Outlook for Week of June 2nd

We close the month of May with a gain of 2.2% and plenty of head scratching. The upside gains the last two weeks of the month never really defined a catalyst. The optimism relative to growth in the second quarter outlined by the FOMC meeting would be the best we can define. Thus, we take the gains and look towards June. This is the final month of the quarter… May economic reports start on Monday and they will tell us if made progress over April in growth of manufacturing, services, retail, etc. Those numbers should set the tone for the week as well as the short term direction.

Sticking with our theme of simple… we added positions based on technical moves the last two weeks. The fundamentals are broken and that leaves us with the trend. If the trend breaks down we exit our positions and wait for the next trend to develop. Plain, simple and executable.

I have combined the weekend update with the Trading Notes for Monday. This will keep it simple versus posting and having to read to two separate reports. Get ready for fun filled week ahead.

Have A Disciplined Week of Trading!

Market Story & Outlook:

Current Story of the market boils down to the simple issue of uncertainty. Despite the rally¬†off the recent lows, we still have unresolved¬†issues economically, fundamentally and earnings growth. The bridge to nowhere has been being built the last two weeks and for now the outcome is positive. This¬†move¬†was founded¬†on no specific reason and we need to manage it accordingly. As we have discussed the markets underlying challenge is the economy. The ‘buyers’ believe the economic improvements, currently being prognosticated at 4% growth for the second quarter, are a given. That means we must ignore the first quarter contraction in GDP (minus one percent). ¬†This week the data reports were better and¬†part of the reason behind the current move higher. The belief of the buyers got some validation (not four percent worth, but some) and they put money to work in stocks. The ‘sellers’, on the other hand, believe the economy is growing slower at a rate of maybe 1-1.5%. First quarter GDP validates that belief, their opinion. The buyers winning currently as the uptrend resumed short term with the S&P 500 index hitting a new closing high. Clarity will be the key to how this ultimately plays out. In the meantime we have to be cautious, take the trades we are comfortable with and keep looking forward, and managing our risk as we go.

The second phase of the story line is, bond yields were believed to rise this year as the Fed tapered (cut stimulus) and the economic growth improved. The yields to start the year on the thirty-year bond were 3.94%, currently they are 3.3% or they have declined 64 basis points pushing the long bond up nearly 13% for the year. That is not what was prognosticated and the story line has not helped the current lack of direction in the markets. The bonds are telling us something different than the Fed and economist. The above issues of growth in the economy are showing up in the bond prices as investors push money in that direction. The big move lower in yield last week only adds to this worry.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data has not been good overall. 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. Running scans using the PEG ratio shows clearly the challenges arising in this indicator. Just another pieces of the story we have to monitor to determine our outlook and belief.

This all adds up to stocks losing value if the economic growth going forward is weaker than expected. As we have been saying for more than a year, fundamentals don’t matter, until they matter. Activity in the markets short term are saying the still don’t matter. The VIX index would validate that as it resides near lows. Until there is anxiety from investors the downside will remain talking point more than a reality. Until we will have clarity¬†stick with the trend and for now that is back on the upside. Patience and discipline are key to success long term.

RESEARCH MODELS:

The models can be linked to below and each has been updated for the current outlook:

Sector Rotation Model (updated Р5/31/14)

ONLY ETF Model (updated Р5/31/14)

S&P 500 Index Model (Updated Р5/31/14)

ONE EGG Model (updated Р5/31/14)

Pattern Trading Setup:

Today’s opportunities:

  1. Manage your positions and adjust your stops accordingly. Still not believing this is a sustainable trend. Small test on Wednesday, but the upside bias remains… focus.
  2. AKAM – entry $55. trading range breakout.
  3. EXPE – entry $73.90. Downtrend break and follow through.

