Short Trading Week Closes Positive

This was a holiday week that went according to plans and ended positive. The major indexes all closed at highs and the optimism among investors heading into the last month of trading remains upbeat. The Friday trading day remained true to form with the last hour of trading erasing most if not all the gains for the day. It is that type of trading activity the last week plus that keeps me concerned about the outlook going forward. It is easy to attribute this activity to program trading, but there is more going on and we have to be alert to the outlook.
The trends remain on the upside for the broad markets overall. The leadership from the financials, healthcare, consumer services and industrials remain. Technology posted a solid week on the upside as well, with the semiconductors finally making a move to a new high from the consolidation pattern over the last eight weeks. Global markets ended the week higher as well. For now we can say all is well and the bias remains with the buyers. Next week will be one to watch relative to data from the economy and black Friday sales reports relative to the holiday outlook. Promises to be interesting if nothing else.
The trend is higher and we always stick with the trend and manage our exits accordingly.
State of the Market:

The S&P 500 index post eighth week of upside and closes above the 1800 mark and added two points this week. The upside target we set was achieved and continue to watch the upside trend. Can it continue or does this start a slide towards support or our test zone of 1657-1730. The trend is higher and we go with the trend for now. Remember next week starts the next round of data reports and will set the tone going forward.

The NASDAQ continued upward clearing the 4000 mark and closing  at 4059. This puts the composite back in a leadership role relative to the upside momentum with the other indexes, after lagging for a couple of week. Upside remains in play. Be respective of the extended move, but take what the market gives.

The Dow attempting to make the next level of  16,100 mark to keep the uptrend in play. The move Friday managed to close off 11 points after hitting 16,174 and dropping nearly 90 points into the close. That is worth our attention to start the trading week to see what if any response investors have.

Russell 2000 Small Cap index like the NASDAQ has returned to an upward trending index. The acceleration is welcome especially heading into the new year. Watch to see if the leadership role remains in play and how much upside remains. We have trades in both IWM and TNA to capture the move in the index.

With the final month starting Monday we have to watch how the data and outlook impacts the major indexes going forward. Plenty of work to do relative to the Fed and stimulus. Do they cut or not in the final month? The VIX index is pointing towards calm, but that can change quickly. Focus, set your stops, and maintain your discipline.

Economic Data & Outlook:

The economy remains steady as the housing data took center stage. The pending home sales were still negative, but much better than the previous report. Permits were up, prices were improved again and the housing starts were delayed until next week. Consumer confidence declined, but consumer sentiment index rose? Jobless claims fell again helping the the outlook for the jobs report next week. Durable goods were lower and Chicago PMI improved. Bottom line things remain very similar to how they have been over the last year. There is not much in terms of improvement, but steady growth remains the plan. This is the final month of the year and the November reports all start on Monday with the ISM Manufacturing. I am watching to see if the expectations for the fourth quarter remain on pace.

The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

Sectors to Watch:

  1. Housing data this week was disappointing as pending home sales remain negative. Our position in XHB responded by moving up 2% and made the break above $31.60 to follow through bounce off the trendline. Watching for further follow through this week as the upside remains in play.
  2. NASDAQ break above 4000 after 13 years! The leadership remains the large cap stocks like Google breaking higher from the consolidation pattern of the last five weeks. Priceline and Amazon both moved to new highs as well. QQQ continued above the $84 mark.
  3. Financial leadership is large banks (KBE), but regional banks (KRE) and insurance (KIE) have added to the upside along with the brokers (IAI). Small test on Tuesday and watching to see how it trades today. Want to add to our position if the test continues.
  4. Healthcare made a solid break above $54.60 and continues to be one of the leading sectors. Watch for the consolidation to move higher this week. The leadership is coming from IHF, the healthcare providers and biotech currently. I continue to like the sector and would look to add to position if the test develops. Digging into the ETF shows the best opportunities going forward.
  5. Real Estate REITs remain on the downside, but testing support again at the $63 level on IYR. If it bounces off support it could be good for a trade up to $66.25. A break lower and SRS, short trade remains the play. Worth watching here for trade this week.
  6. Biotech (IBB) has a big break from consolidation pattern to gain 3%. Small caps are pushing the sector, but the sector overall has been is solid uptrend. Look for test and continuation of the move higher. Scanning IBB for insight to the move is worth the trip. XBI broke higher on Monday showing the large caps moving as well.
  7. Retail is still in an uptrend after testing last week. This is a sector worth scanning for the leadership heading into the holiday season. RAD, at the top of the current trading range. WMT breaking to new high. COST breaking higher from a pennant pattern. AMZN, M, CHS also breaking higher. I like the individual stock picks in the sector for the best upside short term. Watch to the sales reports for black Friday to add or switch the direction.
  8. Crude oil hit resistance again near the $95.30 mark. The selling below support on Wednesday to $92.36 was a negative, but the buying on Friday pushed the price back to $93.92, but failed to hold as the price moved back to $92.78. Will the downside continue and confirm the current trend? DTO is short oil and OIL is long, looking for some clarity as we start the trading week. Gasoline is pushing higher hitting the next level of resistance near $59 on UGA. Both could offer opportunity this week.
  9. I still not a fan of gold. Short has been the play for some time now and it isn’t looking much better following last weeks move sideways. GLL is still the fund of choice on the downside play. Goldminers (GDX) is another component of gold that is hurting on the downside. The test of the lows at $22 is worth watching. DUST is short side of the trade should the break lower resume.
  10. Bonds continue to be at risk of interest rate creeping higher as the Fed pushed towards cuts in stimulus. They did bounce last week on the Yellen effect, but we will have to see if that last versus the stimulus cut threat? Thus, a longer term play with TBF may be in order. Watch list for Sector Rotation Model.
  11. The dollar bounced and then fell back, but holding steady. A reverse head-and-shoulder pattern on UUP shows some hope for the upside of the dollar along with the hope of the Fed following through on stimulus cuts. Watch and see how this plays out moving forward.

