NASDAQ Leads the Way Down – Weekly Update

The NASDAQ sets the pace on the downside ending the week with a 100+ point drop on Friday. What does this mean for investors? That all the negative talk is taking root as we head into earnings. All the headlines are full of negative comparisons as we start the weekend and they will only multiply with the drop Friday. Don’t over react to the data and don’t get caught up in the hype of all the downside talk. There is plenty to worry about without listening to the talking heads. Stay focused, stay disciplined and stick to the trend.

Is this the self-fulfilling prophecy that has been building in the media? I would like to say yes, but the headlines by the close on Friday were full of more prognostications of a 30% drop in US stocks than I could count. One thing is certain… stocks drop three times faster (in duration) than they rise. Simply put, bad news is easier to believe than good news. Watch your downside risk, set your stops accordingly and keep your head focused on being disciplined.

Below we cover in more detail our strategy for the week.

Have a good week of trading!

Economic Data & Outlook:

As promised a week full of economic, but as feared, no clarity gained. The economy continues to move at a slow pace of growth and nothing changed in all the data produced this week. The ISM manufacturing and services reports were basically in line with expectations and not significant growth forecast looking forward.

Construction spending, factory orders and vehicle sales were better than expected for the month showing some modest growth. Chicago PMI, trade deficit, weekly jobless claims and the jobs report all fell short of expectations, but not enough to ring any alarm bells.

Where does this leave us relative to the economic picture? Exactly where we have been the last four months, waiting for growth to emerge from the continued push of stimulus into the markets. Thus far it has been slow and steady despite the efforts. The lack of hiring continues to be an issue for the economic picture despite the 6.7% unemployment. Under-employment is an issue and one we would like to see change in the near term outlook.

Economic Events & Calendar

Models:

The models can be linked to below and each has been updated for the current outlook:

Sector Rotation Model (updated Р3/29/14)

ONLY ETF Model (updated Р3/29/14)

S&P 500 Index Model (Updated Р3/29/14)

ONE EGG Model (updated Р3/29/14)

Breaking Down the 7 Asset Classes:

We are still working from the February 3rd pivot point, but since March 6th we have been essentially trading sideways. The US markets have lacked any conviction on the upside and that leaves investors to speculate on both sides of market. Friday’s selling caught the attention of many investors as the reversal from the early week buying sent some running for the exits.

The winner since the low on March 13th has been the emerging markets. EEM is hitting against resistance at the $41.76 mark for now. The EAFE index and REITs joined the upside move the last couple of weeks and remain a positive influence over all.

Emerging market bonds and commodities were modestly higher. We could throw in the dollar as modest gainer as well on the week. No big changes, but positive is good.

Treasury bonds started lower as the US equities rallied. The rallied back to end the week as stocks sold lower on Thursday and Friday.

Thus, we end the week with a cautious bias and some aggressive selling on the NASDAQ. Looking to next week we still don’t have clarity on one side or the other. The hopeful are looking for stocks to continue the rally cry. The sellers are happy and adding to their short positions licking their chops!

For the week of April 7th: (Each is updated in the asset classes below.)

  1. Looking for some leadership from the global markets as the US folds their tent for now.
  2. Treasury bonds are likely to remain within the current trading range barring any collapse in stocks and investor psyche.
  3. Emerging markets are taking a leadership role? Does it continue? Emerging market bonds have been a benefactor as well on the upside move.
  4. Commodities benefited from the bounce in gold on Friday. Does it continue? Oil gapped higher? Does it continue? Agriculture is still in the flag pattern and looking for upside assurance. Base metals bounced off lows and continue to work their way higher.
  5. US stocks are in position to break support and test lower levels from earlier in the year.
  6. REITs are seeing some cash flow that direction in the selling, but still could suffer if rates move higher going forward.

