Notes to Note:
Welcome to the new world of volatility. It has been awhile since we have experienced any prolonged activity like the rise in volatility the last two weeks. We have not reached any pinnacle in the upside and there is still plenty of worry facing investors going forward. The economic data was better in some categories and shows growth inline with the expectations from the Federal Reserve. However the response was more of concern than excitement looking forward. The fear comes from the hike in interest rates to combat inflation from the Fed. Throw in speculation over the geopolitical concerns with sanction against Russia and the worry is growing. Looking towards next week there are two camps of differing opinions. The sellers who believe the economy will stall if the Fed acts too soon and that the sanctions will impact growth in Europe. The buyers who believe the growth is fast enough to offset any impact from either issue. For now the sellers are in charge, but we have to be aware that could shift at any point. August 20th has now taken on the next data point of interest when the Fed minutes from the FOMC meeting will be released and offer some insight into the Feds thought process relative to interest rates and the economic picture.
As we conclude a week of ups and downs and look forward I expect more of the same. We still have to stay focused and disciplined enough to the follow the trend, but aware enough to know when to raise cash. Below are some key notes on the week’s events and what we are watching looking forward:
- Russia/Ukraine… the issue remains and it is far from over as worries rise about sanctions from the US and Europe. The Russia ETF (RBL) declined on the week and in position technically to fall further. Watching to see how it unfolds. RUSS is the short ETF for the country and we have been willing to step into the trade when appropriate relative to the risk. $13.26 is breakout level to watch.
- Volatility spiked to 17.5 this week as the anxiety rose relative to interest potentially rising sooner than later. The fear that trends with volatility moving higher and markets moving lower is what we are concerned about as we progress toward the future. If all the headlines about bubbles and corrections gain traction in action… the selling will accelerate.
- Small cap stocks (IWM) moved back to the 50 DMA last week. This week it tested support at the 200 DMA and Thursday broke support and closed at $110.68… next support is $108. The weakness in small caps has been present all year with the up and down short term trends. Looking at a weekly chart the trading range is very well defined for the last seven months. Risk off has definitely become the short term theme. TZA is the short ETF for small caps.
- Housing is another sector which the data has confirmed a slowing with the decline in new home sales and pending sales. The short interest and the negative sentiment has grown and taken sector below support. Looking at the weekly chart of ITB the next level of support is $21.55. This is a barometer for the health of the economy as well looking forward.
- Patience is a word we all like to use, but struggle with implementing. The last four weeks shows the importance of knowing how to manage the risk and volatility of the broad markets. Knowing when to put on risk in your portfolio versus knowing where to take risk off is vital to the preservation of principle. Short term view is to raise cash. Longer term view is to manage your stops and lessen your equity exposure if the selling continues.
Have A Disciplined Week of Trading!
The final piece of the puzzle is earnings and economic growth. In an effort to keep it simple… earnings growth will be dependent on the economy continuing to make progress in growth. Not just in the top line numbers, but in the real impact of consumer and business spending, sales rising to impact earnings versus cuts in spending or stock buy-backs, and global expansion in the consumer. If that trend takes place the market will digest a rise in interest rates.
Last and not least from my view is the worry factor has to play out. Until there is clarity the chop will continue and speculation will rise along with volatility. Take it one day at a time and establish your strategy short term or long term before you deploy your cash.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 8/1/14)
ONLY ETF Model (updated – 8/1/14)
S&P 500 Index Model (Updated – 8/1/14)
ONE EGG Model (updated – 8/1/14)
Monday Trade Opportunities:
- Each weekday we post the trading opportunities we see using technical analysis. As you have seen the last couple of weeks, when volatility results in choppy markets we have less holdings to manage in the portfolio. Trend changes take time and we saw this week that chop turned lower… Now come the real test for the broad markets up or down? The goal is patience and discipline as this unfolds and filter for the best trading opportunities.
- We will add the opportunities for Monday before the open on Monday.
Pattern Trade Tracking & Follow Up:
- JO – entry $34.80. Bottom reversal. Breaking the downtrend line off the April high and looking for upside follow through. I like the outlook. Stop $34.80.
