Modest Week for Markets Overall

Four out of five up days for the broad markets and we close higher, obviously. This raises the usual questions of how much higher can we go before there is a test or pullback in the indexes? If you have been around the markets any amount of time you know the answer is, as long as it wants to. Speculating on the market outcome relative to pivots or turns in direction is like picking which number or color the wheel will land on in Roulette. For the now the trend is higher, the buyers are in control relative to sentiment and all is good. So, until that changes hang on for the ride.

State of the Market:

The S&P 500 index continued higher and closed at 1759 and held the breakout move from last Friday. I would look for a test of the move higher with 710 as my target on the test. If we continue higher ride it out until the tank is empty. Be patient, watch earnings and the VIX index for some clues going forward.

The NASDAQ tested and then moved higher to close at a new high of 3943. With earning in the technology sector remaining positive the index continues to be the leader. We posted QQQ on the pattern trading model and we own a small position there, but still looking for a test and opportunity.

Russell 2000 Small Cap index tested the break above resistance and then moved back to the upside. Friday closed in the red, but still near the current high. Watch for a test and then move higher for the index.

The Dow gets a medal for the most improved index on the week. After trailing on the bounce off the low the index had a good week and moved to 15,570 to close the week. Looking to challenge the high for 15,676 in the coming week.

There is plenty of talk about it being time to be short the market? While some believe that is the play, I am not convinced that is going to be the outcome of the current activities as we discussed all of last week. We have to be patient and let the noise and events impacting the market play out. If we get a pullback or test of the current trend look for the opportunities in the move. The buyers are not done and with the Fed stimulus as a safety net for traders looking for the upside to resume easily on any test.

Economic Data & Outlook:

The economy remains unimpressive relative growth, but steady as it goes. The jobs report was so-so, but received as positive to keep the Fed engaged in stimulus. Inflation on the imports were flat, home price positive, existing home sales good, jobless claims okay, durable goods better than expected and consumer sentiment down slightly. There is always hope, but the focus is on the Fed continuing to supply stimulus in light of the soft numbers.

Looking forward we have CPI, PPI, industrial production, ISM manufacturing and the beginning of the October reports. Jobs will be delayed to November 8th. Watch for how the tone is set relative to October numbers.

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

Economic Events & Calendar

Sectors to Watch:

  1. Semiconductors (SOXX) are struggling with the gap lower last week and so-so attempt to bounce. Need the sector to return to the uptrend if the upside move in the NASDAQ is to continue. Tech has stumbled as well on the negative sentiment.
  2. Natural Gas (UNG) was at a key point technically hitting support of the uptrend line fromt he August low. The bounce on Friday was a positive and now looking for the follow through. The chart shows resistance at the 200 DMA and the $19.73 mark. Following another attempt to break higher the commodity tested lower again? Looking for a trade setup in either direction for currently.
  3. Small Caps (RUT-X) Russell 2000 index posted new high last week and the outlook is still for the uptrend to remain in play. The sector accelerated to a new high and is testing the move. So far it has held and we are looking for the upside opportunity on any test short term. Watching IWM.
  4. Interest rates and the Fed? Rates on both the 10 and 30 year bond have been moving lower and pushing the prices up. Most believe the Fed will not cut stimulus causing the decline in yield. The bias last week has been for the yields to fall and prices on bonds to rise. Nothing definitive on direction, but the rally in bonds is still under way short term. TLT broke above $107 and held.
  5. Gold moving higher on what would amount to speculation. We got the continuation of the move higher to end the week and could see a move back to the August high. GLD moved above the 50 DMA as resistance and has held, but looking for that convincing move higher. I like the miners on the move in GDX. Patience is required with any positions as there are too many opinions about the metals future.
  6. Energy made solid move higher the last two weeks, but that tested last week on the supply data. Oil prices have been dropping the last four weeks and now the supply data is reflecting what we have been warning about… slower demand. I don’t believe it is slower in consumption it just isn’t growing and supply/production is increasing. Thus, our short oil play has benefited, but we have to watch what happens with the energy stocks going forward.
  7. Technology struggles near the highs of late. The earnings guidance from several technology stocks were not good and the impact was selling. This follows up on the heels of the Netflix intraday washout on earnings. There is increased selling relative to the high beta stocks which could signal some rotation of assets near term. How this plays out short term will be important to how we play the sector near term. SKYY, FDN, IGN, IGV and SOXX are all on watch relative to direction in the sector.
  8. Financials (XLF) – The sector hit the previous highs at $20.85. A break higher puts the sector in confirmation mode relative to a consolidation breakout. Watch for $21 entry on the move if it materializes. The resistance remains in play as we held the 10 DMA, but there is still a lack of conviction in the sector near term.
  9. Real Estate (IYR) The sector moved to resistance level at $67.30. We go the break higher Friday and look for a move back near the $69.50 level short term. The positive move in rates helped the upside for the sector. Watching for a follow through and opportunity to add to existing position. Patience is required for any position in the sector longer term.
  10. Japan (EWJ) and China (FXI) moved lower on data. Short opportunities? Or do they bounce back. This is worth watching into next week.

