Notes to Note:
This week was the passing of the baton from second quarter to third and with it comes plenty of data to digest about the advancing of growth in the US economic picture. The jobs report on Thursday was the key report showing 288,000 new jobs added and the unemployment rate falling to 6.1%. Below are some key notes on the week’s data and what we are watching looking forward:
- ISM manufacturing was close at 55.3%, but the lack of growth was a concern. The new orders data in auto and computers help investors look past the number.
- ISM services was close at 56%, but the lack of growth is a concern. Again new orders helped as increased and employment index within the report rose as well. More forgiveness.
- Earnings start next week and for many it will give some insight to all the chatter for growth in the US economy.
- Base metals (DBB) have been making a move higher… gained 2.6% for the week as copper jumped SLX produced solid gains as well. FCX jumped to lead in the sector on the week. Nice follow through on sector we have been tracking.
- Crude dropped below $105 support and ended the week at at $104 mark. Watching SCO on the upside as short play on crude. Entry at $25 on test would be of interest. This is a touchy issue with Iraq and Ukraine still on the table for speculation.
- Volatility moved lower despite the jitters created by the rumors of Fed hiking rates on the positive economic data. The action in SVXY remains bullish, but extended as it broke from consolidation this week. The self-fulfilling prophecy could be building if the nerves rise on worry relative to the Fed and interest rates. Watching for a bounce in VXX short term ($27.80 entry potentially). No reversal in sight heading into the weekend.
- Banks remain a challenge as investors just cannot gain confidence in the sector enough to push it through resistance and higher. This week we have tried to break the $33.65 barrier on KBE we closed above this level on Friday and looking to move higher. Watching for opportunity. Entry at $34 work if we follow through on Monday. BAC made move higher as well this week on upgrades from analyst.
- Telecom (IYZ) attempting to move to new highs again. Looking for some leadership, but each time we get to this level the sector finds a reason to stall. Closed above $30.50 on Friday and willing to use that as an entry point for the ETF next week.
- Retail (XRT) is still a mixed bag as chart breaks through the volatile downtrend line off the November high. The break higher is a positive as investors find value in the sector despite the economic reports. Scanning the stocks is where I would spend the time versus the sector as a whole. The parts are where I like the opportunity in the sector.
- Positive economic data from the land of China helped FXI follow through on the bottom reversal and add position on the move. Hit new high to close the week.
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 now we 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 are ending 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. 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 – 7/3/14)
ONLY ETF Model (updated – 7/3/14)
S&P 500 Index Model (Updated – 7/3/14)
ONE EGG Model (updated – 7/3/14)
Monday Trade Opportunities:
- Following a long weekend the question will be who returns on Monday? The buyers or the sellers? Most believe the buyers will be back and the bond sellers will there as well. We could see a rotation to growth and away from income. Patience as this play out to start the week and will make the adjustments as needed.
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.
- GILD – entry $83.50. Cup and handle pattern. Biotech remains one of the leaders. Stop $83
- SPWR – Entry $40.80. Flag pattern. Broke higher with move in the sector. Looking for continuation move from the pattern. Gap open. Stop $40. STOP HIT
- CRM – Entry $$58.25. bottom consolidation break higher. Consolidating on the break higher and looking for a follow through. Stop $58.70. STOP HIT
- AAPL – Entry $91.10. Test of support is shallow ABC pattern. Run back to previous high and beyond if momentum picks up.
- DBB – Entry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside. Stop 16.75.
- GLW – Entry $21.75. Channel or trading range breakout. Watch and let volume drive entry. Stop $21.75.
- IGT – Entry $16. Pennant again set up to break higher. Stop $15.70
- TWTR – entry $38.15. bottom reversal and follow through. Bottom in? watching as trade for now, but could develop into more. Stop $39.55.
- SCTY – entry $55.31. bottom trading range. Break higher from the range as sector moves higher. TAN broke higher on Monday. Stop $70.
- QQQ – entry $92.63. test reversal. Tested the trend line and looking for bounce back to upside as trade opportunity. Stop 94.
- DDD – entry $51.70. bottom trading range. Break from the range with upside return. Stop $59.75.
- YELP – entry $66.80. cup and handle. Break higher from the bottom reversal in play. Stop 75. Jump on Open Table acquisition raise stop and say thank you.
- FB – entry $64.22. cup and handle. Break higher as continuation of the trading range breakout attempt. Holding the move for now and Stop $64. Methodical melt to the upside. Watching, managing stop, and letting it go for now. Allowing room for volatility.
- PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $49
- AKAM – entry $55. trading range breakout. Stop $60.50.
- STI – entry $38.95. trading range. Banks attempting to break higher. stop $$39.50.
- SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $48.50.
- 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 $252.
- CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $87.
- 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.
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 last week they remain the strongest of the asset classes with a strong move higher this week. The EAFE index bounced back to attempt to get back in step with the US markets as ECB steps up words to support stimulus to kick start growth. Patience and focus on opportunity.
For the week of June 30th:
- Treasury bonds bounced reversed from the bounce last week as the rumor of the Fed intervention following (perceived) positive economic data on the week. If the economy is growing faster in the US this will be big negative for holding bonds. Stops have to be in place now. See bond sector below for current exit points.
- Commodities bounced last week fell this week. Weakness in oil and agriculture were enough to offset the gains in precious and base metals. Go where the money is versus belief.
- Emerging market moved higher and back in play.
