Notes for the Week of June 30th

Notes to Note: 

I will put this week of trading in the choppy consolidation category. Going into next weeks trading I expect more of the same. We will close out the quarter on Monday and may get some buying prior to all the data at the end of the week and earnings beginning. As hard as it may be we need to practice patience and discipline going forward. The trend remains on the upside, but the worries all remain. Take it one day at a time and remain focused on your goals. Manage your money and not the market. Below are some key notes on the week and looking forward:

  • Consumer sentiment rose to 82.5 vs 81.9 in May. Now that is true improvement! Bad news, we are still below pre-recession levels. But, it is getting better.
  • Housing data was better than expected this week reflecting the positive impact of lower interest rates and better employment. At least that was what the media stated. I accept the interest rates for the reason… employment is a political statement.
  • GDP for first quarter was revised to -2.9%, ugly, ugly ugly. Enough said.
  • Durable goods were -1%, ugly.
  • Overall economy is plodding along at modest growth. The current outlook is 4% growth in GDP for the second quarter. Not likely as Goldman downgraded that to 3.5% this week. Not likely either. Maybe 2-2.5% if we are lucky.
  • Remember Monday ends the quarter… economic data all week and prognostications on what that will mean for earnings for Q2.

Have A Disciplined Week of Trading!

Market Story & Outlook:

Current Story of the market still involves uncertainty looking forward¬†as the second quarter officially comes to a close today. The broad indexes have made a statement that investors believe the Fed is correct in their assumptions relative to growth forecasts.¬†The buyers believe growth is building in the US economy as the Fed stated in the last FOMC meeting. The sellers believe the market is stuck in a 1-2% growth cycle and not much is changing relative to that outlook.¬†The¬†Fed forecast for the second quarter (now second half of the year according to Yellen) of 4% isn’t looking to line up with the current data releases and starting tomorrow we will have a better view as we report the June data. The buyers remain in control as the uptrend resumed in the S&P 500 index hitting a new closing highs. As a side note, Goldman Sachs lower GDP estimates to 3.5% from 4% last week. Is this the¬†beginning of the downgrades on economic growth forecast?

The second phase of the story line is bond yields were believed to rise this year as the Fed tapered (cut stimulus) and the economic growth improved. The yields to start the year on the thirty-year bond were 3.94%, currently they are 3.36%. That is not what was prognosticated and the story line has not helped the current lack of direction in¬†the markets. The bonds are telling us something different than the Fed and economist.¬†FOMC meeting showed a lack of reality from the Fed, but that’s what makes them the Fed. I would watch for rates to start creeping higher if we end the second quarter on a positive note… economic data improves.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data was not good overall in real data. However, the spin by analyst kept investors looking forward not back. The rate of decline in earnings is the primary concern from my view. The focus from the media is the number of companies that beat expectations, but the rate of growth in earnings will determine the rate of growth in stocks looking forward. The quarter is over and now we get the report card, good or bad. Earnings are and remain a concern for investors longer term.

This all adds up to uncertainty and a lack of clarity relative to the data and the belief. The underlying concerns have not been removed or dealt with. We are ending the second quarter and the next phase of report begin tomorrow. As we always say and attempt to do, take what the market gives and protect the downside risk of your portfolio. Patience and discipline are key to success long term.

RESEARCH MODELS:

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

Sector Rotation Model (updated Р6/28/14)

ONLY ETF Model (updated Р6/28/14)

S&P 500 Index Model (Updated Р6/28/14)

ONE EGG Model (updated Р6/28/14)

Monday Trade Opportunities:

  1. VMW – Entry $98.45. Trading range. Break through resistance and run. In software sector.
  2. CRM – Entry $$58.25. bottom consolidation break higher. Consolidating on the break higher and looking for a follow through.
  3. PCLN – Entry $1225. trend continuation from consolidation. Internet space remains positive and move back to the $1300 level possible. 1220 Oct call $81 or better if you don’t want to buy the stock.
  4. SPWR – Entry $40.75. Flag pattern. Broke higher with move in the sector. Looking for continuation move from the pattern. Gap open.

Pattern Trade Tracking & Follow Up:

  1. AAPL – Entry $91.10. Test of support is shallow ABC pattern. Run back to previous high and beyond if momentum picks up.
  2. DBB РEntry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside.  Stop 16.62.
  3. GLW – Entry $21.75. Channel or trading range breakout. Watch and let volume drive entry. Stop $21.50.
  4. IGT – Entry $16. Pennant again set up to break higher. Stop $15.70
  5. TWTR – entry $38.15. bottom reversal and follow through. Bottom in? watching as trade for now, but could develop into more. Stop $37.50.
  6. SCTY – entry $55.31. bottom trading range. Break higher from the range as sector moves higher. TAN broke higher on Monday. Stop $67.45.
  7. QQQ – entry $92.63. test reversal. Tested the trend line and looking for bounce back to upside as trade opportunity. Stop 92.
  8. DDD – entry $51.70. bottom trading range. Break from the range with upside return. Stop $54.90.
  9. YELP – entry $66.80. cup and handle. Break higher from the bottom reversal in play. Stop 73.84. Jump on Open Table acquisition raise stop and say thank you.
  10. FB – entry $64.22. cup and handle. Break higher as continuation of the trading range breakout attempt. Holding the move for now and Stop $62.30.
  11. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $49
  12. AKAM – entry $55. trading range breakout. Stop $60.50.
  13. STI – entry $38.95. trading range. Banks attempting to break higher. stop $$39.50.
  14. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $48.50.
  15. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $22.15
  16. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $252.
  17. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $87.
  18. TRIP – entry $86.95. Higher low, ascending triangle. Be patient with entry as it needs room to validate the move on the upside. Internet sector oversold. Stop $102.

