Notes to Note:
I leave town for a week and the sellers step in to take a shot. The shot however, was taken on a news event and no true markets fears about earnings or other key points that have a shot a reversing trends. Reviewing the activity for the week I find it one driven by events or news and neither was lasting enough at this point to disrupt the overall trend. The Pattern trades and Models were disrupted by tighter stops we placed last week, but we will deal with the opportunities in front of us not what has happened. Stay focused on the discipline and follow the trend. Below are some key notes on the week’s data and what we are watching looking forward:
- Portugal was an event on Thursday morning. Worse yet it was a news event. As usual we have to treat events as temporary reactions on the market by investors until which time the truth is learned. Or in the case of Portugal it was news event and those tend to get one or two day reactions from the markets. We will learn more in time as to whether this a something to be concerned about relative to the euro and the EU.
- The call for a correction continues in the headlines, but not in the charts.
- No economic data worthy of worry… The FOMC minutes brought the most excitement, but even it was more worry over semantics than the truth of the Fed bringing an end to Quantitative Easing this year. However, next week will offer plenty to consider with the retail sales, inflation data, housing data and industrial production.
- Earnings from the financial sector will be up next week and I for one am interested to see if there is any improvement over the first quarter.
- Gold lifts higher on the worries over Portugal and the impact on the euro. The metal is still trading on speculation for now. Gold miners (GDX) broke above resistance at the $26.50 level and wants to continue higher at this point.
- As discussed last week base metals (DBB) have been making a move higher and that action continue this week as well. SLX slumped this week and is testing support at the $48 level. Watching for a follow through on the upside.
- Crude dropped below $101.50 support and and testing. This is the next level to watch as the price drops on the decline in speculation globally.
- Volatility made a move on the upside this week with the VIX index spiking above 13 on Thursday and calming back near resistance at the 12.4 mark. If the worry continues to rise in earnest next week this is an index to watch and trade on any break higher.
- Banks (KBE) as stated above start the earnings season with plenty of interest. The ETF is sitting on support at the $32.75 mark and Citigroup on Monday may well set the tone for what the short term holds for the sector.
- Telecom (IYZ) attempting to move to new highs again. After a short term move lower this week we are still well within distance to climbing to a new high. Closed at $30.50 on Friday and willing to use that as an entry point for the ETF next week the upside continues.
- Retail (XRT) Big reversal and test back to support at $85.50. Watching to see how this unfolds looking forward. Broke the uptrend off the May low, but watch for a upside continuation.
- Patience and discipline as we look to next week for greater clarity on the direction short term.
Have A Disciplined Week of Trading!
The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data was not good overall in real data growth. However, the spin by analyst kept investors looking forward not back. The rate of decline in earnings is the primary concern from my view. The focus from the media is the number of companies that beat expectations, but the rate of growth in earnings will determine the rate of growth in stocks looking forward. The quarter is over and we now get the report card, good or bad. Earnings are and remain a concern for investors longer term and now short term.
This all adds up to worry relative to a lack of clarity and the belief. The underlying concerns have not been removed or dealt with. We ended the second quarter and the next phase of reports have begun with plenty more to come. So far investors have embraced the data as positive, but at the same time worrisome relative to the Fed hiking interest rates. Throw in growing geopolitical issues impacting oil prices and economic uncertainty. As we always say and attempt to do, take what the market gives and protect the downside risk of your portfolio. Patience and discipline are key to success long term.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 7/12/14)
ONLY ETF Model (updated – 7/12/14)
S&P 500 Index Model (Updated – 7/12/14)
ONE EGG Model (updated – 7/12/14)
Monday Trade Opportunities:
- Mixed week of trading as news and events disrupt the flow of the buyers. The sellers took a small shot at the downside, but not enough momentum to shift the trend. Watch for further updates relative to next weeks trading in the tables above to be posted on Sunday. I see some opportunities on the trading ranges and consolidations that have set up as a result of the last two weeks of trading.
