The December data released on Thursday did no favors for investors as the ISM manufacturing was lower than November, but ahead of expectations. It didn’t set the best of tones to start the news year. One major concern is auto sales which slowed in November and December.
Monday we get the ISM services data which will show if the discretionary side of the economy is still moving higher. Expectations are 55% versus the 53.9% posted in November. Retail sales data for the holidays would point to a potential disappointment in this sector. Factory orders will be released as well.
The balance of the week will be all about jobs. With the Fed minutes out prior to the jobs report we will get some insight to how the numbers will potentially impact the markets relative to the Federal Reserve actions going forward. Inventory data is also out on Friday.
Plenty to watch and plenty to worry about, but for now all things seem to be steady. The calendar link below will take you to the data expectations for next week.
Sectors to Watch:
- S&P 500 index held support at the 10 DMA to end the week. The uptrend remains in play with the 50 DMA the level to hold moving forward. The Fed couldn’t stand letting the markets trade on their own merit, they had to intervene again with comments relative to stimulus and the economy. Upside remains in play and we will be patient to see how it plays this week.
- NASDAQ remains in the uptrend, closed at 4131 and down for the week, but most of the action came from the large cap stocks such as Apple. Respect the trend and let this play out going forward. IF we hold above 4080 on the week look for the opportunity to add to QQQ.
- Small Caps (IWM) the Russell 2000 index moved above 1133 level and tested on Thursday. Still in position to continue the move higher with the uptrend remaining in play. There may be an opportunity to add to the IWM position if support holds short term. A follow through of the test and confirmation of a move above the 1160 level is what we will watch.
- Financials (XLF) moved above the top of the trading range and resistance on Friday. An upgrade to Bank of America helped the move and we continue to look at this as a long term sector to own. Patience is the key with the sector going forward.
- Energy (XLE) bounced off support of $84.80 and moved to the previous hight at $88.20 only to test again as oil fell to $94 last week. The sector has been mixed of late and the trading range remains in play. A move above the upper end of the range would give reason to add to the existing positions. The refiners remain the strongest sub-sector currently.
- Technology (XLK) gapped higher on the move above the $34.95 level. On Thursday and Friday we tested the move higher as semiconductor sector (SOXX) tested lower. We may fill the gap left before resuming the upside and would use the test of support as an opportunity to add to the position.
- Crude oil fell to the $94 level on Friday. This test lower is worth watching for the bounce. The decline presumably came on a strong dollar to end the week? That may explain some, but the real issue from my perspective is demand. As much speculation as can be mustered is being put into the effort to talk oil higher. The weakness from China’s economic data was a bigger impact than the dollar. Watching for a bounce trade in oil.
- Bonds have worked lower as rates climbed above the 3% on the ten year bond, but closed at 2.99%. The move higher in rates has been taking a toll on the the bond sector and puts the short play against (TBT or PST) the bond as the play of choice with rates on the climb. Watch rates as they push through resistance levels.
The models are updated and our short term view continues to dominate the process currently. The news from the Fed took some of the fear out and restored some confidence in the uptrend, but now it is data time and it has already added some more worries to the outlook for the fourth quarter earnings. Watching to see if buyers are willing to wade into an overbought market technically that got some minor selling to end the week. I am not changing my focus from the current events as they unfold and the opportunities they give as a result. The pattern list is where we are posting most trades short term as a result of the current market environment. Manage the risk on trades more aggressively and monitor your longer term holdings with trailing stops to account for any rise in volatility.
Breaking Down the 7 Asset Classes:
As you can see on the Scatter Chart the resumption of the uptrend on December 12th tuned lower to end the week. US stocks continue to lead the assets classes overall. The EAFE index fell on economic news in China impacting Europe along with the Emerging Markets. Commodities reversed lower on a stronger dollar to end the week. Real Estate is still attempting to recover on the upside reversal along with the dollar making a move higher. Overall this remains a US based investment market environment with risk remaining high in the other asset classes. We continue to look for the trading opportunities in these asset classes, but for now they are nothing more than that… trades.
