Notes and Update for Week Ending September 20th

The news of the week has to be the FOMC meeting on Wednesday ending with no stimulus cuts. After spending months preparing the market for cuts, the Fed decides to wait. The simple explanation… wimps. How does this all play out short term? There is lies the challenge for investors. The lack of clarity just went from clear to partly cloudy to dark. Flashlight anyone? The media has spent the last two days talking about a new bull trend in place, but that still remains to be seen. I don’t want to be negative, but tightening stops and protecting against the downside is a prudent approach going forward.

Despite all the negative surrounding the broad markets they still have found a way to attract buyers. Below we have updated the sectors of interest, the different asset classes have been addressed and with it our overall market outlook. Patience is the only word I can use to describe what actions need to be taken now relative to existing positions and adding any new positions going forward. The confidence level of investors grew on the Fed decision, the volatility index declined and hope springs eternal.

Stay focused and disciplined towards managing your money and your risk.

Sector and Model Notes:

  1. Looking at the Scatter graph below of the S&P 500 index we can define the current bounce off the August 27th low as the trend to watch short term. Of course that has been positive for the last three weeks. The shift on Thursday and Friday is some give back from the Fed bounce on Wednesday. Nothing was exempt from the modest move lower, but the upside stays in effect for now.
  2. Consumer Staples gapped higher to start the week and close at support of $41 (XLP). Breaks lower exit and bounce look for the leading stocks in the sector. Grocery stores are the leading sub-sector currently.
  3. Utilities gapped up 3% on Wednesday and gave it back on Thursday and Friday. XLU is paying a 4% dividend. The chart is showing a consolidation pattern which broke higher and is testing currently. All said, it is worth keeping on a watch list to own long term and add to the position. We added to the Sector Rotation Model and we are looking to build a position to hold as well as trade the position as we move forward.This is a sector for the patient investor!
  4. Financials moved above resistance at $20.50, but gave it up on Friday. The indecision in the sector remains a result of the uncertainty around the regulations, fines and lawsuits pending. Slowing in the mortgage origination business isn’t helping either and the whining goes on and on. KBE & KRE are trading lower and still need some kind of catalyst on the upside if the trend shifts. IAI has been the strength of the sector as the brokers added a solid moves higher, but the topping look the last couple of days could test lower if the sentiment shifts gears short term. Watch IAI and KIE for clues short term on direction. Their leadership has pushed the index higher and any downside acceleration would be a negative short term. Manage the risk of the positions in the Models.
  5. Healthcare (XLV) РMoved to a new high and holding. Manage your stops in the S&P 500 Model. The sector is holding up well and continues in the current uptrend.  Biotech (IBB) has moved above the previous high and consolidating near the $210 mark, stop at $205. XPH is worth watching as it consolidates for breakout. IHF failed and moved lower on the week as the weakness in the sector.
  6. Technology hit a new high, but reversed on Friday down 1%? Apple sell off this week didn’t help the upside, The bounce off the lows gave back on Friday. The semiconductors (SOXX) moved to the previous high at $66.85 leading the broad sector. Internet (FDN) is leading on the upside as well in the sector, but struggled on Friday. IGN and IGV both made solid moves on the upside as well, but struggled on Friday. Sector still in a leadership role and we raised the stops accordingly.
  7. Consumer Discretionary is hitting some resistance at the $60.25 mark. We adjusted the stops in the S&P 500 Model on the position.  XRT cleared the 50 DMA and tested the July high? Watching for defined leadership and if the upside is to continue this will be an important sector. AMZN resuming a leadership role short term. Homebuilders did well on the week with some selling on Friday. Still holding for now. Adjust stops and watch.
  8. Real Estate (REITs) finally broke higher short term on the Fed news about stimulus, but it didn’t last with the reversal on Thursday and Friday. Watching and scanning the sector for short term opportunities if the bounce remains in play.
  9. The global markets bounced led by the EAFE index (EFA) moving higher as they track along with the US markets. Led by Europe (IEV)  and China (GXC) short term. See sector update below for more on this asset class.
  10. Interest rates fell, Bond prices rose. By the end of the week if was reversed and the Fed comments forgotten? Watching the bond sector along with interest rates.
  11. Commodities are struggling and that is not really a surprise when you look at the stocks market in comparison. Until we gain some clarity relative to the Fed actions going forward, expect more volatility in the sector.
  12. Volatility index tested support at 12.5 this week and ended the week at 13.3 down from last weeks close at 14.3. The thanks goes to the Fed for their gracious efforts to continue funding $85 billion per month in stimulus. SVXY trade in the S&P 500 model has work well on the move and we have raised the stop on the position to protect the gains. This also puts VXX back in the post as an opportunity should the selling on Friday continue into next week.
  13. The dollar is not able to hold on to last weeks gains. As the anxiety over Syria subsided this week the dollar trekked lower.  $21.90 is still support and the data is updated below on this asset class.

Economic Data & Outlook:

The economic data according to the Fed is not strong enough to cut stimulus. That comment alone makes me want to run screaming from the market short term. But, we must look at the facts versus listen to the BS. Production, utilization, home builders index, housing starts, permits, jobless claims and Philly Fed were all positive data points. The were not stellar on the upside, but they were sufficient enough to keep the economy projections of 2% growth in GDP well within grasp. Even the leading indicators ticked higher more than expected. Thus, the discrepancy between the comments from the Fed and the economic data.

Jobs are the big issue for the Fed. We are not creating enough of them to justify the stimulus cuts. Equally important is the hike in interest rates. The Fed wants lower rates to keep housing growing and thus, stimulus helps both supposedly. Anyway that is the rationale and we will go with it for now.