7 Assest Classes

1) US Equities:

The US equity indexes established a pivot point on February 3rd off the lows, but on March 7th started to turn lower, but reversed and has essentially built a trading range. The week ended on a negative note Friday following the NASDAQ’s lead to the downside losing 104 points and testing the trendline. S&P 500 index Closed below the 1873 support on Friday and now we see how it plays out next week. The support level we are watching is 1840-1850. That breaks all bets are off.

For the week of April 7th:

  1. Utilities (XLU) were the benefactor of the selling in the broad index on Thursday and Friday. Uptrending wedge pattern in play and looking for further upside in the sector. Break above $41.50 looking to add to our position.
  2. Technology (XLK) gave up 2% on the Friday to land on the 50 DMA Рwatch to see how it unfolds. Break brings the short opportunity into play. IGN, IGV and FDN leading the downside. SOXX gave up 2.8% as well.  
  3. Financials (XLF) cleared the $28.50 entry and then fell with the market. Watching for level to add to our positions.
  4. Energy (XLE) held up well and remains one of the best looking sectors currently. Watch for test of the break at $88.50 to hold and then opportunity to add to the sector.
  5. Plenty to watch as we head into the next week of trading. BE PATIENT!

See S&P 500 Model for current watch list and stops on existing positions. ONLY ETF model will capture the short term trades for the index and US markets.

SP500Scatter

2) Currency:

We are still working off the January 30th pivot point which has amounted to modest move lower to test support on the dollar.  We did bounce some as the US markets benefit from the geopolitical challenges globally. We still have little to no interest in trades at this point in the asset class.

BZF and FXA continue to move higher short term. CEW and FXA joined in this week with positive moves higher as well.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

We are still using the December pivot point and the trend is still slightly higher to sideways. Yield volatility has picked up relative to the economic data and the Fed. Throw in the geopolitical worries and the sector remains volatile. The chart below shows the lack of clarity relative to leadership from the sector. They are all addressed below.

Bonds

  • Utilities –¬†The dividend play remains, but it has experienced some volatility that now defines the trend. Hit a new high last week and tested lower, and closed at new high this week. That to me defines volatility due to uncertainty. 4% dividend remains and stop at $39.50. Watch and manage the dividend not the short term volatility. Stop raised, but let it work the volatility out.
  • REITs¬†– This still a sector to watch for the dividend play of 3.2%. We stopped out of our play on the sector, but continue to watch IYR with a potential entry at $68.50 move. Be patient.
  • Mortgage REITs¬†– REM hit stop on the interest rates moving higher. The concern is for mortgage rates to rise as the economy improves. Hasn’t happened yet, but investors have exited as if it is a given. Watch and be patient here as this plays out. Could fill the gap with a move above the $12.35 mark going forward. Watching.
  • Treasury Bonds¬†– Yields have become volatile as uncertainty remains in the sector. TLT broke from the trading range above $109, but returned on the rally in stocks. Not much interest other than to trade the bonds through the volatility.
  • High Yield Bonds¬†– HYG = 6.4% yield. Bounced off the $91.25 support (Sept 2013) and held to close back above the 200 DMA. It broke from the trading range and is testing. Watch for move lower if stocks start to sell off again. Stop is $92.50 (break even) on position as this is a dividend trade.
  • Corporate Bonds¬†– LQD = 3.6% yield. Small rally in play off the low at $113.20. Cleared $115 level as traded through top of the trading range. Stop is $115.25 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Bounced back this week and holding mid-range currently. Manage your risk and still looking to collect the dividend. Stop at $104.50 (entry) and the dividend is the play.
  • Convertible Bonds¬†– CWB = 3.6% yield. bounced off $43.75 support (Sept 2013) and $44.80 entry point. Watching the reversal as stock pick up volatilty. We keep the position and our stops at $47.50. Flirting with the downside and need to watch as we approach the stop. The trade is now a risk free dividend of 3.6% +5% gain. manage your risk short term.

