Ten Things of Importance for Our Portfolios

January closes on the downside with all the major indexes in the red. The worries relative to the emerging markets have been the headline the last two weeks. The challenge is indirectly related to the Federal Reserve cutting stimulus. The perception is a stronger dollar will impact these markets. Whatever the rationale or justification for the current volatility it has resulted in a modest downside and choppy markets. The worries go beyond the headlines and fall all the way to each individual investor or portfolio manager on Wall Street. We all have our own opinions and forecasts as to what we believe is driving the markets in the current microtrend and place trades accordingly. The key is to be focused on what you believe and trade it relative to what the market does. Be humble enough to admit if you are wrong versus taking big losses as a result of wanting to be right versus disciplined.

Below I have outlined ten things of importance for our portfolio looking forward. Each is based on what is in the media, the charts, the fundamentals and my notes. The objective is to give you some guidance, but also food for thought. Each offers some opportunity if it develops moving forward. Trading, from my view, is all about ideas that create opportunities both short and long term. I am not a prophet and I don’t have a crystal ball for predicting what will take place in the markets, what I do have is a strategy to capture ideas, put my money to work in those ideas, if they work make money and exit with manageable losses if they don’t. The ultimate decision making factor… the market. Therefore, discipline plays a key role in being successful at putting your money at risk in volatile markets.

  1. The buyers are still engaged. Albeit they don’t have huge conviction, but they have still been willing to step in at support and buy. Friday showed the buyers come in after a very negative open and pushed the major indexes back to break-even or positive until the last hour of trading. Another sing is $10.2 billion flowed into equity mutual funds to end the week of January 29th, according to Thompson Reuters. Until the buyers are unwilling to step in and hold up the markets we have to respect there position.
  2. The sellers are alive and well. Three of the highest volume days in January were on selling, not buying. Thus, the decline in the indexes as a result during the month. As stated in number one, the buyers have been willing to step in at key support levels, but the bigger question is for now long? If all the worries grow in belief, the sellers will take control from the buyers and establish a new trend short term.
  3. S&P 500 Index is holding support at the 1775 mark. It is still above the 100 day moving average and sitting on the up trendline off the November 2012 lows. Thus, the intermediate trend is in jeopardy of being broken. From my view that would embolden the sellers, giving them the upper hand short term as stated in number two. I would use this index as an indicator of the trend.
  4. The buyers are still counting on the upside growth being fed by continued stock buybacks, more mergers and acquisitions, IPOs and capital expenditures. The one glaring element missing from this list is revenue growth due to economic expansion of the consumer. The argument put forth sounds good as a news clip on TV, but the reality is, it is getting harder to produce. Thus, the buyers are hoping for a continuation of what got us to this point over the last 18+ months. If they are right the next leg higher will be easily identified in earnings and financial filings. Pay attention to the data points moving forward.
  5. Europe was prophesied as the winner for 2014. It started out okay, but has now retreated to the key support level tracking once again with the US markets. I am not against Europe, but looking at the data, it doesn’t support the wishful thinking of the analyst pounding this drum. $44.61 on IEV is the key level to hold. The key factor to Europe on the surface is China. If China gets their act together Europe will benefit. If they continue to struggle it is not good for Europe. For now… as the US markets go… so goes Europe.
  6. Earnings are still the key from my perspective looking forward, in other words guidance. Hitting their numbers is important as seen in the case of Facebook. Missing as seen with Apple is not good. However, The real plus in Facebook’s numbers was the guidance. The real downer in Apple’s case was the guidance. Remember stocks prices trade looking forward, economic data  reports looking back. It is clarity of the outlook that matters the most in the numbers in this type of market environment. If the ISM manufacturing data on Monday is bad… that is two consecutive months of retraction in growth. The prognosis will turn negative. A negative outlook in manufacturing will impact the guidance in stocks from that sector of the economy. Thus, the domino effect of data. January’s economic reports will have added weight due to the weaker numbers in December. Throw earnings guidance on top and you could build a case for the sellers to continue to take the broad markets lower.
  7. Volatility Index points to uncertainty to confirm what we are seeing in the numbers. A simple rule of thumb is for a reversal in selling (buyers gain momentum) to have a chance the index needs to reverse three points off the high. That would put the VIX at 15-16 currently. It closed at 18.6 on Friday and held up all of last week. This is just one of the indicators to watch and is not a guarantee to predict anything, just another part of the puzzle.
  8. Telecom price wars are starting to hit full stride. AT&T announced Friday they would reduce their price plans for phones. T-Mobile started the price wars and they are heating up. This is not good for the margins in the sector and that will adjust earnings projections going forward. Yes, you have to factor in acquisition cost of customers, but the life-cycle of those customers are becoming shorter with a short contract duration. Anyway you cut it, the outlook in the sector is not getting brighter. The winner will likely be the consumer and the parts manufacturers. The tower providers could stand to win as well with the higher usage. The biggest concern is saturation in the mobile phone market with estimates approaching 70% of phones are now “smart” phones. A weaker consumer is only driving this activity faster. See number ten below.
  9. Money rotation to defensive sectors. Utilities (XLU) broke through $38.86 resistance and confirm the reversal off the last low in December. REITs (IYR) have cleared the next level of resistance at $64.75 and keeping the uptrend off the December low in play. Treasury Bonds (TLT) has pushed back to the 200 DMA and the October high. The point being money is seeking some degree of safety short term. If this accelerates the pressure will be on the downside for the higher risk sectors of stocks.
  10. The consumer is contracting, not expanding. A look at XRT shows the damage from the holiday sales period. The decline of 10.3% has broken below the 200 DMA with the 10 DMA close to moving below the 200. Jobs are the primary challenge (my view) and stagnate income is the second. We are not creating quality jobs, we are creating part-time jobs. Any wonder why the White House wants to raise minimum wage? The regulations, taxes, and welfare created over the last five years are choking the economy. Job expansion comes from small business not conglomerates. Expansion comes from new technology. Look at the energy sector for a simple example. Jobs are being added with the expansion in drilling processes and renewable energy technology. Solar is expanding and creating opportunities, etc. When the focus shifts from giving out handouts to creating new businesses we will see this trend reverse, but not until.

I want to restate that I am not making predictions in this outline, but merely looking for opportunities and  a disciplined method to capture the resulting move. In each point above there is a sector that is impacted good or bad. The follow through in those sectors, good or bad, creates and investment opportunity. Scanning and following market movements without actionable ideas results in missed opportunities for your portfolio. Build a watch list based on your ideas and beliefs and then track how to benefit from the resulting moves. Be disciplined and focused as you navigate the choppy waters that are the market.