Outlook and Trading Notes for Week of June 16th

The nerves that were showing on Thursday settled somewhat on¬†Friday and the buyers were willing to step back in and the indexes held support. As we discussed in the webinar¬†Thursday¬†night there were two options to plan for heading into Friday’s trading. First, a follow through on the¬†downside move¬†and break support at the 1925ish level on the S&P 500 index pushing the index lower. Second, a bounce off the support of the same 1925ish level and move higher. Friday’s trading is leaning towards option two. We have to be patient and watch to see how it plays out next week, but the case can still be made for the upside to continue.

The data continues to be mixed. The retail sales reports on Thursday were not good, regardless of how much perfume analyst wanted to spray on them. Today the consumer sentiment was lower than expected and lower than last month. However, PPI showed a -0.2% decline and better than expected on the wholesale inflation front.

Thank goodness we have the weekend to digest all of this and put in place a plan of how to address next week and beyond. The trend is still on the upside and the noise is getting louder relative to a pullback or correction. In listening to the talking heads last week you would have thought the world was coming to an end. Filter the noise, focus yourself and keep moving towards your objectives.

Have A Disciplined Week of Trading!

Market Story & Outlook:

Current Story of the market still involves uncertainty about the markets looking forward. Despite the rally¬†off the recent lows and the move to new highs on the major indexes, there are still those¬†unresolved¬†issues economically, fundamentally and growth. As we have discussed the markets underlying challenge is the slow growth of the economy. The tug-o-war is, ‘buyers’ believe the economic improvements currently being prognosticated at 4% growth for the second quarter are a given. That means we must ignore the first quarter contraction in GDP (minus one percent), the mixed data in the economic reports comparing¬†May to¬†April and a slowing consumer. The buyers are getting¬†some validation (not four percent worth) and they are putting money to work in stocks. The ‘sellers’, on the other hand, believe the economy is growing slower at a rate of maybe 1-1.5%. The buyers are winning currently as the uptrend resumed in the S&P 500 index hitting a new closing highs. The sellers took a small shot this week, but not enough to change the technical views of the market.

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 3.41%. 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 this week may shed some light on this topic.

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. With two weeks left in the quarter the rhetoric on this issue will increase in volume. Earnings are and remain a concern for investors longer term.

This all adds up to uncertainty and a lack of clarity for stocks. The underlying concerns have not been removed or dealt with. We are now in the last month of the second quarter and the next phase of report will begin in three weeks. 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 Р6/14/14)

ONLY ETF Model (updated Р6/14/14)

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

ONE EGG Model (updated Р6/14/14)

Today’s opportunities:

  1. C – entry $49.65. Bottom reversal from trading range and move through the 200 DMA. Banks are moving higher currently.

Pattern Trade Tracking & Follow Up:

  1. JO – entry $34. bottom reversal. bounce off support and volume? Watch. Stop $32.90
  2. STX – entry $55. bottom reversal test. Tech remains strong currently. Stop $53.
  3. DANG –¬†entry $11.42. bottom reversal breakout. testing move above the 200 DMA. Stop $11.08.
  4. YELP – entry $66.80. cup and handle. Break higher from the bottom reversal in play. Stop 71.80. Jump on Open Table acquisition raise stop and say thank you.
  5. XOP – entry $78.40. reverse head and shoulder. part of the energy sector attempting to break to new high. Stop $78.40. Hit new high as oil move above $107.
  6. 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.
  7. ANIK Рentry $48. trading range. biotech moving higher again. Stop$47  РHIT STOP
  8. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $47.70
  9. BAC – entry $15.35. trading range. Banks moving to the upside. Stop $15.35.
  10. AKAM – entry $55. trading range breakout. Stop $57.37.
  11. STI – entry $38.95. trading range. Banks attempting to break higher. stop $$39.87.
  12. EXPE –¬†entry $73.90. Downtrend break and follow through. ¬†Stop $73.90. HIT STOP
  13. WAG – cup and handle. test the breakout and take the entry price or follow through entry at $71.45. Stop $72..
  14. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $48.15.
  15. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $21.60
  16. RVBD – entry $19.90. trading range. technology moving higher short term. Stop $20.
  17. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $242.25.
  18. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $83.
  19. ERX –¬†entry $106.42. uptrend test of support in consolidation. Energy is one of the leaders and looking for upside continuation of the previous trend. Stop $114.75
  20. 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 $99.90.
  21. AAPL – entry $84.29. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $91.70. HIT STOP
  22. GE – entry $26.30. Trading range breakout. Value stock coming back into favor. Gapped on earnings above the entry… patience. Got the test early and added the position. Stop $26.30.