- REITs sold lower as the threat of higher interest rates loom over the sector.
- The dollar is drifting lower, but bounce Thursday and Friday on economic data.
- Emerging market bonds turned lower on rate threat in US again.
1) US Equities:
Using the latest pivot point (May 15th) you can see the sideways activity for the broad index that resumed the upside this week. Utilities were leading last week and that changed on the interest rate rattle this week. Healthcare, consumers services, technology and energy remain the leading components this week. The defensive sentiment has been replaced with hope and optimism about the economy and the changes on the horizon. We are going to face plenty of data in the next couple of weeks and there is still that deep seeded worry they may disappoint. Stops in place and eye on the trend… only time will tell.
For the week of July 7th:
- S&P 500 index broke above the consolidation phase Tuesday. Trend is clearly on the upside and we are managing our positions in the index. Semiconductors have resumed leadership for Tech and Telecom (IYZ) hit new highs. Some defensive buyers and some buy on the dip participants in technology pushing them to a leadership role again. Watching as this unfolds heading into earnings and the second quarter.
- NASDAQ Index moved back above the March high and moved through the 4400 level helped set the stage for the week. The index is approaching the closing high levels going back to early 2000. The NASDAQ 100 index continues to move up as the large cap stocks take on renewed leadership as well. Stops in place and let it run
- Small Caps (IWM) – Small caps pushed higher and tested. Still digesting the positive move as end the week near the highs. 1190 exit point on the Russell 2000 index currently.
- Energy (XLE) was one of the primary leader, but following the tumble lower last week it has stalled. Crude is dropping and closed below $105. This could impact the sector, but the services stocks (IEZ) are leading the upside. Alternative energy ETFs have stalled as well with TAN, FAN and PBW all holding steady. This is a sector that needs to maintain the upside going forward.
- Technology (XLK) broke through the consolidation range to new highs this week thanks to the SOX index. The help came from the renewed interest in the semiconductors (SOXX) which bounced. After testing last week the sector was one of the leaders on the day. FDN has renewed the upside as well and adding strength to the sector. IGV broke higher to renew the upside run and I still like the outlook. Watch and manage your risk.
- Healthcare is moving back into a leadership role with technology. The biotech (IBB), pharma (XPH) and devices (IHI) are leading the sector higher near term. I like what we have seen and would be willing to add to the position on any test near term.
- Consumer Staples (XLP) are moving off the lows? The reversal may be in play after testing lower. Watch for entry at the $45.25 level next week.
- Industrials in same position as the staples and $55 is the entry level we are watching.
- This has been a positive week for US Equities and now we move forward to see if the they can hold the gains and continue the upside move.
We are working off the June 11th pivot point with the dollar moving lower gradually, but some shift 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 and now down again relative to the bond. The move in interest rates shows very clearly at the end of the chart. Yield volatility continues to bounce around, but the move in motion may be the one that tips the scales on the downside for the sector. I am tightening all stops and looking toward the exits if the continues into next week.
- Utilities – The dividend play remains, but it has experienced volatility the last four weeks and this week was the best yet on the downside. 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. Made a move lower this week. 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 motions short term. The 30 year yield which is now at 3.36%. TLT tested support at the $111.25 mark and we are watching the move higher. 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 $94.50 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 $119.50 level. 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 $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 tradable or investable? It accomplished that, but it is testing lower this week. Oil is weighing down the index. Still opportunities withing the sector as the parts are moving opposite of each other.
For the Week of July 7th:
- Natural Gas – UNG moving lower off the $26.30 high in June. $24 is the level to watch for support. Attempting to hold, but suspect on the move. Challenge is one of perceived demand declining on global economic issues. Still negative trend and KOLD is on watch list.
- Oil (USO) moving lower and the continued concern in Iraq and Ukraine are on the back burner. Let this play out and take the resulting directional change as an opportunity. SCO?
- Agriculture (DBA) hit $27.80 breakout pivot, tested on Friday and looking to see if we have an opportunity to trade on Monday.
- Precious metals bounce with gold and silver having solid moves higher. Consolidating currently near the $126.50 level on gold. Silver is still rising. Both offer opportunities.
- Base Metals (DBB) moved higher as Steel (SLX) and copper (JJC) have led the charge. Like the opportunity in both short term.
Commodities Rotation Chart:
DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.
5) Global Markets:
The global markets continue to see a drift to the upside off the April 11th pivot point. The dip this week was some testing on news in Europe challenging the outlook. There were dividends as well in EFA which distorts the chart. Make the adjustment for the dividend in cost per share and you will have better view of current situation. Bounced off the low this wee and ended on positive note. Patience is required as Europe determines the outlook going forward.
For the Week of June 30th:
- Emerging Markets (EEM) bounced and made move to new June high. Watching for continuation next week and opportunity to add to the positions. Entry $44.
- Japan (EWJ) has made solid move to the upside since the move off the May 20th low. Testing this week, but we still like the upside opportunity.
- China (FXI) tested lower last week and solid follow through on upside this week. I like this country ETF and could see further upside this week.
- India (PIN) went vertical on elections results and optimism about the turn around. PIN has tested some the last two week, but the upside remains in play. Manage your stops as we move forward and look for opportunity to add to trade on move higher.
- Solid moves higher in Canada (EWC) the last month as well and taking on leadership role with the boost in the energy sector.
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, but with the shift in rates this week we may see more downside pressure into next week. 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 7th:
- 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.