Pattern Trade Tracking & Follow Up:

  1. WAG – cup and handle. test the breakout and take the entry price or follow through entry at $71.45. Stop $70.35.
  2. UNG – entry $25.25 test of the double bottom breakout. Run to $27 and decision time for the commodity. Trade and exit if outlook doesn’t improve in commodities. Stop $24.80.
  3. AMZN – Added Option. Bottom reversal. Tested move on Tuesday. Upside challenged by margins and other fundamentals from last earnings report. Could move to $338 on this bounce. $310 $17.65 entry (Wednesday), Stop $15.65.
  4. TAN –¬†entry $40.38. Bottom reversal. Previous leader, but in the growth sector side. Looking for the reversal to validate on the upside. Tested to $0.25 and bounced adding the trade short term. Stop $40.40.
  5. FDN Рentry $56.60. Bottom reversal breakout and test. Looking for test of the move. This is another growth leader previously. Only want entry on test and hold. Tested the move and held adding the position. Stop $56.
  6. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $45
  7. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $19.80
  8. RVBD – entry $19.90. trading range. technology moving higher short term. Stop $19.50
  9. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $236.70.
  10. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $80.50.
  11. BIDU – entry $164.50. Trading range. Following the large cap NASDAQ stocks. Made the move higher and letting it play out. Stop $162.85.
  12. YELP – entry $58.15. Base and bottom reversal. Technology bounce and upside. Stop $65.25.
  13. ERX –¬†entry $106.42. uptrend test of support in consolidation. Energy is one of the leaders and looking for upside continuation of the previous trend. Stop $106.42.
  14. 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 $94.05.
  15. ERUS – entry $$18.75. ascending triangle breakout. Russia has moved off the lows on positive comments from Putin. Move above $18.64 would be breakout point for the ETF. Stop $19.40. HIT STOP.
  16. AAPL – entry $590. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $620.
  17. MXWL – entry $15.25. Testing trend (30 DMA). Trade to $17 and exit. Holding with the upside momentum on our side. Stop $17.20 which was the target worst case scenario. HIT Stop.
  18. S Рentry $8.75. Bottom reversal. Telecom sector moving higher. Tested the move on Friday and moved higher Monday. Stop $8.75.
  19. JBHT – entry $77.10. Flag on bottom reversal. Move to $80 target as transportation continues to be a leading sector. Stop $75.
  20. RAD –¬†entry $7.45.¬†Consolidation range near high. Breakout move should make it to $8 short term. Stop is $8.01.
  21. GE – entry $26.30. Trading range breakout. Value stock coming back into favor. Gapped on earnings above the entry… patience. Got the test early and added the position. Stop $25.70.

NOTE: The pattern trades above are setups that I see for a potential swing trade or short term trade opportunities. Some will fail to follow through on the pattern, some will break and trade according to the pattern. The key is to use discipline in the trades. Entry, Exit and Target on all trades is vital. I am posting these as opportunities that I see when doing scans daily. You can use them as a teaching tool or you can trade them, either way please use discipline. The best way to treat these as a learning tool is to assume a $100,000 portfolio and each positions receives a 5% allocation. If we state to take a 1/2 position as an example you would only allocate 2.5% to that position. I would use a downside risk of $500 per trade as a maximum loss. That will help  you learn position sizing and risk management. All investing comes with risk. Our job as investors is to manage the risk. Keep your focus and discipline in place.

Facebook (FB) Update: (see Facebook research page for archive of posts)

  • 4/28 – Tested support at the $54.85 level. Watch to see if it breaks support. If it does the downside trade in order. (Trade result…¬†FB –¬†sold to support at the $54.80 level held and working higher. The bounce has worked its way to $59.78 and added some shares on a move to $60.05.¬†The target would be $63.50 or top end of the trading range currently trading in. Stop $58.30. HIT STOP)
  • 5/12 – solid bounce off the low, but remains within the trading range. could trade the move back to the upper end of the range at $63. Watch today to see how it moves. 5/15 – The move lower stays within the range, but pressure is being put on the growth stocks again. Watch for a short trade if we break from the current trading range.
  • 5/19 – Definitely has moved into a consolidation period and not much happening worthy of the risk at this point. The range has narrowed and the risk of trading has risen without some clarity in the stock as well as the sector. SOCL has dropped more than 20% the last two months, and in light of that move, FB is looking good short term. Be patient for now and let this all unfold.
  • 5/27 – Moved above the $60 mark and held… looking for a trade opportunity on the upside. $63.50 next level of resistance for the stock.
  • 5/29 – Add 500 at $63.55 follow through today. Added the shares and set the stop at $61.90.

Breaking Down the 7 Asset Classes:

Since the April pivot point the move was¬†sideways, but nice effort this week on the upside, following the initial push higher.¬†It is important to remember when we move sideways… investors are confused and don’t know which side to commit to.¬†The current move¬†to the upside has provided some short term direction, but little in term of conviction, see volume on the week. Patience is the best course, but taking what the markets give is the key for now.

