesn’t hold or to add long positions if the upside find reason to trend higher.

Healthcare (XLV), Consumer Staples (XLP), Financials (XLF), Industrials (XLI) and Technology (XLK) broke lower last week, but have recovered to levels of hope short term. Still watching to see how they progress next week.

Sideways Trend: The bounce on the week puts some of the sectors back in a sideways trend and offers some opportunity if they can find some optimism from investors. It will take time and patience remains the best course of action.

Upside Rotation: The is not upside movement at this point, but if we follow through on the  bounce off the current low watch for the leadership to come from those holding up the best (XLV, XLY) and the those with the biggest downside moves (XLU, XLK, IYZ). The latter being only a trade opportunity on the bounce.

2) Currency:

As seen below the dollar moved lower from the previous high on May 17th high (pivot point).  Thanks to the FOMC meeting the dollar has regained the upside rotation and other currencies have moved lower. The question mark is will it last or is this just a reaction to the news. For now we  will approach it is a reaction to the news and a short term trading opportunity in the currencies relative t the news moving forward.

10 currency

Sector Watch:

  • UUP¬†– Move back above the $22.20 mark was the entry point for the dollar. The dollar has continued to move towards the short term target of $22.65. Upside remains in play for now.
  • EUO¬†– The short euro trade entry was $18.80 and has continued higher. Plenty of downside worries about European markets currently in play.
  • YCS¬†– The short yen play off the reversal at $59.75 was the entry which we did post and add to the ONLY ETF Model. Watch the $64.50 level for resistance, but the weakness in the euro remains in play.

3)  Tracking Bond Sectors of Interest:

Sector Summary:

The bond market overall experienced a sell off that is a direct result of the yields rising quickly. There was some calming this week, but the concerns remain. I would expect this to calm even further on the week, but the question is more on the yields holding these levels or receding? You know the level will overshot on the upside initially and then settle into a reasonable zone for yields. Here is where the opportunity lies, if the yields move lower again.

  • 30 Year Yield = 3.49% – down 7 basis points for week ¬†—¬† TLT = $114.40 up $3.96 (3.5%) for week.
  • 10 Year Yield = 2.47% –¬† down 4 basis point for week ¬†— IEF = $102.50 down $102.03 up 47 cents for week.

Treasury Bonds¬†– The yield on the 10 year bond is up 80 basis points over the last six weeks. At what point do these bonds become a buy? If you believe the economy is not strong enough for the Fed to withdraw the stimulus in place, bonds will snap back. However, if you believe the Fed will let rates rise as they cut stimulus, the downside may continue to be your play. I believe the opportunity lies somewhere in the middle. The Fed is likely to cut stimulus at least 20% or so initially to curb the amount of buying by the Fed. Thus far the the market believes the yields are high enough… but watch to see how this plays out moving forward.

Jim’s Notes Article on Bond Yields rising.

High Yield Bonds РHYG = 6.5% yield. Bounced, but remain volatile short term.

Corporate Bonds РLQD = 3.8% yield. No positions currently. Bounced? Watching for any opportunity short term.

Municipal Bonds РMUB = 2.8% tax-free yield. No positions currently. Watching for any opportunity short term.

Convertible Bonds РCWB = 3.6% yield. Still in selling mode. Bounced and and may offer short term play.

4) Commodities –¬†Sector Summary:

  • Commodity Index¬†(DBC) – Last week ¬†broke below the bottom of the trading range. The outlook for commodities remains suspect at best. Not interested currently unless things improve fundamentally and technically. Short plays are working.
  • Natural Gas¬†– (UNG) The break lower offered short trade in KOLD. Manage the stop.
  • Crude Oil¬†– (OIL) ¬†Stuck in trading range and the upside is the bias. Don’t like the trade near term.
  • Gasoline¬†– (UGA) Testing near term lows with the support at $54.25? Watch the downside break as short opportunity.
  • Gold –¬†(GLD) Resolved the trading range issue with further decline. Still needs to find support short term.
  • Palladium¬†– (PALL) – The position imploded on itself the last two weeks heading down to $61.85 support. Could be a bounce play in the metal, but the risk is too high at this point.

Commodities Rotation Chart:

Still moving sideways to down without any real leadership up or down. No interest in the asset class at this point.

10 Commodities

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

5) Global Markets: 

Global markets shifted to the downside and have not changed course yet. The May 21st pivot point lower has been more dramatic than the US markets, but the pivot correlates to the struggles facing the US markets relative to interest rates and the Fed as well as China, Japan, Europe and the Emerging Markets.

Japan (EWJ) has become volatile as a result of stimulus worries with the Bank of Japan. I still like the upside opportunity in the country, but you have to be willing to live with the volatility.  China (FXI) has struggled on the downside (down 14.6% since 5/21) with slowing economic growth that has disrupted investors. Europe (IEV) moved lower on concerns in Europe from China and the US markets.  Most bounced this week along with the US markets, but the downside trend remains in play short term.

The chart below shows the downtrend over the last week.

10 Country

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:

  • FXP– Short play on China as the downside has been the leader. Looking for entry off the recent bounce.
  • EEV¬†– Short emerging markets following the recent bounce off the lows.
  • EWJ¬†– Still looking for an upside move from the country accompanied by volatility.
  • EPV¬†– Short Europe is posted as possible downside play to the ONLY ETF Watch List.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke down and is still looking for a bottom. There was a small bounce this week off the lows, but there is still plenty of work to do before the upside looks attractive. Be patient with the sector. If you like to trade there is opportunities to trade the sectors short term swings.

Sector Summary:

  • IYR – Found support and moved back above the $64.80 level. Break above the 200 DMA would be attractive.
  • RWO –¬†SPDR Global Real Estate ETF¬†– Looks just like IYR currently on the chart. Move above $42.50 is of interest.
  • MDIV –¬†First Trust Multi- Asset Income ETF¬†is a good alternative to picking through all the choices of income funds. This multi-assets income fund pays a 5% dividend. Bounced off the lows and looking for a move above $21.30 short term.

7) Global Fixed Income:

Sector Summary: Downtrend in play and uninterested in the sector currently.  We will continue to watch for the next opportunity, but for now no positions.

  • Watching these funds for a bottom.
  • PAFCX – Spike to the downside. Attempting to bottom?
  • PICB – 3.1% dividend. No reason to own currently. Still looking for a bottom.
  • EMB – 4.3% dividend yield. Bounced off the low, but no reason to own currently.
  • PCY – current dividend yield is 4.8%. Bounced off the low, but no reason to own currently.

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.¬†