Outlook for Week of April 28th

Worry? About what? Russia and Ukraine? China? The weak economic picture that is unfolding? Why worry, just buy stocks and believe in the Fed. As I wrote earlier this week… buy the rally, or sell the bounce? Both camps are working to convince the investor they are right. The bounce worked as the S&P 500 was up 3.7% after hitting the low on April 11th and now it has stalled on worries, most of which are in question format above. They are real, but at this point they are purely speculative in nature on what damage they may cause going forward. Thus, market activity that last part of the week is favoring sell the bounce.

One question that was on my mind Friday as I watched the NASDAQ fall 1.7%… is the issue in Ukraine a reason or excuse for the push lower? From my simple way of seeing things it strikes me as an excuse. The bounce was supposed to be a test of the downside, but then the Fed stepped in and said wait, you miss understood we are pro stimulus! The words from Yellen putting the rate hike many feared out to 2016 and the rally gained momentum it would not have garnered without the comments or half-promise. Now investors are looking for a way out of this mess and Russia provided an excuse for selling. If it were a reason the downside moves would be more dramatic.

Have a good week of trading!

Economic Data & Outlook:

For me, this is where the challenge lies going forward. When you review the numbers week after week and they are not improving it is difficult to want to be a long term buyer of stocks. This week was no different as the numbers remain mixed with some positive data points and some negative.

The leading economic indicators were positive again showing signs of growth on the horizon. Michigan consumer sentiment was better than expected with a positive consumer. Market PMI was flat, existing home sales in line and durable goods were much better than expected. All adds up to improving outlook?

The one big negative was the new home sales missing badly 384k versus the 450k expected. Homebuilders are having challenges getting property, but there is more in this number than that? We will have to see if a trend develops going forward.

Next week we start the process all over again as the month of April comes to a close. It will be a busy economic week for investors. The data matters and April data will set the tone. Do they prompt a sell in May and go-away mentality of rally the markets?

Economic Events & Calendar

Models:

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

Sector Rotation Model (updated Р4/17/14)

ONLY ETF Model (updated Р4/17/14)

S&P 500 Index Model (Updated Р4/17/14)

ONE EGG Model (updated Р4/17/14)

Breaking Down the 7 Asset Classes:

I posted the chart below starting on April 13th which is the pivot off the recent selling. As you can see the bounce in US stocks led the move with real estate and the EAFE index no far behind on the move. The other two moves of note on the chart is the reaction to the Russia/Ukraine issue first, in US treasury bonds, and second, in the emerging markets. They diverged with emerging markets trading lower and bonds trading higher. That is the classic flight to quality and avoidance of risk. Both sectors are covered below within their respective asset class, but they show the current uncertainty and speculation building in the markets overall.

7 Assest Classes

Stepping back to the February 3rd pivot point you can sees the turn sideways for US stocks starting on March 6th. Since then the leadership has been moving around. Emerging markets were leading until this week as they retraces nearly half of the gains on the move. Real estate has moved higher since March 24th and emerging market bonds moved higher as well starting near the same point. Treasury bonds have been moving higher since the March 7th low. Thus the move in Treasuries reflects the sideways trading as money rotated towards safety. This is likely to remain the case going forward. as the worries continue to plague investors relative to growth based assets.

7 Assest Classes

For the week of April 28th: (Each is updated in the asset classes below.)

  1. The transition in leadership maybe back to safety or bonds. Watch to see how that unfolds in the coming week as fear of war from Russia and China economic woes continue.
  2. Treasury bonds rallied with yields continuing to drop to levels not seen since June 2013. Rally in bonds is on again.
  3. Commodities remain positive with some volatility. Oil moved lower on supply and demand reports. Agriculture is positive and the base metals are mixed. This remains a trading sector short term.
  4. Emerging market bonds remain in uptrend and continue to attract assets.
  5. Emerging markets sold off on the Russia/Ukraine issues and we will continue to watch how it unfolds. If war does not breakout, buying the sector is an option.
  6. REITs recaptured some upside momentum, but the rally in bonds and drop in yields has put it on the watch lits. Watch and manage the volatility as this is a long term position or opportunity.
  7. EAFE index moved back to resistance of the previous highs and sees some selling on Friday to end the week. Still a positive longer term outlook for the country.