- CLF – entry 16.20. Trading range. The bottom reversal has been consolidating the last three weeks and looking for a clear break higher. Stop $16.50.
- QID – entry $46.88. Bottom reversal. The break lower in the semiconductors is a negative for the index and earnings from Amazon will impact the index today. Watch for downside trade as NASDAQ looks toppy. 7/31 – added to position – entry $47.50 – bottom reversal. Volatility in the index has been slowly rising the last week and concerns in the large caps are rising as well. Hedge for other positions. Stop $47.50. both positions
- PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
- SCTY – entry $66.50 . Test upside breakout. the support is being tested on the move higher in June. Upside trade setup is positive. Stop $70.85. HIT STOP
- DBB – Entry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside. Stop 17.50.
Breaking Down the 7 Asset Classes:
As you can see on the chart below the US stocks have been leading the move to the upside until this week. Now they are leading the downside. Plenty of questions relative to the outlook for stocks and we will have to practice patience and see how it unfolds short term. This has become a trading market with plenty of chop to keep everyone honest.
For the week of August 4th:
- Emerging markets testing $43.50 support again. I like the upside long term, but you have to be willing to live with the chop short term.
- Treasury bonds are a big question mark with interest rates. Watching to see if rate start to rise in earnest.
- Commodities are moving lower with a stronger dollar and weak outlook for stocks. Still opportunities like coffee.
- REITs watching how the react to the interest rate environment with the volatility.
- The dollar was drifting higher off support short term and UUP is good for now.
- Emerging market bonds sold off on fear of the US markets raising rates.
1) US Equities:
Using the latest pivot point (May 15th) you can see the sideways activity for the broad index and then the sharp decline this week. There was no defensive positions that worked except being short the index. with the big dip this week there are plenty of questions about opportunities? I am too cautious on this move and the rationale behind it . The leadership is being challenged by interest rate worries and that should push money away growth and more towards safety. Thus, the index has seen all ten sector struggle on the downside.
For the week of August 4th:
- S&P 500 index chopped around to start the week and then the bottom fell out and the index fell below the 50 DMA. Hit stops and willing to give it a couple of days to sourt things out.
- NASDAQ 100 Index tested lower as the large cap stocks sold lower as well. held the first level of support and watching as we head into the new trading week and month.
- Small Caps (IWM) – Small caps continued lower and broke support at the $112.20 support and is looking at $108.05. The short trade in TZA has played out nicely.
- As you can see on the chart above they are all trading lower. We hit stop on most of our positions and now we are willing to let this play out before taking on undue risk.
We are working off the June 30th pivot point with the dollar moving higher gradually. UUP is the leader using the May 30th as a pivot point of the low. Watching for any opportunities as this unfolds further.
3) Tracking the Bond/Fixed Income Sectors:
Using May 28th as pivot point to push sideways we see the down, up, down again and up again activity relative to bonds. The move in interest rates shows very clearly the influence on the chart. Yield volatility continues to bounce around and with bounce this week in treasury bond yields play havoc with bonds on the week. Manage your stops and if you used the bounce to lessen exposure you are in a good position for now… cash.
- Utilities – hit stops took exit and watching the bounce on Friday for any signs of life.
- REITs – This is still a sector to watch and manage for the dividend of 3.2%. We continue to monitor the short term volatility and the testing the last couple of weeks. Support at the $70.60 mark for now and exit point.
- Mortgage REITs – has slowly worked higher from the gap lower in March. Made the break through resistance at $12.50 (REM) added $12.50 position and $12.35 stop (HIT on Friday). Dividend distribution of 29 cents, that explains the drop in price on June 24th. The current selling is in light of interest rates and the outlook for moving them higher. Willing to watch this from the sidelines for now.