Asset Classes

For the week of June 2nd:

  1. The global markets have returned to be in correlation with the US markets and that is sideways currently. Positive moves on the week and we will take the opportunities as they present themselves.
  2. Treasury bonds were higher last this week as yields continue to fall and bond prices rise. Still holding the bonds for now, but keeping our stops in place should this trend change.
  3. Commodities are struggling as you can see on the chart they turned lower this week, continuing a slow drift to the downside.
  4. Emerging market bonds have made a drift to the upside the last two weeks with some solid gains on the week. Watch and manage your stops on this sector.
  5. Emerging markets have been working their way higher, but met with some selling on Thursday and Friday. Is the sentiment shifting? Time will tell, but we have to manage our risk short term. I am of the opinion this sector moves higher longer term. Money rotation into the sector short term is likely hot money and I would ladder my stops to protect the gains.
  6. REITs are showing signs of topping or resting near the highs. Interest rates and economic picture are part of the concern. The upside is still in play, but we have to protect the gains and monitor our stops. Watch and manage the volatility as this is a long term position or opportunity.
  7. The dollar gained some ground on geopolitical concerns globally, but retreated on EU and Japan rallies. Not convinced this holds longer term, but for now the move higher is a bounce off the test of the lows currently in the dollar.

1) US Equities:

The sideways move found enough buyers to push the index to a new high. The leadership is Energy, REITs, Healthcare, Technology and Materials. An ecletic group, but that would stem from the drivers… or lack of them in the current move.¬†The index charts shows a clear breakout, but the challenge is in the momentum/volume of the move. The sectors are still trading in unison on the upside with some modest leadership, but lack conviction, my view. Approach this week with caution, monitor you stops. We added positions in the S&P 500 Model (we still follow our discipline), but we have to manage the risk of those positions moving forward.

500 Scatter Rot

For the week of June 2nd:

  1. Small Caps (IWM) РThe sector added to the upside clearing the $113 resistance, but closed Friday just below that level. Clearing resistance at the 110.20 level was the basis for the upside position. Still hanging near the 50 DMA, but stalled there for now. Watch to see how this plays short term and manage your stops accordingly. Entry hit at the $111 mark.
  2. REITs –¬†The¬†sector remains in a uptrend, but has spent the last two weeks¬†moving sideways. Tuesday the move through the $71.36 mark on IYR was a new high and closed above this level on Friday. I am¬†still interested in holding¬†and managing this position with a longer term time horizon. The worry which was present the last two weeks may be giving way to optimism. Set your stops according to the risk you are willing to accept as this unfolds.¬†Hold positions and¬†keep moving forward.
  3. The NASDAQ moved back to the March highs to erase the decline from the last eight weeks. The large cap and growth stocks were the catalyst of the move and continue to provide key leadership. Holding our positions in QQQ and watch how this plays out in the coming week.
  4. Energy (XLE) remains a leader, but has picked up some volatility short term and is in a consolidation period. Be cautious and adjust your stops according to your time horizon. Technically in a trading range, but at the top side and attempting to break higher. Crude moved lower on in reference to inventory worries closing the week at support of $102.50. This is something watch short term along with any impact. For now the outlook is higher for the stocks, but watch oil prices, they may have an impact on the sector near term.
  5. Semiconductors broke from the wedge consolidation pattern to the¬†upside and followed through. Tuesday added a position to our model (SOXX @ $80.35 entry).¬†I like the upside¬†as¬†the technology stocks have¬†recovered some of the lost momentum. XLK moved back to the current highs at $36.80 and broke above $37 (added position)… now managing the risk of the trade going forward.
  6. S&P 500 index moved through the 1900 level and  to new high for the index at 1923. What does it mean now? Uptrend back in play and watching for the upside to continue short term. Volume has been a concern along with defined leadership. Technology has helped, but still plenty of work left to do on the upside. Manage stops and keep going forward.
  7. NASDAQ 100 index has been the bounce back index, after selling lower the last nine weeks, the index closed back at the March highs. The close above 3737 would push to a current high and keep the move intact. Large cap stocks are leading the way for the broad markets currently. QLD hit entry At $100.70. and has moved up nicely on this break higher. Raised stop and letting it run for now.
  8. Natural Gas РUNG is testing support again at $24 and holding. Double bottom set up, and overcoming the negative momentum. Looking for a reversal and trade opportunity on move above $25.20 (hit entry on Wednesday). FCG is attempting to reverse from recent selling as well (hit entry at $22.16 on Wednesday). Positive move reversing the short term downtrends. Watch and set your stops accordingly.
  9. Healthcare – Biotech (IBB, BIB) broke above the resistance point and completed a bottom reversal pattern. We added the sector in the models. This will be a key indicator if investors are willing to return to the risk trades. Tested modestly on Wednesday, but still looking positive for now. CURE, XLV broke to the upside showing strength short term in the broad sector. Pharma stocks PJP, XPH moved to the upside as money rotates back into the sector. All tested on Wednesday.
  10. Utilities (XLU) breaking higher from the test lower. Cleared resistance at the $42.40 level. Look for entry on a test of that level or $42.80.