The models have been updated for the trading day. The challenge is dealing with the buyers versus the sellers this week. The sellers are unwilling to take on any risk short term. Even the move last Wednesday was tentative. I can’t blame them at this point, but the short side of the market isn’t attractive until the sellers are willing to poke their nose in and get it bloody. We have put some money to work, but cautiously. We are adding 1/2 position sizes as the entries are hit as the risk remains elevated. The bigger question is how quickly the attention will return to the fundamentals and reality of growth? We continue to see rumblings from analyst and now the financial networks are picking up on the theme. 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. Emerging markets tested earlier in the week, but seem to have righted the ship for now. The dollar remains week, bonds rallied on lower interest rates and emerging market bonds continue to drift higher.

Asset Classes

1) US Equities:

Looking at our sector rotation chart below with the October 9th pivot point, the sectors were trading in step with the index again as the broad markets fail to break away from the one for all mentality. This is not a bad thing, but lends itself to just buying the broad index or the leading stocks. Consumer Services (IYR) showed some leadership this week along with the Industrials (XLI) on earnings. Utilities continue to play catch up along with technology and energy. Uptrend in play short term and we still with the trend.

500 Scatter Rot

2) Currency:

The dollar is getting crushed by the Fed stimulus addiction, but held some support and continues to move sideways for now. Regardless it is still in a downtrend and not likely to change anytime soon or at least until the Fed stops pumping money into the system.

The other currencies remain sideways to higher on the devaluation of the buck. Euro is setting the pace currently on the upside against a weaker dollar. Others have been positive as well. No real plays here for now.

currency

3)  Tracking the Bond/Fixed Income Sectors:

Sector Summary:

The sector has turned sideways with a boost on the upside from the budget deal in Washington to the sectors overall. Bonds have been positive due to the lower rates, but this is still a issue of patience and letting any opportunity develop. Note the big jump in the interest sensitive assets such as REITs, Utilities and MLPs.

Bonds

Treasury Bonds¬†– TLT or IEF hitting resistance as yields flatten out. No positions currently, ¬†but worth watching if the upside continues through $107 on TLT. Didn’t add on the move through this level, but the move is still in play.

High Yield Bonds¬†– HYG = 6.4% yield. Bouncing off the $91.25 support and may have some interest if we can hold steady and manage the risk of the trade short term. Gave an entry signal at $92.30 and moved above the 200 DMA. Don’t own the bonds, but the trade has played out nicely on the upside… stop at break-even on the trade.

Corporate Bonds РLQD = 3.9% yield. No positions currently. Broke higher on the resolution to the budget with entry at $113.75. I would have a stop at break-even on any position short term.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Bounced off the 50 DMA and moved higher short term. Still no interested in a position currently risk remains high.

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.

***Fixed annuities have finally returned to the 3% guarantee mark (five years). The best five year CD currently is 2.1%. As these yields grow they will attract more money. I view that as a positive for stability in the markets overall.

4) Commodities –¬†The chart below shows the progress of the sector since the high on June 19th and it is essentially sideways with specific components showing volatility on either side of neutral. In some cases that has been the same commodity. From my perspective this is a commodity picking and trading sector for now. The outlook isn’t changing for now and if you are going to make money it will be from short term trade setups and they will come with their own degree of risk.

Gold (GLD) made an interesting gap higher and has held for now, but I am still not convinced it will hold this level going forward. Watching for a break abobve the $130.50 level and the 50 DMA on the upside makes it interesting. For now watch and see how it unfolds. Miners (GDX) may be the better play option.

Natural Gas (UNG) made a solid move to the upside, but stalled at resistance of $19.75.

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. This week they moved higher along with the US markets in response to the earnnings. EFA, IEV, and others made solid moves to the upside. China (FXI) made a noticeable move lower at the bottom of the chart on economic data. Overall I expect the global markets to continue to trade in unison with the US for now. Thus, any trades in these countries should be done with an outlook of the how the US markets will perform going forward.

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 bounced on the Fed decision and has tested back on concerns in the markets overall.  With the budget risk behind and interest rates moving lower it found a catalyst for the sector. The move back to the resistance of the 200 DMA is in play with the move higher on Friday. The break above the $65.25 level was the entry, but a follow through will give an additional signal to add to the sector on the upside.  RWO is the international Real Estate fund and it is moving higher as well.

REM – Mortgage REIT ETF is moving on the upside as well. The fund cleared the $12.15 resistance and a move to $12.80 is the first target and from there it will depend on interest rates and the housing sector.

Sector Summary:

  • IYR¬†– Found a bottom? Current dividend is 4%. Added position on the follow through move higher.
  • RWO¬†–¬†SPDR Global Real Estate ETF¬†– Trended lower and bounced off support near the $41.75 mark. Moved above resistance at the 200 DMA and continues to move modestly higher. ¬†Dividend is currently 4.7%.

7) Global Fixed Income:

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

  • PAFCX – 1% dividend. Trending lower, but bounced off the $10.80 mark and going higher now. $11.20 entry point on upside play. Hit entry and moving higher for now.
  • PICB – 3.1% dividend. 27.80 support and bounce above $28.70 trade opportunity. Hit entry and adjusted stop to the entry. zero risk trade on dividend.
  • EMB – 4.5% dividend yield. Bounced with the Fed decision. Testing with the emerging markets moving. Hit the entry at $111 and held. Watch manage your risk moving forward.
  • PCY – current dividend yield is 4.8%. Possible trade above the $27.70 level. Got the move and looking for the upside to hold with stop at $27.20.

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.¬†