A week full of data leaves the market up 1 % on the S&P 500 index, but the move higher lacked any conviction. The sellers seem unwilling to challenge the upside move on earnings last week and the same this week on the economic data relative to April and the outlook from the FOMC meeting. There was nothing motivational about the data in terms of growth, but at least it was not worse than March! That is the big takeaway… not worse and slightly improved.
We did manage to avoid a big sell off like last Friday on the fear of Russia and the Ukraine starting a war. The worry is still there as we head into the weekend, but the hope of a peaceful resolution is still on the table.
The jobs report did show 288,000 new jobs added and the unemployment rate declining to 6.3%, but it wasn’t enough to rally the markets to new highs. Why? The new worry is we are not seeing wages increase. Without increasing wages how will the economy grow… blah, blah, blah! We have bigger things to worry about… or do we? Onward and upward it the cry regardless of the valuations.
Have a good week of trading!
We started the week with better pending home sales and that put investors in a better mood. Consumer is still confident, but less than in March, that is interesting sense the winter was an excuse for everything declining. Chicago PMI was bullish with a nice jump higher. Without boring you the data was actually reasonable and in the ballpark of keeping investors happy for now.
The jobs report was good from the view that 288,000 new jobs were added and the unemployment rate dropped to 6.3%. From there is was analyzed to death over the wages. I would have to say no political motivation relative to the minimum wage law influenced these comments:) All the talk about the need to raise minimum wage in the media, and the hang up with the jobs report was no growth in wages? Got it! More than half of the jobs added over the last two years have been at the lower end of the pay scale. Thus, now we need to increase minimum wage. What about innovating and creating businesses that pay better and create better jobs. It only takes some creativity to figure this all out not more handouts.
Still working on the growth picture and dealing with the 0.1% GDP growth for Q1 2014. That was just plain awful and worse than some realize.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 5/3/14)
ONLY ETF Model (updated – 5/3/14)
S&P 500 Index Model (Updated – 5/3/14)
ONE EGG Model (updated – 5/3/14)
Breaking Down the 7 Asset Classes:
Looking at the chart we continue to trade sideways since the March low, and not much changed this week. We bounced off the April 11th low again and back to the sideways trek. It is important to remember when we move sideways… investors are confused and don’t know which side to commit to. That is a line that represents the lack of clarity in the markets about the future.
For the week of May 5th:
- The transition in leadership, the last few weeks has been, back to safety with dividends and/or bonds. This leadership generally only lasts as long as the fear is in place relative to the uncertainty of outcome for growth in the growth of the economy, domestically and globally.
- Treasury bonds added to their upside rally with yields continuing to drop to levels not seen since June 2013. Still a trade opportunity with tight stops as when this turns it will happen quickly.
- Commodities experienced downside pressure with the selling in crude oil and metals. Watch the support levels short term and tighten any stops on positions you currently own.
- Emerging market bonds are trading sideways in the uncertainty that is Russia.
- Emerging markets sold on the Russia/Ukraine issues and we will continue to watch how it unfolds. I am of the opinion the this sector rallies when the threat subsides.
- REITs recaptured some upside momentum and broke to new high. Watch and manage the volatility as this is a long term position or opportunity. Interest rates rising will be the risk to the move short term.
- EAFE index moved to a new high s and sees some selling on Friday to end the week. Still a positive longer term outlook for the mature global markets.
1) US Equities:
The move still remain sideways as seen on the chart below. Healthcare and Consumer Services are the big laggards on that move. Utilities, Consumer Staples and Energy are the leaders on the upside. Thus, the defensive stocks maintained the leadership. The balance are hugging the middle with the index. Nothing has changed short term.
The US equity indexes established a new pivot point on April 11th and to put that move off the brief low into perspective, energy has been the clear leader for the broad markets. Telecom gets the award for the biggest turn around thanks to the bounce on April 28th. There are still plenty of questions, but few answers. Volatility doesn’t exist and it is all moving forward slowly and methodically. We will continue to take the approach of one day at a time going forward. Patience is the key.
For the week of May 5th:
- Energy (XLE) remains the clear leader, but crude sold back below $100 and that could get a negative reaction in the stocks if the downside in crude continues. The bounce helped keep the stocks engaged this week. The sector remains positive and we will raise our stops to $92.70 and see how it plays out.
- Telecom (IYZ) Bounced on Monday and has continue to be a benefactor of the outlook from analyst. Back towards the top end of the range and moving forward.
