Outlook & Trading Notes for Week of June 9th

Sell in May and go away isn’t working thus far. Another positive week for the major indexes puts them at new highs and small caps even join the party.¬†The S&P index was up 1.2%, NASDAQ 100 index gained 1.5% and the Dow was up 1.2%. Small caps gained 2.6% to lead the indexes for the week. Overall good week for the buyers and everyone goes home with a big smile.

Jobs report wraped up the week with the final economic data that was inline with expectations and just enough to pacify the market. That was the perfect end to a fun filled week that was led by money flowing in to hit new highs and show the buyers are still in control… for now. Below we cover the details of the week and what’s on tap for next week.

Remember, 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 still involves some¬†uncertainty about why we have started the next leg higher, but for now everyone is willing to accept the move. Despite the rally¬†off the recent lows and the move to new highs on the major indexes, we still have unresolved¬†issues economically, fundamentally and with growth in earnings. As we have discussed the markets underlying challenge is the economy. The tug-o-war is, ‘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 relative to May over April. The buyers are getting¬†some validation (not four percent worth) and they are putting 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, in their opinion. The buyers are winning currently as the uptrend resumed the S&P 500 index hitting a new closing high. 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 3.43%. 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. We have to watch as this plays out going forward.

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. They are and remain a concern for investors longer term.

This all adds up to uncertainty and a lack of clarity for stocks. Despite the move higher in stocks the underlying concerns have not been removed or dealt with. We are now in the last month of the second quarter and the next phase of report will begin in five weeks. June’s reports will be forth coming shortly and it will all add to story going forward. As we always say and attempt to do, take what the market gives and protect the downside risk of your portfolio.¬†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 Р6/6/14)

ONLY ETF Model (updated Р6/6/14)

S&P 500 Index Model (Updated Р6/6/14)

ONE EGG Model (updated Р6/6/14)

Pattern Trading Setup:

Today’s opportunities:

  1. Manage your positions and adjust your stops accordingly.¬†Today ends the week with the Jobs Report…
  2. RF – entry $10.50. trading range breakout test. Solid move higher and $10.50 entry hit on Thursday. Look for test and entry to the trade.
  3. FB – entry $64.22. cup and handle. Break higher as continuation of the trading range breakout attempt.
  4. YELP – entry $66.80. cup and handle. Break higher from the bottom reversal in play.

Pattern Trade Tracking & Follow Up:

  1. NPSP – entry $33.80. Pennant. Continuation of the upside breakout in biotech stock. Stop $33.
  2. ANIK – entry $48. trading range. biotech moving higher again. Adding to the existing position. Stop$47
  3. PFG – entry $48. trading range. Insurance joining upside move with breakout. Stop $47
  4. BAC – entry $15.35. trading range. Banks moving to the upside. Stop $15.20.
  5. AKAM – entry $55. trading range breakout. Stop $53.50.
  6. STI – entry $38.95. trading range. Banks attempting to break higher. stop $$38.25.
  7. EXPE –¬†entry $73.90. Downtrend break and follow through. ¬†Stop $71.90.
  8. WAG – cup and handle. test the breakout and take the entry price or follow through entry at $71.45. Stop $70.35.
  9. 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.
  10. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $45
  11. AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $20.50. NICE jump on Tuesday.
  12. RVBD – entry $19.90. trading range. technology moving higher short term. Stop $19.80
  13. IBB – entry $236.70. Ascending triangle. looking for upside follow through on breakout. Stop $236.70.
  14. CURE – entry $81.42. Ascending triangle. looking for upside follow through on breakout. Stop $81.42.
  15. 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.
  16. 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.
  17. AAPL – entry $590. Test of gap higher. Splitting 7:1 and should add a upside boost short term to the stock. Stop $620.
  18. 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
  • 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.
  • 6/6 – See above on pattern breakout to add to existing position. Add additional 500 shares.

Breaking Down the 7 Asset Classes:

Since the April pivot point the move was¬†sideways, but since May 20th the move higher has bee positive as the US stocks hit new highs. 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¬†it still requires discipline in our approach and efforts to put money to work.

Asset Classes

For the week of June 9th:

  1. The global markets have returned to be in correlation with the US markets and that is moving higher currently. Positive moves on the week and we will take the opportunities as they present themselves.
  2. Treasury bonds were lower this week as yields rose slightly on bonds and prices fell. This is more in line with what you would expect relative to the stocks moving higher. Stops are tightened on bond positions and entertaining hedging positions with TBT.
  3. Commodities continue to struggle¬†as you can see on the chart they turned lower a small turn to end the week. We are watching to see how this unfolds, but with the exception of natural gas we don’t own anything in the asset class.
  4. Emerging market bonds made the move back to the upside from the consolidation pattern the last couple of weeks. The continuation is a positive and we need to manage our stops.
  5. REITs are still leading the major asset classes with some renewed buying on the week. The upside remains 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.
  6. 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.
  7. US stocks are trading higher and hitting new highs on the week. The EAFE index is trading along with the US with Europe leading the charge.

1) US Equities:

The push higher from last week continued this week as the S&P hits a new high. The leadership is consumer discretionary, REITs, healthcare, technology and financials. This is more normal leadership as the rotation has moved higher. The index charts shows a clear breakout and follow through this week. The sectors are still trading in unison on the upside with some modest leadership and we are still looking for a definitive move overall. Approach this week with caution, monitor you stops. We fully invested in the S&P 500 model and have to take precautions to manage the risk.

