Without having to repeat this weeks headlines lets just call this a reversal of news and comments. The FOMC provided the comments and Russia provided the news… end result a bounce off the lows from last week. The uncertainty remains along with a lack of clarity, but the buyers want to make another run at new highs. Time will tell and we will remain patient as it unfolds.
As we discussed last week the markets longer term view is still elevated well above the current trendline. This poses a short term challenge for the sellers as they will need a catalyst to push the indexes back towards the support levels of the current trend.
How do we adjust and use the current data to help us next week? Hopefully better than last week when everything set up for negative week of trading and the buyers step back into the picture on the news in Ukraine. The Fed turned a negative into a positive catalyst as well. Thus, we approach this week with cautious optimism that the buyers want to take the broad markets higher and the rotation to new leaders will leave an investable trail. If you have longer term positions you made it through the test and bounce back near the previous highs.
Below we cover in more detail our strategy for the week.
Have a good week of trading!
The data this week is given an assist on the upside as New York PMI, industrial production, jobless claims, Philly Fed and leading economic indicators were ahead of expectations. That put investors in a positive mood to start the week and add some confidence to the FOMC announcement.
The drag this week came from the housing sector. Housing starts, existing home sales and building permits were on the disappointing side. The analyst reports attributing some of the slow down to higher home prices. That is a factor relative to income and jobs. Homebuilders were downgraded by several analyst as a result of the news. This is a sector to watch going forward for opportunity as it unfolds.
The Fed stole the show on Wednesday as Yellen made comments that rattled markets until everyone rethought the time frame and decided it was in line with expectations. I am sure we have not heard the last from the Fed and we will continue to watch how this story unfolds.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 3/22/14)
ONLY ETF Model (updated – 3/22/14)
S&P 500 Index Model (Updated – 3/22/14)
ONE EGG Model (updated – 3/22/14)
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? The bounce March 7th negated the move lower and the trend has turned sideways and we would need to break above the March 6th high to resume the uptrend.The pressure remains on the US markets to continue the leadership. The EAFE (EFA) index turned lower on March 6th ans has continued and the downside is in position to create a short trade (see below). Europe (IEV) equally has been trading lower and has formed a triangle pattern and a break lower would offer a short trade as well (see below).
The asset classes are weaker despite the positive week in the US markets. Watch the setups below and let this play out short term. Markets still lacks conviction short term in either direction.
For the week of March 24th:
- Watch EFA to find some support ($64.50 ). If it fails a short trade in EFU ($43.50 entry) would be the opportunity. A close below $65.15 could set up a good entry point on the short side.
- 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. Patience on this and let it unfold.
- Emerging markets are next on the list to hold support at $38.07 (held last week on test). The downside trade is still a potential should negative sentiment return. $23.25 EEV entry if selling accelerates to start the week.
- Commodities (DBC) held support near the 200 DMA and worth our attention as well. Gold retreated and oil bounced off support to lead the sector on this current test. Watching define the direction as the story unfolds.
- The dollar (UUP) broke support last week and then bounced on the FOMC meeting this week. Watching to see if the bounce holds or retreats again. The story with Europe above will determine the outcome against the euro. Need patience short term.
- US markets are covered below as are all the asset classes.
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, but that reversed this week and pushed back to the previous high. The week ended on a negative note Friday following the Fed stress test for banks. The selling late day left US stocks in limbo heading into this weeks trading. On Thursday financials established some leadership for the broad index, but that failed on Friday. Therefore we head into the week with plenty of question marks.
For the week of March 24th:
- The S&P 500 index did break from the triangle consolidation pattern to the upside on Friday, but it gave back the move to close lower at 1866, again failing to break above 1874 resistance. SDS short trade at $29.10 if the selling continues to start the week. Watch stops on SPY position in the S&P 500 Model.
- Technology (XLK) has become mixed with semiconductors continuing to look strong despite the give back on Friday. Electronics however, look weaker as the leaders give up gains. Rotation or fear heading to bonds? There is a question that we will look for answers to this week. The new high breakout on Thursday reversed Friday. Watching for the direction to unfold short term.
