The broad markets bounced after the technical indicators were pointing to oversold. Thus, the buyers stepped in. The bigger question is will they remain? Do they have the conviction to drive the markets higher in the face of declining revenue and manufactured earnings in the US. Only time will answer the question and we have to go with the trend short term. The S&P 500 index needs to establish a new high if this trend is to be convincing going forward. That will be a challenge without a catalyst… Russia is in position to provide a strong catalyst short term to investors and one issue to watch.
The Fed in Yellen’s speech on Wednesday may have provided another key catalyst point if it sticks with investors. The promise to push rate hikes out to 2016 if current weakness is growth remains. If believable enough and sustained activity supports that view, it would act as a catalyst.
Earnings are the final catalyst point we see heading into the trading week. Coming off a week of mixed results, if the upside is the direction in earnings reports this week it provide a needed catalyst to stocks. Leadership is another issue facing stocks. Healthcare, Technology and Financials are the three largest sectors and they are all lagging the move off the low last week. Energy, Industrial, Basic Materials and Telecom are good, but they cannot lead the indexes higher long term. The Semiconductors made a move finally on Thursday to help tech, but they need to follow through and get some help from the large cap stocks if the upside is going to gain any momentum.
Patience as we start the trading week and watch to see how each of these potential pivot points adds to the trading week.
Below we cover in more detail our strategy for the week.
Have a good week of trading!
The data started out on the positive side with retail sales ahead of expectations gaining 1.1% in March. Inventories were flat and below expectations, another positive. Industrial production was better than expected along with capacity utilization. Jobless claims continue to fall, now at 304,000 for the week. Thus, some positive news to assist the bounce off the lows.
Inflation was hotter than expected with the CPI at 0.2%. We discussed this last week and it remains a concern despite the Fed brushing it off. The Empire State manufacturing number was a big disappointment and something to watch going forward. Once again the data was mixed… some good and some bad.
Yellen spoke on Wednesday and added fuel to the buyers as she essentially stated the Fed wouldn’t hike rates until what would be 2016 now. That gave some energy to the upside move as one of the main reasons for the selling has been the market pricing in a potential rate hike as stimulus is withdrawn. That could add to the bounce strength and duration. Something to watch going forward as well.
Economic picture isn’t changing relative to growth. The outlook is still slow growth and the slowing in the housing sector (predicted) could have more of an impact. Patience for now, but the outlook is still very questionable.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 4/17/14)
ONLY ETF Model (updated – 4/17/14)
S&P 500 Index Model (Updated – 4/17/14)
ONE EGG Model (updated – 4/17/14)
Breaking Down the 7 Asset Classes:
The oversold technical bounce showed up almost on cue. The question is how much influence Yellen’s comments on Wednesday will play into the bounce going forward. She retracted her six months from the end of QE comment and essentially pushed the forecast out to 2016. One current worry for the broad markets is the lack of stimulus from the Fed to keep the economy going. If it is interpreted and believed the Fed will not intervene until 2016 that could add some upside momentum to the markets.
The other issue facing investors is earnings and they have been very mixed thus far. The some important reports from IBM and Google were disappointing. Ones from the likes of Chipotle Mexican Grill, concerning as they report higher food costs (30% increase in some cases) impacted their margins and thus missed the bottom line number. And others, as you would expect, are hitting on all cylinders. This leaves room for the upside to continue depending on how the numbers fall out going forward. This week offers some big numbers to watch as well.
Using April 2nd as the downside catalyst we can see the separation and rotation within the asset classes. US Stocks lead the downside. Treasury bonds lead the upside. However, if we look at the 11th of April for the bounce the opposite is true. Therefore, we don’t have any clear direction at this point, but we do have to manage the risk of the trading positions and balance out our longer term holdings. Patience is the best course of action for now.
For the week of April 21st: (Each is updated in the asset classes below.)
- The transition in leadership held the most interest on the trading week as we get a bounce in the stock oriented classes with the income/defensive classes moving sideways.
- Treasury bonds fell hard on Thursday with a shift in belief towards stocks. The decline of 10 basis points on the ten year bond was significant and we will watch how this plays out in the coming week.
- Commodities took over the leadership as oil prices continue to rise. That is a concern for the consumer short term. A sector to watch and trade moving forward.
- Emerging market bonds remain in uptrend and continue to attract assets.
- Emerging markets sold off on the Russia/Ukraine issues, but had nice bounce back on Thursday.
- REITs recaptured some upside momentum, but Thursday’s move in interest rates worried investors and some profit taking or selling was in play. Watch and manage the volatility as this is a long term position or opportunity.
- EAFE index. Trading in unison with the US markets again and joined the downside and upside as the market look for clarity.
1) US Equities:
The US equity indexes established a new pivot point on April 2nd, but the reversal on April 11th could negate this short term pivot if it clears the April 9th high. That would put the trend back into a sideways momentum or a break back above the April 2nd high would resume the uptrend for US stocks. The three day bounce took the short term volatility out of the market and put the buyers in control… at least for now. Plenty to ponder and determine going forward.
The bounce last week is where we look for leadership going forward.
For the week of April 21st:
- Energy (XLE) was the clear leader gaining 4.9% for the week. The break through resistance came as money rotated into the large cap stocks. The dividend opportunities and rising oil prices attracted money. Will it continue? Raise stops on trades taken, manage the risk going forward and be patient… still upside in the sector longer term.
- Telecom (IYZ) The sector that continues to frustrate with volatility. The momentum turn on Thursday is worth putting money to work as a trade nothing more at this point. The stocks offer better upside, but greater volatility. Take what fits your investing personality.