Pattern Trade Tracking & Follow Up:
- T – entry $35.60. Reverse head and shoulders pattern. Telecom wants to break higher. Stop $34.75.
- VMW – Entry $98.45. Trading range. Break through resistance and run. In software sector. Stop $96.95. HIT STOP Tuesday.
- GILD – entry $83.50. Cup and handle pattern. Biotech remains one of the leaders. Stop $86
- AAPL – Entry $91.10. Test of support is shallow ABC pattern. Run back to previous high and beyond if momentum picks up. Stop $93.30
- DBB – Entry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside. Stop 16.75.
- GLW – Entry $21.75. Channel or trading range breakout. Watch and let volume drive entry. Stop $21.75. HIT STOP Thursday.
- IGT – Entry $16. Pennant again set up to break higher. Stop $15.70 HIT STOP Monday.
- TWTR – entry $38.15. bottom reversal and follow through. Bottom in? watching as trade for now, but could develop into more. Stop $40. HIT STOP Tuesday.
- SCTY – entry $55.31. bottom trading range. Break higher from the range as sector moves higher. TAN broke higher on Monday. Stop $70. HIT STOP Monday.
- QQQ – entry $92.63. test reversal. Tested the trend line and looking for bounce back to upside as trade opportunity. Stop 94.
- DDD – entry $51.70. bottom trading range. Break from the range with upside return. Stop $59.75. HIT STOP Tuesday.
- YELP – entry $66.80. cup and handle. Break higher from the bottom reversal in play. Stop 75. Jump on Open Table acquisition raise stop and say thank you. HIT STOP Tuesday.
- FB – entry $64.22. cup and handle. Break higher as continuation of the trading range breakout attempt. Holding the move for now and Stop $64. Methodical melt to the upside. Watching, managing stop, and letting it go for now. Allowing room for volatility. HIT STOP Tuesday.
- PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $49
- AKAM – entry $55. trading range breakout. Stop $60.50. HIT STOP Tuesday.
- STI – entry $38.95. trading range. Banks attempting to break higher. stop $$39.50. HIT STOP Tuesday.
- SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $49.50.
- AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $22.15
- IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $257.30. HIT STOP Tuesday.
- CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $90.
- TRIP – entry $86.95. Higher low, ascending triangle. Be patient with entry as it needs room to validate the move on the upside. Internet sector oversold. Stop $105. STOP HIT Tuesday.
Breaking Down the 7 Asset Classes:
As you can see on the chart below the US stocks have been leading the move to the upside. Despite the test they remain the strongest of the asset classes with a test lower this week. Real Estate REITs bounced back this week. The EAFE and Commodities led the downside and we continue to track the opportunities in each of the sectors below. Patience and focus on opportunity.
For the week of July 14th:
- Treasury bonds bounced reversed from the selling last week to create a trading range for the bond short term. If the economy is growing faster in the US it will still be a negative for holding bonds. The range is a reflection of uncertainty about the direction and for now we watch to see how it plays out.
- Commodities remain a mixed bag with oil declining and gold rising. Pick the best opportunity as the trend unfold… short or long.
- Emerging market moved higher last week and held, but still looking for some upside conviction is the trend is to develop for the sector.
- REITs moved higher as rates declined yet again. Watching the sector for the opportunity, up or down.
- The dollar was drifting lower, but found some support short term. No certainty in either direction for now.
- Emerging market bonds bounced back as well with rates leveling off this week.
1) US Equities:
Using the latest pivot point (May 15th) you can see the sideways activity for the broad index that resumed the upside last week, but reversed and is trending sideways again this week. Tough week for energy as the price of crude breaks lower. Healthcare, consumers services and technology are attempting to provided the needed leadership for the broad index. The defensive sentiment returned some this week, but there is still hope and optimism about the economy and the changes on the horizon. We are going to face plenty of challenged in the next few weeks and there is still worry there will be other disappointments. Stops in place and eye on the trend… only time will tell.
