Sellers Take Control – Outlook for Week of April 14th

The NASDAQ continues to set the pace on the downside for the broad markets. The index closed right at the 4000 mark and a key level of support. The downside risk so many have worried about for the last eight months showing up in the charts. The bears are out of the woods and running rampant on Wall Street. The two camps continue to throw out their respective theories on why stocks are going down or up. Theory is only unsubstantiated beliefs, otherwise know as speculation. Don’t get me wrong, we all have to have our belief of what we think will happen looking forward. But, as the truth unfolds on the charts we may have to adjust our beliefs to protect our principle.

Looking towards next weeks trading there is plenty to be concerned about looking at the charts. Some short opportunities are in play and there are some upside opportunities as well. But, for the majority of our assets cash or bonds look to be the best opportunity as this all settles out. Gambling is better left to Vegas as we manage the risk of our money going forward.

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

Have a good week of trading!

Economic Data & Outlook:

The data was lost in the hype of the equity markets making volatile adjustments to price. The consumer is spending as credit rose well above the January levels. Small business index was higher showing some confidence in the sector. Wholesales investors continue to run higher than normal showing less spending among businesses, and the jobless claims were down to 300K. That was a positive completely lost in the market reversal. Or was it that the jobs being added are low paying jobs that have little to no impact on the economy?

PPI showed inflation at the producers level jumping to 0.5%! That is not good and could easily impact the CPI going forward. If inflation heats up the Fed will be forced into action relative to interest rates. Watch the CPI report next week.

Economic picture isn’t changing relative to growth. The outlook is still slow growth and the slowing in the housing sector (predicted) could have more of an impact. Patience for now, but the outlook is still very questionable and the markets may well be pricing this outlook in currently.

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:

What a difference a week makes as the sellers step in to take over control of the markets. Thursday and Friday showed how quickly the momentum can shift when the sellers take the reins. As bad as it looks on paper and in the media the downside has not done any significant damage, but it has inflicted enough pain to have everyone’s attention. Thus we end the week on a negative tone and support broken. How does it unfold going into next week? That is the million dollar question.

Using April 2nd as the downside catalyst point, we can see the separation and rotation within the asset classes. US Stocks lead the downside. Treasury bonds lead the upside. Everything else falls between. How much downside is in play will hold the answer on what timelines to assign to each looking forward.

For the week of April 14th: (Each is updated in the asset classes below.)

  1. The transition in leadership held the most interest on the trading week and now we have the defensive sectors taking the lead.
  2. Treasury bonds are the leader. Watch the break above $109 in the long bond TLT.
  3. Commodities gave up some early leadership, but remains in the mix looking forward. DBC tested the highs are $26.40 and fell back. Looking for the parts to move more than the whole.
  4. Emerging market bonds were higher and they are attracting assets as well.
  5. Emerging markets continue to hold despite all the selling around the world. Worth watching this week to trade if the upside continues.
  6. REITs are testing after hitting resistance on the upside earlier in the week. Watch interest rates as they do impact the direction of the sector.
  7. EAFE index. Trading in unison with the US markets again and joined the downside parade to end the week.

Asset Classes

1) US Equities:

The US equity indexes established a new pivot point on April 2nd for the downside move currently in play. The acceleration this week sent investors scrambling for cover. The defensive sectors, Utilities, Energy and Consumer Staples held up relative to the other seven sectors moving lower. Looking to next week… caution is the code word and based on the close Friday, more selling may be in store with 1790 well in sight for the next test.

For the week of April 14th:

  1. Utilities (XLU) held the uptrend and the 10 DMA. Willing to hold our positions and use the 30 DMA as a stop for now on short term positions. The three largest sectors of the S&P 500 index are in position to break lower.
  2. Technology (XLK) broke support at the $35.75 level and $35 is up next for support, then $34. The semiconductors (SOXX) had been the leader and has now broke below the 50 DMA. $73 is the key support and the that leaves plenty of downside. Looking at TECS and SSG as short trades in the sector.
  3. Financials (XLF) broke support as well at $21.38. Earnings season WFC good, JPM bad. Plenty more to go next week. SKF or FAZ short opportunity if selling continues.
  4. Healthcare (XLV) broke support last week and acclerated on the downside with biotech leading the way. Break of $55.50 open short opportunity. BIS or Puts on XLV
  5. There are plenty of negatives rummaging through the US equities. Let’s keep it simple for now.

See Models 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. The dollar lost ground this week testing the previous lows. We still have little to no interest in trades at this point in the asset class.

BZF and FXA continue to move higher short term. CEW and FXE have moved higher of well. The transition from the dollar to other currency strength is under way and the dovish comments from the Fed are helping lead the transition.

currency

3)  Tracking the Bond/Fixed Income Sectors:

We are still using the December pivot point and the trend has resumed the upside as stocks head lower. Yield volatility has shifted to an uptrend fueled by the economic data and the Fed. There are still geopolitical worries unresolved that will add to the fear component should they escalate. The chart below shows the leaders clearly, but also the volatility that comes with a normally steady sector. This has created anxiety among bond investors and in turn volatility in the sector.

