Trading Notes for the Week of July 22-26th

Investors remain content to buy despite the news, GDP revisions and earnings shortfall. Google missed revenue on Thursday, opened down 4% and managed to rally back throughout the day. Microsoft on the other hand missed both revenue and earnings and fell nearly 11% on Friday. The valuation for stocks are rich in reference to the fundamental data. We have revenue stalled on most earnings which is a direct result of a 1.5% GDP. You can grow sales in a flat economy. The earnings increases are coming for cutting expenses and margins are starting to shrink. Does it matter? In time the answer is absolutely. We have to play out the Fed hand currently as they commit to providing stimulus. Track the trend and take it one day at a time.

Below I evaluate the impact and outlook for each asset class and how we want to find the opportunities for putting money to work next week.

Sector Moves of Note:

  1. The Bank ETF (KBE) and Regional Bank ETF (KRE), we discussed last week as opportunities and they came under fire from the Fed actions looking forward. They broke higher on Thursday and followed through on Friday as earnings from sector remain one of the bright spots. The test lower did offer a good entry point if you are willing to accept some short term volatility. Financials remain one of the leading sectors.
  2. Volatility (VIX) fell lower on Friday as a confirmation that the buyers are firmly in control again of the market trend. SVXY is pushing the previous high of $100 and we will continue to watch what opportunities develop going forward.
  3. Interest rates have settled again. The Bernanke and Fed comments relative to interest rates have settled in and are keeping rates in check and slightly lower for now. We added a position in IEF this week in the S&P 500 Model. Watch to see how this pans out going forward.
  4. The commodities have shifted to the upside in oil based on speculation relative to supply. Gold has bounced off the lows as buyers have been willing to step into the trade again. The direction is slightly higher and we added a position in DBC to capture the upside. Be patient as the target on crude is $120 and Gold could follow through on the upside to $137 on GLD.
  5. The global markets remain a challenge. China’s economy is questionable, Japan is volatile, Europe is not recovering, sovereign debt remains a big question mark and emerging markets can’t gain any momentum to speak of. That said we have seen some moves higher in IEV, EWC, EWJ, etc. We will continue to look for the opportunities in the global assets.
  6. The US indexes have hit new highs again? This puts the upside firmly back in play technically, but of course the speculation around the data points are still an issue. Take what the technical data shows currently as the weakness in the fundamental data is being ignored. At some point it will all matter, but for now traders are pushing the indexes higher.
  7. Don’t assume anything at this point. If the buyers were willing to step in and push the markets higher so be it, but expect the V bottom to test at some point near term. ¬†The uncertainty remains relative to direction and we remain focused on discipline versus chasing trades.

Economic Data & Outlook:

The data this week was mixed, but mostly on the positive side. Retail sales were disappointing and missed expectations. The outlook for the consumer remains challenged based on jobs, wages, rising gasoline prices and a flat leading economic indicator report. The CPI was in line, but showing a significant increase in inflation pressure at the consumer level. Gasoline got most of the blame for the increase, but there are signs of inflation picking up regardless. Housing Starts were lower than expected and higher interest rates get the blame. Has some to do with it, but the economic picture isn’t great. Empire State Index and Philly Fed Index showed solid¬†improvement in¬†manufacturing. Still a mixed picture with forecast for continued slow growth overall. Click on the link below for reports on the week.

This weeks Economic Data

Investors are focused on buying now and the future will take care of itself. There is plenty of data to digest again next week and it will have an impact (supposedly) if the numbers don’t measure up. Earnings are in play¬†and adding¬†to the pressure on the markets. The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

1) US Equities:

The June 24th pivot point is where we are watching currently as the bottom has been established along with a new high. The scatter chart below shows the current leadership. The spike higher in the telecom is a result of the Leap Wireless deal with AT&T. Financials regained the lead over the Consumer Discretionary as the Sale Report for June was disappointing. Industrials have move up nicely the last two weeks as well. Energy is back on the upside as oil price have pushed above the $108 level.  Note the decline at the end of the chart in the Technology sector thanks to missed earnings on Friday. Despite the missed revenue and earnings reports buyers have still been willing to step into stocks and maintain the uptrend. I would still expect a test of the move higher short term.

The ‘V’ bottom move has been significant and the buyers are still willing to step in and believe that Bernanke and friends are not going to make any drastic changes to stimulus and all is well in the US markets. Right or wrong that is what the markets are trading on currently. Our job is to take what it gives one day at a time and then make our changes accordingly.

June 24th Low Pivot Point

Scatter 624

The shift back to the previous trend is worth looking at the chart off the November pivot point again as a refresher of what has taken place.

November Pivot Point Low S&P 500 Index (click to enlarge the chart)

SP500

Sector Rotation of Interest:

Downside Rotation: The downside short term has reversed. The move in the technology sector on Friday has put XLK and QQQ on the downside watch list.