Breaking Down the 7 Asset Classes:

As you can see on the chart below the US stocks have been leading the move to the upside. Despite the test this week they remain the strongest of the asset classes currently and, from we can determine, will be going forward. The EAFE index moved lower on concerns in Europe and we are watching to see how that unfolds or just a bump in the road. Overall the fatigue is showing in the charts as investors look for clarity and validation that more upside in store.

7 Assest Classes

For the week of June 30th:

  1. The global markets stumble with Europe leading the test lower. Watching.
  2. Treasury bonds bounced again volatility picked up and money moved back towards safety. Why the renewed concerns? That is the key issue we are all waiting for the explanation.
  3. Commodities bounced with gold, base metals and agriculture adding to the upside. The challenge in oil, natural gas and gasoline are on my watch list of what to expect. Still like the positive sentiment in the sector overall.
  4. Emerging market moved lower and remain in consolidation phase.
  5. REITs sold lower, found support and is now consolidating while looking for the next catalyst.
  6. The dollar is drifting lower as other currencies pick up momentum.
  7. Emerging market bonds has return back to the uptrend for now.

1) US Equities:

Using the latest pivot point you can see the sideways activity for the broad index. Utilities are leading? That should tell you alone the defensive mindset of investors the last two weeks. Why the stall? End of the quarter, earnings on the horizon, economic data for June, Q2 economic picture, etc. We are going to face plenty of data in the next couple of weeks and the worry… it may not meet with expectations Nerves before the event essentially is what we are seeing. Below we break down the impact by sector.

SP500Scatter

For the week of June 30th:

  1. Utilities are leading the dance? Defensive sector are in charge across the last two weeks. The renewed interest in the sector does raise some short term concerns for stocks, but it is still early and while we like the results in the position we hold, we still are watching to see the outcome going forward.
  2. Healthcare is moving back into a leadership role as technology and others consolidate or move sideways. The biotech (IBB), pharma (XPH) and devices (IHI) are leading the sector higher near term. I like what we have seen and would be willing to add to the position on any test near term.
  3. Consumer Staples (XLP) are moving lower? Generally a defensive sector, but the move lower in interest rates and high commodity prices are taking a toll on the sector near term. The margins for these companies are small and they are dependent on higher dividends to be competitive against bonds. Fear of rates moving higher are have some impact. Watch for support to hold and the upside to resume.
  4. Industrials are moving lower and testing support short term. A break lower would be a negative for the sector and the broader index. Watching for the resulting opportunity.
  5. Balance of the sectors are content to trade in unison with the broader index. Next week look for clarity and separation to arise. Leadership is lacking and that alone makes me cautious. Take it slow and let this unfold near term.

2) Currency:

We are working off the June 11th pivot point with the dollar moving lower gradually. UUP is low man on the totem pole as you can see on the chart. Brazil made big jump higher and Canada has made a solid move on the upside. In fact most of them look positive relative to the US dollar.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

Using April 2nd as the pivot point The test lower on May 28th is clear and the renewed push on lower yields is also seen. Yield volatility continues to bounce around keeping the sector in check, but the outlook is still for rates to remain low. Treasury yields moved lower again this week and pushed the sector higher. Watch, manage the stops and continue to collect the dividend until the price move forces you out of any positions.

