The data was disappointing with durable goods falling 4.3% and setting a negative tone to the economic outlook. New home sales missed the target of 455k at 414k for December another disappointing point on the week. Pending homes sales missed as well in December falling 8.7%. Weekly jobless claims climbed 18k to add another disappointment to the week. The GDP for the 4th quarter was at 3.2% growth helping negate some of the negative data. Personal income was flat (negative), consumer spending rose 0.4% (positive), Chicago PMI was 59.6 (positive) and the consumer sentiment was 81.2 (positive). Bottom line the data was mixed reinforcing the lack of clarity for the broad markets.
The Fed cut another 10 billion dollars from the stimulus. The challenge isn’t the cutting of stimulus, but can the economy get along with a help from the Fed? The Fed says yes, but investors are voting no with some selling. Definitely a area of concern and point we continue to watch looking forward.
Sectors to Watch:
- S&P 500 index tested below the support at 1775 and bounced closing the week at 1784. The back and forth this week was interesting, but was net down 6 points. The index lost 3.6% for the month of January. Is the market building a trading range or is this just another period of volatility before heading lower? The next support would be 1745 and resistance is at 1810. Index volatility has picked up as well with the VIX index hitting an intraday high of 19, a test back towards the 15 level would show the anxiety is dropping and a bounce may follow. The index moved up to 18.6 to end the week and leaves volatility squarely in play. Watch the index for clues on direction this week.
- Utilities (XLU), REITs (IYR) and Technology (XLK) showed the best momentum to end the week. Watch to see how they progress today. Healthcare (XLV) struggled on Friday, but biotech (IBB), pharma (XPH) and medical devices (IHI) are still in good position to lead the upside.
- The NASDAQ closed the week at 4103 after starting the week at 4128. This has been the most volatile index of the broad markets. The technology index has been extremely volatile on the week leading the downside along with semiconductors. Both however, made a bounce to lead on Friday. 4000 is the next level of support and 4135 resistance. Earnings from the large cap stocks have been an issue and continue weigh down the index short term. Biotech has been a leader for the index and worth tracking the leaders within as they continue to perform well and show nice pattern setups for trading short term. TKMR broke from consolidation on Friday. AEIS equally moved higher to complete the move from a consolidation or handle pattern. Scanning IBB will turn up these opportunities.
- Dow is in the worst shape of the major indexes technically. 15,710 is support and we closed below that level on Friday. The index actually hit 15,617 intraday before recovering. Thursday posted a modest gain of 0.7%, but failed to achieve any upside follow through on Friday. Large cap stocks have been the weak link in this test lower and it isn’t showing signs of improving near term for the index. The up trendline off the November 2012 low is is next along wit the 200 DMA. DXD is the short ETF if we break support. *Moves of interest: MSFT breaking higher from trading range. CAT reversing and moving higher on earnings. MRK in position to break higher as continuation of the uptrend. XOM and CVX triggered short signals on the downside last week. Where is support?
- Russell 2000 Small Cap index held 1120 support and closed the week at 1130. The close remains on or just below the trendline off the November 2012 low. A break of this support would be a negative longer term for the index. The 30 DMA would be a good target to clear on the upside as breathing room for the index. TZA is short ETF for the index. Scanning the index shows some big moves on the upside Friday? Watching to see how that plays out short term.
- Europe (IEV) fell to $45.25 on the week with several attempts to bounce higher. Not what we expected with the positive economic data in Germany and the eurozone over the last week. We would need to move back above $46.52 to hold the uptrend currently. $45 is the next level of support to watch. EPV is the 2x short ETF for Europe.
- Natural Gas (UNG) rallied more than 17% the last two weeks and then sold back to support at $23.25. The volatility has picked up as the weather and the speculation are deciding who is right. The cold weather blast is giving reason to believe usage will arise along with plenty of speculation of what that will mean for price looking forward. The natural gas stocks (FCG) hit the entry point, but they have lagged the commodity significantly. Still looking for the upside to respond.
- China (FXI) worries sent the country ETF to support at the $34 level and consolidating near term. Plenty of talk about things improving in China near term. The challenge is the sentiment remains negative along with the economic forecasts. Be patient and let this test of support play out. A break of this level and adding to FXP is the trade with the target at $31.80 on FXI short term.
- Gold miners (GDX) bounced as gold moved up early in the week, but is testing and consolidating now. It has now turned sideways as the price of the metal can’t rise through resistance. We will see how this plays out next week to start, but if the upside doesn’t resume soon we will exit the position and look else where for opportunities. Until then keep stops in place and see how the consolidation plays out.
- Bond yields continue to drop and push bond prices higher. If the economic picture is positive and the Fed is cutting stimulus… shouldn’t rates be ticking higher? This may be telling us that something is wrong with the Feds view or investors are too worried about the future. Either way this is another indicator for the worriers to watch. TLT hitting against the 200 DMA.
