Outlook for the Week of February 10th

Jobs gain 113,000 in January versus 190,000 expected. December revised up 1000 to 75,000. Unemployment rate 6.6% and the participation rate is 62.8%. Where is the good news? Why is the market moving higher? Because of the number of analyst that saw positive in the negative simply put. The two points made are first, the jobless rate fell again and second, the participation rate rose slightly. The combination was worthy of being positive about the job picture looking forward. Interest rates fell again on the news as the bond market liked the number. This is why you never buy or sell based on what you think will happen with economic data and the reaction. For me, the belief was a miss on the number and a negative reaction from stocks. I was half right, but completely wrong. Bottom line we head into the weekend with plenty to ponder and contemplate.

The news contradicted the move in the broad markets as the major indexes all gained nearly 1% on the day. The ripple effect was for the global markets to rise as well. The EAFE index was up 1% as well with a four day rally off the lows this week. Europe (IEV) rallied as well and pushed back near the $46.33 mark. The emerging markets (EEM) gained 0.7% and is making a move to fill the gap left on the move lower on January 23rd. China (FXI) was higher as well, but still doesn’t look overly healthy. Emerging market bonds (EMB) have rallied nicely as well off the low and offers some upside opportunities near term. I am still of the opinion as the US markets go, so go the global markets. Until there is supportive data for evaluation of the global markets independently of the US we go with the in tandem trade.

Bonds rallied as yields dropped slightly on the reaction to the jobs report. There is some idea/opinion the Fed will stop the stimulus cuts on the job data! That doesn’t seem likely, if you take into account the other larger opinions that the lower rate of unemployment in conjunction with the higher participation rate. are a positive for the economic picture. Who is right? Bonds are going with the Fed cutting as of today, but that is coupled with some worries about growth going forward. I am on the side of the continuing to cut, and if they can hiking rates in the third or fourth quarter versus deferring until 2014. All said, I still expect rates will rise this year, the Fed will cut and hopefully the economic picture will stabilize at 2-2.5% growth. But, as you know that is all prognostication and our approach will be to take it one day at a time and deal with what the market delivers.

Looking towards next week the key issue will now be… follow through on the bounce off the recent lows. 1793 is on the S&P 500 become a question on the upside. Can or will the buyers continue to push prices higher in light of all the worries going forward. No one has crystal ball and we all have our opinions of what we believe will happen, but the market will have to validate the belief if we are to take on the risk of owning stocks. Discipline, Focus, Targets, Stops and Risk Management are the keys to obtaining our objectives. See you on Monday and have a great weekend.

Economic Data & Outlook:

The jobs report was the key focal point on the week and it was disappointment, but the changes in the rate of unemployment and participation rate sparked interest in stocks. Still not going to attempt to understand the rationale, but only follow where the market leads.

ISM manufacturing was the biggest disappointment for the week falling well below expectations. ISM services was in line with expectations. Construction spending was down. ADP disappointed, jobless claims better, trade deficit higher, productivity lower and overall not the best of data as a whole, but good enough was the consensus.

Next week there will inventory data, both wholesale and business. Industrial production and the University of Michigan consumer sentiment report. Should be too disruptive, but we would still like to see some positive reports to keep the upside on track. One day at at time, one report at a time.

Economic Events & Calendar

Sectors to Watch:

