Outlook for Week of January 13th

The markets spent last week trading sideways and attempting to understand investor sentiment relative to market data. The economic data didn’t provide the catalyst many were hoping for and in many ways were disappointing. The jobs report was a dud, ISM data disappointed, retail sales were lower than expected, and the list goes on. The bottom line is we are not seeing the growth the Fed sees, but the hope is still in play. Looking forward, investors are still optimistic and if you listened to any of the financial networks last week you would believe we are in one of the strongest growth periods for the US. Regardless of what anyone thinks the trend is our friend and for now the trend remains on the upside and we will respect that until it changes.
Plenty of issues to address this week in economy, but we also start earnings in earnest this week. The start has not been great, but we will see how the banks fare and they will set the tone for trading on the week. The key currently is to not assume anything, manage your risk and take what the market gives each day. Don’t get stops so tight you lose good positions. Take some profit and give stops room on the remaining position.
The major asset classes are update below looking into the trading week ahead.
Economic Data & Outlook:

The jobs report was supposed to be the key data point to prove the economy is improving… oops. The weather was to blame right? Sure why not, let it take the credit for the short fall in the report of only 74k jobs added in December. That was the smallest in three years by the way. 6.7% unemployment rate? Wow, how about it being closer to 12% when you just apply the average participation rate. Speaking of which was 62.8% the lowest since February 1978! Quality of jobs is another issue… 55% or 40k of the jobs added were part-time, 45% or 34k were full-time. Temporary, retail and wholesale trade jobs added 111k. That would mean the rest of the sectors netted a 35k loss of jobs.

Bottom line… it was one big ugly mess for the jobs picture. This is the worst job recovery since the depression. Less jobs created in 2013 than 21012? True enough, but also depressing. 91.8 million working age people out of the workforce! Something will have to change going forward or this continues to get ugly for the economic outlook.

Plenty to watch and plenty to worry about, but for now all things seem to be steady. The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

Sectors to Watch:

  1. S&P 500 index was up slightly closing at 1842 Friday. The uptrend remains in play with the 50 DMA the level to hold moving forward. Worries about earnings are rising in the headlines heading into next weeks trading. Raised our stops on positions and looking to take some profit out of positions (lessening size) in the index and watching how it progresses. Upside remains in play and we will be patient to see how it plays from here.
  2. NASDAQ was up 1% for the week despite what seemed to be a negative week of trading. Worries and data points are keeping the broad market in check currently. The index is back near the high closing at 4176. Respect the trend and let this play out going forward. A break to new high would offer a opportunity to add to our position in QQQ.
  3. Small Caps (IWM) the Russell 2000 index closed up 0.7% on the week and more positive thanks in part to the biotech stocks. 1164 is a new closing high for the index and worth watching to break higher this week on earnings data. The downside risk of the sector is still a possibility and we will watch to see how it unfolds going forward. Watch and take what the sector gives, but don’t assume anything at this point.
  4. Financials (XLF) will be the sector to watch with earnings in the banks starting this week. They will set the tone for the sector and market overall. A gain of 0.6% for the week was not bad as it is in position to move to another new high. The banks (KBE) broke to a new high on Thursday and remains positive short term. The regional banks (KRE) are consolidating near the previous high and content to hold for now. The brokers (IAI) remain in a steady uptrend helping the broader index maintain the upside. Watch the earnings reports.
  5. Healthcare (XLV) continued to move higher gaining 2.7% for the week. A break above the $55.65 level hit the entry to add to the position in XLV.  The consolidation in the sector goes back to the November high. Watch look for the sector to continue the trend.  Medical devices (IHI), healthcare providers (IHF), pharma (XPH) and biotech (IBB & XBI) are all helping lead the sector higher.
  6. Telecom (IYZ) was looking for a break higher and continuation of the upside with a move above the $29.75 level. This is a sector that comes with volatility and Thursday it was in action with the selling of stocks erasing 1.6% of the gains. Friday is held support, but still looks tenuous at best. Watch the news in the sector as the subscriber wars high high gear with T-Mobile challenging for market share and willing to spend the money to take. That is not good for the bottom line of the sectors. However, the chips and component makers still look attractive. Now we have to break it down and find the parts that are moving.
  7. Technology (XLK) is testing lower and in position to test the last entry point at $34.95. The semiconductors were providing the upside, but have met with a bout of volatility this week. Watch and see how this plays out and look for the opportunities in the uptrend. IGN broke to new high, IGV broke to a new high as well, and FDN is testing the previous highs. If the upside resumes we will add to positions.