- Earnings were a mixed bag of winners, losers and non-events. Apple and Amazon disappoint investors and sell off more than 10% on the week. Facebook and Google beat expectations and move up to reward investors. The weaker reporting overall was expected and thus, the selling. There will be plenty more announcements next week, 80 of the S&P 500 index stocks report, and we will watch to see how they impact the markets moving forward.
The models have raised cash as a result of hitting stops, but we continue to look for the short term trading opportunities as this all unfolds. Looking to see if the markets can break free of the up and down, day-to-day trading cycle. We are willing to sit and let this unfold for now as some clarity is gained in reference to outlook short term. We are watching the support levels as defined above and we will act accordingly. Technical damage has been done and potentially more on the way as the trend is challenged from a longer term perspective. No reason to panic and no reason not to add positions if the opportunity arises. The key is to manage the risk of your emotions in relationship to the reality or results of the market, versus what speculation is being put forward from analyst.
Breaking Down the 7 Asset Classes:
Emerging markets remain the primary story relative to the total market outlook. They did find some support last week, but the downside sentiment remains. US stocks and EAFE index accelerated lower to join the selling. As you would expect Treasury bonds and Real Estate moved higher as money looked for safety. Friday’s activity did nothing to change the outlook for the current rotation and we look towards next week expecting more of the same. If the US markets hold support and reverse the current selling this could all change they are the leading component currently.
1) US Equities:
The US equity indexes all sold lower to support and then spent the week bouncing off the key support levels with buyers stepping in at each step of the way. The S&P 500 index found support at 1775 and if it fails to hold this level will open the door to further downside risk. As a result of the negative sentiment Utilities and REITs were the leaders as money rotated. Technology bounced on Thursday and Friday off the lows, but the other seven sectors managed to close lower on Friday showing the continued breadth of the selling. Support is the question mark and we will be looking for how to address this in trading next week. Be patient and take what the market gives.
The dollar bounced and seems content at this point to hold the move. Note the jump in the yen as Japan talks of cutting stimulus and it has held the move through a rough week for emerging market currency. The dollar index is moving back toward 81.50 resistance and a break above this level would be positive for the dollar. Too much volatility in reference to the global economy and not willing to step into any of these positions currently.
3) Tracking the Bond/Fixed Income Sectors:
The sector continues to be the benefactor of the fear driving equities. The move or rotation to quality is rising as the emerging markets, Fed stimulus cuts, weaker earnings outlook and volatility create concerns. Convertible bonds found some support this week, but will continue to feel pressure if equities continue to struggle. TLT, XLU, IYR and AMLP are moving higher on the rotation to safety. Watch to see how this plays out short term.
- Utilities – The dividend play remains in play as the upside gains some strength this week. 4% dividend and stop at $37.
- REITs – See below – dividend play 4%. IYR made solid move above $64 and still have stop at $63.
- 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. The rally is on short term. breakout ths week gave entry points on either ETF. (S&P 500 Model)
- High Yield Bonds – HYG = 6.4% yield. Bounced off the $91.25 support and held to close back above the 200 DMA, barely. Break above the $93.30 level offered a trade on the upside. But, as you can see last week the volatility is still not worth the relative risk short term.
- 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.
- 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 and $44.80 entry point. Watching the upside and volatility. The pullback in stocks is reflected in the selling last week 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 the downside was lead by crude oil. natural gas and gasoline. The move in natural gas and crude oil has pushed the index higher offering trades in both commodities. This is a trading sector and nothing more currently. The sector remains flat, but you can see on the chart there are some trades available. Opportunities to track this week:
- OIL – move above $23 as trade to the previous high. UCO give 2x leverage.
- JO – coffee broke higher on crop news. Watch for more upside and trade on the commodity.
- SGG – sugar reversed off the low and attempting to take out the down trendline.
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 December 15th. The trend has been tracking the US markets on the upside, so why should the downside be any different? On January 22nd it created a downside pivot point. As you can see on the chart most of the country ETFs are heading lower at this point. China and the emerging markets have been blamed for the selling around the globe, but we will see how this all unfolds going forward. You can see all the global ETFs we track made a turn lower to end last week. The following are opportunities in the asset class:
- Europe setting up a short trade. EPV entry $63 (HIT the entry point)
- Japan setting up a short trade. EWV entry $67.50 (HIT the entry point)
- Emerging Markets setting up short trade. EEV entry $22.75 (HIT the entry point)
- China hit short trade entry last week. FXP (HIT the entry point)
The key is to manage the risk of the trades in the event of a bounce. All should be at breakeven stops now. Don’t want to give up principle at this point.
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 pattern and followed through, finally got the follow through on the upside of this trade. Watch and manage your risk, but let it run. Covered in the weekend video the upside and entry points for IYR. Still like the upside and willing to take the opportunity on the pullback short term. VTR, BXP, HCP, HCN and EQR are leading the upside.
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? Moved to the $107 support as emerging markets struggle. No position interest at this point.
- PCY – current dividend yield is 4.8%. Trending lower again as emerging markets come into question. No position interest at this point.
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.