  1. VIX index dropped to 15.1 on Friday and that is the level we were looking for to prompt a rally or at least reverse the selling.As stated on Wednesday it offered a short term trade entry on SVXY. entry $54 and selling half of the position on Friday into the close was prudent at $60.20. The stop now goes to $57.35 for next weeks trading. The target remains near $62.
  2. S&P 500 index bounced off the low and is now hitting resistance at the 1800 level. The move above this level was point to add to the SPY (entry $178) position posted on Friday (S&P 500 Model). We get an opportunity to add to the position if we can move through this level of resistance and the index makes a move back toward the previous high.
  3. The NASDAQ rallied 60 points on Friday as a nice follow through to the gains on Thursday. Technology followed suit gaining 1.2% and hitting resistance at the $35 mark. A move above this level would offer an entry point for technology. Semiconductors (SOXX) were up 1.3% to lead the index and the ETF needs to rise above the $72.50 mark. We added the QQQ position at $85 and now we will look to add to the holding if we clear the 20 DMA.
  4. Dow remains in the worst shape of the major indexes technically. The index bounced back above the 200 DMA on Thursday to close at 15,628. The follow through on Friday pushed back above 15,700 previous support. In position to move higher now, but the large cap stocks would have to regain their upside momentum. 16,093 target short term.
  5. Russell 2000 Small Cap index broke 1120 support and tested 1090 support. Broke the trendline off the November 2012 low. The bounce off support has not been as impressive as the other indexes and leaves the index in the micro downtrend. We need to watch and see how this plays out next week with interest. If they fail to accelerate on the upside could be an indicator for the broad markets as well. Entry for IWM would be $111.40 if upside continues.
  6. Europe (IEV) moved back above the $45 level on Thursday with a nice follow through on Friday. $46.50 is the next level to move through and then potentially back towards the previous high. The index is trading in unison with the US markets and a rally would be in line if the US continues to move higher. Emerging markets are still weak, but managed a bounce as well. Entry for IEV is $46.50 if we follow through on upside.
  7. OTHER OPPORTUNITIES COVERED BELOW BY SECTOR.

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

Sector Rotation Model (updated – 2/7/14)

ONLY ETF Model (updated – 2/7/14)

S&P 500 Index Model (Updated – 2/7/14)

ONE EGG Model (updated – 2/7/14)

Breaking Down the 7 Asset Classes:

The high pivot point on January 22nd is below. However, we have hit a new potential pivot point on February 3rd if the bounce is able to establish a higher low. Based on that we have to watch thus far investors are confused about the outlook for growth. The reversal from the selling on February 3rd has US stocks (VTI), the EAFE index (EFA), Emerging Markets (EEM), Emerging Market Bonds (EMB) bouncing off their respective lows of late. Real Estate (IYR) and Commodities (DBC) have continued to move higher. The downside move came in US Treasury Bonds (TLT) as a result of the rally in stocks and higher interest rates.

Does this shift or pivot continue? That is what we are looking for this week and the move will determine any action to be taken relative to adding positions. ¬†VTI entry is $93.50. EFA entry is $65.30. EEM entry is $39.15. Adding to IYR at $65.35 on Friday’s continuation move was prudent. DBC followed through on the $25.20 entry from Thursday and now has the downtrend line to deal with. manage the risk of this trade. TLT is on $106.50 support with stop at $106.25. Manage the positions as the market remains volatile and uncertain on direction short term.

7 Assest Classes

1) US Equities:

The US equity indexes have been in a downward tending pivot from the highs on January 15th. As you can clearly see on the chart all the sector have traded in unison as the downside accelerated. Utilities remains the clear upside leaders, but has turned sideways on the rally. We will continue to hold the position for now to collect the dividend and manage the risk of the trade.

The move on Thursday and Friday has brought the balance of the sectors back into view for upside trade opportunities should the bounce follow through. Technology (XLK) moved through the $35 resistance point and if it holds on Monday would be at entry point. Healthcare (XLV) bounced off the low and to the next resistance as well at $56.25. We own this position and will look to add of the follow through is worthy of the task. Financials (XLF) moved to resistance point as well and needs to clear the $21.30 mark with volume. Willing to take a trade on the move with at target at the previous high. This sector will be key if the broad indexes are to regain their upside momentum.

Other sectors that are set up for short term trades, but not big moves are Basic Materials (XLB) which moved back to resistance at the 200 DMA and a move above this level would be worth a trade on the follow through. Commodities are moving and could influence the sector short term. Industrials (XLI) has bounced back to resistance as well at 50.50 and a move through this level is worth a trade on the upside. Energy (XLE) has been a mixed bag as the large cap stocks have not helped the upside. the move back above the 50 DMA is a positive and we are looking add a position on the move higher. Be patient and let this develop as we move forward.

If the trend is to continue higher the volatility will continue to come out of the broad markets. SVXY has been a trade posted on the index the last couple of trading days. We are still at a point of benefiting from the ETF. If we test $58.50ish level I would look to add a small position with a target move to $64 short term.