For the week of July 14th:
- S&P 500 index returned to the consolidation phase this week. Trend was on the upside and we are testing that upside move. Very mixed week of trading in the index and the leadership is testing as the broad index looks for direction and commitment.
- NASDAQ Index moved lower to the 4350 level held to close at 4415 on the week. The index is still in a positive trend and continues to hold above support. The leadership from technology, telecom and large caps stocks (The NASDAQ 100 index) continues the hope for the index to hit a new high. Stops in place and see how it plays out near term.
- Small Caps (IWM) – Small caps tested the 200 day moving average and the held above the $115.20 support. Watching to see if the upside resumes next week as a trade opportunity.
- Energy (XLE) broke the $98.72 support and now watching to see how it starts the week. If it continues lower we will look at the short trade opportunities. Patience for now on direction.
- Technology (XLK) false test lower and still in position to break higher above the $39 mark on XLK. The semiconductors (SOXX) are consolidating near the high and worth watching as well. FDN tested $58, held and now watching for upside to continue. IGV and IGN both tested lower and watching to see how they play out near term. Watch and manage your risk.
- Healthcare remains in a leadership role with technology. The biotech (IBB), pharma (XPH) and devices (IHI) are leading the sector with a current test in play near term. I like what we have seen and would be willing to add to the position on the test next week.
- Consumer Staples (XLP) moved off the lows and held this week. This is a defensive sector on the rebound and could offer some upside opportunity as well. Watch for entry at the $45.25 level next week.
- Plenty of opportunities if the bounce on Friday follows through next week.
We are working off the June 11th pivot point with the dollar moving lower gradually, but some shift to upside to end the week. UUP remains low man on the totem pole and trying.
3) Tracking the Bond/Fixed Income Sectors:
Using May 28th as pivot point to push lower we see the down, up, down again and up again activity relative to bonds. The move in interest rates shows very clearly at the end of the chart. Yield volatility continues to bounce around and no conviction in either direction at this point. Manage your stops and use the bounce to lessen exposure if rates start higher again.
- Utilities – The dividend play remains, but it has experienced volatility and this week bounced modestly from last weeks selling. The 4% dividend (entry point) remains. Added again on the move above $42. Stop at $42 and break even on the trade plus the dividend.
- REITs – This is still a sector to watch and manage for the dividend of 3.2%. We continue to monitor the short term volatility and sideways trading range now in play. Support at the $70.60 mark for now and exit point.
- Mortgage REITs – has slowly worked higher from the gap lower in March. Made the break through resistance at $12.50 (REM) added $12.50 position and $12.35 stop. Target hit at $12.90 level, but may be time to leave. Dividend distribution of 29 cents, that explains the drop in price on June 24th. Now the challenge is rising interest rates adjust your stops.
- Treasury Bonds – Yields moved lower this week on money flow. Risk on trade is in motion short term. The 30 year yield which is now at 3.34%. TLT tested supportwe are watching the move higher this week back to June highs. I still see this as a trade opportunity and nothing more at this point. Be cautious here and don’t fight the Fed for now.
- High Yield Bonds – HYG = 6.4% yield (from entry). Bounced off the $91.25 support (Sept 2013) and held to close back above the 200 DMA. Was moving higher, but dropped on rumors in the high yield sector. Still watching how it moves from here. Stop is $94.25 on position as this is a dividend trade, but I don’t like the development in the yield side.
- Corporate Bonds – LQD = 3.6% yield. Entry off the low at $113.20 (12/2013). Cleared $117.50 resistance level as traded through top of the consolidation range and now near the $119 off the test lower last week. Watch how it plays out and keep your stop at $117.50.
- Municipal Bonds – MUB = 2.9% tax-free yield. tested support at $107.80 and holding. Manage your risk and still looking to collect the dividend. Stop at $107.50 (entry 104.50 12/2014) and the dividend is the play. Muni’s tested lower with corporate’s on the week.