- Financials (XLF) broke higher on Thursday and retreated on Friday with the Fed stress test results hitting BAC and others. KBE, KRE and IAI all retreated from the move higher. Plenty of comments related to this release from the Fed, but it only keeps the uncertainty in play relative to the sector and the broad market index. Watch how this unfolds this week.
- Healthcare (XLV) failed to hold support at $58.65. after a nice bounce the first four days of the week. The put the downside play in XLV to work. Posted last week… Short XLV with June 58 puts @ $1.85. Stop on puts is $1.50.
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 last week offering the downside trades in the buck. Following the FOMC meeting the buck bounced and is testing resistance (Previous low) and we will watch to see how it plays out short term. No interest in trades at this point in the asset class.
3) Tracking the Bond/Fixed Income Sectors:
We are still using the December pivot point and the trend is still slightly higher to sideways. Yield volatility has picked up relative to the economic data and the Fed. Throw in some geopolitical data and the sector remains volatile. The chart below shows the lack of clarity relative to leadership from the sector. They are all addressed below.
- Utilities – The dividend play remains, but experienced some volatility now defines the trend. Hit a new high this week then tested lower of fear of interest rates moving higher short term. 4% dividend remains and stop at $39.50. Watch the resistance at the previous high and manage the dividend not the short term volatility. Stop raised 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. This is a dividend play in this asset class and we have to let the volatility short term play out. Fear relative to interest rates is the challenge and we are watching how this unfolds.
- Mortgage REITs – REM moved higher, but risk remains high interest rates threaten to move higher short term. Thus, the drop on Wednesday and Thursday this 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 watching for some clarity short term. Willing to watch for now.
- 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. Watch for move lower if stocks start to sell off again. 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. Watch the triangle pattern for some clarity in direction short term.
- Municipal Bonds – MUB = 2.9% tax-free yield. Bounced back this week and holding mid-range currently. 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 pick up volatilty. We keep the position and our stops at $47.50. The trade is now a risk free dividend of 3.6% +5% 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. March 3rd shows a modest pivot lower and from there we get a better picture of what is moving the sector overall. Natural gas had been the clear winner in the sector, but that has shifted lower and is trailing the sector overall. Leadership moved to PALL this week with oil, gasoline and copper attempting to move higher.
DBA shifted lower following the FOMC meeting with coffee (JO) leading the downside. Cotton (BAL) remains in an uptrend, but CORN is moving lower again. Negative shift in agriculture isn’t helping overall.
DBP shifted lower as well with the selling in gold. PALL is the leader in the precious metals. Base metals DBB sold lower again with weakness across the board.
Not a sector to like currently as the bounce fades and the sellers take advantage.
For the Week of March 24th:
- Palladium (PALL) broke resistance and looking for follow through on the upside. Trade entry $76.80 and stop at $75. Gapped higher on Friday and watching for the test and opportunity. otherwise don’t chase the trade with all the weakness in the metals.
- Gold (GLD) remain in the uptrend, but hit our stop on the reversal in the metal this week. If we hold support at the $127.50 level we will look to add the trade back going forward. Entry $128.
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. This week the two parted company temporarily on the bounce back from the Fed announcements following the FOMC meeting. The difference is the issues of geopolitical debates with Russia. Europe stands to be hurt more by sanctions than the US. Watching to see how this unfolds going forward.
For the Week of March 24th:
- Covered EAFE index, Emerging Markets and Europe above in the 7 asset classes outlook.
- China (FXI) bounced on Friday relative to data. Those have been good short entry points more than long positions. Watch and let this story unfold. A break below $33 would be a short entry opportunity to watch.
- Japan (EWJ) as discussed last week broke below support at $11. A short play in the country ETF. (EWV, low volume). We added the June $12 puts @ $1.05 to play the break of support at $11. Stop is at $0.90.
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) – Potential pivot point on March 4th in in the REIT. I still like the outlook for the longer term play along with the dividend and growth opportunity. Watching to see if the lower holds. The reversal off the low on Thursday is good start, but interest rates will be the determining factor. If the Fed can keep lower rates in play and believable the rally returns. Watch and manage the risk of the position as well as the parts.
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.