2) Currency:

We are still working off the January 30th pivot point which has amounted to modest move higher off the test of support on the dollar. The buck was dying a slow death and testing support until Draghi stated the ECB was willing to cut rates in June. Euro fell and dollar rallied, but we still have little to no interest in trades at this point in the asset class. Even BZF has turned sideways of late.

currency

3)  Tracking the Bond/Fixed Income Sectors:

Moving forward to April 2nd as pivot point on the upside, the climb has continued to be gradual, but a confirmation of the previous uptrend. Yield volatility continues to bounce around keeping the sector in check, but the outlook is still for rates to remain low. This week the yield on the treasury bond fell again the thirty-year bond. There are still geopolitical worries unresolved that will add to the fear component should they escalate. Overall the market setup favors this sector and the chart below shows the leaders clearly, but also the volatility that comes with a normally steady sector.

Bond yields moved to new lows again Wednesday on the thirty year bond and closed at 3.3% and bond prices are at a new high. The trend shows the buyers are still interested in bonds. The ten-year hit 2.45% and hit a new one year low on the week. The sentiment on yields is lower short term, but I would not be overly aggressive with that stance.

Bonds

  • Utilities –¬†¬†Sold to near term support, moved back above that level of support and has regained positive momentum. Watch and manage your risk. The dividend play remains, but it has experienced some volatility the last four¬†weeks. The 4% dividend (entry point) remains. Added again no the move above $42. Stop at the previous low $41.25.
  • REITs¬†– This is still a sector to watch and manage for the dividend of 3.2%. We continue to monitor the short term volatility. The Fed, interest rates and outlook for interest rates are all a worry point for the sector. Support is $68.40 and $66.25. Long term view is to hold and manage the volatility.
  • Mortgage REITs¬†– slowly working higher from the gap lower in March. Made the break through resistance at $12.50 (REM) added $12.50 position and $12.05 stop to capture the dividend. Target for now is the $12.90 level and we will maintain for the dividend.
  • Treasury Bonds¬†– Yields moved to a new low this week on rotation to safety¬†and TLT and IEF hit new highs. The 30 year yield which is now at 3.33%. TLT hit new high breaking above the $112.50 resistance and closing at $114.10. 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. Moving sideways to higher, but trading around¬†the 50 DMA. Stop is $92.50 (break even) on position as this is a dividend trade. Nice move back to highs the last three weeks.
  • 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 $120 level. Watch how it plays out and keep your stop at $117 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Ascending triangle of consolidation was broken on the upside at $107.21. Manage your risk and still looking to collect the dividend. Stop raised to $107.50 (entry 104.50 12/2014) and the dividend is the play. Muni’s are moving higher on rotation of money.
  • 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¬†this week and stop is $47.50 for now.
  • Preferred Stocks¬†– PFF = 5.2% yield. Modest uptrend continues, but flattening. Any¬†shift in stocks to the downside could impact the position, but only if debt risk rises. Watch and maintain your stops at $38.50 currently (entry 3/13). Break even trade with focus on dividend.

4) Commodities –¬†The commodity index (DBC) made a pivot¬†higher April 2nd and on April 24th started drifting lower again. This is getting volatile as the outlook got cloudy for commodities. Still moving sideways to down this week and downside may be picking up some momentum short term. Watch this week as it unfolds and we attempt to gains some clarity.