1) US Equities:

The US equity indexes established a new pivot point on April 11th on the bounce following the recent selling. Friday the sellers stepped back in on worries in Russia. Trading range? Downside returns? Plenty of questions, but few answers. The volatility picked up on Friday, but too much focus on Russia to get a feel for the real sentiment of investors. If we take that out of the equation the economic and earnings picture are still not very rewarding. We will take the approach of one day at a time next week. Patience is the key.

For the week of April 28th:

  1. Energy (XLE) remains the clear leader, but crude sold back below $101 support and that could get a negative reaction in the stocks if the downside in crude continues. The target for crude now $99.50. The sector remains positive and we will raise our stops to $92.70 and see how it plays out.
  2. Telecom (IYZ) The sector was doing well until earning sidetracked the advance. Testing support at $28.70 and the downside may accelerate.
  3. Flight to safety and defensive positions is the theme of the close Friday. Still have to question what will transpire if nothing happens in Ukraine over the weekend. Does a bounce materialize to start the week or does the worry shift to other problems? We will approach the week with caution and determine if the sectors offer anything further worth trading.

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.

SP500Scatter

 

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 dollar bounced last week after testing the previous lows and held. 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 moved higher, but are testing the downside short term. FXE is moving sideways with the rumor of the currency gaining strength on the current global outlook.¬†No trades here for now… too much uncertainty and news driving the direction.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

We are still using the December pivot point and the trend has sideways to up. Yield volatility has shifted to to the downside prompted by the Fed actions and Russia stirring the pot. There are still geopolitical worries unresolved that will add to the fear component should they escalate. The fall in rates on Friday was in response to the negative reaction in Russia. 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 – They are still leading the upside. The dividend play remains, but it has experienced some volatility¬†with the¬†uptrend still in play. Hit a new high to close the week. 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 $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 3.43%. 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 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. 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 is a good fixed income trade. The downtrend was established, but is attempting to reverse if it can break back above the 50 DMA. Still not willing to venture into the bonds without some clarity on direction.
  • 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.¬†The outlook is still mixed and to the upside. I look at this as a trading asset class only currently. If some solid trend develop we can always hold longer term, but take what it gives from a trading view.

For the Week of April 21st:

  1. Natural Gas (UNG) jumped up 4.2%¬†last week and has tested back this week… my point on trades.
  2. Gasoline (UGA) topping on oil prices dropping to end the week. Watch the downside risk if crude continues lower short term.
  3. Oil (USO) short trade with SCO this week on the break lower on supply data. sitting on the 50 DMA and watch for some support. If break downside accelerates.
  4. 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.
  5. Precious metals tested lower hit support at the 123.50 level on GLD and bounced. Now attempting to move higher? Watch as demand is not present, but speculation is.

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! 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 April 28th:

  1. The EAFE (EFA) index¬†can’t break above the $68 level as the US markets pullback as well. The two are still linked together for now. Europe (IEV) looks similar, but made an attempt to break higher this week, but failed to hold the move. Watching for a break higher.
  2. China (FXI)¬†returned to it’s downward ways breaking below the 50 DMA again. Economic worries continue plague the country. Short trade was attractive on the move.
  3. Emerging Markets (EEM) fell on worries over Russia. Back below $41 and watching for now.
  4. Russia (RBL) big bounce off the rumors of a peaceful settlement. Trade opportunity for those willing to trade the news.
  5. Most countries are trending sideways while this all plays out.

Global Mkt

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. 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:

  1. 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.
  2. 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.
  3. The ETF (IYR) contains 95 REITs sorting for upside since the pivot point on March 26th show HCP and RHP as the top performing positions at 9.8% versus the ETF at 3.6%.
  4. CUBE is another worth tracking as it just moved through resistance at $17.80 and holding.
  5. Nice consolidation patterns showing up near the current highs. Looking for a continuation and breakout next week if the trend continues to the upside.

Real Estate IYR

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.