Market remains challenged by economic data, China, Russia/Ukraine and first quarter economic data. Oops, I forgot the polar vortex! Worries remain in the forefront and thus the rolling top continues to play out on the major indexes short term. The good news is the trendlines are still in play. The bad news is there is 2-3% downside room before we challenge the trendline and that give room for some selling in the immediate term outlook.
Don’t let the short term be confused with the longer term outlook which is still modest growth and modest uptrend. The short term outlook is find an excuse to push prices lower so the buyers can step back into the market and drive prices higher again (my opinion). This is the fourth stage of the uptrend off the 2009 lows. We are currently trading about 17% above that trendline and 4% off the current intermediate term trendline. Thus, plenty of room for volatility and keep the up trendlines intact. Just food for thought as you are formulating your opinion on this current market environment.
How do we use that data to help us next week? That is where strategy planning comes into play, and with the turn lower last week we are inclined to have some trading bias to the downside. In the ONLY ETF Model we did establish some short positions and we will manage those next week based on the micro trend established last week. If you have longer term positions you are concerned about you can hedge those positions within your portfolio. One way to hedge is what we did with Facebook by buying put contracts that one, protect the position from loss and two, give a gain in the trade if the downside occurs. That is why you have to plan your strategy and then trade your plan.
This promises to be a interesting week. The vote in the Ukraine will play some role in activity to start the week and we will post in the trading notes on Monday morning any changes to the outlook.
Have a good week of trading!
The week was more mixed bag of data as the February sale report showed a bump higher. That was the first in the last three months and seen a positive going forward. Q1 GDP was revised lower by 50% by analyst leaving the estimate at 1.5%… not good.
The Fed remains the wild card for some as the cuts to stimulus continue. The bigger question is how aggressive the Fed will be in the this process or if they stall in making the cuts based on the current economic outlook. Don’t fight the Fed. If they continue to cut stimulus rates should continue to move modestly higher. The opposite side of that argument is the market corrects and investors rotate to bonds for safety pushing rates lower and bonds higher.
The economic data is not encouraging, but we are not in the business of determining when and how the data will impact markets. However, we do know at some point fundamentals will matter. Until they do we just go with the trend of the markets technically.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 3/14/14)
ONLY ETF Model (updated – 3/14/14)
S&P 500 Index Model (Updated – 3/14/14)
ONE EGG Model (updated – 3/14/14)
Breaking Down the 7 Asset Classes:
On February 3rd we started another pivot point to continue the upside move. On March 6th we are watching to see if the next pivot point is in play? Technically the close on Friday was 10 cents below the previous low and a break of the previous trend. The pressure is now on the US markets to continue lead. The US and EAFE Indexes remain attached in direction with the EFA moving down more than the US markets. You can see the shift lower in the emerging markets as well equal to that of the EAFE index. US Treasury bonds rallied on the selling and emerging market bonds, commodities, REITs and the dollar all drifted lower with less aggressive selling. Nothing is convincing in direction, but enough selling to garner the attention of investors.
For the week of March 17th:
- Watch EFA to find some support ($64.50 ). If it fails a short trade in EFU would be the opportunity.
- If the EAFE fails to hold support, Europe (IEV) will likely break support as well. We would add a position in EPV on a break above $60.60
- Emerging markets are next on the list to hold support at $38.07. Failure to do so opens the downside trade. EEV already has a position in the ONLY ETF Model and we would look to add to the position if support fails to hold. $23.25 EEV entry.
- Commodities (DBC) held support at $25.85 and worth our attention as well. The test lower held last week and we will see how both oil and gold hold up moving forward.
- The dollar (UUP) broke support and offers a short opportunity. (UDN) The euro (FXE or EUO leveraged) and the yen (FXY or YCL leveraged) are both in position to break higher as a result.
- US markets are covered below.
1) US Equities:
The US equity indexes established a pivot point on February 3rd off the lows, but on March 7th started to turn lower and offer another pivot point on the downside. The shift lower captured nine of the ten sectors with Utilities (XLU) being the only one to survive the turn. Technically the close Friday was below the previous low and puts the index in position to establish a new trend lower. Watch to see how it plays out as we start the week of trading.
For the week of March 17th:
- Short setup for the S&P 500 index (SDS). Already in the ONLY ETF Model. Move above $29.60 willing to add to the position as well as add to other models short trade on the index.
- Technology (XLK) closed below $35.80 support and set up short opportunity. (REW, low volume) easier to short the ETF or buy $36 June puts for $1.45 or better.
- Energy (XLE) is near support at $85.80 and if we break a short in the sector would be warranted. ERY is 3x leveraged short ETF at $$20.90. ONLY ETF Model.
- Healthcare (XLV) failed to hold support at $58.65. Setting up short trade on the break. Short XLV or June 58 puts @ $1.85 or better.
- Financials (XLF) has support at the $21.65 mark. A break opens the downside trade. SKF at $17.20 on sector breaking lower.
See S&P 500 Model for current watch list and stops on existing positions. Other models like ONLY ETF will capture the short trades as the S&P 500 only short position is SH for the index.