For the Week of June 2nd:

  1. Natural Gas РUNG is testing support again at $24 and holding. Double bottom set up, and overcoming the negative momentum. Looking for a reversal and trade opportunity on move above $25.20 (hit entry on Wednesday). FCG is attempting to reverse from recent selling as well (hit entry at $22.16 on Wednesday). Positive move reversing the short term downtrends. Watch and set your stops accordingly.
  2. Gasoline (UGA) – Entry point at $59.50. Still moving higher with a test on Friday. Stop at $60.50.
  3. Oil (USO)¬†$36 support and needs to hold – added¬†upside trade¬†with¬†entry at $36.75. Ran with¬†move to the previous high and now stalling on worries in the inventory data. Trail stops on this trade to $37.45. Closed near that level on Friday… watch.
  4. Agriculture (DBA) turned lower and hit a short entry at $28.50 (5/9). The downside momentum remains with $28.50 the stop and reversal point.
  5. Precious metals were treading water and gold dumped lower on the week. That gave a short trade signal for GLL. The downside for the miners is in play as well. DUST is the leveraged short ETF. Watch for bounce in gold at $120 GLD. If it reverses and bounces, I would look to add to the short trade in GLL at $90. DUST testing the move with support at $26.40. If holds add to the ETF at $27.05. If it breaks above the $30.40 mark first at there.
  6. Steel (SLX) is breaking lower, and break of the $45.50 level I would look for short trade to $43.

Commodities Rotation Chart:

commodity

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

5) Global Markets: 

The global markets as you can see on the chart has one big sideways move since October! A drive higher the last week has been the US markets emphasis. The emerging markets have been the bigger story, but that is testing as well. No conviction and too much worry about geopolitical and economic risk. This has kept the asset class in check. That would make it a trading opportunity versus a longer term buying opportunity for now. Breaking down the parts you can see the clear trading opportunities despite the lack of conviction in the overall class.

For the Week of June 2nd:

  1. Emerging Markets (EEM) fell 1.3% on Friday. Uptrend is in play, but the uncertainty of the markets is still a concern. Set your stops accordingly and focus on the horizon as we still have a 12-36 month outlook on the sector to move higher. Entry $43 on EEM hit. Stop $41.76. Manage the stop as this is support as well for the ETF.
  2. Russia (RBL) Cleared the entry point ($23.55) and continues to be positive on the upside response. Worries? Watch to see how the follow through pans outwith some consolidation this week near the highs.
  3. China (FXI) has returned to bounce higher on positive reports… if you believe them. Still positive move and worth watching going forward. FXI in play above the $35.80 resistance level (entry 5/16) and willing to add on move above the $$36.90 mark. How high does it go? How much belief in the data will determine the gain. Manage the stop at $35.50
  4. India went vertical on elections results and optimism about the turn around. PIN has come down from the run this week and worth watching for some consolidation and trade opportunity if the upside resumes short term.
  5. Japan broke the downtrend line and is running. How high? Guess… Look for move above $11.70 as opportunity for the upside to move back to previous highs.

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) РPivot point on March 26th back to the upside has turned into a up and down battle of the traders, but the uptrend continues. The sector remains in a uptrend, but has spent the last two weeks moving sideways. Tuesday the move through the $71.36 mark on IYR was a new high and closed above this level on Friday. I am still interested in holding and managing this position with a longer term time horizon. The worry which was present the last two weeks may be giving way to optimism. Set your stops according to the risk you are willing to accept as this unfolds. Hold positions and keep moving forward.

For the Week of June 2nd:

  1. HST is still leading higher for the sector overall. SPG dumped lower outlook revision lower, investors sold positions. Could be worth watching the overreaction short term.
  2. Healthcare (HCN) REIT is challenged on the downside as well. Watching to see how it plays out.
  3. Running Scans of the sector shows leaders like JOE, PCL and other continuing to add gains. Some interesting technical setups would be in TWO (trading range), RESI (bottom reversal), ELS (breakout from trading range) and HME (test of highs in consolidation pattern).

REITs

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 sideways the three months, but making a move back towards 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. Testing the move lower near support at $30.05. set your stops accordingly as this goes forward.
  • 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 $111.50 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. Trend still moving higher.
  • PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a question. Found support and bounced. entry $27.30. stop $27.30 and manage your risk as the gain is more than the dividend yield.

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.