1) US Equities:
The upside leader among the asset classes took a small hit on Thursday, but remain in a defined uptrend. The pivot off the test on December 12th is the current short term trading point to watch. As you can see on the chart below the leadership from Telecom, Basic Materials, Industrials, Technology, Consumer Services and Financials are being challenged by the selling on Thursday.
Watch Financials, Healthcare and Industrials to start the trading week for upside leadership. Looking for some clarity relative to the Fed and investor sentiment.
The dollar has been drifting lower, but reversed to end the week. Looking for more of the same… indecision relative to the global picture and uncertainty from Fed actions and speeches. Not interested in owning this sector currently.
3) Tracking the Bond/Fixed Income Sectors:
The sector initially reacted on the downside to the Feds announcement to cut stimulus. However, it has leveled off of late, but BND did break key support. MLPs are picking up some short term momentum worth our attention and the REITs likewise are holding support and looking for a bounce off the lows to continue (see real estate below). Until we gain some clarity on interest rates looking forward I am willing to watch and see how this unfolds.
Treasury Bonds – TLT or IEF are still holding support near the current lows. They attempted to break lower and accelerate the rate shift, but that has calmed considerably. No positions currently, too much volatility for my taste in owning bonds. The only trade here is to short the bond with TBF or PST.
High Yield Bonds – HYG = 6.4% yield. Bounced off the $91.25 support and held to close back above the 200 DMA, barely. Don’t own the bonds, and I would move my stops to break even ($91.25) to protect any downside reversal.
Corporate Bonds – LQD = 3.9% yield. No positions currently. Small rally in play off the low at $113.20.
Municipal Bonds – MUB = 2.9% tax-free yield. No positions currently. Moving gradually lower as money flows continue out of the sector on worries about the state of municipalities.
Convertible Bonds – CWB = 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 stops at $45.50. The trade has now become a risk free dividend of 3.6%.
4) Commodities – The commodity index (DBC) made modest pivot higher in November, but remains predominately sideways. The clear winner is natural gas (UNG), but even it has moved off the highs. The weather in the northeast sparked a rally in the commodity and now testing the move.
Crude sold lower last week and ended the upside rally in play. Testing support currently near the $93 level.
Base metals (DBB) bounced, but tested lower on Friday as copper dropped from the current highs.
Gold (GLD) bounced off support at the $114 level and held for now. Move back above $121 could make it interesting short term for the precious metal.
Commodities Rotation Chart:
DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.
5) Global Markets:
The global markets tested lower on the economic data from China. Europe and the emerging markets took the biggest hit. This is what we will be watching as we start the trading week. As you can see on the chart below FXI and IEV were the downside leaders. The ripple effect to the emerging markets show as well in EEM. Australia was the only country ETF not to respond on the downside, but then it has already corrected and making a move of the recent lows worth watching going forward.
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) – The sector has become erratic and volatile relative to tracking every rumor on interest rates and the Fed. The break of support at $63 managed to bounce and close back above that level for now. As seen on the chart some leaders are emerging in the index, but the lack of conviction from investors keeps the sector on hold for now. Long term positions in IYR with dollar-cost-averaging approach may offer some opportunities. We will have to be patient and let this play out moving forward.
7) Global Fixed Income:
Sector Summary: Bounced off the lows and trending sideways. Any positions are for the dividend play only.
- PAFCX – 1% dividend. Trading and trending lower the last three weeks.
- 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. This a dividend play, hold the stop at break-even and see how it plays out from here.
- EMB – 4.5% dividend yield. Looking for bottom? Move above $109 was of interest, but failed to hold the move. Watching to find support and opportunity.
- PCY – current dividend yield is 4.8%. Trading lower. Looking for bottom and move above the $27.20 mark.
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.