Outlook for Week of May 12th

The market has gone psycho. While the volatility remains low, the lack of direction remains plain and evident in the charts. As we discuss below there are the losers, NASDAQ, Small Cap and Biotech, the leaders S&P 500 index, Dow, Energy and Real Estate, and those inbetween. They have resulted in some sectors break below the 200 DMA and other trading near their current or all time highs. Regardless of what we think or believe at this point, the best course of action is to let this inaction play out and the direction of the broad markets to be defined along with momentum and sentiment.

Have a good week of trading!

Economic Data & Outlook:

Ms. Yellen gets all the credit for the current rosy view of the economic outlook. Her testimony to Congress this week made me feel certain that everything is doing well and growth is just around the corner. Despite her rosy outlook the fact remain that growth is none existent, first quarter GDP validated that. Thus, we will take what she says in the spirit it is delivered… we hope things improve.

The week started with some positive new from the ISM Services beating expectations at 55.2%. Consumer credit rose giving some hope to that sector and productivity fell. The numbers were mixed just as they have been for the last two years. The “recovery” has been the worst in history and the concern is when the Fed withdraws money from the picture (QE infinity being tapered) what is going to happen? Is the 0.1% GDP in the first quarter going to be the norm going forward? Not attempting to be negative, just throwing out parts of the story that is unfolding economically.

When you put all the data together you have a clear understanding why the markets are struggling to gain traction on the upside. Equally, you understand that they are not bad enough to send everyone running for the exits, but then the guidance going forward remains positive (from most economist) and not one is acting as if they believe it, and we are stalled, chopping and trading sideways. Bottom line… let this work out and take what we see versus what we believe.

Economic Events & Calendar

RESEARCH MODELS:

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

Sector Rotation Model (updated Р5/10/14)

ONLY ETF Model (updated Р5/10/14)

S&P 500 Index Model (Updated Р5/10/14)

ONE EGG Model (updated Р5/10/14)

Breaking Down the 7 Asset Classes:

Looking at the chart we¬†continue to trade¬†sideways since the March low. It is important to remember when we move sideways… investors are confused and don’t know which side to commit to.¬†The current move sideways¬†represents the lack of clarity in the markets about the future.

7 Assest Classes

For the week of May 12th:

  1. The global markets and the defensive sectors are taking on a small leadership role by default, but they are worth our attention short term.
  2. Treasury bonds added to their upside rally with yields dropping, but now finding a low. As seen in the chart the bonds have stalled this week. Still a trade opportunity with tight stops, if the yields turn higher it is likely to happen quickly.
  3. Commodities experienced downside pressure with the selling in crude oil and metals. They are not selling enough to entertain a short, but placing tighter stops on positions you currently own.
  4. Emerging market bonds are trading higher and showing a positive jump to the upside.
  5. Emerging markets still working their way higher following the selling and consolidation. I am of the opinion the this sector rallies when the threat subsides. EGG Model owns position.
  6. REITs recaptured some upside momentum and broke to new high. Watch and manage the volatility as this is a long term position or opportunity. Interest rates rising will be the risk to the move short term.
  7. EAFE index is struggling as the issues with Russia remain a cloud. Putin remains like the market, up and down with not directoin. Still a positive longer term outlook for the mature global markets.

1) US Equities:

The sideways move is still in effect and dividend among the major indexes. The S&P 500 trading near current highs and the NASDAQ moving towards major support. Which will determine direction going forward? Trend is on the upside… rumors/speculation is on the downside.

The US equity indexes established a new pivot point on April 11th  and to put that move off the brief low into perspective, energy has been the clear leader, but that shifted on Thursday and Friday with what looks to be some short term profit taking. As you can see on the chart below, the activity this week has clustered the other nine sectors together around the broad index line. This illustrates the lack of direction.

SP500Scatter

For the week of May 12th:

  1. Energy (XLE) remains the clear leader, but crude sold back and on a delayed response the stocks have moved lower off the new high. Tighten stops on the sector and watch how it unfolds in the coming week.
  2. I am watching the rest to define themselves before putting money at risk. The S&P 500 model is tightening the stops to protect the principle and evaluating any downside or short play opportunities of the index overall with SDS.

See Models for current watch list and stops on existing positions. (Updated the Sector Rotation Watch List for Monday.)

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. 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 the last few days, but we still have little to no interest in trades at this point in the asset class.