The models are updated and with our short term view dominating the process currently we are heavy in cash as a result of hitting stops and managing our discipline. The early selling last week followed by a move back towards the highs is the exact action that keeps us from building larger positions. We have added to the watch list. We are looking for the upside to continue as we head into the holiday season. We are still adding 1/2 position sizes with the entries hit as the risk remains elevated from our view. Manage the risk on trades more aggressively and monitor your longer term holdings with trailing stops to account for any rise in volatility.

Breaking Down the 7 Asset Classes:

As you can see on the Scatter Chart the resumption of the uptrend on November 7th is still progressing on the upside. The US markets continue to be the leader on the upside. The EAFE index has joined in mirroring the upside moves and other have been a volatile mess with the downside the trend.

Real Estate (IYR) has led the downside as interest rates rising have pushed the asset class lower. Emerging markets have bounced back off the lows, commodities are trading sideways at best with a downward bias, interest rates are in a range and watching the Fed relative to stimulus cuts, and the dollar is flat. All of this is covered in the specific asset class update below. The key is to follow the leaders and look for reversals off lows or bottoms in the others.


7 Assest Classes

1) US Equities:

Looking at our sector rotation chart below with the October 9th pivot point, the sectors have been trading in step with the index. The separation of consumer services, industrials, healthcare and financials has taken on some leadership, with technology deciding to join in last week. We got the  follow through this week to confirm the break above 1800 in the index. The downside in utilities and telecom continues as the interest rate issue comes back midweek. Energy joined the selling this week as well and that is something to watch going forward. Be patient with the move higher and let the trend dictate your actions.


2) Currency:

The dollar is drifting lower on the Yellen effect and uncertainty in stimulus. The yen made a continued move lower this week and reinforced the short yen trade with YCS. The ECB interest rate cut helped the dollar against the euro, but the euro is trading flat to the dollar for now. I am watching for the euro to gain if the cuts in stimulus don’t take place.  UUP holding near support, but watching for any renewed conviction on the upside.

The upside moves to watch this week are FXF, FXB, FXE, FXS.

The downside moves to watch this week are FXA, YCS, FXC, UUP


3)  Tracking the Bond/Fixed Income Sectors:

The sector has been pricing in a cut to stimulus for December? This is the big question mark hanging over bonds currently and one that will be addressed shortly. Yields spiked to 3.93% last week on the belief the Fed will cut stimulus in December. The 3.80% close on Friday showed some calming in the sector, but this issue won’t be over until the meeting in December. Still not a fan of owning or trading this sector currently as the noise is too loud with the approaching meeting and change in Fed Chairperson.


Treasury Bonds – TLT or IEF traded last week, but bounced, but still lack direction. No positions currently, too much volatility for my taste in owning bonds.

High Yield Bonds – HYG = 6.4% yield. Bounced off the $91.25 support and held to close back above the 200 DMA, barely. Don’t own the bonds, and I would move my stops to break even on the recent events with the Fed impacting bond prices.

Corporate Bonds – LQD = 3.9% yield. No positions currently. Volatility on yield move this week. A break above $114.85 would be interesting for a opportunity.

Municipal Bonds – MUB = 2.9% tax-free yield. No positions currently. Moving sideways for now.

Convertible Bonds – CWB = 3.6% yield. bounced off $43.75 support and $44.80 entry point. Watching the upside and volatility. This is the one bright spot in the fixed income class. Continued trek higher and put stops at $45.50. Making a move to new high? Watch.

4) Commodities – The chart below shows that commodities continue to work lower and sideways. This week natural gas (UNG) made a move off the low from last week. I like the upside move and it has been good for a short term trade. Gasoline (UGA) continues to push higher as well short term, but outside of those the downside is in play.

Commodities Rotation Chart:


DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

The global markets remain tied to the US and until things change economically that will remain true. All the country ETFs bounced along with the US move and fell with the US markets. No real leadership in the global markets except for the recent surge in China (FXI). We are looking for some separation, but until the volatility and follow the leader mentality changes I am willing to stay out.

Emerging Markets (EEM), India (PIN) and Europe (IEV) all made pivots, but looking for some upside follow through going into the new trading week.

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) – The sector has become erratic and volatile relative to tracking every rumor on interest rates and the Fed. The test of support at $63 is in play currently. As seen on the chart below not much has change in view of the leadership. HST, which is leisure properties continues to be the bright spot, but it is trading sideways. Still not interested in the sector overall. Looking for rates/yields to level out before this becomes attractive.

Real Estate IYR

7) Global Fixed Income:

Sector Summary: Bounced off the lows and trending sideways. No interest currently.

  • PAFCX – 1% dividend. Trending lower again and at the 50 DMA.
  • PICB – 3.1% dividend. 27.80 support and bounced. $28.70 entry. Hit entry and adjusted stop to the entry. zero risk trade on dividend. Negative reaction to the Fed. this is a dividend play hold the stop at break-even and see how it plays out from here.
  • EMB – 4.5% dividend yield. Looking for bottom reversal?
  • PCY – current dividend yield is 4.8%. Trading lower.

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.