Outlook for Week of March 10th

Market reacts to Russia/Ukraine issues with selling, rallies on Tuesday in relief, spends the rest of the week doing nothing. Mixed data on the economic front and not much in terms of a catalyst for traders and the market limps into the weekend. This leaves the question of direction once again hanging in the air. I addressed the issue of the market topping earlier in the week, and we will have to be patient and let this play out one day at a time.

As I covered in the video update on Friday this is a market of specific opportunities as the broad markets drift looking for a collective agreement on direction. Financials were the benefactor this week of money from investors rotating to what was deemed to be a value sector. Utilities and REITs struggled as interest rates made a move to the upside. We will cover this in more detail below.

The key is to keep your discipline in place and not get caught up in the hype over the markets moving higher or lower. The key currently is to define you time horizon, your risk and target relative to each position and remain disciplined.  There are too many mixed signals from both the buy side and the sell side. For now the trend is higher and we will follow the trend, but the downside risk is also elevated and thus the need to manage your exit points.

Have a good weekend.

Economic Data & Outlook:

The week was a mixed bag of data with the ISM manufacturing data better than expected, but the ISM services data worse. Jobs report was better, but ADP private sector sector jobs worse. Construction spending better, consumer spending lower. This is the challenge for investors when it comes to judging growth looking forward. The best course of action is to be patient and let it all play out.

The Fed remains the wild card for some as they banter about the cuts continuing versus the strength of the economy. Throw in Mr. Fishers comments about stocks being in a bubble and you have more confusion for the markets to deal with. Don’t fight the Fed. If they continue to cut stimulus rates should continue to move modestly higher.

The economic data is not encouraging, but we are not in the business of determining when and how the data will impact markets. However, we do know at some point fundamentals will matter. Until they do we just go with the trend of the markets technically.

Economic Events & Calendar

Sectors to Watch:

  1. S&P 500 index closed at a new high of 1878 and held the move above the 1850 mark. The challenge remains consistent with the economic/fundamental picture versus the technical trends. Watch how the index responds this week as investors deal with their emotions relative to the outlook. Support remains 1810 and for now.
  2. The NASDAQ struggled to maintain the trek higher with some modest selling on Thursday and Friday. How we progress this week will give a better indication of the near term direction. 4225 is the level for support short term. Watch for technology to regain the leadership role this week or the index may struggle.
  3. Dow made nice gains on the week as it cleared the 16,300 level. It is still lagging the other indexes, but it is beginning to play catch up. Financials are helping the index make a move as Goldman Sachs and JP Morgan both have a bottom reversal. For now patience as this plays out.
  4. Russell 2000 Small Cap index jumped to a new high on Tuesday and then traded sideways to end the week. Held the move above the 1181 mark and looking for leadership this week to continue. For now we will hold our positions and adjust our stops on the move higher.
  5. Europe (IEV) is trading in unison with the US markets and held above the $47.70 mark as support for n now. Sold on Friday, watch for the index to hold above support. The key will be how the US markets advance next week. Adjust your stops according to risk currently.
  6. Transports (IYT) made the move above $135.50 to end the week, and closed at a  new high. The big lift of 4% last week is worth watching for a test of the move, but the key is to know that Transports are working north.
  7. Consumer Services (XLY) pushing through resistance with entry at $65.50. Great leadership this week for the sector and watching to see if it continues. We do have retail sales data out for February and it could stall the move if it is disappointing. Stop now is the entry point on the trade to manage the risk.
  8. Financials (XLF) the follow through on the move above the entry at $21.65 level. The climb to $22.37 on the close Friday puts the leadership from the sector back in to play. Need to hold above the $22.12 level this week.
  9. Real Estate (IYR) has now become a worry with a new high established, but then selling on interest rates working higher. Barely held above the $68 level on the close and we will watch how to manage the risk of this position moving forward.
  10. Bond yields have bounced off the low again and put bonds in position to pullback again from the move higher. TLT is showing double top and a move back near $106 is not out of the question. Thus,  TBT shows a double bottom pattern worth watching. ONLY ETF Model.
  11. OTHER OPPORTUNITIES COVERED BELOW.

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

Sector Rotation Model (updated Р3/8/14)

ONLY ETF Model (updated Р3/8/14)

S&P 500 Index Model (Updated Р3/8/14)

ONE EGG Model (updated Р3/8/14)

Breaking Down the 7 Asset Classes:

On February 3rd we started another pivot point to continue the upside move. The US and EAFE Indexes have been the leaders and remain in that role currently. Thus, the micro trend is now on the upside with the EAFE (EFA) and US Markets (VTI) leading the way. REITs (IYR), Commodities (DBC) and Emerging Markets have been leading short term, but we have to watch to see how they all advance this week.  are doing their part to help on the upside.  Treasury Bonds (TLT) are lagging the others with a move lower this week gaining our attention. For now we step back adjust our stops and look for the next round of leadership short term.

