Outlook for Week of February 17th

Over the last week the market has enjoyed the move higher on what is considered to welcome news from Fed Chair Yellen. I am not an economic scholar, but I do understand economic growth and the need for that growth to enable companies to be more profitable from the resulting revenue growth. Earnings for Q4 have not shown much in terms of revenue growth? Earnings were in line with… lowered expectations. January economic data thus far has been not been overly impressive. The slowing manufacturing data in the ISM report alone is a warning sign. Retail data is weak and with it inventories are rising slightly. If the rally is from the Fed, and the Fed is projecting growth… where is it in the data? Just curious!

The worries over the emerging markets have subsided as well with the Fed comments. The interpretation of a move dovish Fed relative to stimulus is the hope. EEM is up more than 7% off the February 3rd low. The downtrend is still in play, but the reversal is in play and if it breaks higher could offer some upside opportunity. Volume has been declining the last three days on the buying and it could lead to a test of the move short term. Worth watching.

Consumer sentiment for February was flat relative to January, but better than estimates (which were lower than January). Despite this number most analyst believe the consumer will spend more looking forward. Not sure of the logic that is twisted to get to that conclusion, but we will watch to see how this plays out short term.

Looking towards next week the key issue will now be… follow through on the upside move. Yes, we have come a long way with the S&P 500 index climbing to 1835, but there is still plenty of work to do to restore the uptrend off the November 2012 low. Can or will the buyers continue to push prices higher? No one has a crystal ball and we all have our opinions of what we believe will happen, but the market will have to validate the belief if we are to take on the risk of owning stocks. A discipline strategy is still the key to success.

Economic Data & Outlook:

It is all about the economy… eventually. Yellen comments about the comments trump the actual numbers the economy produced. So fiction really is better than truth. Overall the numbers continue to slow from Q4 reports, but analyst continue to believe it is getting better along with the Fed. I am going back to finish up my PhD in economics… maybe then I will know how to interpret these numbers from the right angle.

As you can tell I remain suspect and cautious relative to the economy putting together a stellar year of growth. Therefore, my focus now is to follow the technical data versus the fundamental. Tracking the trend and going with what the charts say versus the fundamental data at this point. Eventually the fundamentals win, but for now investors are wearing rose colored glasses.

Next week housing, inflation and the Philly Fed will be the reports to watch. Not expecting any big surprises  and we will watch to see what, if any, impact the data has on the markets moving forward. One day at at time, one report at a time.

Economic Events & Calendar

Sectors to Watch:

  1. VIX index dropped to 15.1 on Friday and that is the level we were looking for to prompt a rally or at least reverse the selling.As stated on Wednesday it offered a short term trade entry on SVXY. entry $54 and selling half of the position on Friday into the close was prudent at $60.20. The stop now goes to $57.35 for next weeks trading. The target remains near $62.
  2. S&P 500 index bounced off the low and is now hitting resistance at the 1800 level. The move above this level was point to add to the SPY (entry $178) position posted on Friday (S&P 500 Model). We get an opportunity to add to the position if we can move through this level of resistance and the index makes a move back toward the previous high.
  3. The NASDAQ rallied 60 points on Friday as a nice follow through to the gains on Thursday. Technology followed suit gaining 1.2% and hitting resistance at the $35 mark. A move above this level would offer an entry point for technology. Semiconductors (SOXX) were up 1.3% to lead the index and the ETF needs to rise above the $72.50 mark. We added the QQQ position at $85 and now we will look to add to the holding if we clear the 20 DMA.
  4. Dow remains in the worst shape of the major indexes technically. The index bounced back above the 200 DMA on Thursday to close at 15,628. The follow through on Friday pushed back above 15,700 previous support. In position to move higher now, but the large cap stocks would have to regain their upside momentum. 16,093 target short term.
  5. Russell 2000 Small Cap index broke 1120 support and tested 1090 support. Broke the trendline off the November 2012 low. The bounce off support has not been as impressive as the other indexes and leaves the index in the micro downtrend. We need to watch and see how this plays out next week with interest. If they fail to accelerate on the upside could be an indicator for the broad markets as well. Entry for IWM would be $111.40 if upside continues.
  6. Europe (IEV) moved back above the $45 level on Thursday with a nice follow through on Friday. $46.50 is the next level to move through and then potentially back towards the previous high. The index is trading in unison with the US markets and a rally would be in line if the US continues to move higher. Emerging markets are still weak, but managed a bounce as well. Entry for IEV is $46.50 if we follow through on upside.
  7. OTHER OPPORTUNITIES COVERED BELOW BY SECTOR.

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

Sector Rotation Model (updated Р2/15/14)

ONLY ETF Model (updated Р2/15/14)

S&P 500 Index Model (Updated Р2/15/14)

ONE EGG Model (updated Р2/15/14)

Breaking Down the 7 Asset Classes:

On February 3rd we started another potential pivot point. Thus, the micro trend is now on the upside with the EAFE (EFA) and Emerging Markets (EEM) leading the way. REITs (IYR), Commodities (DBC) are doing their part to help on the upside. Emerging Market Bonds (EMB) and Treasury Bonds (TLT) are lagging the others with a modest downside in play. For now we go with this on the upside as short term opportunities.

The previous pivot was October 9th on the upside. The current move is attempting to recapture this upside momentum. US stocks continue to be the leader longer term with the other asset classes playing catch up.

