Outlook for the Week of January 20th

Interesting week of trading as investors remain confused about the outlook for 2014… at least that is what the activity looks like on the charts. Some selling to start the week, some buying that pushed the NASDAQ to a new high, and then two days of chopping to end the week. The S&P 500 was a wash and the Dow was up nearly 40 points. Putting it all in perspective the economic data showed stronger versus the jobs report last week and that kept the buyers engaged enough to see if earnings would offer some upside hope. However, they were as mixed as the rest of the data. We have to be patient and pick our way through the mess that is and take the best opportunities presented.
This is becoming a stock pickers market and that requires more work on our behalf to dig into the winning sectors to find the best stocks to own. The pattern list we produce every day has been doing well as we take what the market gives and avoid the weakness. Patience as it all unfolds.
Next week promises to be even more interesting with an even greater amount of earnings being reported. There will be some key data points to watch relative to how they impact the market short term and longer term outlook. Remember that Monday is a holiday and the trading week will be shortened by a day as a result. All new trading notes will be up on Monday versus Sunday as a result.
The major asset classes are update below looking into the trading week ahead.
Economic Data & Outlook:

The sales data for December were better than expected causing a bounce back in Tuesday’s trading. However, it was not enough to ¬†produce a sustained rally, but we did see enough to assume the modest growth the Federal Reserve has prognosticated is likely to happen near term.

Small business index was better than expected, PPI was up more than expected, CPI was lower than expected, jobless claims continue to improve, Empire state index finally moved higher, Beige Book showed modest growth for the economy, Philly Fed was better than expected and housing starts were up. The biggest disappointment on the week was the consumer sentiment index falling to 80.4, much lower than expected.

It is the economy vs earnings and how they report will determine the direction of the markets short term.

Economic Events & Calendar

Sectors to Watch:

  1. S&P 500 index still struggling to push through to a new high as earnings stall the move higher closing at 1838. The sideways action continues and we are content to watch and see how it unfolds. Watch the impact of earnings and economic outlook on the index.
  2. NASDAQ leads the way with the index closing at 4196 and testing the break to the new high. If the upside tests back to 4180 and holds, looking to add the position in QQQ.
  3. Small Caps (IWM) the Russell 2000 index moved lower closing at 1168 and testing the break to new high. Take it for what it is at this point and use the 30 DMA as a stop or exit point on short term trades.
  4. Financials (XLF) struggled as earnings disappoint on some and better on others. This is putting pressure on KBE and tested as well as the regional banks (KRE), added to watch list for Sector Rotation Model. The insurance companies (KIE) attempted to join the upside run, but stalled as well. I still like the fundamentals of the sector and would look for the opportunities in the sector going forward based on momentum being regained in the stocks.
  5. Healthcare (XLV) set the pace on the upside again this week. IHI, XPH and IHF are all adding to the upside as well. Analyst warnings about the benefits of the AHA being priced in already and the downside risk rising. Watch and monitor your stops as this unfolds.
  6. Telecom (XTL) made a solid move higher gaining 1.6% on Wednesday and held the gains Thursday. The hope is this will follow through on the upside. I still like the individual plays better than the overall sector. The Apple deal with China Mobile helped the sector regain some upside momentum, but the individual stocks are still the clearest winners/leaders.
  7. Technology (XLK) held the new high posted on Wednesday, but watching the SOXX after the INTC news was disappointing. Internet, Networking and Software are still on the upside short term.
  8. China (FXI) Entry $36.55 if it can clear the 200 DMA and bounce off the recent support for a micro trend reversal trade. (Sector Rotation Model). Faded on Thursday, but still looking for a upside follow through from the bottoming consolidation pattern.
    1. Oil
    2. is rising off the low on speculation of demand rising again globally as the economies recover in Europe. Took the entry on Friday and now looking for the upside to continue short term. Manage your stop. (Sector Rotation Model)
  9. Gold miners (GDX) broke out on Friday as posted on the pattern trade list. Watch the upside move with a target at the $25 level on the ETF. Scanning the ETF is worth the time to find the leaders. SLW, MUX, NGD, and PAAS are a few that stand out currently.
  10. Bonds have rotated to favor on the stability in interest rates. Worth trading to obtain a risk free dividend. See below.
  11. Commodities are producing some trades, but not much relative to trending higher near term. See below.
  12. REITs are attempting to reverse the downside trend short term. The Asset class below covers the opportunities based on are current scans.
  13. Global Fixed Income below… PCY added at $27.25 as emerging market sovereign bonds move above resistance. This is a dividend play with an intermediate time horizon. EMB is in position to break above resistance as well with $109.30 entry point. PICB remains in play as dividend play also.

