Outlook for Week of January 27th

The sellers return on Friday to take control and push the indexes lower again. The catalyst for the selling… emerging markets. China on Thursday showed more economic woes and banking concerns rippling to the US markets. Friday the ripple effect to other emerging markets impacted Europe and the US markets. Some indexes broke support (see below) and others are hanging on by their fingernails. Bottom line… the sellers are attempting to exert control in the broad markets. The fear factor is rising with the VIX index spiking to 16.01 a level not seen since early December when the concern was over retail sales. Do the buyers come back to the table next week? That will be the primary focus to start the week on Monday.
I have outlined my current outlook/belief heading into the last week of January. Earnings will pick up some key data points from large cap stocks such as Apple and Amazon. Speculation will continue in reference to the emerging markets. Economic data will be ignored again if the headline news is more important and traders will have to decide which side they want to be on… sellers or buyers.
Economic Data & Outlook:

The data wasn’t bad on the week, but then it wasn’t good either. There in lies part of the problem looking forward. Home prices were lower year-over-year, existing home sales were better than they have been in the last four months and the leading indicators fell from 1% to 0.1% in December.

Next week we get new home sales, durable goods, consumer confidence, GDP, consumer spending and consumer sentiment. That should keep everyone busy along with the other speculation stirring in and around the markets.

Economic Events & Calendar

Sectors to Watch:

  1. Natural Gas (UNG) up 17.8% this week… welcome to the winter impact on the commodity. The upside remained in play after catching support at the 50 DMA. FCG responded, but with the broad market worries tested back below the $20 breakout level. Worth watching as an opportunity as the underlying stocks are not participating in the upside commodity prices. The trade opportunity is $23.70 as a reasonable target over the next 12 months.
  2. Biotech (IBB) tested lower, but remains in the uptrend. Positive sector should give opportunity on the selling.
  3. Energy (XLE) closed below the $84.77 support. Watch for bounce or short play in the sector.
  4. Retail (XRT) is getting more pressure on the downside of the index. Broke support at $83.25 and now testing the 200 DMA? Earnings are keeping the sector down and the outlook isn’t improving. Downside trade, but watch for a short term bounce first.
  5. S&P 500 index broke 1810 support and puts the short trade in motion short term. Watch the table for the trade this weekend.
  6. NASDAQ fell 75 points to 4144 breaking support at the 4180 mark and leaving the short opportunity as a trade. uptrend still in play longer term and we will see how the overhang plays out next week.
  7. Dow broke the 50 DMA and triggered the short in DXD we posted Friday morning. Weakest of the sector so far. Does it bounce or the other play catch up.
  8. Small Caps (IWM) the Russell 2000 index broke 1165 support and 1147 put the downside in play. The negative move could offer short plays next week.

The models are updated and stops are everywhere. Friday was a mess and the acceleration with a gap lower to open put traders in a selling mood. We will set back… regroup and determine the best course of action heading into next week. Look for the Daily Trading Notes to be published on Sunday night versus Monday morning. I want to give you time deal with any trade setups based on the scans this weekend. Plenty of technical damage done on Friday and that left some short setups and some opportunities as well if the buyers return. No reason to panic and no reason not to add to positions if the opportunity arises. The key is to 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:

Emerging markets are the story of the week as China leads the sector lower on Thursday. Another round of disappointing economic data from China started the decline and then the currency sell off in the emerging countries accelerated the downside. The ripple effect was selling in the US markets in conjunction with a rally in gold and bonds. The latter indicating investors are willing to head for the exits, take some profit and move to safety. Not the type of thing you want to see when it comes to broad indexes. This once again validates bad news is easier to believe and trade than good news.

Commodities (DBC) and Treasury Bonds (TLT) are the positives in the assets classes with the balance turning lower to end the week. EEM broke support and accelerated the downtrend. Watching early next week for short opportunities on the follow through.

7 Assest Classes

1) US Equities:

The US equity indexes all sold lower on Thursday and Friday to test the downside risk overall. The S&P 500 index broke key support at 1810 and is now in position to test even lower. All ten sectors managed to close lower on Friday showing the breadth of the selling. Support is the question mark and we will be looking for how to address this in trading next week. Being short is the big question mark and that will depend on the how much fear is generated from the issues facing stocks currently.

Be patient and take what the market gives.

SP500Scatter

2) Currency:

The dollar bounced and seems content at this point to move sideways currently. Note the jump in the yen as Japan talks of cutting stimulus. This would be a trade worthy of our consideration if this unfolds. The euro has picked up in strength as well with the decline in the emerging markets. I am looking at a trade in both as we start the trading week.

Currency

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 create concerns. Convertible bonds were the only negative in the sector this week. Watch to see how this plays out short term.

Bonds

  • Utilities –¬†The dividend play remains in play as the volatility comes. 4% dividend and stop at $37.
  • REITs – See below – dividend play 4%.
  • Mortgage REITs – REM making a move higher, but risk remains high as well. Caution about adding near term.
  • 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. Opportunities to track this week:

  • OIL – bounced off the low and gave a short term trade signal we still own with our stops in place should the move decide to reverse. (Sector Rotation Model)
  • GLD – attempting to trend higher, I like the miners as a better play than the metal. (ONLY ETF Model)
  • UNG – natural gas was the leader on the week as the cold weather continues add to the upside trade.

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 December 15th. The trend has been tracking the US markets on the upside, so why should the downside be any different? 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
  • Japan setting up a short trade. EWV entry $67.50
  • Emerging Markets setting up short trade. EEV entry $22.75
  • China hit short trade entry last week. FXP

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, but this week the issues surrounding stocks came into play. Testing the break higher and you can see that 9 of the 10 REITs turned lower to end the week. Still like the upside and willing to take the opportunity on the pullback short term.

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? Moved to the $109 resistance and moving lower on the news in the emerging market stocks.
  • PCY – current dividend yield is 4.8%. Trending lower again as emerging markets come into question.

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.¬†