The market has gone psycho, my way of saying it is choppy and cannot make up its mind on direction. Wednesday and Thursday moves lower and Friday until 3pm same, then buyers step in and closes up 0.5% for the day. That is psycho. There is no conviction in trades on either side and that is a market that will give you a bloody nose. We hit the entry signal for the short trade on small caps Friday, but it then reverses and turns positive? Patience is all I can say for now.
Plenty of work to do this weekend in evaluating the sentiment, technical data and fundamentals. Looking for the common thread and what the potential catalyst will be to either side. Time will tell, but understanding the variables make the resulting move easier to follow.
Have a good weekend!
Current Story of the market boils down to the simple issue of uncertainty. As we have discussed the current choppy markets are being pushed by the news of the day or perceived problem of the week. However, the underlying challenge is the economy. The ‘buyers’ believe the economic improvements currently being prognosticated at 4% growth for the second quarter. The ‘sellers’ believe the economy is growing slower at a rate of maybe 1-1.5%. The buyers are winning as the uptrend remains in play. The April economic data is causing some heartburn as the growth has still not shown up in the numbers. Thus, the current choppy markets. The longer term outlook is for growth to return, if it fails to show up, eventually the sellers win and the correction takes place. We continue to track this story line and will act accordingly as it unfolds.
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 3.33% or they have declined 61 basis points pushing the long bond up nearly 12% for the year. That is not what was prognosticated and the story line has not helped the current choppiness of 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.
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 is starting to act like they matter. I think this is key to watch going forward and the reality unfolds. Then we will have clarity as to which sectors and asset classes offer the best opportunity, even if that is on the short side of the trade.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 5/17/14)
ONLY ETF Model (updated – 5/17/14)
S&P 500 Index Model (Updated – 5/17/14)
ONE EGG Model (updated – 5/17/14) Added TZA
Breaking Down the 7 Asset Classes:
Since the April pivot point we continue to trade sideways 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 sideways represents the lack of clarity in the markets about the future as discussed above.
For the week of May 19th:
- The global markets have returned to be in correlation with the US markets and that is sideways currently. No real changes on the week and the longer term uptrend remains in play.
- Treasury bonds were lower last week and higher this week? The story relative to economic growth was positive last week and not positive this week. Thus, the uncertainty from investors. Some flight to quality in the buying this week and we are a watch and see mode, but money likes bonds for now. TLT and IEF both hit new highs this week.
- Commodities experienced downside pressure last week, and has flattened out to sideways activity this week. If there is a lack of direction in the US economic outlook, it is equally true globally in both the mature markets as well as the emerging markets. Still willing to wait and see how this unfolds going forward for some clarity.
- Emerging market bonds are trading higher and showing a positive move on the upside. Rate it a hold for now.
- Emerging markets still working their way higher following the selling and consolidation. I am of the opinion this sector moves higher longer term.
- REITs recaptured some upside momentum and broke to new high, but has now stalled and moving sideways. Watch and manage the volatility as this is a long term position or opportunity. How the housing market, interest rates and demand unfold will dictate future direction.
- The dollar gained some ground on comments from Draghi and the UK on interest rates and stimulus have helped the strength of late. 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 is still in effect among the major indexes. The S&P 500 tested a new high and moved back to near term support of 1870 again. Still no clarity, and as you can see on the chart below, a juggling or lack of leadership in the index. 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, sideways is the current movement overall. I still say give it room and let this settle and the leadership rise before taking on the risk of stocks.
For the week of May 19th:
- The downside pressure is in play on all of the sector of the major index. Even the defensive sector moved lower this week as the markets tested the downside the last three days. The good news is the major index held support at the 1870 level for now. A test lower may be in store, but for now we watch to see how next week unfolds.
- If we break support levels next week we have to look at SDS or some other short activity for the index.
- 30 DMA is support for now and key to if number two happens.
- Retail earnings are reporting with some mixed reports. They are another indicator of how the US economy is holding or not growing currently. XRT is at the midpoint of the current trading range and holding, but the downside could come into play if earnings continue on the current course.
- Home builders are another sector showing weakness and plenty of negative headlines about the outlook. XHB has been in position to move lower and create another short trade opportunity, but it bounced Friday. Watch for the downside to play out if the news continues.
See Models for current watch list and stops on existing positions. (Updated the Sector Rotation Watch List for Monday.)
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, but we still have little to no interest in trades at this point in the asset class.
BFZ remains the best trade currently relative to the dollar.
3) Tracking the Bond/Fixed Income Sectors:
We are still using the January pivot point and the trend has been sideways and up. 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 spiked lower on fear relative to the outlook in the US. 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 and they hit new 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: 86 of the 103 dividend assets I scan have hit a new highs! That is defensive rotation in the markets.
- Utilities – Sold to near term support last week and now trading sideways. 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 – slowly working higher from the gap lower. Hitting against the 50 DMA as resistance. A move through this level is worth looking for a position going forward.
- 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 3.34%. TLT hit new high breaking above the $112.50 resistance. 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, 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 $117.50 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 $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. Watching the reversal as stock pick up downside volatility. 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. Added the position back at $48.75 on the bounce off support. Moved back into the trading range this week and stop is $47.50 for now.
- 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 got cloudy for stocks and commodities. Still moving sideways this week and nothing clearing relative to the outlook.
For the Week of May 12th:
- Natural Gas (UNG) sold off last week, found support on Thursday and watching to see how it unfolds this week.
- 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. Got bounce with entry point at $59.50. Still moving higher for now.
- Oil (USO) $36 support and needs to hold – if so, add upside trade. Trade entry at $36.75. Watch as this continues to be volatile. Break even on the stop for now.
- Agriculture (DBA) remains in an uptrend with some volatility, but worth holding the position for now. $28.50 stop hit and still testing the downside. Could set up a short trade if this move continues lower.
- SGG – sugar bounced higher and broke the downtrend line and looks to move higher from here. Looking for trade on Monday if we can hold above $27.
Commodities Rotation Chart:
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 19th:
- The EAFE (EFA) index broke above the $68 level and has stalled with the Russia issue hanging overhead. Now it has decided to trade in conjunction with the US markets again, giving up its divergence. Watch and keep tight stop on the positions.
- Emerging Markets (EEM) continues to consolidate looking for direction as well following the brief bump higher. Tested lower on Thursday, but returned to the on Friday. Still like the upside of the sector going forward.
- Russia (RBL) Cleared the entry point and continues to be slow on the upside response. Worries? Watch to see how the follow through pans out?
- China (FXI) has returned to the bounce high on positive reports… if you believe them. Still positive move and worth watching going forward.
- India has gone verticle on elections results and optimism about the turn around. PIN
- Keep your stops in place and be disciplined in your approach.
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 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 May19th:
- 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.
- HCP, Inc. (HCP) and Ventas (VTR) are healthcare facilities (REITs). They have been leading on the upside, but tested last week and this week resumed their upside, thus the volatility comments. Manage your risk.
- Holding here for now and looking for the next leg higher as the consolidation breaks upside.
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 $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.