The models are updated and our short term view continues to dominate the process currently. The minutes from the Fed FOMC meeting created some clarity on Wednesday, but upon further review anxiety on Thursday relative to the pace of the stimulus cuts. Earnings start with dud in Alcoa’s miss. The fear factor is still looming in reference to earnings and we will have to be patient as it all plays out. The buyers seem willing to put money to work despite the worries relative to an overbought market technically. Looking to take some profit if earnings continue to disrupt the short term outlook. The pattern list (below) is where we are posting most trades short term as a result of the current market environment. Manage the risk on trades more aggressively and monitor your longer term holdings with trailing stops to account for any rise in volatility.

Breaking Down the 7 Asset Classes:

As you can see on the Scatter Chart the resumption of the uptrend on December 12th tuned lower to end the week. US stocks continue to lead the assets classes overall. The EAFE index fell on economic news in China impacting Europe along with the Emerging Markets. Commodities reversed lower on a stronger dollar to end the week. Real Estate is still attempting to recover on the upside reversal along with the dollar making a move higher. Overall this remains a US based investment market environment with risk remaining high in the other asset classes. We continue to look for the trading opportunities in these asset classes, but for now they are nothing more than that… trades.

Asset Classes

1) US Equities:

The upside leader among the asset classes last week was healthcare and utilities as they both gained more than 2% on the week. As you can see on the scatter chart below the reversal in utilities and the healthcare standout. Telecom was the downside leaders losing 2.2% on the week. Not the best of week for the other seven sectors as energy, technology and retail all struggled.

Looking forward we are watch the leadership from last week along with the industirals, technology and energy to add to the upside. US stocks continue to be the bright spot for investing overall and the hope remains that the upside will continue.

500 Scatter Rot

2) Currency:

The dollar has been drifting lower, but bounced and seems content at this point to move sideways. Nothing changed in the outlook for currency for now and we are not interested in owning any at this point. let it play out and then we will find where the opportunities lie.

currency

3)  Tracking the Bond/Fixed Income Sectors:

The sector initially reacted on the downside to the Feds announcement to cut stimulus. However, it has leveled off of late, and in fact, move higher this week as interest rates continued to erode. Why? That is the million dollar question of late, but the economic data would be my suggestion. The weakness puts the stimulus cuts in question for some and that is sending money in the direction of bonds short term. Watch, trade and run. This is not likely a long term event for rates to decline. As we have stated for the last several weeks sideways is the best case scenario for both bonds and stocks.

Bonds

Treasury Bonds РTLT or IEF rallied off the current lows. The rally is on short term. No positions currently, too much volatility for my taste in owning bonds. The only trade here is to short the bond with TBF or TLT.

High Yield Bonds РHYG = 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. Still not willing to venture here relative to the risk short term.

Corporate Bonds РLQD = 3.9% yield. No positions currently. Small rally in play off the low at $113.20. Cleared $115 level as trade through top of the trading range.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Broke the downtrend line at $104.25 and offered upside trade. Getting interesting as money flow shifts towards bonds.

Convertible Bonds РCWB = 3.6% yield. bounced off $43.75 support and $44.80 entry point. Watching the upside and volatility. This is the one bright spot in the fixed income class. Continued trek higher and stops at $45.50. The trade has now become a risk free dividend of 3.6%.

4) Commodities –¬†The commodity index (DBC) made a pivot lower on December 29th and the downside was lead by crude oil. natural gas joined the selling last week along with gasoline. All seemed to bottom to end the week and we are watching to see how this unfolds looking forward. This is a trading sector and nothing more currently.

Base metals (DBB) tested lower but bounced on Friday and worth watching this week for a trade.

Gold (GLD) bounced off support at the $114 level and moved to $120 resistance on the week. A move back above $121 could make it interesting short term for the precious metal.

Commodities Rotation Chart:

commodity

DBC –¬†PowerShares Commodity Index ETF¬†(click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

The global markets tested lower on the economic data from China, but are still attempting to maintain the upside micro trend off teh December 17th pivot point. China (FXI) is attempting to bottom from the more than 10% drop and is worth watching this week. All seem to find some buyers on Friday, but still not convinced we see much upside near term.

Emerging markets (EEM) bounced on Friday as well, right back to resistance. Watching to see if it can regain any momentum on the upside.

India (PIN) bounced as well and worth watching for a trade setup.

Europe (IEV) and EAFE (EFA) remain the leaders on the upside.

Proceed with caution and look at this as a trading asset class only currently.

country rotation

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 sector has been erratic and volatile relative to tracking every rumor on interest rates and the Fed. IYR finally made a move above the $64 resistance on Friday. Watch for follow through on the upside and a trade on the upside as long as rates done reverse again.

VTR and HCP broke higher on Friday.

REITs

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 lower the last three weeks, but bounced on Friday?
  • 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 see how it plays out from here.
  • EMB – 4.5% dividend yield. Looking for bottom? Move above $109 was of interest, but failed to hold the move. Watching to find support and opportunity.
  • PCY – current dividend yield is 4.8%. Looking for bottom and move above the $27.20 mark.

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.¬†