More Jobs, More Growth?

The jobs report on Friday put some life back into the major indexes to end the week. Despite the move on Friday the headlines remain full of negative comments and outlook for the broad markets. It is the story behind the numbers that is the buzz. With the 16 day shutdown of the government shifting the report by a week many economist believe the number is padded (my interpretation of their words). Either way it promises to make next months numbers more interesting. The reaction to the number is where the fun was on Friday.

How does the move on Friday impact the markets moving forward? That is the big question mark. The fact the indexes jumped back near the previous highs put the pressure back on the buyers, my view. How does this play out next week and beyond is where we have to focus and equally important manage the risk as well as the opportunity.

State of the Market:

The S&P 500 index added nine point this week versus the two added last week, however the way it got there is the point of interest. Thursday the index tested support at 1745 and closed Friday at 1770. The worry erased by the jobs report on Friday is where the test will take place this week.  Our upside target remains 1800 and our support or test zone is 1657-1730 should the sellers make another attempt to push the markets lower.

The NASDAQ continued to test closing down three points at 3922. The drop on Thursday to the 30 DMA got my attention as the volatility pick up in the index. The  move on Friday left an inside bar and a downside bias on the index. 3800-3814 is support near term. Technology has been a weak link of late and the sector to watch moving forward.

The Dow moved above the 15,700 resistance and top of trading range to close the week higher. The index was the bright spot of the major indexes gaining nearly 1% and setting the pace. If the downside returns look for 15,400 as the support level to watch near term.

Russell 2000 Small Cap index showed the most downside effect of the week testing key support near the 1085 level and just above the 50 DMA on Thursday. The move higher on Friday added four points to the index for the week. The 50 DMA and then 1070 is the support level to watch. On the upside a move back to the 1120 high would be a good start.

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. The jobs report should have been a negative if the true belief of stimulus cuts are seen as bad for the markets. This could all lead to a news driven market which tends to be choppy. Don’t beat your head against the wall attempting to guess which direction we are headed. Be patient and disciplined in your approach to the market near term. Remember, cash is a sector.

Economic Data & Outlook:

The economy is showing what has come to 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 were positive including the jobs report on Friday. The Q3 GDP was better than expected and all seem to be going the way of the Fed as they look to cut back on the stimulus of $85 billion per month. .

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

Economic Events & Calendar

Sectors to Watch:

  1. Rotation is in play with money moving from the previous leaders towards materials, industrials, consumer staples and utilities of late. Watching to see if the shift sticks or just money chasing the Friday momentum short term. Financials made a solid move on the upside and is worth our attention on a follow through above the $20.85 mark.
  2. Europe post solid gains on improvements in the UK and rate cuts from the ECB. The micro trend is lower. Watching the 50 DMA as support and the move higher on Friday to hold. Watch the downside if this does not hold on Monday.
  3. Small and Mid Cap indexes tested the upper levels of the move higher. Both made a move lower and tested support. The bounce on Friday is the what we will watch to see if this moves back to upside or if the downside is truly the direction of choice.
  4. VIX – the index is testing the lows as the buyers are content to put money to work. Complacency at it’s best for now. The buyers have pushed the index to the low. VXX closed at a new low.
  5. Dollar (UUP) made a move higher and is above the $21.75 resistance Friday. The stronger dollar is a matter of belief the Fed will cut stimulus in December? Watching currently for opportunities if this continues to play out according to the Fed’s comments.
  6. Interest rates and the Fed? The initial response was for rates was to tick higher. They got help from the jobs report on Friday and now we are looking for the follow through on yields rising, the Fed cutting and money rotating to equities. At least that is the belief short term from analyst.
  7. Gold closed lower breaking the $126.50 level on GLD. That set up the GLL short trade and the target of $122.50 on GLD. Still no reason to be long the metal.
  8. Energy is showing signs of topping technically and the fundamental data is showing some weakness as crude prices decline. Watching to see if the weakness validates and creates a downside play in the sector going forward.
  9. Financials (XLF) – The sector hit the previous highs at $20.85 on Friday as the jobs report pushed buyers back into the bank stocks. Signs of a stronger economy favor the financials. Looking for a break higher.
  10. Real Estate (IYR) We have a short trade (micro term) with SRS, the short ETF for the REITs, as a trade opportunity. Patience and risk management for any positions.

The models still face the challenge of dealing with the buyers versus the sellers. The sellers made a move on Thursday, but the buyers cam back on Friday’s jobs report? The AAII sentiment report shows the bulls at excessive levels. The market has every reason to adjust, test, pullback, sell off, or whatever downside phrase you like, but it hasn’t manage to do so to this point. Thus, you have be careful not to assume one day of selling is the apocalypse, as Friday showed. We are still adding 1/2 position sizes with the entries hit as the risk remains elevated. Will the speculation with the FOMC comments continue or is the worst of it over? Is Europe the next downside catalyst? Is it really recovering? 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. However, at the end of the chart you can see the US market turn lower to sideways while the EAFE index drops lower along with the Emerging markets. The dollar turned higher on the FOMC comments which also impacted real estate on the downside along with bonds and commodities. There was not change in the development last week as emerging markets accelerated lower along with bonds, real estate and commodities again. Looking for more of the same this week barring any surprises on the horizon.

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, we started to get some negative separation last week and a jump in financials (XLF) on Friday. The negative move Thursday and positive move on Friday did so in unison with the exception of Utilities (XLU). Thus, short utilities? And be long financials? We will see how it plays out to start the week. Industrials (XLI) are worthy of our attention as well.

500 Scatter Rot

2) Currency:

The dollar shifted gears on the rumor of cuts in Fed stimulus two weeks ago and has continued to improve on better economic data. The ECB interest rate cut this week also helped the dollar against the euro.  UUP moved above the $21.75 resistance and continue to look strong for now. All of the currencies on the chart responded lower as a result.

currency

3)  Tracking the Bond/Fixed Income Sectors:

Sector Summary:

The sector was moving sideways, but thanks to the FOMC meeting they started heading lower on the rumor of stimulus cuts as rates rise. This week the improved economic data pushed rate higher and spiked higher on Friday’s jobs report. The chart below shows the reversal in the fixed income or interest sensitive assets. We will watch for the upside opportunities if the rumor proves to be false going forward, but for now the risk relative to owning bonds is high.

Bonds

Treasury Bonds РTLT or IEF dumped lower on higher yields. No positions currently, too much volatility for my taste in owning bonds.

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, 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. Big dump on Friday in response to jobs and yields. Watch and see how it plays from here.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Moving lower again.

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 the move lower on the week in the sector. The rumor mill relative to the Fed cutting stimulus sooner started on the FOMC notes and that hit commodities. Gold and oil dropped as the dollar gained strength. Agriculture fell and base metals have held their ground for now. The outlook is negative for now, but that only means opportunity on the reactions will result in these commodities. Watch and set levels of opportunity on the move.

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. However, last week we did see a bigger reaction in the global markets to the FOMC notes. The fear of a stimulus cut globally would be a negative. Looking at the chart below you can see the short lower off the 10/22 high. Brazil is the obvious loser with the issues they are facing economically. Europe has reacted along with Japan. China was higher on economic data, but don’t expect that to last short term. We did add several short trades in the global markets this week.

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. We added a short trade with SRS this week as real estate continues to react to the interest rates drop.

Sector Summary:

  • IYR¬†– Current dividend is 4%. Short the sector above.
  • RWO¬†–¬†SPDR Global Real Estate ETF¬†– Not willing to deal with this volatility currently. 4.7% dividend on the ETF worth watching for play. Uptrend is in play.

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. Trending lower.
  • 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.¬†