- Convertible Bonds – CWB = 3.6% yield. bounced off $43.75 support (Sept 2013) and $44.80 entry point. We hit our stops at $47.50 4/10/14. (locked in a 2% dividend + 8.6% capital gain) That was a good fixed income trade. We added the position back at $48.75 on the bounce off support. Moved higher and trading near the high. Stop is $49.50 for now.
- Preferred Stocks – PFF = 5.2% yield. Modest uptrend continues. Tested the 50 DMA and bounced back to the previous highs only to test lower again. Watch and maintain your stops at $39.50 currently (entry 38.50 3/13).
4) Commodities – The commodity index (DBC) made a pivot higher June 4th after six weeks of drifting lower. The big question is if the trend is back to drifting lower overall again? The lower low set this week would qualify for a shift in trend lower. However, there are trading opportunities in the volatility of the parts versus the whole.
For the Week of July 14th:
- Natural Gas – UNG moving lower off the $26.30 high in June. $24 level of support broke and offered the trade in KOLD as a short trade on the commodity. The stop $45.02. The entry was $43.50.
- Oil (USO) Broke lower again this week and the SCO trade is panning out. entry $25.45 and stop at $25.50 currently. Expect some resistance at $27.
- Agriculture (DBA) reversed and broke support offer a potential short trade at $27.25 entry and that would be the stop as well currently. We did not take that trade as the risk was not clearly defined from my view.
- Precious metals bounce with gold and silver gaining on the Portugal issues. The move above $128 was a positive, but watching to see if holds on the news driven event. Manage your stops on the volatility.
- Base Metals (DBB) moved higher again. Raise your stops on the trade to $17 with entry at $17.
Commodities Rotation Chart:
DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.
5) Global Markets:
The global markets have shifted to the downside as the EAFE index establishes a lower low this week reversing the current trendline to the downside. Geopolitics gets most of the credit for the shift in momentum. The treat of financials issues in the EU as a result of Portugal has garnered plenty of attention this week and should not be ignored. Despite the shift in trend there are parts worth watching.
For the Week of July 14th:
- Emerging Markets (EEM) bounced and made move to near June highs and temping to hold. This is one of the bright spots for the sector currently. Watching for continuation next week and opportunity to add to the positions. Entry $44.
- China (FXI) tested lower this week and looking upside to return next week. I like this country ETF and could see further upside going forward.
- India (PIN) went vertical on elections results and optimism about the turn around. PIN has tested and developed a trading range to watch currently. Break below $21 and exit is the trade. Bounce off support at this level and willing to add to positions.
- Patience here and look for further opportunity.
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) – Pivot point on June 5th was on the downside and the lower high on June 2oth added to the downside shift. A move back above $72.25 would shift the trend back to the upside. Simply put there is some indecision in the sector short term and hopefully some opportunity on how it plays out. Patience and look for the leadership.
For the Week of July 14th:
- EQR has move back to the upside and holding the move for now watch.
- The balance are shifting lower are we have to address our stops and exit points if this downside pressure continues within the sector.
7) Global Fixed Income:
Sector Summary: Bounced off the lows and Trading higher on the bounce in the global markets over the last couple of weeks. Any positions are for the dividend play only, thus manage your stops.
- PAFCX – 1% dividend. Trading and trending higher the three months, and cleared the previous highs. $11.15 entry. Stop at $11.15 break even and collect the dividend.
- PICB – 3.1% dividend. $27.80 found support and bounced. $28.70 entry (Sept 2013) stop at the entry. zero risk trade on dividend. This a dividend play. Tested the move lower near support and holding for now. Adjust your stops accordingly.
- EMB – 4.5% dividend yield. Looking for bottom? Found the low and bounce. A break above $109.27 would be of interest. entry $109.30. Adjusted our stop to $113.50 on volatility. Watch and manage risk and dividend. Again the gains are more than the dividend, thus we have to look at protecting the gain should this reverse. Made move back to the previous highs on reversal in sentiment.
- PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a question. Found support and bounced. entry $27.30. stop $28.75 and manage your risk as the gain is more than the dividend yield. support at $28.80 in play. Watching to see how this unfolds going forward.
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.