- Industrials (XLI) jumped into a leadership role as well on the week up 3.6%. I expect the momentum to remain in the sector moving forward.
- Basic Materials (XLB) got a boost from the commodities rotation and for now remains in an uptrend.
- Financials (XLF) made an unimpressive bounce off the lows and back above $21.60. Need leadership from the sector, but I would be patient here and let this develop. 50 DMA is in play currently and if we can move through that level may be an opportunity.
- Healthcare (XLV), Consumer Services (XLY) and Technology (XLK) made upside moves, but have not regained the previous momentum. If the upside in stocks is to move higher, these sector have to get back on course.
- Utilities (XLU) and Consumer Staples (XLP) the defensive sector gave up some gains on Thursday, but remain positive and in their respective uptrends. I still like the defensive sectors short term.
- There are plenty of issues facing the US equities. Let’s keep it simple for now. We will take the trades presented up or down and let the rest sort itself out. Our opinions don’t matter, it is money flow in and out of sectors that will determine opportunities.
See Models for current watch list and stops on existing positions. ONLY ETF model will capture the short term trades for the index and US markets.
We are still working off the January 30th pivot point which has amounted to modest move lower to test support on the dollar. The dollar bounced this week after testing the previous lows. The global issues with Russia are impact the outlook short term pushing money towards the dollar. If the issue gets resolved peacefully the dollar is likely to decline again and retest the lows. We still have little to no interest in trades at this point in the asset class.
BZF and FXA continue to moved higher, but are testing the downside short term. FXE moved lower on the threat to devalue the euro if Russia attacked the Ukraine. The issues are still in the forefront with some hope a resolution in the works currently. No trades here for now… too much uncertainty and news driving the direction.
3) Tracking the Bond/Fixed Income Sectors:
We are still using the December pivot point and the trend has sideways to up as the uncertainty continues in stocks. Yield volatility has shifted to an uptrend fueled by the economic data and the Fed. There are still geopolitical worries unresolved that will add to the fear component should they escalate. The jump in rates on Friday was in response to the positive upside in stocks. 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.
- Utilities – The dividend play remains, but it has experienced some volatility, but the uptrend remains in play. Hit a new high and tested lower, but closed the week higher. The 4% dividend remains (from our entry point) and stop raised to $40.80. Watch and manage the dividend not the short term volatility. Stop raised, but let it work the volatility out.
- REITs – This still a sector to watch for the dividend play 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. Closed back above the DMA Friday and support is $66.25. Long term view is to hold and manage the volatility.
- Mortgage REITs – REM hit stop on the interest rates and worries in the housing sector. 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. Thursday did see a 10 basis point bounce for the 30 year yield which is now at 3.51%. TLT broke from the trading range above $109 again and held, but could test the move if rates continue to bounce on the strength in stocks. 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 and hugging the 50 DMA currently. 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, but now reversing on rates moving higher. 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.
- 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 is a good fixed income trade. The downtrend has now been established with a lower high. Downtrend hitting the trendline and could accelerate with stocks. Still not willing to venture into the bond.
- 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 lower March 3rd, but has shifted back to the upside with the higher high on Thursday. This move would establish the April 2nd low as the current pivot point and upside trend. Looking from this point forward you can see the defined leadership on the chart below.
For the Week of April 21st:
- Natural Gas (UNG) jumped up 4.2% on Thursday. Supplies, price, demand all playing a part in the move. This puts the commodity back in a leadership role and breaks from the consolidation of the last month. Watch for entry point.
- Gasoline (UGA) climbing steadily higher as the price of oil move higher. UGA broke to new high and we need to own it if we are going to off set the price at the pump in our personal lives.
- Oil (USO) breaking higher as well and continues in the uptrend. UCO is the leveraged trading ETF for the trade upside.
- Agriculture (DBA) remains in an uptrend with some volatility, but worth holding the position for now. The parts are moving like coffee (JO) back near the highs. Soybeans (SOYB) moved higher as well.
- Precious metals turning lower as money rotates back to stocks. Watch to see if support at $123.50 holds on GLD. could present a trading opportunity this week.
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 and look very similar to the US equity charts. Using the March 21st low as a pivot point currently you can see the uncertainty and volatility in the chart. This is a short term trading dream with the volatility. However, it is a nightmare for those who want to hold longer term positions in the global markets. I continue to like the longer term view, but the short term is a challenge. Be patient and pick your entry points based on your risk tolerance.
For the Week of April 21st:
- The EAFE (EFA) index remains in a trading range and bounced off support near the $66 level. Move above $68 on volume would interest me this week, but you have to have a strategy for managing the risk going forward versus buy and hold.
- China (FXI) bounced off the 50 DMA as support short term. This remains a trade from my view as the uncertainty surrounding China is still in play. Move above $36 is a trade to the previous high.
- Emerging Markets (EEM) made back above $42 after testing lower last week. The volatility is due to Russia/Ukraine. If it gets resolved amicably the upside in the emerging markets should return. Looking for entry at this level and a longer term holding period is the trade with managed risk.
- Russia (RBL) big bounce off the rumors of a peaceful settlement. Trade opportunity for those willing to trade the news.
- Japan (EWJ) moving off the lows? Some interest if it gets above the 50 DMA.
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 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 Thursday on the chart. 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 selling is going to pick up if rates tick higher.
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 of late, but are testing the move on the worries in interest rates currently. Watch and manage your position.
- The ETF contains 95 REITs with the current leader Ryman Hospitality Properties (RHP) up 10.2% since the pivot point on March 26th.
- CUBE is another worth tracking as it just moved through resistance at $17.80 and holding.
- MPW is in position to break above resistance as well at the $13.50 level.
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 $108 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 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.