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

Economic Events & Calendar

1) US Equities:

The S&P 500 index ended the week up 1.4% despite the small give back on Friday. The run stalled on Thursday and Friday as investors sobered from the FOMC meeting. The uptrend off the November low is still intact as investors continue to buy. Watching to see how it unfolds going forward. 1710 is the previous high and support for now.

The NASDAQ has held up better than the other major indexes during the last six weeks of volatility. It remains above the 50 day moving average and established a new high this week. The Apple helped the upside to resume after gaining some momentum on news of sold out pre-orders on the 5s phones. Keep your stops fairly tight.

Small Cap (IWM) made the move above $102.50 resistance. Added the position and we continue to monitor the upside move.

Mid Cap (IJH) moved back to the previous high and testing. The upside remains in play and we will monitor the downside risk short term.

The SOX index is offering solid leadership. Hit a new high near $68 and is testing the move. Look for the leadership to continue if the NASDAQ and broad markets are to continue higher. .

Short S&P 500 Index (SH) – I am adding to the watch list as the potential for a test or move lower is a worthy trade if it plays out moving through the balance of the month and quarter.

The June 24th pivot point is still in play on the downside, with another bottom reversal attempt on August 27th in play. Without some clarity a reversal or bounce will be tough to maintain at this point. The index is in need of leadership if the move off the recent low is going to materialize into some or anything meaningful.

August 27th low Pivot Point – Late week selling is worth watching.

SP500Scatter

2) Currency:

The dollar got crushed on Wednesday by the Fed stimulus addiction and the outlook isn’t improving for now.

FXB and BZF both head higher as the emerging markets gain traction.

No purchases in the sector currently and still looking for a defining move short term.

Currency

3)  Tracking the Bond Sectors:

Sector Summary:

The bond market rallies on the Fed as yields drop on the continued stimulus dump. Plenty of Volatility currently as bond market has struggled with the uncertainty. The FOMC decision doesn’t clarify anything, in fact, it will do more to stir the pot. This will create another short opportunity in bonds going forward.

  • 30 Year Yield = 3.76% – down 8 basis points for week ¬†—¬† TLT = $105 up $1.47 for week.
  • 10 Year Yield = 2.72% –¬†down 16 basis points for week ¬†— IEF = $101.09 up $1.47 ¬†for week.

Treasury Bonds РTLT or IEF potential trade on the upside as this sorts out. But, TBT is still on my watch list if the Fed hints at cutting anytime soon. No trades currently.

High Yield Bonds РHYG = 6.4% yield. Jumped above the $91.50 entry point on on the bounce above resistance. Passed on the trade, but watching to see how the test develops.

Corporate Bonds РLQD = 3.9% yield. No positions currently. Attempting to break the down trend line and establish some upside. However, rates would have to move lower? Not willing to make that bet currently.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Nice reversal off the low and some of the default fears are subsiding. Watch $104 as possible entry point for a dividend play longer term.

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.

***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 shift in the sector was lower, but the Fed announcement pushed money into commodities for the day. The results since has been very mixed. DBC bounced on Wednesday, but resumed selling on Thursday and Friday. Watch to see if support develops or the upside resumes. The chart below shows the modest downtrend since the high on August 28th.

  • Natural Gas¬†– (UNG) is still trying to hold the uptrend for now.
  • Crude Oil¬†– (OIL) ¬†is up and down as investors attempt to make the difference between demand and speculation. Short term speculation is winning, but not willing to jump in on either side near term.
  • Gasoline¬†– (UGA) Testing the lows near the $56.50 mark. The volatility in gasoline versus oil has not been level. Holding this level for now, and worth watching to see how it plays going forward.
  • Gold –¬†(GLD) The metal bounced big off the FOMC announcement. Hit $132 (GLD) and then fell back to $128.70. Not the upside many had expected off the news? Still not willing to own, but GLL is looking good.
  • Agriculture¬†– (DBA) $25 support. Nothing making a move and will to avoid for now.
  • Base Metals¬†(DBB) volatile comes to mind. SLX has been the bright spot, but testing back after big bump from the Fed. Same with copper and zinc. Not willing to venture in just yet.

Commodities Rotation Chart:

Commodity

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

5) Global Markets: 

The global markets bounced led by the EAFE index (EFA) moving above the August high and pushing back towards the May high and led by Europe (IEV)  and China (GXC) short term. The chart below shows the move lower to end the week. As the US markets go so to do the global markets currently.

Global Mkt

EFA –¬†iShares EAFE Index ETF¬†(click to view)

10 Deve

loped 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.

Sector Watch:

  • GXC-¬†China is leading the global markets, but watching the test in play.
  • IEV¬†– Europe bounced after a bout of selling. Hit new high this week and holding for now.
  • EEM¬†– Solid bounce and cleared the $40 resistance again. Testing the jump from the Fed. 41.75 support.
  • PIN¬†– India bounce off the lows last week as their currency leveled off from selling. $17.50 resistance. $16.25 support short term.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector bounced on the Fed decision and has tested back on the rise in rate the last two days. Too much, too soon and the data remains questionable short term. We took a position with a longer term time horizon and the short term uptrend still in play off the low in August and September.

Sector Summary:

  • IYR¬†– Found a bottom? Current dividend is 4%. Added position and watching to add more on a pullback.
  • RWO¬†–¬†SPDR Global Real Estate ETF¬†– Trended lower and bounced off support near the $40 mark. Some resistance at the 50 day moving average. 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.
  • PICB – 3.1% dividend. 27.80 support and bounce above $28.70 trade opportunity.
  • EMB – 4.5% dividend yield. Bounced with the Fed decision. Hold $109 willing to add a position.
  • PCY – current dividend yield is 4.8%. cup pattern with entry at $27.60.

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.¬†