Outlook for the Week of May 26th

We end the week with four of the five trading days positive. The major indexes all added positive returns for the week, and all worries are gone with the upside in control? I would like to say that is the way it is, but all the worries in place last week have not disappeared, just put on the back burner for now. In fact, I would like to call this the no reason rally. There is no news event, not rationale reason for the buying, only buyers (low volume buyers) willing to push the indexes higher in the face of little to no resistance from the sellers.

As we look to next week we do so with an extreme caution. A low volume rally in an oversold NASDAQ index, doesn’t convince me we are going higher, but the market is in control, not what I think or believe. Need validation plain and simple.

Have a good weekend!

Market Story & Outlook:

Current Story of the market boils down to the simple issue of uncertainty. Despite the move off the recent lows this week, we still have not resolved anything. Like the bridge to nowhere in Alaska, this move was based on no specific reason and could be building a bridge to nowhere. As we have discussed the markets underlying challenge is the economy. The ‘buyers’ believe the economic improvements currently being prognosticated at 4% growth for the second quarter. Better data reports this week were part of the reason behind the move higher. The believe of the buyers got some validation (not four percent worth, but some) and they put money to work in stocks. The ‘sellers’, on the other hand, believe the economy is growing slower at a rate of maybe 1-1.5%, and the truth may be somewhere between. The buyers are winning as the uptrend resumed short term with the S&P 500 index hitting a new closing high. Clarity will be the key to how this ultimately plays out. In the meantime we have to be cautious, take the trades we are comfortable with and keep looking forward.

The second phase of the story line is, bond yields were believed to rise this year as the Fed tapered (cut stimulus) and the economic growth improved. The yields to start the year on the thirty-year bond were 3.94%, currently they are 3.39% (up six basis point for the week) or they have declined 55 basis points pushing the long bond up nearly 12% for the year. That is not what was prognosticated and the story line has not helped the current lack of direction in the markets. The bonds are telling us something different than the Fed and economist. The above issues of growth in the economy are showing up in the bond prices as investors push money in that direction.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data has not been good overall. The rate of decline in earnings is the concern from my view. The focus on the media is the number of companies that beat expectations, but the rate of growth in earnings will determine the rate of growth in stocks looking forward. Running scans using PEG ratios shows clearly the challenges arising in this indicator. Just another pieces of the story we have to monitor to determine our outlook and belief.

This all adds up to stocks losing value if the economic growth going forward is weaker than expected. As we have been saying for more than a year, fundamentals don’t matter, until they matter. Activity in the markets short term is starting to act like they¬†matter, and don’t let the push to the upside this week fool you. I think this is key to watch going forward and the reality unfolds. Then we will have clarity as to which sectors and asset classes offer the best opportunity, even if that is on the short side of the trade.

RESEARCH MODELS:

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

Sector Rotation Model (updated Р5/25/14)

ONLY ETF Model (updated Р5/25/14)

S&P 500 Index Model (Updated Р5/25/14)

ONE EGG Model (updated Р5/25/14)

Breaking Down the 7 Asset Classes:

Since the April pivot point we¬†continue to trade¬†sideways, but nice effort this week on the upside, following the initial push higher.¬†It is important to remember when we move sideways… investors are confused and don’t know which side to commit to.¬†The current move sideways¬†represents the lack of clarity in the markets about the future as discussed above.

Asset Classes

For the week of May 26th:

  1. The global markets have returned to be in correlation with the US markets and that is sideways currently. Some positive moves on the week, but no real changes looking forward. There are things to watch as we discuss below.
  2. Treasury bonds were lower last this week, with small bounce on Friday. Fear towards equities is always a motive to rotate money towards bonds. Throw in the geopolitical issues around the world and you get the rotation move. Thus, the uncertainty from investors. Some flight to quality in the buying this week and we are watching to see how this plays out. We rate the sector a hold relative to TLT and IEF with tighter stops in place.
  3. Commodities are showing some upside in the energy based commodities. Agriculture is moving lower and precious metals are moving sideways to down. Oil is the only interest int he sector short term.
  4. Emerging market bonds are trading sideways to higher after showing a positive move on the upside. Rate it a hold for now.
  5. Emerging markets still working their way higher following the selling and consolidation. I am of the opinion this sector moves higher longer term. Money rotation into the sector is likely hot money (short term) and I would ladder my stops to protect the gains.
  6. REITs are showing signs of topping or resting near the highs. Interest rates and economic picture are part of the concern. The upside is still in play, but we have to protect the gains and monitor our stops. Watch and manage the volatility as this is a long term position or opportunity. How the housing market, interest rates and demand unfold will dictate future direction.
  7. The dollar gained some ground on geopolitical concerns with China and Russia getting in bed together. Not convinced this holds longer term, but for now the move higher is a bounce off the test of the lows currently in the dollar.