Currency

3)  Tracking the Bond/Fixed Income Sectors:

We are still using the December pivot point and the trend has been sideways to up. Yield volatility continues to bounce around keeping the sector in check, but the outlook is still for rates to remain low. There are still geopolitical worries unresolved that will add to the fear component should they escalate. The fall in rates was in response to the economic reports last week and they have remained near the lows this week. 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. Interesting note: 81 of the 101 dividend assets I scan have hit a new high! (11 more this week) That is defensive rotation in the markets.

Bonds

  • Utilities –¬†They took a dump on Thursday and Friday, but are still leading the upside.¬†Testing the 30 day moving average for support.¬†The dividend play remains, but it has experienced some volatility¬†with the¬†uptrend still in play. The 4% dividend (entry point) remains and stop raised to trailing 50 DMA. Watch and manage the dividend not the short term volatility.
  • 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¬†– REM hit stop on the gapped lower. Slow uptrend in play off the April low and hitting against the 50 DMA. Watch for entry if we clear that level short term.
  • Treasury Bonds¬†– Yields moved to a new low this week on rotation to safety, but bounced slightly this week pushing TLT back to the 20 DMA. The 30 year yield which is now at 3.46%, up 10 basis points on the week. TLT testing the¬†$111 support again and held. I still see this as a trade opportunity and nothing more at this point.¬†If break support watch for trade in TBT short term.
  • 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, but trading around¬†the 50 DMA. Stop is $92.50 (break even) on position as this is a dividend trade.
  • Corporate Bonds¬†– LQD = 3.6% yield. Entry off the low at $113.20 (12/2013). Cleared $117.25 resistance level as traded through top of the consolidation range. Watch how it plays out and keep your stop at $115.25 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Ascending triangle of consolidation was broken on the upside last week at $107.21. Manage your risk and still looking to collect the dividend. Stop raised to $105.50 (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. Watching the reversal as stock pick up downside volatility. We hit our stops at $47.50 (locked in a 2% dividend + 8.6% capital gain) That was¬†a good fixed income trade.¬†Watch for move above the $48.70¬†for entry¬†($48.75)¬†to the ETF (added back this week, but has been testing the move the last few days.)
  • Preferred Stocks¬†– PFF = 5.2% yield. Modest uptrend continues, but flattening. The shift in stocks to the downside could impact the stocks, but only if debt risk rises. Watch and maintain your stops at $38.50 currently. 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 get cloudy for stocks and commodities.

For the Week of May 12th:

  1. Natural Gas (UNG) sold off on Thursday and Friday and is test support at the $25 mark. That broke the uptrend line in play and now we see how much downside there is. Dangerous short trade currently.
  2. Gasoline (UGA)¬†corrected with the drop in crude oil. support at $59.50… holding and we are watching to see if a bounce materializes from the selling.
  3. Oil (USO) $36 support and needs to hold Рif so, add upside trade.
  4. Agriculture (DBA) remains in an uptrend with some volatility, but worth holding the position for now. $28.50 stop hit on Friday.
  5. Gold (GLD) stuck in the trading range and it is not likely to clear up near term. Patience is best not plays currently.

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! No conviction and too much worry 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 May 12th:

  1. The EAFE (EFA) index broke above the $68 level and has stalled with the Russia issue hanging overhead. The Putin effect is a volatile as intraday trading currently.
  2. Emerging Markets (EEM) continues to consolidate looking for direction as well following the brief bump higher. Russia is impacting this as well.
  3. Russia (RBL) big bounce off the rumors of a peaceful settlement. No selling on Putin comments, thus, flip a coin and see what happens next week.
  4. Most countries are trending sideways while this all plays out. EWZ and ILF both still trending higher.

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) РPivot point on March 26th back to the upside has turned into a up and down battle of the traders, but the uptrend continues. This is a dividend play and you will have to manage the risk of the trade as this picks up volatility. SRS is the leveraged short ETF to use to hedge the position when the downside picks up. I still like the outlook longer term and want to hold the position, thus we manage it.

For the Week of May12th:

  1. Real Estate (IYR) cleared resistance at the $68.50 mark and has continued upside. Watch and manage your position in the sector. I like the dividend if you manage the risk.
  2. HCP, Inc. (HCP) and Ventas (VTR) are healthcare facilities (REITs). They have been leading on the upside, but are testing the move on the worries in the broad markets. Manage your risk.
  3. REITs of interest… DFT, breaking from trading range. MWP, breaking to new high. JOE, breaking from consolidation. HTS, break to new high from the trading range? Plenty of strong uptrends in the scans as well.

Real Estate IYR

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 higher, but still in uptrend.
  • 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 $110.80 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.