Outlook for Week of March 3rd

Market finds way to move through resistance at 1850 on the S&P 500 index and close the week at new high. The NASDAQ struggled to closed in the green on Friday as technology saw some profit taking. The Dow moved above 16,300 and looking better. Overall the broad market remains in a uptrend and rumblings about the valuations continued. Next week promises to be interesting if nothing else.

The focus will shift to the economic data for February. Friday’s data was helpful in setting a positive tone going forward. The Chicago PMI was better than expected at 59.8 and hopefully is a sign of things to come from the ISM Manufacturing number on Monday. Consumer sentiment was in line and pending home sales improved to the positive side gaining 0.1%. The hope is for improvements to show in February’s data.

The key is to keep your discipline in place and not get caught up in the hype over the markets moving higher. If they go, great! However, if they correct you know where the exits are. 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.

Below we scan the sectors and look for the opportunities!

Have a good weekend.

Economic Data & Outlook:

As I stated last week, it is all about the economy… eventually. And next week it is about the economy. We start the week with the ISM Manufacturing report and the Market PMI. ISM Services on Wednesday and Jobs report on Friday. Busy week, but hopefully some clarity will be gained looking forward.

This week the data was mixed yet again. Home sales were better, but GDP for Q4 was revised lower. The back an forth between the different parts on the economy is why there is a lack of clarity about the outlook for the economic growth. Thus, we still have to move forward with caution and hope.

I still am cautiously optimistic, but the data has to improve if stock prices are going to hold the uptrend. 

Economic Events & Calendar

Sectors to Watch:

  1. S&P 500 index made the break above 1850 finally. Now comes the challenge… holding it and moving on from here. Watch how the index responds this week as economic data sets the tone. Support remains 1810 and for now.
  2. The NASDAQ struggled late on Friday with profit taking as the index closed negative on the day, but higher on the week. 4225 is the level for support short term on the move above the January high. Watch for technology to regain the leadership role this week or the sector may struggle.
  3. Dow made nice gains on the week as it cleared the 16,300 level. Still lagging the other indexes, but it is beginning to play catch up. For now patience as this plays out.
  4. Russell 2000 Small Cap index struggled on Friday with the NASDAQ. 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. I would like to say the data matter in Europe, but it matter more what happens in the US markets. Adjust your stops according to risk currently.
  6. Transports (IYT) made the move above $131.20 to end the week, but we need to see a follow through this week or it could be drag on the broad markets. Still in the trading range and holding above the 50 DMA. Patience is key.
  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. Stop now is the entry point on the trade to manage the risk.
  8. Financials (XLF) need some upside leadership from the sector short term? That was what we were hoping for this week, but it didn’t materialize… on to next week and see how it unfolds. Made move above the entry at $21.65 level, but failed to follow through thus far. Manage your risk short term.
  9. Real Estate (IYR) has continued to add to the upside and we are at the next entry level if the upside continues. Made the move above $68 again Friday? Watching.
  10. OTHER OPPORTUNITIES COVERED BELOW.

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

Sector Rotation Model (updated Р2/28/14)

ONLY ETF Model (updated Р2/28/14)

S&P 500 Index Model (Updated Р2/28/14)

ONE EGG Model (updated Р2/28/14)

Breaking Down the 7 Asset Classes:

On February 3rd we started another potential pivot point which has not panned out on the upside reversal. Thus, the micro trend is now on the upside with the EAFE (EFA) and Emerging Markets (EEM) leading the way. REITs (IYR) and Commodities (DBC) are doing their part to help on the upside. Emerging Market Bonds (EMB) and Treasury Bonds (TLT) are lagging the others with a sideways trend in play. For now we go with this on the upside as short term opportunities.

The previous pivot was October 9th on the upside. The current move is attempting to recapture this upside momentum. US stocks continue to be the leader longer term with the other asset classes playing catch up. There are still plenty of challenges facing the major indexes and we will have to monitor and manage the risk one day at a time.

7 Assest 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 Healthcare. Testing the current leadership role is Technology (XLK) and Energy (XLE). Lagging or looking for some upside momentum is Telecom (IYZ), Financials (XLF) and Consumer Staples. Positive upside moment in the Utilities (XLU) and Industrails (XLI) has helped as well.

Moving back to the October 8th pivot point off the previous low is the short term trend and it has reestablished the uptrend currently. The leadership dynamics have changed since the drop off the January 22nd peak with Financials and Technology dropping out of a leadership role.

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

SP500Scatter

2) Currency:

We are still working off the January 30th pivot point which has amounted to nothing more than a sideways trend that is now moving 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. Overall interesting moves, but still not willing to accept the risk of the uncertainty in place and willing to sit tight and watch for now.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

Continues to trade sideways with an upward bias, but the parts are making move on the Fed comments and outlook. Convertible Bonds (CWG), Utiliites (XLU), REITs (IYR) and Corporate Bonds (LQD) are leading the asset class higher near term. We have added IYR, XLU and REM as trade opportunities in the portfolios, but we continue to manage the issues around interest rates and the longer term outlook for now.

Looking at the chart below you can see the rally opportunities to trade, but holding these positions longer term as they are designed, is too much risk for my taste, trade only for the equity return versus the dividend yield.

Bonds

  • Utilities –¬†The dividend play remains in play as the upside gains some strength again 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. Made the move above resistance at $68 this week.
  • Mortgage REITs¬†– REM making a move higher, but risk remains high as well if interest rates turn back to the upside. Testing resistance at $12.65 and moving through. Stop $12.15.
  • Treasury Bonds¬†– Yields started dropping again this week and the rally in the bond returned with TLT and IEF making moves back to the previous highs. Stop on TLT $106.50. Breaks to new high??? What are bonds saying about stocks?
  • 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 the downtrend line and has continued to move higher. More acceleration this week on the upside. 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 are now moving higher as well. News relative to the California drought issues will have an impact on agriculture prices as well going into the summer, add the¬†speculation of drought conditions in Brazil hurting sugar and coffee production to the equation.

UNG, DBA and DBC all are moving higher.

  • OIL – move above $23 as trade to the previous high. UCO give 2x leverage. Added UCO at $31.75 on move higher and managing the stops on the position. Consolidation at the high currently watching for the resulting break.
  • JO – coffee broke higher on crop news. extreme volatility last three trading days. Willing to watch again as the second flag pattern is setting up for a continuation trade. Entry $28.50. Stop$31.50.
  • SGG – sugar tested the move higher and added to the move last week. Held $52 support. $53.75 entry. Stop $54.50.

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. On January 22nd it created a downside pivot point, which reversed on the February 3rd bounce. Welcome to volatility. 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. 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.

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-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 trade remains in place in the S&P 500 Model. Scanning the individual REITs that make up the index is worth the exercise as some are again on the verge of breaking higher.

Move through $68 key for the continuation of the upside. Watch this week as this plays out.

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 three months, but making a move back towards the previous highs. $11.15 entry.
  • 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.¬†