1) US Equities:

The sideways move is still in effect among the major indexes. The S&P 500¬†tested a new high and finally made the move on Friday. Will it follow through? That is the bigger question looking into next week. Still no clarity except if you are looking at the charts only. The index charts shows a clear breakout, but the challenge is in the momentum/volume of the move.¬†An additional concern for me is the chart below… where is the leadership in the index? The sectors are trading in unison on the upside last week.¬†The only discrepancy came from XLP and XLU and that wasn’t much to consider. Approach this week with caution, monitor you stops. We added positions in the S&P 500 Model (we still follow our discipline), but we have to manage the risk of those positions moving forward.

500 Scatter Rot

For the week of May 26th:

  1. The Index follows the NASDAQ higher. The large cap and growth stocks were the catalyst on the week from their oversold state. New high and overall positive week for stocks, but still that concern relative the sustainability of the move.
  2. The upside sectors to watch are consumer services (XLY), technology (XLK) and telecom (IYZ). They showed some upside leadership and if they continue it will help the broad index move higher.
  3. Healthcare is of interest as well with the pharm (XPH) and biotech (IBB) stocks moving higher. I am cautious about this sector as the negative data points have been mounting along with some negative sentiment towards the sector overall.
  4. Utilities (XLU) broke support and bounced back. Rising interest rates, inflation, etc have been the talk and that weighs on the sector which has enjoyed a very positive upside move. Tighten stops if you still own. We hit the stop in the models this week.
  5. NASDAQ 100 (QQQ) broke from the consolidation pattern on the upside and we added to the models. It is a trade and needs to reaffirm the upside trend if we are going higher. For now taking on a leadership role. Watch as we progress next week.
  6. Dow (DIA) lagged this week and failed to move back towards the previous highs. Looking for a move above $166 to confirm the upside.

2) Currency:

We are still working off the January 30th pivot point which has amounted to modest move lower to test support on the dollar. The buck was dying a slow death and testing support until Draghi stated the ECB was willing to cut rates in June. Euro fell and dollar rallied, but we still have little to no interest in trades at this point in the asset class. Even BZF has turned sideways of late.

currency

3)  Tracking the Bond/Fixed Income Sectors:

Moving forward to April 2nd as pivot point on the upside, the climb has continued to be gradual, but a confirmation of the previous uptrend. Yield volatility continues to bounce around keeping the sector in check, but the outlook is still for rates to remain low. This week the yield on the treasury bond gain six basis points on the thirty-year bond. There are still geopolitical worries unresolved that will add to the fear component should they escalate. Overall the market setup favors this sector and the chart below shows the leaders clearly, but also the volatility that comes with a normally steady sector.

Bonds

  • Utilities –¬†¬†Sold to near term support, broke temporarily and then moved back above that level of support. Low volume buying versus higher volume selling has my attention. The bias is still on the downside short term. Watch and manage your risk. The dividend play remains, but it has experienced some volatility the last three weeks. The 4% dividend (entry point) remains and stop raised to trailing 50 DMA (hit this week and watching to reenter the trade).
  • REITs¬†– This is still a sector to watch and manage for the dividend of 3.2%. We continue to monitor the short term volatility. The Fed, interest rates and outlook for interest rates are all a worry point for the sector. Support is $68.40 and $66.25. Long term view is to hold and manage the volatility.
  • Mortgage REITs¬†– slowly working higher from the gap lower. Hitting against the 50 DMA as resistance. A move through this level is worth looking for a position going forward. Made the break through resistance at $12.50 (REM) added $12.50 position and $12.05 stop to capture the dividend.
  • Treasury Bonds¬†– Yields moved to a new low this week on rotation to safety¬†and TLT and IEF hit new highs. The 30 year yield which is now at 3.39%. TLT hit new high breaking above the $112.50 resistance. I still see this as a trade opportunity and nothing more at this point.¬†Be cautious here and don’t fight the Fed for now.
  • High Yield Bonds¬†– HYG = 6.4% yield (from entry). Bounced off the $91.25 support (Sept 2013) and held to close back above the 200 DMA. Moving sideways to higher, but trading around¬†the 50 DMA. Stop is $92.50 (break even) on position as this is a dividend trade.
  • 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 consolidating. Watch how it plays out and keep your stop at $115.25 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Ascending triangle of consolidation was broken on the upside last week at $107.21. Manage your risk and still looking to collect the dividend. Stop raised to $107.50 (entry 104.50 12/2014) and the dividend is the play. Muni’s are moving higher on rotation of money.
  • 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 downside volatility. 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. Added the position back at $48.75 on the bounce off support.¬†Moved back into the trading range this week and stop is $47.50 for now.
  • Preferred Stocks¬†– PFF = 5.2% yield. Modest uptrend continues, but flattening. The shift in stocks to the downside could impact the stocks, but only if debt risk rises. Watch and maintain your stops at $38.50 currently. Break even trade with focus on dividend.