- Retail (XRT) is attempting to bounce off the lows and establish a move back towards the previous highs. $83.95 is the resistance currently. May offer a short term trade on the upside.
- Midcap (IJH) wants to break above the $136.25 resistance, but can’t seem to follow through. Watching to see how this plays out.
- No move in the US markets that changed my mind technically or fundamentally. We proceed to next week with the eye on the prize and disciplined focus.
See Models for current watch list and stops on existing positions. (Added to the Sector Rotation Watch List for Monday.)
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 is dying a slow death and testing support. We still have little to no interest in trades at this point in the asset class.
Moves of note are FXB, FXS, and FXE moving up gradually the last two weeks.
3) Tracking the Bond/Fixed Income Sectors:
We are still using the December pivot point and the trend has been sideways to up. Yield volatility has shifted to to the downside prompted by the Fed actions and lack of clarity, otherwise know as move to safety. There are still geopolitical worries unresolved that will add to the fear component should they escalate. The fall in rates was in response to the economic reports. 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. Interesting note: 70 of the 101 dividend assets I scan have hit a new high! That is defensive rotation in the markets.
- Utilities – They took a 2% dump on Friday, but are still leading the upside. The dividend play remains, but it has experienced some volatility with the uptrend still in play. The 4% dividend (entry point) remains and stop raised to trailing 50 DMA. Watch and manage the dividend not the short term volatility.
- 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 – REM hit stop on the gapped lower. Building some support short term, but still plenty of work to do here before willing to put money at risk. Watch and be patient here as this plays out.
- Treasury Bonds – Yields moved to a new low this week on rotation to safety. The 30 year yield which is now at 3.36%. TLT broke from the trading range above $111 again and held, but could test the move if rates bounce on any strength in stocks next week. I still see this as a trade opportunity and nothing more at this point. We added IEF to the S&P 500 Model.
- 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, but broke below 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 $117.25 resistance level as traded through top of the consolidation range. 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 $105.50 (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 (locked in a 2% dividend + 8.6% capital gain) That was a good fixed income trade. Watch for move above the $48.70 for entry ($48.75) to the ETF
- 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 you can see from the chart below it is all over the place relative to the parts, and turning sideways to down overall. I look at this as a trading asset class only currently.
For the Week of May 5th: (ADDED TO the Models Watch List)
- Natural Gas (UNG) testing in the uptrend, patience, look for opportunity to add.
- Gasoline (UGA) corrected with the drop in crude oil. support at $59.50… holds look to buy.
- Oil (USO) $36 support and needs to hold – if so, add upside trade.
- Agriculture (DBA) remains in an uptrend with some volatility, but worth holding the position for now. $28.50 stop on the position.
- Gold (GLD) traded back to resistance at the $125.70 mark. Still looking for upside breakout.
Commodities Rotation Chart:
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! No conviction and too much worry 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 5th:
- The EAFE (EFA) index attempting break above the $68 level as the US markets pullback as well. The two are still linked together for now.
- Emerging Markets (EEM) fell on worries over Russia. Consolidating and watching for now.
- Russia (RBL) big bounce off the rumors of a peaceful settlement. Trade opportunity for those willing to trade the news.
- Most countries are trending sideways while this all plays out.
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) – Pivot point on March 26th back to the upside has turned into a up and down battle of the traders. The challenge is the Fed and their view towards stimulus impacting interest rates. You can see the impact of rates moving higher on the chart and then the upside resuming when rates fell again. 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 when the downside picks up. I still like the outlook longer term, but the short term volatility is in play.
For the Week of April 21st:
- Real Estate (IYR) moved back to resistance at the $68.50 mark. Tested support at the 50 DMA and bounced back. Still uncertainty relative to the upside in the chart. Watch and manage your position in the sector. I like the dividend if you manage the risk.
- HCP, Inc. (HCP) and Ventas (VTR) are healthcare facilities (REITs). They have been leading on the upside, but are testing the move on the worries in the broad markets. Manage your risk.
- Sorting for upside over the last week shows CBG breaking to new high and leading, JOE jumped back to the top end of its trading range, as did HHC, and PDM broke higher. Our scan list in the sector is now 129 REITs and 90 have hit new highs as of Friday’s close.
- Last week we discussed the consolidation patterns showing up near the current highs. There were plenty of breakouts on Thursday and Friday. Looking for a continuation and the trend to continue on the upside.
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 higher, but still in uptrend.
- 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 $110.80 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.