NOTE: The pattern trades above are setups that I see for a potential swing trade or short term trade opportunities. Some will fail to follow through on the pattern, some will break and trade according to the pattern. The key is to use discipline in the trades. Entry, Exit and Target on all trades is vital. I am posting these as opportunities that I see when doing scans daily. You can use them as a teaching tool or you can trade them, either way please use discipline. The best way to treat these as a learning tool is to assume a $100,000 portfolio and each positions receives a 5% allocation. If we state to take a 1/2 position as an example you would only allocate 2.5% to that position. I would use a downside risk of $500 per trade as a maximum loss. That will help  you learn position sizing and risk management. All investing comes with risk. Our job as investors is to manage the risk. Keep your focus and discipline in place.

Breaking Down the 7 Asset Classes:

Since the April pivot point the move was¬†sideways, but since May 20th the move higher has been positive as the US stocks hit new highs. It is important to remember when we move sideways… investors are confused and don’t know which side to commit to.¬†The current move¬†to the upside has provided some short term direction, but¬†it still requires discipline¬†as it started to test this week with some modest selling.

Asset Classes

For the week of June 16th:

  1. The global markets have returned to be in correlation with the US markets and that is moving higher currently. Mixed week with the sellers taking a shot, but held support.
  2. Treasury bonds bounced again volatility picked up and money moved back towards safety.
  3. Commodities bounced as oil and gold moved on the geopolitical issues in Iraq. This is a speculation move not fundamental. This is a trade and nothing more at this point.
  4. Emerging market moved higher early in the week and then tested the move. Still like the outlook longer term. If you are willing to take the volatility the sector is worth trading.
  5. REITs sold lower on the fear of rising rates. Ended the week with modest move, but still need to watch how it plays out. Hit our stops and looking to see if it offers a reentry opportunity.
  6. The dollar gained some ground on geopolitical concerns globally, but retreated on EU and Japan rallies. Not convinced this holds longer term, but for now the move higher is a bounce off the test of the lows currently in the dollar.
  7. The EAFE index is trading along with the US, breaking down the parts offers a better opportunity for global investments.

1) US Equities:

The S&P hits a new high and then tests the move. The mixed economic reports get some of the credit as the expected rate of growth in the economy has not appeared. The uptrend remains intact and no sell signals have been produced, but the caution flags have been raised. 1925 level is what we are watching from short term perspective. Approach this week with caution, monitor you stops. We have some cash as result of stop hit in the S&P 500 model and have to take precautions to manage the risk.

500 Scatter Rot

For the week of June 16th:

  1. Small Caps (IWM) РBroke higher and has now set up a pennant pattern on the test and consolidation. Break of $115 support is the exit point, but the bounce on Friday off support will be of interest as we start the trading week. The trade has panned out on the upside, but raised the stop to $114.70 in the event more selling comes.
  2. The NASDAQ 100 (QQQ) Tested near the $93 level on the upside and stalled with the test this week. Raised stop to $91.40. Bounced on Friday, but still cautious as we start the trading week. Take the necessary precautions, but still looking for bounce off support and run higher. We can make assumption, but need stops in the event those assumptions are wrong.
  3. S&P 500 index remains in an uptrend, but the test this week has put everyone on notice. This is a test in the trend and nothing more at this point. The tendency is to want to read more into the move than is reality. 1920 is the level to hold and we will watch and make adjustments accordingly.
  4. Energy (XLE) remains a leader and continues to move higher from the consolidation and hitting new highs again. Adjust your stops according to your time horizon. The move in crude on the geopolitical issues in Iraq are in play, but stocks have remained in uptrend. Mange your stops and let it run.
  5. Semiconductors similar to energy, has been in a upswing and has not looked back. The news from Intel on Friday helped the move higher and we just adjust our stops and let it keep running for now.
  6. Healthcare РBiotech (IBB, BIB) broke above the resistance point and completed a bottom reversal pattern. Some fading on the week, but still holding the upside. Be patient here manage your stop, but give the volatility room and look for upside to resume. XLV has moved lower due to the selling in the dividend stocks as well as the providers struggling short term. Patience.
  7. Utilities (XLU) Uncertainty in the dividend arena with interest rates has the sector developing a trading range. We hit our stops, but watching to see how this unfolds and willing to trade the results.