SP500Scatter

2) Currency:

The dollar has returned to a trading range with the euro gaining some momentum on the ECB standing pat last week. The yen is flattening out following the threat to cut stimulus. Overall interesting moves, but not willing to accept the risk of the uncertainty in the emerging markets and the speculation is the mature markets. Willing to sit tight and watch for now.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

The sector has been a benefactor of the fear driving equities. Some of that fear evaporated this week (see VIX index) and bonds reversed course slightly on the move. Do to the uncertainty in stocks it has created a trading opportunity in bonds. Our outlook remains that interest rates will rise looking forward. If that is true the risk to bonds remains.

Looking at the chart below you can see the rally opportunities to trade, but holding these positions longer term as they are designed, is too much risk for my taste. I address more below.

Bonds

  • Utilities –¬†The dividend play remains in play as the upside gains some strength this week. 4% dividend and stop at $37.
  • REITs¬†– See below – dividend play 4%. IYR made solid move above $64 and still have stop at $63.
  • Mortgage REITs¬†– REM making a move higher, but risk remains high as well if interest rates turn back to the upside. Caution about adding near term, see it as a trade only.
  • Treasury Bonds¬†– TLT or IEF rallied off the current lows. Hit our stop on IEF (S&P Model). The trade could develop again as it is sitting on support. A break would open the opportunity to trade the downside with TBT.
  • High Yield Bonds¬†– HYG = 6.4% yield. Bounced off the $91.25 support (Sept 2013) and held to close back above the 200 DMA. It has remained in a trading range since. The test down to $92.40 support held and trading higher again with stocks moving off lows. Stop is $92 on positions.
  • Corporate Bonds¬†– LQD = 3.9% yield. Small rally in play off the low at $113.20. Cleared $115 level as trade through top of the trading range. Stop is $115.25 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Broke the downtrend line and has continued to move higher. Stop at $104.50 and the dividend is the play.
  • Convertible Bonds¬†– CWB = 3.6% yield. bounced off $43.75 support (Sept 2013) and $44.80 entry point. Watching the upside and volatility. The pullback in stocks is reflected in the selling last two weeks and we keep the position and our stops at $45.50. The trade is now a risk free dividend of 3.6%. manage your risk short term.

4) Commodities –¬†The commodity index (DBC) made a pivot lower on December 29th and move off the February 3rd low is potentially a pivot back to the upside. Natural gas has been the clear winner in the sector, but we are now getting a test of key support. A move lower would be a negative short term for the commodity. Be cautious as the volatility and speculation have been big.

Agriculture commodities have been moving higher on the speculation of drought conditions in Brazil hurting sugar and coffee production. Both have moved higher and are currently testing the breakout moves. DBA shows solid break higher with high volatility last three days due to coffee. Holds 50 DMA gets interesting for a upside trade on the continuation of the move.

  • OIL – move above $23 as trade to the previous high. UCO give 2x leverage. Added UCO at $31.75 on move higher last week.
  • JO – coffee broke higher on crop news. extreme volatility last three trading days. Willing to watch for now, but could offer trade if support holds at the $26.25 mark.
  • SGG – sugar is testing the move higher. If it holds it could offer some upside trades. $53.75 entry.

Commodities Rotation Chart:

Commodity

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

5) Global Markets: 

The global markets established a pivot point on December 15th. The trend has been tracking the US markets on the upside, so why should the downside be any different? On January 22nd it created a downside pivot point, which is now attempting to reverse on the February 3rd bounce. Welcome to volatlity. As you can see on the chart most of the country ETFs are heading higher off the pivot point of February 3rd in lock step with the US markets. Worth following the opportunities as they unfold.

  • EFA – Watch for follow through on the upside of this trade. (entry $65.20, Only ETF Model)
  • IEV – Watch for follow through on the upside of this trade. (See Sector Rotation Model)

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) РThe chart broke from a cup pattern and followed through. It has tested with the volatility in stocks, but held the uptrend. We broke above $65.50 this week and the 50 DMA is the next hurdle to jump. This is a solid longer term play for the dividend and growth opportunity. The trade remains in place in the S&P 500 Model. Scanning the individual REITs that make up the index is worth the exercise as some are again on the verge of breaking higher.

Real Estate IYR

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 sideways the two months.
  • 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 let it play out.
  • EMB – 4.5% dividend yield. Looking for bottom? Found the low and bounce this week. A break above $109.27 would be of interest.
  • PCY – current dividend yield is 4.8%. Trending lower again as emerging markets come into question. Found support and bounced. $27.26 remains our point of interest to add any positions.

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.¬†