7 Assest Classes

1) US Equities:

The US equity indexes established another pivot point on February 3rd off the recent lows. The micro trend leadership is coming from Basic Materials (XLB), Consumer Services (XLY), Healthcare (XLV) and Technology (XLK). Adding to the upside is Financials (XLF), Telecom (IYZ), Consumer Staples (XLP), Energy (XLE) and Utilities (XLU).

Moving back to the October 8th pivot point off the previous low is the short term trend we are attempting to reestablish currently. The leadership dynamics have changed since the drop off the January 22nd peak. Financials and Basic Materials dropped out of the leadership role, but the last couple of days have made progress and that bodes well for the continuation of the current move.

SP500Scatter

2) Currency:

We are still working off the January 30th pivot point which has amounted to nothing more than a sideways trend. The biggest transition has been in the emerging market currencies bouncing off their current lows. The dollar has been drifting lower of late and we are watching to see if the downside gains any momentum. Overall interesting moves, but not willing to accept the risk of the uncertainty in place and willing to sit tight and watch for now.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

Starting to trade sideways, but the parts are making move on the Fed comments and outlook relative to actions. Morgtage REITs (REM), Utiliites (XLU), REITs (IYR) and Treasury Bonds (TLT) are leading the asset class higher near term. We have added IYR, XLU and REM as trade opportunities in the portfolios, but we continue to manage the issues around interest rates and the longer term outlook for now.

Looking at the chart below you can see the rally opportunities to trade, but holding these positions longer term as they are designed, is too much risk for my taste.

Bonds

  • Utilities –¬†The dividend play remains in play as the upside gains some strength again this week. 4% dividend and stop at $38.20.
  • REITs¬†– See below – dividend play 4%. IYR made solid move above $64 and still have stop at $64.
  • Mortgage REITs¬†– REM making a move higher, but risk remains high as well if interest rates turn back to the upside. Caution about adding near term, see it as a trade only.
  • Treasury Bonds¬†– TLT or IEF rallied off the current lows. Hit our stop on IEF (S&P Model). The trade could develop again as it is sitting on support. A break would open the opportunity to trade the downside with TBT.
  • High Yield Bonds¬†– HYG = 6.4% yield. Bounced off the $91.25 support (Sept 2013) and held to close back above the 200 DMA. It has remained in a trading range since. The test down to $92.40 support held and trading higher again with stocks moving off lows. Stop is $92 on positions.
  • Corporate Bonds¬†– LQD = 3.9% yield. Small rally in play off the low at $113.20. Cleared $115 level as trade through top of the trading range. Stop is $115.25 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Broke the downtrend line and has continued to move higher. Stop at $104.50 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 upside and volatility. The pullback in stocks is reflected in the selling last two weeks and we keep the position and our stops at $45.50. The trade is now a risk free dividend of 3.6%. manage your risk short term.

4) Commodities –¬†The commodity index (DBC) made a pivot lower on December 29th and move off the February 3rd low is potentially a pivot back to the upside. Natural gas has been the clear winner in the sector, but we are now getting a test of key support. A move lower would be a negative short term for the commodity. Be cautious as the volatility and speculation have been big.

Agriculture commodities have been moving higher on the speculation of drought conditions in Brazil hurting sugar and coffee production. Both have moved higher and are currently testing the breakout moves. DBA shows solid break higher with high volatility last three days due to coffee. Holds 50 DMA gets interesting for a upside trade on the continuation of the move.

  • OIL – move above $23 as trade to the previous high. UCO give 2x leverage. Added UCO at $31.75 on move higher last week.
  • JO – coffee broke higher on crop news. extreme volatility last three trading days. Willing to watch for now the flag pattern to break and continue the trend higher. Entry $28.50 on break higher.
  • SGG – sugar is testing the move higher. Holding above $52 support. $53.75 entry.

Commodities Rotation Chart:

Commodity

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 as it is tracking with the US markest. On January 22nd it created a downside pivot point, which reversed on the February 3rd bounce. Welcome to volatlity. As you can see on the chart most of the country ETFs are heading higher off the pivot point of February 3rd in lock step with the US markets. Worth following the opportunities as they unfold.

  • EFA – Watch for follow through on the upside of this trade. (entry $65.20, Only ETF Model) Got the follow through and added the position. Managing the risk of the trade.
  • IEV – Watch for follow through on the upside of this trade. (See Sector Rotation Model) Got the follow through and the trade, but plenty of work to do as we move forward.

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) РThe chart broke from a cup pattern and followed through. It has tested with the volatility in stocks, but held the uptrend. We broke above $65.50 and the upside has continued. This is a solid longer term play for the dividend and growth opportunity. The trade remains in place in the S&P 500 Model. Scanning the individual REITs that make up the index is worth the exercise as some are again on the verge of breaking higher.

Real Estate IYR

7) Global Fixed Income:

Sector Summary: Bounced off the lows and trending sideways. Any positions are for the dividend play only.

  • PAFCX – 1% dividend. Trading and trending sideways the two months.
  • PICB – 3.1% dividend. 27.80 support and bounced. $28.70 entry. Hit entry and adjusted stop to the entry. zero risk trade on dividend. This a dividend play, hold the stop at break-even and let it play out.
  • EMB – 4.5% dividend yield. Looking for bottom? Found the low and bounce this week. A break above $109.27 would be of interest.
  • PCY – current dividend yield is 4.8%. Trending lower again as emerging markets come into question. Found support and bounced. $27.26 remains our point of interest to add any positions.

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.¬†