Outlook Week of March 31st

The word uncertainty seems to come out of my mouth a lot these days. The fact that the US economy is growing at 2%+ currently, and the expectations are for similar growth the balance of the year, you would believe all things are well with the market, right? We all know there is more to the story, and like reading a good mystery novel we are kept guessing how it is going to turn out. The difference is our money is at stake not our intellectual curiosity. That brings me to the next word that is coming out of my mouth equally as much these days… Patience. Until the uncertainty clears, we have to be patient with this market environment, plain and simple.

The longer term trendlines off the November 2012 low is still in play and the March 2009 trendline is still intact as well. The longer term view of the markets technically remain bullish, to borrow and animal analogy for the market. It is the short term view that is playing with everyone’s psyche. If you are a trader this matters, if you are long term investor, it should only result in some indigestion. If the proposed or believed problems develop into a correction you will have to deal with your holdings.

How do we adjust and use the current data to help us next week?

Rotation was the theme for last week and it is likely to continue. The movement from growth to value stocks is taking place. The small caps, technology and biotech stocks have been selling and some money is flowing to large cap value stocks, but there is equally if not more flowing into treasury bonds. Thus, some money is staying in stocks and some is moving towards safety. I expect that to continue until the economic data for the first quarter is released along with March and first quarter earnings data. The next short term catalyst for the markets will be the facts about the economy and earnings. Thus, the call for patience as this all unfolds.

Below we cover in more detail our strategy for the week.

Have a good week of trading!

Economic Data & Outlook:

The data this week was more on the disappointing side in light of future growth potential. Flash PMI was on lower, new home sales fell below expectations, fourth quarter GDP revised lower, pending home sales lower and consumer sentiment lower. Again validating the need for patience relative to the economy.

The signs of hope came from the durable goods orders beating expectations, consumer confidence was better, consumer spending was better and personal income rose. There are some signs of growth, but the challenge is getting it all together enough to build confidence for investors.

This promises to be a interesting week for economic data as the end of the quarter is here. We get plenty of data for March, but also our first glimpse of what happened in the first quarter. This will likely set the tone for the markets short term along with the beginning of earnings season.

Economic Events & Calendar

Models:

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

Sector Rotation Model (updated Р3/29/14)

ONLY ETF Model (updated Р3/29/14)

S&P 500 Index Model (Updated Р3/29/14)

ONE EGG Model (updated Р3/29/14)

Breaking Down the 7 Asset Classes:

On February 3rd we started another pivot point to continue the upside move. On March 6th we are watching to see if the next pivot point is in play? The bounce March 7th negated the move lower, but reversed again on March 20th, now we see again the need for patience as Friday ended on an up note with the trend still in play on the upside technically. But, looking closer at the chart we see some interesting developments this week.

First, the EAFE index finally traded opposite the US markets, ending higher on the week. Second, emerging markets index broke higher and actually issues a short term trade signal on Thursday. This development is worth our attention this week in trading.

Commodities, emerging market bonds and treasury bonds all had positive direction on the week as well I expect that to continue this week. Finally the dollar is holding steady and helping the global markets with the lack of volatility. Overall positive signs for the chart this week and we will watch to see what opportunities evolve this week.

For the week of March 24th:

  1. Watch EFA to find some support ($64.50 ). That was last week and it did find support and moved higher. Friday hit an entry point at $66.50 on small gap higher. We added to the watch list for the models.
  2. Europe (IEV) broke higher as well to help lead the EAFE index higher. Watching to see if we hold the move above $47.80 this week and possible position.
  3. Emerging markets (EEM) held support at $38.07 and moved through resistance at the $40.20 mark for entry in the ETF. The shift is short term, but worth a trade in the sector short term.
  4. Commodities (DBC) held support near the 200 DMA and has bounced back with oil prices moving above $101 again. Gold continues to struggle following the FOMC meeting. Many are still calling for the upside in gold, but it has not emerged yet. Watch DBC for upside trade.
  5. US markets and treasuries are covered below as are all the asset classes.

Asset Classes

1) US Equities:

The US equity indexes established a pivot point on February 3rd off the lows, but on March 7th started to turn lower, but that reversed this week and pushed back to the previous high. The week ended on a negative note Friday following the Fed stress test for banks. The selling late day left US stocks in limbo heading into this weeks trading. On Thursday financials established some leadership for the broad index, but that failed on Friday. Therefore we head into the week with plenty of question marks.