- Treasury Bonds – Yields moved lower this week on money flow. Risk on trade is in motion short term. The 30 year yield which is now at 3.29%. The bump is worth watching to exit any positions in the bond, but for now we willing to keep the opportunity in front of me and tight stops on positions. 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. Hit stop last week and locked in the gains. Watching to see how this plays out and look for the next opportunity. The negative sentiment towards stocks is impacting the sector as well as the threat to bounce interest rates higher. Higher risk and looking for the support level to be established.
- 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 near the $119 off the test lower last week. Watch how it plays out and keep your stop at $107.75.
- Municipal Bonds – MUB = 2.9% tax-free yield. tested support at $107.80 and holding. Manage your risk and still looking to collect the dividend. Stop at $117 (entry 104.50 12/2014) and the dividend is the play. Muni’s tested lower with corporate’s on the week.
- Convertible Bonds – CWB = 3.6% yield. bounced off $43.75 support (Sept 2013) and $44.80 entry point. 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. We added the position back at $48.75 on the bounce off support. Moved higher and trading near the high. Stop is $49.50 and hit on Friday. Watch for now and see how this unfolds.
- Preferred Stocks – PFF = 5.2% yield. Modest uptrend continues. Tested the 50 DMA and bounced back to the previous highs only to test lower again. Hit our stops at $39.50 and willing to watch for now. (entry 38.50 3/13).
4) Commodities – The commodity index (DBC) made a pivot lower June 20th and has not looked back. The mixed issues within the sector and the reversal in natural gas have contributed to the downside trek. We have to be patient and let it all play out versus forcing any positions. The parts have offered some trading opportunities and we continue to watch those.
For the Week of August 4th:
- Natural Gas – UNG has been the dog of the sector and watching to see if support at the $20.80 mark can hold.
- Oil (USO) is trading lower. Broke support and is now below $98 per barrel for crude. USO is testing the next level of support at the $36 mark. Patience as this plays out short term. Strong dollar has also put pressure on the price of crude.
- Agriculture (DBA) building a base short term and could develop into a short term upside trade. Nice 2% gain off the lows, but no real conviction. Coffee (JO) continue to be the winner this week in the sector.
- Gold testing support and no conviction in either direction short term.
- Base Metals (DBB) moved higher again. Raise your stops on the trade to $17.25 with entry at $17. Testing the move higher short term with all the noise in the markets.
Commodities Rotation Chart:
DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.
5) Global Markets:
The global markets have shifted to drifting lower as the EAFE index cannot gain any upside traction. Geopolitics gets most of the credit for the shift in momentum. Russia and sanctions from Europe are weighing on the outlook for the largest region. Despite the shift in trend there are parts worth watching.
For the Week of August 4th:
- Hong Kong (EWH) and China (FXI) have continue to make upside progress as date improves in China. Looking for an opportunity as the anxiety calms globally.
- Japan (EWJ) tested, continues sideways with some upside opportunity if the rest of the noise will silence globally.
- Emerging Markets (EEM) are testing on the interest rate issues and the default in Argentina. Long term view remains positive, but the short term is choppy.
- Philippines (EPHE) bounced on Friday and could resume the upside looking to next week.
- This like most asset classes are offering trades and it the noise clears up we could see longer term opportunities as well.
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 May 16th shows gradual move to the upside. A move to new highs with some testing the last week. From a short term perspective I am not liking what we are seeing technically, but patience is the key as this all unfold relative to the Fed, interest rates and economy.
For the Week of August 4th:
- The leaders are all testing lower and we are watching to see how this plays against interest rates moving forward. Hold positions, tighten stops and let it go.
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 higher the three months, and cleared 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. Tested the move lower near support and holding for now. Adjust your stops accordingly.
- EMB – 4.5% dividend yield. A break above $109.27 would be of interest. entry $109.30. Adjusted our stop to $113.50 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. The interest rate issues in the US are impacting the emerging markets as well currently. We took the exit at $114 and now look to see how this unfolds. Booked s solid profit on this investment over the last four months.
- PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a question. Found support and bounced. entry $27.30. stop $28.75 and manage your risk as the gain is more than the dividend yield. support at $28.80 in play. Hit stop on Friday and watching how it unfolds.
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.