Asset Classes

1) US Equities:

The US equity indexes established another pivot point on February 3rd off the recent lows. The micro trend leadership is coming from Basic Materials (XLB), Consumer Services (XLY) and Financials (XLF) joined in this week. Testing the current leadership role is Technology (XLK), Healthcare and Energy (XLE). Lagging or looking for some upside momentum is Telecom (IYZ), Utilities (XLU) and Consumer Staples (XLP). Some patience is necessary as this unfolds.

As we have discussed this past week, the key is to find where money is rotating to and why. Financials were a benefactor this week from rotation. Brokers (IAI) was the leadership in the sector with Goldman Sachs and JP Morgan leading the move.

Watching Technology, Healthcare, Energy and Utilities as money is leaving the sectors.

See S&P 500 Model for current allocation as we are 100% invested.

500 Scatter Rot

2) Currency:

We are still working off the January 30th pivot point which has amounted to modest move lower to test support on the dollar ($21.32 UUP). The biggest transition has been in the emerging market currencies bouncing off their current lows (BZF). The euro (FXE) move higher on weakness this week in the dollar. Watching for a trade in the euro as a result and follow through next week. Overall interesting moves and willing to sit tight and watch for now.

currency

3)  Tracking the Bond/Fixed Income Sectors:

Continues to trade sideways with an downside bias building this week.  Why the shift in direction relative to yields? Market is doing well and the Fed is willing to continue to cut stimulus. Convertible Bonds (CWG) are leading the asset class higher near term. We are watching IYR, XLU, LQD and REM on the shift in interest rates. It invites some downside anxiety relative to the positions and I would recommend raising stops to maintain or control your risk.

Bonds

  • Utilities –¬†The dividend play remains in play, but experienced some downside this week. 4% dividend and stop at $38.60. Starting to top some and need to manage the risk of the trade.
  • REITs¬†– See below – dividend play 4%. IYR made solid move above $64 and still have stop at $66.50. Watch the $68 this week to hold support. Manage your risk should rate continue to rise and present an issue for the sector.
  • Mortgage REITs¬†– REM moved higher, but risk remains high as well with interest rates turning back to the upside. Stop $12.50.
  • Treasury Bonds¬†– Yields started rising this week and we hit our stop on TLT $106.50. Watch and manage any opportunities going forward in TBT to short bonds.
  • High Yield Bonds¬†– HYG = 6.4% yield. Bounced off the $91.25 support (Sept 2013) and held to close back above the 200 DMA. It broke from the trading range this week with stocks hitting new highs. Stop is $92.50 on positions.
  • Corporate Bonds¬†– LQD = 3.9% yield. Small rally in play off the low at $113.20. Cleared $115 level as traded through top of the trading range. Stop is $115.25 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Broke lower this week as well. Manage your risk and still looking to collect the dividend. Stop at $104.50 (entry) and the dividend is the play.
  • Convertible Bonds¬†– CWB = 3.6% yield. bounced off $43.75 support (Sept 2013) and $44.80 entry point. Watching the upside and volatility, but the acceleration has been solid. We keep the position and our stops at $46.50. The trade is now a risk free dividend of 3.6% +3% gain. manage your risk short term.

4) Commodities –¬†The commodity index (DBC) made a pivot lower on December 29th, but the move off the February 3rd low was a pivot back to the upside. Natural gas has been the clear winner in the sector, but gold, silver, gasoline, oil and soft agriculture have been moving higher as well. News relative to the California drought issues will have an impact on agriculture prices as well, add the speculation of drought conditions in Brazil hurting sugar and coffee production adding to the equation.

UNG, DBA and DBC all are moving higher.

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 February 3rd as it is tracking with the US market. As you can see on the chart most of the country ETFs are heading higher off the pivot point of February 3rd in lock step with the US markets. Russia took a big decline as you can see on the Ukraine issue last week. Watch to see how this responds if the US markets find any selling next week. Worth following the opportunities as they unfold.

  • EFA – Watch for follow through on the upside of this trade. (entry $65.20) Got the follow through and added the position. Managing the risk of the trade.
  • IEV – Watch for follow through on the upside of this trade. (See Sector Rotation Model) Got the follow through and the trade, but plenty of work to do as we move forward.

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 chart broke from a cup-and-handle pattern ($65.50) and followed through. It has tested with the volatility in stocks, but held the uptrend. This remains a solid longer term play for the dividend and growth opportunity. The drop relative to interest rates moving higher is a concern short term and important to monitor the risk of the trade relative to how that unfolds moving forward.

You can see in the chart below the disruption this caused in the individual REITs. Watch and maintain your stops as posted on the models.

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 sideways the three months, but making a move back towards the previous highs. $11.15 entry. Stop at $11
  • PICB – 3.1% dividend. 27.80 found support and bounced. $28.70 entry (Sept 2013). 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? Found the low and bounce. A break above $109.27 would be of interest. entry $109.30. Same stop – risk free dividend.
  • 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 and manage your risk

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.¬†