Notes to Note:
Another week of volatility and worry for investors as the they attempt to sort through the foreign policy as it relates to Russia, Israel, Iraq and others. The indexes all tested key support levels and were able to hold despite all the rumblings about a correction. The good news was Friday closed higher as investors liked to hear Russia was considering a peaceful settlement with the Ukraine. The airstrikes order by the White House in Iraq were ignored due to the Russia comments. All said, it is crazy and you have two courses of action for now. First, sit tight and hold your positions with a hedge or stop in place, or second sell and hold cash. We have done both depending on the time horizon of the holding. Trading in this weather is insanity for more, meaning it will make me insane. Patience is always a key part of managing money and now is one of those time we have to practice extreme patience and let it all play out.
Have A Disciplined Week of Trading!
The final piece of the puzzle was Q2 earnings and economic growth. In an effort to keep it simple… earnings growth was better than expected and the rise in Q3 and Q4 projections will carry some positive clout as well. The latest stats from FactSet shows that earnings growth was north of 8% and much better than the 4.6% growth estimates. Maybe we are finally getting a reversal in growth trends for earnings. The other side that improved was the revenue numbers. We have to keep our eye on both going forward, but the market should trade in anticipation of growth once the geopolitical issues clear the headlines.
Last and not least from my view is the worry factor has to play out. Until there is clarity the chop will continue and speculation will rise along with volatility. Take it one day at a time and establish your strategy short term or long term before you deploy your cash.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 8/8/14)
ONLY ETF Model (updated – 8/8/14)
S&P 500 Index Model (Updated – 8/8/14)
ONE EGG Model (updated – 8/8/14)
Monday Trade Opportunities:
- Negative setup on the Iraq news from the White House. Watch and manage your risk.
- SDS – entry $26.65. bottom reversal. Selling activity picking up 1900 level will be in play on the index today as downside now in play.
- GLD – entry $126.50. falling wedge. economic and global activity favors a rise in price short term. Low risk trade with stop at $123 support. (Gapped open and watching for the test of the move to establish an entry point.)
- SOCL – entry $20.15. cup and handle pattern. Held up well in the selling last week.
- FDN – entry $59.85. trading range. Upside still in play. held up well in selling last week.
Pattern Trade Tracking & Follow Up:
- VMW – entry $100.50. trading range breakout and test. Upside value along with EMC. Stop $97.80. Use some patience on upside move.
- JO – entry $34.80. Bottom reversal. Breaking the downtrend line off the April high and looking for upside follow through. I like the outlook. Stop $34.80.
- CLF – entry 16.20. Trading range. The bottom reversal has been consolidating the last three weeks and looking for a clear break higher. Stop $16.50.
- QID – entry $46.88. Bottom reversal. The break lower in the semiconductors is a negative for the index and earnings from Amazon will impact the index today. 7/31 – added to position – entry $47.50 – bottom reversal. Volatility in the index has been slowly rising the last week and concerns in the large caps are rising as well. Hedge for other positions. Stop $48.15 both positions. Nice gain on selling in broad markets.
- PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
- DBB – Entry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside. Stop 17.50.
Breaking Down the 7 Asset Classes:
As you can see on the chart below we moved the pivot point to the high on July 24th and moved forward. the selling in the EAFE, Emerging Market, US Stocks and Real Estate have been uniform across the asset classes. Treasury bonds, US dollar and commodities have done fine moving sideways. The chart clearly shows the fear that stepped into the markets overall and now we look for where the best opportunities lie going forward.
For the week of August 11th:
- Emerging markets testing $43 support and holding for now. If we can define a bounce or opportunity off the low we will look for either a trade short or the opportunity to build the longer term positions we had discussed prior to the selling.
- Treasury bonds are a big question mark with interest rates. Watching to see if rate start to rise in earnest.
- Commodities are moving sideways and lower with a stronger dollar having some impact short term. Watching crude with the geopolitical issues in Russia and Iraq.
- REITs (IYR) finding support at the $70.65 mark for now. Watch to see if the downside resumes or if the buyers come back to the table.
- The dollar was drifting higher off support short term and UUP is good for now.
- Emerging market bonds sold off on fear, but finding some support short term. Need the global issues to clear and then a buying opportunity may arise.
1) US Equities:
As we did above we are using the high pivot point of July 24th to see the impact of the selling of late. The consensus is unanimous as all fell and gravitated back to the mean. Nice bounce in Utilities the last two days, but plenty of work to do across the complex. Watching the Consumer Services, Energy, Technology and Healthcare… they were the previous leaders and they need to push back to the upside if the current low is going to hold? Patience is the key for now.
For the week of August 11th:
- S&P 500 index tested the 1900 level and watching to see if the Friday bounce holds the upside. SPY could produce a trading opportunity on the bounce.
- NASDAQ 100 Index tested lower, but held the 50 DMA and could produce a upside trade as well.