For the week of March 24th:

  1. The S&P 500 index did break from the triangle consolidation pattern to the upside on Friday, but it gave back the move to close lower at 1866, again failing to break above 1874 resistance. SDS short trade at $29.10 if the selling continues to start the week. Watch stops on SPY position in the S&P 500 Model.
  2. Technology (XLK) has become mixed with semiconductors continuing to look strong despite the give back on Friday. Electronics however, look weaker as the leaders give up gains. Rotation or fear heading to bonds? There is a question that we will look for answers to this week. The new high breakout on Thursday reversed Friday. Watching for the direction to unfold short term.
  3. Financials (XLF) broke higher on Thursday and retreated on Friday with the Fed stress test results hitting BAC and others. KBE, KRE and IAI all retreated from the move higher. Plenty of comments related to this release from the Fed, but it only keeps the uncertainty in play relative to the sector and the broad market index. Watch how this unfolds this week.
  4. Healthcare (XLV) failed to hold support at $58.65. after a nice bounce the first four days of the week. The put the downside play in XLV to work. Posted last week… Short XLV with June 58 puts @ $1.85. Stop on puts is $1.50.

See S&P 500 Model for current watch list and stops on existing positions. ONLY ETF model will capture the short term trades for the index and US markets.

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. That support broke last week offering the downside trades in the buck. Following the FOMC meeting the buck bounced and is testing resistance (Previous low) and we will watch to see how it plays out short term. No interest in trades at this point in the asset class.

BZF and FXA continue to move higher short term.

currency

3)  Tracking the Bond/Fixed Income Sectors:

We are still using the December pivot point and the trend is still slightly higher to sideways. Yield volatility has picked up relative to the economic data and the Fed. Throw in some geopolitical data and the sector remains volatile. The chart below shows the lack of clarity relative to leadership from the sector. They are all addressed below.

Bonds

  • Utilities –¬†The dividend play remains, but it has experienced some volatility that now defines the trend. Hit a new high last week and tested lower of fear of interest rates moving higher short term. 4% dividend remains and stop at $39.50. Watch the resistance at the previous high and manage the dividend not the short term volatility. Stop raised and let it work the volatility out.
  • REITs¬†– See below – dividend play 4%. IYR made solid move above $64 and we hit our stop this week on the sector. This is still a potential dividend play in the asset class and we have to let the volatility short term play out. Fear relative to interest rates is the challenge and we are watching how this unfolds. $68 is the reentry point.
  • Mortgage REITs¬†– REM hit stop on the interest rates moving higher. The concern is for mortgage rates to rise as the economy improves. Hasn’t happened yet, but investors have exited as if it a give. Watch and be patient here as this plays out.
  • Treasury Bonds¬†– Yields have become volatile as uncertainty remains in the sector. TLT broke from the trading range above $109 and is still a hold at this point with our stops moved to $107.50.
  • 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 and is testing. Watch for move lower if stocks start to sell off again. Stop is $92.50 (break even) on position as this is a dividend trade.
  • 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. Bounced back this week and holding mid-range currently. 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 reversal as stock pick up volatilty. We keep the position and our stops at $47.50. Flirting with the downside and need to watch as we approach the stop. The trade is now a risk free dividend of 3.6% +5% gain. manage your risk short term.

4) Commodities –¬†The commodity index (DBC) made a pivot lowe March 3rd, but has been showing some signs of life and trading opportunities in the individual components short term. Natural gas had been the clear winner in the sector, but that has shifted lower. Now it is moving upside again and worth attention. Gasoline moved up as oil prices have shifted higher again. The precious metals are lower as gold drops again on lack of inflation and the Fed actions to cut stimulus. Watch for trades only in the sector currently and watch for any trend developments going forward for longer term positions.

For the Week of March st:

  1. Soft commodities (DBA) reversal and could offer some upside this week on follow through.
  2. Energy commodities (DBC) reversal and offered some upside in OIL, UGA and UNG.
  3. Precious metals (DBP) moving lower. Looking for support and then any opportunities from there be it short or long.

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 and as noted above diverged from the US markets. This week look for the the two to continue to part company on the bounce and confidence in the global outlook. Watching to see how this unfolds going forward.

For the Week of March 31st:

  1. Covered EAFE index, Emerging Markets and Europe above in the 7 asset classes outlook.
  2. China (FXI) bounced last Friday relative to data and managed to continue that reversal this week. A move above $36 makes for interesting trade opportunities this week.
  3. Japan (EWJ) as discussed last week broke below support at $11, but bounced as support and may off an upside opportunity this week.

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) РPotential pivot point on March 4th in in the REIT. I still like the outlook for the longer term play along with the dividend and growth opportunity. Watching to see if the lower holds. The reversal off the low on Thursday is good start, but interest rates will be the determining factor. If the Fed can keep lower rates in play and believable the rally returns. Watch and manage the risk of the position as well as the parts.

Hit our stops on positions in the sector and now we watch to see if the opportunity arises to reenter the position near the $68 level going forward. Patience as the sector did bounce this week.

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
  • 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. Adjusted our stop to $108 on volatility. Watch and manage risk and 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.