Is the consolidation phase of the current leg in play? Last week the S&P 500 index fell 0.1% for the week or essentially traded sideways. Where do we go from here? My thoughts are more consolidation as we end the week of February and look to the next batch of economic data. The reports since November have shown a modest contraction in the US economy, and if that continues we would likely see a downside move in response.
The emerging markets remain a big question mark, but they have established a new low near the $37 mark on EEM. Plenty of overhead resistance and it will be a test to move through these levels both technically and fundamentally. I still view the sector as nothing more than a trade short term.
The ‘V’ bottom reversal has hit resistance short term. How does it play out from here? Do we form a reverse-head-and-shoulder pattern? Do we test the bounce from the February 3rd low? Do traders ignore the warnings signs and just keep buying? There is plenty to ponder and watch as we head into the last week of trading for February. Stay focused, stay disciplined and manage your risk.
I still say, it is all about the economy… eventually. The data this week was again mixed. Homebuilders index was well below expectations along with the housing starts and existing home sales were in line with expectations. Empire state index was cut in half and the Philly Fed was -6.3!!! Markit flash PMI was better (rallied on news Thursday) than expected at 56.7. Yes, more negative than mixed.
The rally point on Thursday with the Markit flash PMI being better gave hope to the outlook on the manufacturing data improving in February. I am not a believer in buying on hope, but the market is full of buy-the-dip trading currently and that was buy point.
I still am cautiously optimistic, but the data has to improve if stock prices are going to hold the uptrend. This week will give a look at the consumer, Chicago PMI, Pending home sales and Durable Goods Orders. We continue to take this one step at at time for now.
Sectors to Watch:
- VIX index has calmed and settled in near the 14-15 mark. Volatility has evaporated with the worry about stocks near term. This is still worth our attention, but not a concern as we start the week. The news relative to the economy and the consumer will set the tone.
- S&P 500 index traded sideways on the week and closed at 1836 for the week, down 0.1%. Still looking to clear the January highs going forward as this has become resistance. Looking for more consolidation this week, but we still need to manage the risk of our positions and not assume anything… up or down. 1810 is the level to watch short term for support and 1850 for resistance.
- The NASDAQ closed at 4263 or up 0.5% for the week. It is the clear leader for the major indexes and the leadership from semiconductors, networking, internet and biotech has kept the upside push in play since hitting the low on February 3rd. Manage your risk relative to the short term gains on positions in each of these sectors. 4180 is the level of support short term.
- Dow closed at 16,103 or down 0.3% for the week. The large cap stocks have been a challenge for the broad market overall. The sideways trading on the week leaves the downtrend off the December high in play for now. A move above the 16,250 mark would offer some upside opportunities going forward. Watching to see how this unfolds short term.
- Russell 2000 Small Cap index closed at 1164 or up 1.3% for the week as a leaders. The index held the 1150 level on several tests. Content to hold our position and see how this plays out looking forward. IWM needs to hold above the $115.50 previous resistance.
- Europe (IEV) The index is trading in unison with the US markets and the rally has been in line as well. We got the follow through and on the break above the 52 week high, but that is currently being tested. Need to hold $47.70 this week. Watch the downside risk if the US markets test the recent move higher.
- 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 – 2/23/14)
ONLY ETF Model (updated – 2/23/14)
S&P 500 Index Model (Updated – 2/23/14)
ONE EGG Model (updated – 2/23/14)
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.
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) and Healthcare. Testing the current leadership role is Technology (XLK), Energy (XLE) and Telecom (IYZ). Lagging or looking for some upside momentum is Financials (XLF) and Consumer Staples. Positive upside moment in the Utilities (XLU) and Industrails (XLI) has helped as well.
Moving back to the October 8th pivot point off the previous low is the short term trend and reestablished the uptrend currently. The leadership dynamics have changed since the drop off the January 22nd peak with Financials and Basic Materials dropping out of a leadership role.
See S&P 500 Model for current allocation as we are 100% invested.
We are still working off the January 30th pivot point which has amounted to nothing more than a sideways trend that has tested the bottom range of support. The biggest transition has been in the emerging market currencies bouncing off their current lows. Overall interesting moves, but not willing to accept the risk of the uncertainty in place and willing to sit tight and watch for now.
3) Tracking the Bond/Fixed Income Sectors:
Continues to trade sideways, but the parts are making move on the Fed comments and outlook relative to actions. Convertible Bonds (CWG), Utiliites (XLU), REITs (IYR) and Corporate Bonds (LQD) 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, trade only for the equity return versus the dividend yield.
- Utilities – The dividend play remains in play as the upside gains some strength again this week. 4% dividend and stop at $38.60.
- REITs – See below – dividend play 4%. IYR made solid move above $64 and still have stop at $64.50
- Mortgage REITs – REM making a move higher, but risk remains high as well if interest rates turn back to the upside. Testing resistance at $12.65. Stop $12.15.
- Treasury Bonds – Drifting lower after a solid run to the upside. Close below $106 on TLT is short entry 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 was a pivot back to the upside. Natural gas has been the clear winner in the sector, but gold, silver, gasoline, oil and soft agriculture is moving higher as well. News relative to the California drought issues will have an impact on agriculture prices as well going into the summer, add the speculation of drought conditions in Brazil hurting sugar and coffee production to the equation.
UNG, DBA and DBC all are moving higher.
- OIL – move above $23 as trade to the previous high. UCO give 2x leverage. Added UCO at $31.75 on move higher and managing the stops on the position.
- JO – coffee broke higher on crop news. extreme volatility last three trading days. Willing to watch again as the second flag pattern is setting up for a continuation trade. Entry $28.50. Stop$31.50.
- SGG – sugar tested the move higher and added to the move last week. Held $52 support. $53.75 entry. Stop $54.50.
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 as it is tracking with the US market. On January 22nd it created a downside pivot point, which reversed on the February 3rd bounce. Welcome to volatility. 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.
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) – The chart broke from a cup-and-handle pattern ($65.50) and followed through. It has tested with the volatility in stocks, but held the uptrend. This remains 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.
HST made the best move last week and watching to break above the $19.60 level on the upside. Others have been testing of late and are worth watching on the consolidation and raising stops as necessary.
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 three months.
- PICB – 3.1% dividend. 27.80 found support and bounced. $28.70 entry (Sept 2013). Hit entry and now 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. A break above $109.27 would be of interest.
- PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a 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.