Bonds

  • Utilities –¬†¬†The dividend play remains, but it has experienced some volatility the last four¬†weeks and this week was no different with a nice move to the upside. The 4% dividend (entry point) remains. Added again on¬†the move above $42. Stop at the previous low $41.25.
  • REITs¬†– This is still a sector to watch and manage for the dividend of 3.2%. We continue to monitor the short term volatility.¬†Made a move lower¬†this week to test support at the $70.60 mark for now.
  • Mortgage REITs¬†–¬†has¬†slowly worked higher from the gap lower in March. Made the break through resistance at $12.50 (REM) added $12.50 position and $12.05 stop to capture the dividend. Target for now is the $12.90 level and we will maintain for the dividend. Dividend distribution this week of 29 cents, that explains the drop in price on June 24th. Make sure you adjust for the move.
  • Treasury Bonds¬†– Yields moved¬†lower¬†this week on money flow. Risk on trade is in motions short term. The 30 year yield which is now at 3.36%. TLT tested support at the¬†$111.25 mark and we are watching the move higher.¬†I still see this as a trade opportunity and nothing more at this point.¬†Be cautious here and don’t fight the Fed for now.
  • High Yield Bonds¬†– HYG = 6.4% yield (from entry). Bounced off the $91.25 support (Sept 2013) and held to close back above the 200 DMA. Was moving higher, but dropped on rumors in the high yield sector. Closed back at $94.83, but still watching how it move from here. Stop is $92.50 (break even) on position as this is a dividend trade. Nice move to highs last week.
  • Corporate Bonds¬†– LQD = 3.6% yield. Entry off the low at $113.20 (12/2013). Cleared $117.50¬†resistance level as traded through top of the consolidation range and now near the $119.50 level. Watch how it plays out and keep your stop at $117 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield.¬†tested support at $107.80 and holding with modest bounce this week on yields moving lower.¬†Manage your risk and still looking to collect the dividend. Stop at¬†$107.50 (entry 104.50 12/2014) and the dividend is the play. Muni’s tested lower with corporate’s on the week.
  • Convertible Bonds¬†– CWB = 3.6% yield. bounced off $43.75 support (Sept 2013) and $44.80 entry point. We hit our stops at $47.50 4/10/14. (locked in a 2% dividend + 8.6% capital gain) That was¬†a good fixed income trade. We added the position back at $48.75 on the bounce off support.¬†Moved higher¬†this week, trading near the high, and stop is $47.50 for now.
  • Preferred Stocks¬†– PFF = 5.2% yield. Modest uptrend continues. Tested the 50 DMA and has now bounced back to the previous highs.¬†Watch and maintain your stops at $38.50 currently (entry 3/13). Break even trade with focus on dividend.

4) Commodities –¬†The commodity index (DBC) made a pivot¬†higher June 4th after six weeks of drifting lower. The big question is if the trend is tradable or investable? DBC needs to break above the $26.50 level to reverse the trend (did that) and hold with a continued move higher (doing that). The big move this week came from silver on the upside and natural gas on the downside.

For the Week of June 30th:

  1. Natural Gas – UNG¬†moving lower off the $26.30 high in June. $24 is the level to watch for support. Challenge is one of perceived demand declining on global economic issues. Not improving a quickly as expected relative to projections… watch support?
  2. Oil (USO) Moving sideways despite the continued concern in Iraq and Ukraine. Let this play out and take the resulting directional change as an opportunity.
  3. Agriculture (DBA) hit $27.80 breakout pivot, tested on Friday and looking to see if we have an opportunity to trade on Monday.
  4. Precious metals bounce with gold and silver having solid moves higher. Consolidating currently near the $126.50 level on gold. Silver is still rising. Both offer opportunities.
  5. Base Metals (DBB) moved higher as Steel (SLX) and copper (JJC) have led the charge. Like the opportunity in both short term.

Commodities Rotation Chart:

Commodity

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

5) Global Markets: 

The global markets continue to see a drift to the upside off the April 11th pivot point. The dip this week was some testing on news in Europe challenging the outlook. There were dividends as well in EFA which schews the chart. Make the adjustment for the dividend in cost per share and you will have better view of current situation. Watching to see how this unfolds next week. Patience is required as Europe determines the outlook going forward.

For the Week of June 30th:

  1. Emerging Markets (EEM) Was consolidating and moved sideways.¬†Watching to see how it unfolds… up or down. Willing to add on a successful test of support.
  2. Japan (EWJ) has made solid move to the upside since the move off the May 20th low. Testing this week, but we still like the upside opportunity.
  3. China (FXI) tested lower this week as well with modest bounce to end the week. I like this country ETF and looking at the EGG model owning the ETF.
  4. India (PIN) went vertical on elections results and optimism about the turn around. PIN has tested some the last two week, but the upside remains in play. Manage your stops as we move forward and look for opportunity to add to trade on move higher.
  5. Solid moves higher in Canada (EWC) the last month as well and taking on leadership role with the boost in the energy sector.

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) РPivot point on June 5th was on the downside and the lower high on June 2oth added to the downside shift. A move back above $72.25 would shift the trend back to the upside off the June 16th low. Simply put there is some indecision in the sector short term and hopefully some opportunity on how it plays out. Patience and look for the leadership.

For the Week of June 30th:

  1. EQR has move back to the upside and established a new high on Friday.
  2. HCP has bounced off the low and looking positive near term.
  3. AMLP has been moving higher and continues to show leadership in this sector.
  4. EMLP also is moving higher as energy set the pace for the sector.

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¬†higher¬†the three months,¬†and cleared the¬†previous highs. $11.15 entry. Stop at $11.15 break even and collect the dividend.
  • PICB – 3.1% dividend. $27.80 found support and bounced. $28.70 entry (Sept 2013) stop at the entry. zero risk trade on dividend. This a dividend play. Tested the move lower near support at $30.05 and is now resuming the upside move.
  • 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 $111.50 on volatility. Watch and manage risk and dividend. Again the gains are more than the dividend, thus we have to look at protecting the gain should this reverse.¬†Made move back to the previous highs on reversal in sentiment.
  • PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a question. Found support and bounced. entry $27.30. stop $27.30 and manage your risk as the gain is more than the dividend yield. support at $28.80 in play. Watching to see how this¬†unfolds going forward.

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.