We are still working off the January 30th pivot point which has amounted to modest move lower to test support on the dollar. That support broke on Friday offering the downside trades in the buck. UDN is the simple way to trade the dollar on the downside.
The euro (FXE) has rallied in response to the weakness in the dollar. This was expected and the break higher on Friday shows the shift in strength to the euro short term.
The yen (FXY) is in the same position and worth watching on the upside as well.
The trade on this is discussed above under the 7 asset classes.
3) Tracking the Bond/Fixed Income Sectors:
We are still using the December pivot point and the trend is still slightly higher. Yield volatility has picked up relative to the economic data, but also the global geopolitical data. The chart below shows the with clarity the leadership in the sector. The are all addressed below. The challenge for bonds currently is the lack of clarity, but the rotation to safety is worth watching moving forward.
- Utilities – The dividend play remains in play, but experienced some downside, but reversed this week back to the previous high. 4% dividend and stop at $38.60. Watch the resistance at the previous high and manage the dividend not the principle. Stop at break even on the trade and let it work the volatility out.
- REITs – See below – dividend play 4%. IYR made solid move above $64 and still have stop at $66.50. Watch the $68 level again this week to hold support. Manage your risk, but for this sector this is a long term dividend play. Stop at break even and collect the dividend.
- Mortgage REITs – REM moved higher, but risk remains high, but interest rates turned lower last week. Watch and manage the dividend. Stop $12.50.
- Treasury Bonds – Yields have become volatile as uncertainty remains in the sector. TLT in range and we hit our stop on the trade. Didn’t play the bounce off the lows, but watch the resistance at $109. Short trade with TBT if stocks reverse and rally this week. entry $68.70.
- 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 broke from the trading range and is testing now as stocks start to sell. Stop is $92.50 (break even) on position as this is a dividend trade.
- Corporate Bonds – LQD = 3.9% yield. Small rally in play off the low at $113.20. Cleared $115 level as traded through top of the trading range. Stop is $115.25 and holding for dividend.
- Municipal Bonds – MUB = 2.9% tax-free yield. Bounced back this week and back near the previous highs. Manage your risk and still looking to collect the dividend. Stop at $104.50 (entry) 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 reversal as stock have reversed. We keep the position and our stops at $46.50. The trade is now a risk free dividend of 3.6% +3% gain. manage your risk short term.
4) Commodities – The commodity index (DBC) made a pivot lower on December 29th, but the move off the February 3rd low was a pivot back to the upside or what really amounts to a sideways trade. Natural gas had been the clear winner in the sector, but that has been giving back some of the gains to move back near the average price. Volatility picking up in the sector with a very mixed outlook.
For the Week of March 17th:
- Agriculture (DBA) went verticle off the February low and remains in that mode. Stop raised to $28 on any trades in the sector ETF.
- Coffee (JO) moved off the high on Friday and one to watch this week. Stop at $38.50.
- Corn (CORN) consolidating off the bottom reversal. $33.70 entry for trade in the commodity. Stop $33. Watch as the volatility has been present of late.
- Crude oil (OIL) held support at $97.50 on crude and looking for an upside trade on a reversal.
- Palladium (PALL) broke resistance and looking for follow through on the upside. Trade entry $76.80 and stop at $75.
- Copper (JJC) dumped lower on China fears. Could offer an upside trade on oversold conditions when the anxiety wears off. Watch and will post entry as this unfolds.
- Gold (GLD) remain in the uptrend and we continue to manage our position in the trade. Pattern Trade List.
Commodities Rotation Chart:
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 February 3rd as it is tracking with the US market. As you can see on the chart most of the country ETFs. The shift lower on March 6th may be the new pivot point for the micro trend shift. Russia took a big decline as you can see on the Ukraine issue last week. Bounced Friday, but still plenty of worry relative to the issues facing them. Still not a big fan of the asset class as it is a follower, not a leader. Proceed with caution.
For the Week of March 17th:
- Covered EAFE index, Emerging Markets and Europe above in the 7 asset classes outlook.
- China (FXI) broke support and offered a short trade in FXP (didn’t add). The downside is still in play and if it continues we will look to add a position short China.
- Japan (EWJ) is in position to break lower through support at $11. This would offer a short play in the country ETF. (EWV, low volume). Alternative is June $12 puts @ $1.05 or better on the a break of support at $11.
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) – The chart broke from a cup-and-handle pattern ($65.50) and followed through. It has tested with the volatility in stocks, but held the uptrend. This remains a solid longer term play for the dividend and growth opportunity. Watching to see if the beak higher holds and you can see the models for the stop. Break higher would off opportunity to add individual REITs as we will dig into the sector to find the leaders worth owning.
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 three months, but making a move back towards the previous highs. $11.15 entry. Stop at $11
- PICB – 3.1% dividend. $27.80 found support and bounced. $28.70 entry (Sept 2013). 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. A break above $109.27 would be of interest. entry $109.30. Adjusted our stop to $108 on volatility. Watch and manage risk and dividend.
- 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 and manage your risk
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.