4) Commodities –¬†The commodity index (DBC) made a pivot¬†higher April 2nd and on April 24th started drifting lower again. This is getting volatile as the outlook got cloudy for stocks and commodities. Still moving sideways this week and nothing clearing relative to the outlook.

For the Week of May 26th:

  1. Natural Gas (UNG) sold off last week, found support and watching to see how it unfolds.
  2. Gasoline (UGA)¬†corrected with the drop in crude oil. support at $59.50… we got the¬†bounce and have continued to move higher along with crude.¬†Entry point at $59.50. Still moving higher for now.
  3. Oil (USO) $36 support and needs to hold Рif so, add upside trade. Trade entry at $36.75. Added and continues to move towards the previous high. Running on the worries in Russia and the Middle East. Trail stops on this trade to $37.50.
  4. Agriculture (DBA) turned lower and hit a short entry at $28.50. We are not trading that or any agg stocks currently.
  5. Precious metals are treading water and moving sideways for now, and we have no interest until the upside returns.

Commodities Rotation Chart:

commodity

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

5) Global Markets: 

The global markets as you can see on the chart has one big sideways move since October! They have drifted higher, but the emerging markets have been the bigger story. No conviction and too much worry about geopolitical risk has kept the asset class in check. That would make it a trading opportunity versus a longer term buying opportunity for now. Breaking down the parts you can see the clear trading opportunities despite the lack of conviction in the overall class.

For the Week of May 19th:

  1. Emerging Markets (EEM) continues the upside hitting a new near term high this week. India, China and Turkey have shown solid upside leadership for the sector. For now you hold positions adjust stops accordingly and let it run for now.
  2. Russia (RBL) Cleared the entry point and continues to be positive on the upside response. Worries? Watch to see how the follow through pans out, but for now upside in play.
  3. China (FXI) has returned to the bounce high on positive reports… if you believe them. Still positive move and worth watching going forward. FXI in play above the $35.80 resistance level. How high? How much belief will determine.
  4. India has gone verticle on elections results and optimism about the turn around. PIN
  5. Keep your stops in place and be disciplined in your approach.

country rotation

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) РPivot point on March 26th back to the upside has turned into a up and down battle of the traders, but the uptrend continues. This is a dividend play and you will have to manage the risk of the trade as this picks up volatility. SRS is the leveraged short ETF to use to hedge the position if the downside picks up. I still like the outlook longer term and want to hold the position, thus we manage it.

For the Week of May26th:

  1. Real Estate (IYR) cleared resistance at the $68.50 mark and has continued to hold the upside, but has been moving sideways the last two weeks. Watch and manage your position in the sector. I like the dividend if you manage the risk.
  2. HCP, Inc. (HCP) and Ventas (VTR) are healthcare facilities (REITs). They have been leading on the upside, but tested last week and this week resumed their upside, thus the volatility comments. Manage your risk.
  3. Holding here for now and looking for the next leg higher as the consolidation breaks upside. HST, SPG and HCN are showing some signs of moving higher this week. Watch to see how they progress next week.

REITs

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 sideways the three months, but making a move back towards the previous highs. $11.15 entry. Stop at $11.15 break even and collect the dividend.
  • 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. Testing the move lower near support at $30.05. set your stops accordingly as this goes forward.
  • 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 $111.50 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. Trend still moving higher.
  • PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a question. Found support and bounced. entry $27.30. stop $27.30 and manage your risk as the gain is more than the dividend yield.

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.