Bonds

  • Utilities –¬†The dividend play remains, but it has experienced some volatility that now defines the trend. Hit a new high and tested lower, but closed the week in the uptrend. 4% dividend remains on our purchase and stop at $39.50. Watch and manage the dividend not the short term volatility. Stop raised, but let it work the volatility out.
  • REITs¬†– This still a sector to watch for the dividend play 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. Closed on the 50 DMA Friday and support is $66.25. Long term view is to hold and manage the volatility.
  • Mortgage REITs¬†– REM hit stop on the interest rates and worries in the housing sector. Building some support short term, but still plenty of work to do here before willing to put money at risk. ¬†Watch and be patient here as this plays out.
  • Treasury Bonds¬†– Yields have become volatile as uncertainty stocks produces a flight to quality. 30 year yield broke to a new low at 3.47% this week. TLT broke from the trading range above $109 again and held this time. I still see this as a trade opportunity and nothing more at this point. We added IEF to the S&P 500 Model.
  • 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. We experienced the move lower we discussed last week as stocks start to sell off again impacting the risk of this sector. 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. Stop is $115.25 and holding for dividend.
  • Municipal Bonds¬†– MUB = 2.9% tax-free yield. Ascending triangle of consolidation was broken on the upside this 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.
  • 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 is a good fixed income trade. The downtrend has now been established with a lower high. Downtrend hitting the trendline and could accelerate with stocks.
  • 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 lower March 3rd, but has been showing some signs of life and trading opportunities in the individual components short term. Agriculture (DBA) has been the upside leader, but it has stalled of late and is in a consolidation pattern. Still looking for some momentum on the upside.

For the Week of April 14th:

  1. Soft commodities (DBA) moved through the entry point, but failed to break to a new high. entry at $28.45. Use $27.75 as stop and manage this position going forward.
  2. Energy commodities reversal and offered upside in oil (USO), gasoline (UGA) and natural gas (UNG). Trading positions only for now.
  3. Base metals (DBB) bounced off the lows and is making modest move to the upside in recovery. entry $16.05. Copper (JJC entry 37.05), Steel (SLX entry $47.30 tested on Friday) and aluminum (JJU moved up on Alcoa earnings) all bouncing higher.
  4. Precious metals (DBP) tested lower and bounced with gold (GLD) testing support at $123.50 and back near $127. entry $126.40. Palladium (PALL) solid breakout high Friday with entry at $77.20.

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 diverged from the US markets. This week that ended with the exception of Emerging Markets (EEM). The downside joined in with the US and we have to see how much more risk is associated with the global markets as a result of the US markets.

For the Week of April 14th:

  1. The EAFE (EFA) index moved to the stop at $66.50. They returned to trading in tandem with the US markets and thus, the downside could accelerate. For now we will watch and see how this plays our short term before committing any capital. Europe (IEV) has joined the downside as well.
  2. China (FXI) bounced last Friday and moved higher. Then the economic news this week was a disappointment and the downside returned to test support at the breakout level of $36. Stop is at break even with $36.
  3. Emerging Markets (EEM) made moves through the $41 level for entry and is holding near the $41.71 mark as support. Holding the stop at $41 break even for now.
  4. Latin America (ILF) continues to climb vertical off the bottom reversal two weeks ago. Brazil (EWZ) has done the same relative to the upside.
  5. Hong Kong (EWH) is clearing a double bottom breakout. entry $20.80.

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 REITs lower. That shifted on March 26th back to the upside and we are holding the move thus far. I still like the outlook for the longer term play along with the dividend and growth opportunity. If the Fed and lower rates remain in play I expect to trade sideways. If rates rise could be a negative for the sector short term. 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 $68.50 level going forward. Patience as the sector remained non-committal this week.

For the Week of April 14th:

  1. Real Estate (IYR) moved back to resistance at the $68.50 mark. Could test support at the $66.25 mark and if it holds we will look for reasonable entry point there.
  2. HCP, Inc. (HCP) healthcare facilities. Moved above resistance at the $39.50 mark. Some topping as volatility in the sector picks up with stocks selling. entry $39.50
  3. Equity Residential (EQR) Residential REIT. Volatility picked up with the attempted rise above resistance at the $59.40 level. Tested lower to end the week. Watch how this unfolds next week. Concerns in the housing sector is putting pressure on the REIT.
  4. Mortgage REITs (REM) broke lower in interest rate moves. entry $12.35 to fill the gap left and then potentially higher.

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. With break higher we will look at raising the stop to protect the gain as it is more than the dividend of which we established the trade for.
  • 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. Again the gains are more than the dividend, thus we have to look at protecting the gain should this reverse.
  • 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 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.