The models are updated and our short term view continues to dominate the process currently. The minutes from the Fed FOMC meeting created some clarity on Wednesday, but upon further review anxiety on Thursday relative to the pace of the stimulus cuts. Earnings start with dud in Alcoa’s miss. The fear factor is still looming in reference to earnings and we will have to be patient as it all plays out. The buyers seem willing to put money to work despite the worries relative to an overbought market technically. Looking to take some profit if earnings continue to disrupt the short term outlook. The pattern list (below) is where we are posting most trades short term as a result of the current market environment. Manage the risk on trades more aggressively and monitor your longer term holdings with trailing stops to account for any rise in volatility.

Breaking Down the 7 Asset Classes:

As you can see on the Scatter Chart the resumption of the uptrend on December 12th tuned lower to end the week. US stocks continue to lead the assets classes overall. REITs and the EFAE index continue to lead, but the Treasury bond has made a solid run to the upside on declining interest rates the last couple of weeks. The dollar and the Emerging Market bonds have picked up as well. The commodities and emerging markets stocks are still the laggards.

7 Assest Classes

1) US Equities:

The US equity indexes achieved trading flat on a week that was up and down. As you can see on the chart healthcare, telecom, technology, industrials, materials and financials have been the leaders. Some selling on Friday, but still plenty of issues to deal with relative to the outlook for the US markets.

The laggards are utilities, consumer staples, consumer services and energy.

Be patient and take what the market gives.

SP500Scatter

2) Currency:

The dollar bounced and seems content at this point to move sideways and slightly higher. Nothing changed in the outlook for currency for now and we are not interested in owning any at this point. Let it play out and then we will find where the opportunities lie. Could be some currency paired trades setting up short term and we will post as the develop.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

The sector initially reacted on the downside to the Feds announcement to cut stimulus. However, it has leveled off of late, and trekking sideways to higher this week. Opportunities Below:

Bonds

  • Utilities –¬†The dividend play remains in play as the volatility comes. 4% dividend and stop at $37.
  • REITs – See below – dividend play 4%.
  • Mortgage REITs – REM making a move higher, but risk remains high as well. Caution about adding near term.
  • Treasury Bonds¬†– TLT or IEF rallied off the current lows. The rally is on short term. No positions currently, too much volatility for my taste in owning bonds. The only trade here is to short the bond with TBF or TLT.
  • High Yield Bonds¬†– HYG = 6.4% yield. Bounced off the $91.25 support and held to close back above the 200 DMA, barely. Break above the $93.30 level offered a trade on the upside. Still not willing to venture here relative to the risk short term.
  • 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.
  • 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 and $44.80 entry point. Watching the upside and volatility. This is the one bright spot in the fixed income class. Continued trek higher and 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 the downside was lead by crude oil. natural gas and gasoline. All seemed to bottom to last week and we are watching to see how this unfolds looking forward. This is a trading sector and nothing more currently. Opportunities to track this week:

  • OIL – bounced off the low and looking for the bounce to continue short term. (Sector Rotation Model)
  • JJU – Nice move higher this week as base metals pick up momentum.
  • GLD – attempting to trend higher. (ONLY ETF Model)
  • UHN – heating oil picking up on the rise in oil prices this week.

 

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 continues to track along with the US markets and analyst are pushing the global markets as the current opportunity for 2014. Not quite sure I buy the big upside story, but the trading opportunity is present short term. However, if the US markets turn lower I would expect the global markets to struggle as well. Emerging markets continue to struggle to gain any upside momentum and still consolidating. The following are opportunities in the asset class:

  • IEV – Europe is at the previous high and looking to break up. If this takes place the ETF is in the ONLY ETF Model.
  • EWJ – drifting higher and looking for move above $12.10.
  • PIN – India was making move through resistance at $17.65, but tested lower on Friday. Watch to see if upside can follow through on the ETF.

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 this week. $64 was the entry last week and you could add to the position this week at $64.75. Interest rates have stabilized and given some upside to the RETIs and we continue to take this as a dividend opportunity with modest upside growth. Below are the leaders and entry points defined if the sector continues higher.

  • VTR (entry $61)
  • HST (entry $19.60)
  • BXP (entry $105.25)
  • HCN (entry $56.25)
  • HCP (entry $38.65)

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? Move above $109 is the buy point. Patience as this plays out.
  • PCY – current dividend yield is 4.8%. Looking for bottom and move above the $27.20 mark. Got the move and adding a position to the ETF. Stop is $26.90.

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.¬†