2) Currency:

We are working off the May 7th pivot point with the dollar moving upwards slowly. UUP is this resistance at teh $21.60 level and that is where we watch for now. Upside  is being pushed as the euro weakens on stimulus promised from the ECB. FOMC meeting this week may have some influence and worth watching.

currency

3)  Tracking the Bond/Fixed Income Sectors:

Using May 28th as pivot point off the recent highs and test lower on rising yields. Yield volatility continues to bounce around keeping the sector in check, but the outlook is still for rates to remain low. This week the yield on the treasury bond settled and moved lower on the selling in equities showing some rotation to safety. Watching to see how this unfolds. Bond yield s should be rising if equities are rising on a strengthening economic picture. Watch, manage your stops and/or put a hedge in place should yields continue to rise.

Bonds

  • Utilities –¬†¬†The dividend play remains, but it has experienced some volatility the last four¬†weeks and this week was no different. 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. Hit stops, but watching to see if there is opportunity as this unfolds.
  • 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.
  • Treasury Bonds¬†– Yields moved off the¬†new low this week on rotation to stocks. Risk on trade is in motions short term. The 30 year yield which is now at 3.41%. TLT test support at the¬†$111.25 support.¬†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 back to highs the last three weeks.
  • 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 $120 level. Rise in yields sent investors to the exits quickly as tested the 50 DMA on the week. Watch how it plays out and keep your stop at $117 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Ascending triangle of consolidation was broken on the upside at $107.21. 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 and stop is $47.50 for now.
  • Preferred Stocks¬†– PFF = 5.2% yield. Modest uptrend continues. Fear on the move in interest rates on the upside have pushed the stocks lower. Tested the 50 DMA on the week.¬†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 and that is the outlook we take into the trading week. The big move this week came from Palladium on the downside and oil on the upside.

For the Week of June 16th:

  1. Natural Gas – UNG tested support at the $25ish mark and bounce on Thursday. The commodity remains volatile and we continue to hold our position for now with a target of $27.
  2. Gasoline (UGA) spiked higher on the rise in crude oil this week. Gap gave no opportunity to take the trade. Watch.
  3. Oil (USO) Moved above $38.25 for opportunity as oil climbs on speculation in Iraq. Trade only on upside with tight stops.
  4. Agriculture (DBA) Testing $27.25 support and bounce? Move through $28 could set up trade short term. Watch to see how it unfolds this week.
  5. Precious metals bounce with gold and silver having solid week along with the mining stocks. No positions added, but watching to see if it follows through. GLD $123 key level and SLV $19.
  6. Base Metals (DBB) testing lower again as steel and copper struggle short term. nothing to trade for now.

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. Some rotation in the last four weeks has taken place with some new leaders rising to the top of the chart. This is going to take patience as this outlook continues to develop with the ECB promising stimulus, India running higher on hope, Russia bouncing after their threat to take over Ukraine, and now the unrest in the Middle East again. Keep your focus if you are invested in the global markets, plenty of opportunities, but also plenty of volatility.

For the Week of June 2nd:

  1. Emerging Markets (EEM) Was consolidating and now made move to new high again. Watch to see if the break holds and adds to the upside as we start the week. Entry $43 on EEM hit. Stop $41.76. Manage the stop.
  2. Japan (EWJ) has made solid move to the upside since the move off the May 20th low. Still heading higher after modest test this week.
  3. China (FXI) continues the move higher off the May lows and breaks above the April highs this week. The play continues to move and stop is now the $36.50 level.
  4. India (PIN) went vertical on elections results and optimism about the turn around. PIN has tested some this week, but the upside remains in play. Manage your stops as we move forward.
  5. Solid moves higher in Canada (EWC) the last month as well.

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) РPivot point on March 26th was challenged this week with some robust selling in the sector. The worry came from the rise in interest rates. While that was end check by the end of the week, the worries about the downside in the sector still linger. We hit our stops on the move and as you can see on the chart below there si plenty of damage to address. Watching to see if the modest bounce on Friday follows through this week.

For the Week of June 2nd:

  1. IYR – hit stops along with RWO. Watching to see if they recover and offer opportunity going forward. Patience.
  2. MLPs tuned higher last week and we added AMLP to portfolio. This week it is testing that move and we will look at how to best manage this position which has a long term view. This is a dividend plays (4.5%) and entry was $18.25.
  3. REM – Real Estate Mortgage REIT is pushing back near current highs and worth watching as the sector continues to recover.

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. Testing the move lower near support at $30.05. set your stops accordingly as this goes forward.
  • 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.¬†double top pattern developing and watching how it unfolds short term.
  • 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. double top and support at $28.80 in play. Watching to see how that unfolds.

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.