4) Commodities –¬†The commodity index (DBC) made a pivot lower March 3rd, but has been showing some signs of life and trading opportunities in the individual components short term. Agriculture (DBA) has been the upside leader, but it has stalled of late and is in a flag pattern. Still looking for some momentum on the upside.

For the Week of April 7th:

  1. Soft commodities (DBA) reversal and could offer some upside this week on follow through. entry at $28.45.
  2. Energy commodities reversal and offered some upside in OIL. entry $23.80 on test.
  3. Base metals (DBB) bounced off the lows and is making modest move to the upside in recovery. entry $16.05. Copper (JJC), Steel (SLX entry $47.30) and aluminum (JJU) bouncing higher.
  4. Precious metals (DBP) moved lower with gold (GLD) testing support at $123.50. Solid bounce on Friday to $125.50, but will it hold and follow through is the big question facing the metal. entry $126.40. Palladium (PALL) moving towards breakout high.

Commodities Rotation Chart:

Commodity

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

5) Global Markets: 

The global markets established a pivot point on February 3rd and as noted above diverged from the US markets. This week look for the the two to continue to part company on the bounce and confidence in the global outlook. Watching to see how this unfolds going forward. Emerging markets, Europe and South America are moving through key resistance points and ready to put money to work in the sector.

For the Week of April 7th:

  1. The EAFE (EFA) index moved to the previous highs and moved slightly lower in response to the US, but still looks ready to move higher. entry $68. Europe (IEV entry $48.75) is ready to break to new high and willing to add to the position.
  2. China (FXI) bounced last Friday and moved sideways on the week. A move above $36 makes for interesting trade opportunities this week. entry $36.
  3. Emerging Markets (EEM) made moves through the $41 level for entry and is holding near the $41.40 mark as the US markets determine direction. Upside in play and the consolidation may give opportunity to add to positions.
  4. Latin America (ILF) continues to climb vertical off the bottom reversal two weeks ago. Brazil (EWZ) has done the same relative to the upside.
  5. Hong Kong (EWH) is clearing a double bottom breakout. entry $20.80.

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.

6) Real Estate (REITS):

Real Estate Index (REITS) РPotential pivot point on March 4th in in the REITs lower. That shifted on March 26th back to the upside and we are holding the move thus far. I still like the outlook for the longer term play along with the dividend and growth opportunity. If the Fed can keep lower rates in play and believable the rally returns. Watch and manage the risk of the position as well as the parts.

Hit our stops on positions in the sector and now we watch to see if the opportunity arises to reenter the position near the $68.50 level going forward. Patience as the sector did bounce this week.

For the Week of April 7th:

  1. Real Estate (IYR) moved back above the $68 mark and holding, but a move above $68.50 is the entry point for the sector on the bounce back.
  2. HCP, Inc. (HCP) healthcare facilities. Moving above resistance at the $39.50 mark and we would use that as the entry point for the opportunity.
  3. Equity Residential (EQR) Residential REIT. Breaking above resistance at the $59.30 mark and entry at $59.45.
  4. Mortgage REITs (REM) broke lower in interest rate moves. entry $12.35 to fill the gap left and then potentially higher.

Real Estate IYR

7) Global Fixed Income:

Sector Summary: Bounced off the lows and Trading higher on the bounce in the global markets over the last couple of weeks. Any positions are for the dividend play only, thus manage your stops.

  • PAFCX – 1% dividend. Trading and trending sideways the three months, but making a move back towards the previous highs. $11.15 entry. Stop at $11
  • PICB – 3.1% dividend. $27.80 found support and bounced. $28.70 entry (Sept 2013). Hit entry and adjusted stop to the entry. zero risk trade on dividend. This a dividend play, hold the stop at break-even and let it play out.
  • EMB – 4.5% dividend yield. Looking for bottom? Found the low and bounce. A break above $109.27 would be of interest. entry $109.30. Adjusted our stop to $108 on volatility. Watch and manage risk and dividend.
  • PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a question. Found support and bounced. entry $27.30. stop $27 and manage your risk

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.