- Small Caps (IWM) – Small caps made a move above the $112 level on Friday, looking for an opportunity to trade the upside if we hold to start the week.
- Utilities bounce in play… watching to see how it unfolds going into next week.
- As you can see on the chart above we found a low on Thursday, tested on Friday and got positive news relative to Russia on Friday. Assuming Russia follows through the upside will or should be in play next week.
We are working off the June 30th pivot point with the dollar moving higher gradually. UUP is the leader using the June 30th as a pivot point of the low. Watching for any opportunities as this unfolds further. Note the flat movement of the yuan against the dollar.
3) Tracking the Bond/Fixed Income Sectors:
Using May 28th as pivot point to push sideways we see the down, up, down again and up again activity relative to bonds. The move in interest rates shows very clearly the influence on the chart. Yield volatility continues to bounce around and with bounce lower this week in treasury bond yields play havoc with bonds on the week. Manage your stops and if you used the move to lessen exposure you are in a good position for now… cash.
- Utilities – XLU bouncing off the lows near $40 and we will watch how it plays out this week.
- REITs – This is still a sector to watch and manage for the dividend of 3.2%. We continue to monitor the short term volatility and the testing the last couple of weeks. Support at the $70.60 mark for now and exit point (held above last week and looking good for now).
- Mortgage REITs – Dividend distribution of 29 cents, that explains the drop in price on June 24th. Building a trading range for now and watching to see if it defines a direction of stays within the range.
- Treasury Bonds – Yields moved lower this week on money flow. Risk on trade is in motion short term. The 30 year yield which is now at 3.22%. Be cautious here and don’t fight the Fed for now.
- High Yield Bonds – HYG = 6.4% yield (from entry). found support again near the $91.50 level and has bounced back to $93. Expect more downside if the rates remain low and stocks sell. No positions currently.
- 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 off the test lower last week. Watch how it plays out and keep your stop at $107.75.
- Municipal Bonds – MUB = 2.9% tax-free yield. tested support at $107.80 and holding. Manage your risk and still looking to collect the dividend. Stop at $117 (entry 104.50 12/2014) and the dividend is the play. Muni’s bounced higher 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. Locked in profit last week on a trading position in the ETF. Watching for now to define a direction.
- Preferred Stocks – PFF = 5.2% yield. Modest uptrend continues. Tested the 50 DMA and bounced back to the previous highs only to test lower again. Hit our stops at $39.50 and willing to watch for now.
4) Commodities – The commodity index (DBC) made a pivot lower June 20th and has not looked back. The mixed issues within the sector and the reversal in natural gas have contributed to the downside trek. We have to be patient and let it all play out versus forcing any positions. The parts have offered some trading opportunities and we continue to watch those.
For the Week of August 11th:
- Natural Gas – UNG held support at the $20.80 mark and building an upside case in the commodity. looking for entry.
- Oil (USO) is trading lower, but building support near the $36 level on USO. Patience as this plays out short term. Strong dollar has also put pressure on the price of crude. Downside may well be the play again short term.
- Agriculture (DBA) attempted to bounce, but sold lower again. Watch and see.
- Gold bounced on the week with GLD near the $126.50 entry point.
- Base Metals (DBB) uptrend is being challenged on the selling this week. Watch and see how it plays out.
Commodities Rotation Chart:
DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.
5) Global Markets:
The global markets have shifted to drifting lower as the EAFE index cannot gain any upside traction. Geopolitics gets most of the credit for the shift in momentum. Russia and sanctions from Europe are weighing on the outlook for the largest region. Despite the shift in trend there are parts worth watching.
For the Week of August 11th:
- All on the chart are now pointing lower and we will continue to watch for any shift in upside momentum.
- Japan (EWJ) tested, looking for upside play next week after the speculation on the yen.
- Emerging Markets (EEM) are testing on the interest rate issues and the default in Argentina. Long term view remains positive, but the short term is choppy.
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) – Pivot point on July 23rd shows gradual move to the downside. Some damage, but held key support on the overall index for now. Interest rates moving higher are the concern and that is creating havoc in the sector. The best course is patience for now. Held support and collecting the dividend for now and that is the best case scenario.
For the Week of August 11th:
- The leaders are all testing lower and we are watching to see how this plays against interest rates moving forward. Hold positions, tighten stops and let it go.
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. Trading lower as short term bonds struggle.
- 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 and holding for now. Adjust your stops accordingly.
- EMB – 4.5% dividend yield. A break above $109.27 would be of interest. entry $109.30. Adjusted our stop to $113.50 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. The interest rate issues in the US are impacting the emerging markets as well currently. We took the exit at $114 and now look to see how this unfolds. Booked s solid profit on this investment over the last four months.
- PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a question. Found support and bounced. entry $27.30. stop $28.75 and manage your risk as the gain is more than the dividend yield. support at $28.80 in play. Hit stop on and watching how it 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.