500 Scatter Rot

For the week of June 9th:

  1. Small Caps (IWM) РSo much for the three days of testing the $111 mark as the index breaks higher gaining nicely on the week. Clearing resistance at the 110.20 level was the basis for the upside position. We persevered along with others and now the trade has panned out on the upside. Made the move through the $115 level now. Raise the stop to $113.
  2. REITs –¬†The¬†sector remains in a uptrend, but has been¬†moving sideways. That ended officially Thursday with the jump higher gaining 1.5% and pushing through the $71.36 mark and closing at a¬†new high. 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 did give way to optimism. Set your stops according to the risk you are willing to accept based on the move.¬†Hold positions and¬†keep moving forward.
  3. The NASDAQ 100 (QQQ) back at the March highs $91.34 and cleared that level. The close at $92.82 hits new high and keeps 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. Stop $105.60.
  4. Energy (XLE) remains a leader and finally made a clear break higher from the consolidation hitting new highs again. Be cautious and adjust your stops according to your time horizon. Poised to run higher on the positive outlook in the US and EU stimulus. Crude had another volatile week, but still holding support of $102.50. This is something to watch short term along with any impact.
  5. Semiconductors broke from the wedge consolidation pattern to the¬†upside¬†and followed through. Added¬†a position to our model (SOXX @ $80.35 entry). I continue to like¬†the upside¬†as¬†the technology stocks¬†have¬†recovered the lost momentum. Accelerated higher this week and need to manage our stops. 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. Hit new high on Friday with the index gaining traction again.
  6. S&P 500 index moved through the 1900 level and  to new high for the index at 1949. What does it mean as we accelerate to another new high? Uptrend back in play and watching for the upside momentum to continue short term. Seeing the technology, financials and consumer discretionary taking the lead for the index. Manage the risk.
  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 tested support at $24 with a double bottom set up, and overcoming the negative momentum. Looking for a reversal and trade opportunity on move above $25.20 (hit entry) and letting it play out for now short term. FCG is attempting to reverse from recent selling as well (hit entry at $22.16). 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, but still looking positive for now with a renewed push higher the last two days. CURE, XLV broke to the upside showing strength short term in the broad sector. Pharms stocks PJP, XPH moved to the upside as money rotates back into the sector.
  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. Hit the entry and now challenging the previous highs at $43.50.

2) Currency:

We are working off the May 6th pivot point with the dollar moving upwards slowly. The buck was dying a slow death and testing support until Draghi stated the ECB would cut rates in June and consider QE going forward. Euro fell and dollar rallied, 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:

Using 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 rose on the thirty-year bond. This pushed the treasury bond lower and BND drifted lower as well. Watching to see how this unfolds. Bond yield s should be rising if equities are rising on a strengthening economic picture. Watch, manage your stops and/or put a hedge in place should yields continue to rise.

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.¬†Made a solid move to the upside this week and hit a new high.¬†Support is now $71.5 and $68.40. Long term view is to hold and manage the volatility.
  • Mortgage REITs¬†–¬†has¬†slowly worked 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 off the¬†new low this week on rotation to stocks. Risk on trade is in motions short term. The 30 year yield which is now at 3.43%. TLT test support at the¬†$111.25 support.¬†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. Was moving higher, but dropped on rumors in the high yield sector. Closed back at $94.83, but still watching how it move from here. 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. Rise in yields sent investors to the exits quickly as tested the 50 DMA on the week. 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 at¬†$107.50 (entry 104.50 12/2014) and the dividend is the play. Muni’s tested lower with corporates on the week.
  • 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. Fear on the move in interest rates on the upside have pushed the stocks lower. Tested the 50 DMA on the week.¬†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. The lows have not moved below the low of April 2nd and that makes the trend sideways.Watch this week as it unfolds and we attempt to gains some clarity.

For the Week of June 9th:

  1. Natural Gas РUNG is testing support again at $24 and holding. Double bottom set up, and overcoming the negative momentum. Made a reversal and trade opportunity on move above $25.20 (hit entry). FCG is attempting to reverse from recent selling as well (hit entry at $22.16). Positive move reversing the short term downtrends. Watch and set your stops accordingly.
  2. Gasoline (UGA) wedge pattern and not interested currently.
  3. Oil (USO) $36 support and needs to hold Рadded 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. This stop and willing to watch the sector for now.
  4. Agriculture (DBA)¬†turned lower and hit a short entry at $28.50 (5/9). The downside momentum remains with $28 the stop and reversal point. Watch the attempted bounce from Friday… manage stop or exit point
  5. Precious metals not of interest as the emotions and media are keeping the metal in check.
  6. Steel (SLX) made move lower, but bounce last two days. Watching to see if it amounts to a reversal. $47.35 entry (SLX).

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 two weeks has been the US markets emphasis. The¬†emerging markets have been the bigger story, but that is testing as well. 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. Watching to see how Draghi’s comments and actions with the ECB impact the stocks in Europe.

For the Week of June 2nd:

  1. Emerging Markets (EEM) Was consolidating and now made move to new high. Watch to see if the break holds and adds to the upside as we start the week. Entry $43 on EEM hit. Stop $41.76. Manage the stop.
  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 with break higher.
  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 (added 6/2). Now at resistance of the March high and need to move beyond this level.¬†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. Did resume this week and $74 entry on the move. Stop at $72.50.
  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. Got the move higher this week and added small position on the move. If we test lower we would look to add to the position.

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, and on May 22nd made the move higher that is still holding the longer term uptrend in play. The move through the $71.36 mark on IYR was a new high and remains above that level currently. I am still interested in holding and managing this position with a longer term time horizon. 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. PLD made a solid move on the week as well as BXP. Could be worth watching the overreaction short term.
  2. 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).
  3. MLPs are starting to move higher again and added AMLP to portfolio. This is a dividend plays (4.5%) and entry was $18.25. Looking for the longer term view of this position.

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.