Sideways Trend: The bounce stalled in healthcare (nice move on Friday to watch next week), Utilities (resumed some upside), Basic Material (stalled at resistance) and Real Estate (needs to get above the 50 DMA).

Upside Rotation: The bounce off the June 24th low remains in play with financials, consumer discretionary, consumer staples and industrials. They have all pushed to new highs short term and helped the broad index higher.

Updated the S&P 500 Model & Watch List to reflect the moves this week and looking into next week’s trading. We are close to being fully invested in the model and we need manage risk accordingly as the upside slows.

2) Currency:

As seen below the dollar moved higher off the June 18th pivot point, but this week gave some back as the Fed comments towards stimulus and the markets hit the dollar. The resistance at the previous high came into play and the trend is being questioned along with Mr. Bernanke and his intent towards both interest rates and stimulus.

Currency

Sector Watch:

  • UUP¬†–¬†Hit the stop on the play and now considering UDN if the dollar fails to hold support short term ($22.30 is the level to hold).
  • FXE¬†– Reversed to the upside and fighting through some resistance. $130 was the entry point? Watch take the upside is it holds.
  • YCS¬†– Hit stop last week on the short yen play. The consolidation triangle is in play on a break lower in the yen.

3)  Tracking Bond Sectors of Interest:

Sector Summary:

The bond market overall experienced a sell off that is a direct result of the yields rising quickly. The Fed may have finally succeeded in talking bond investors in off the ledge. The rates did calm again this week on the comments from Bernanke as he attempted to explain the Fed actions and what they mean to interest rates. The Fed doesn’t want or need higher rates currently. Willing to watch for any trade opportunities as this plays out.

  • 30 Year Yield = 3.58% – down¬†6 basis points for week ¬†—¬† TLT = $108.66 up 95 cents for week.
  • 10 Year Yield = 2.49% –¬† down 11 basis point for week ¬†— IEF = $102.62 up $2.02 for week.

Treasury Bonds РThe yield on the 10 year bond found some relief again this week with a modest bounce off the low. The 30 year held its ground, but looks to bottom at the current level as the Fed talks calm to the bond market. The proof is in the yield so to speak and this is something to watch as we move forward.

High Yield Bonds РHYG = 6.7% yield. Bounced cleared resistance at $93 for upside trade. Watching to see how it progresses going forward.

Corporate Bonds РLQD = 3.8% yield. No positions currently. Bounced and hitting against resistance near $115.50?

Municipal Bonds¬†– MUB = 2.8% tax-free yield. No positions currently.¬†Bounced, was holding it’s own

Convertible Bonds РCWB = 3.6% yield. Bounced and made move above the $42.80 entry. Manage the move higher and raise stops to breakeven.

4) Commodities –¬†Sector Summary:

  • Commodity Index¬†(DBC) – The outlook for commodities remains questionable as demand is flat. The index bounced off the lows the last two weeks as oil moved higher. Looking for entry play on the upside in the ETF if it can break through the resistance.
  • Natural Gas¬†– (UNG) Bounced off the low with a double bottom pattern. Looking for the $20 level to hold as support and then a move to the upside.
  • Crude Oil¬†– (OIL) ¬†Broke higher on speculation in Egypt and other parts of the Middle East. It then continued higher as supply questions were raised on the data. Upside in play, but the vertical move it may be time to lock in some gain.
  • Gasoline¬†– (UGA) Breaking higher on oil move. Broke above the $57.80 resistance gave the entry and hasn’t looked back since. The risk of the trade has paid off nicely on the move higher. Currently built a flag pattern near the $63 resistance level.
  • Gold –¬†(GLD) Bounced and cleared the $123 level and holding for now. Upside trade? Only if the speculation grows. $125 enty for a trade up to the $130 level. Hit entry this week, but not progressing very well at this point.
  • Palladium¬†– (PALL) – Got the trade higher and looking positive after test. Added play at $66.50. Moved to resistance at $73.70. The stop would now be $70.70 on shares to protect the gain.

Commodities Rotation Chart:

You can see OIL is accelerating higher along with gasoline (UGA) and Palladium (PALL). Others are rotating down or moving sideways currently on the chart.

Commodity

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

5) Global Markets: 

Global markets shifted from the downside on June 24th along with the US markets, but the move has been weaker than the US. EWC, EWJ and IEV are the leaders for the EAFE index. RBL and PIN have made solid moves off the July 10th low for the ETF.

The chart below shows the sideways movement in play.

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.

Country Watch:

  • IEV– Moved above resistance at the $40.50 level and continued above the 50 DMA. Watch as upside is in play.
  • EWC – Big bounce off the double bottom low and now breaking through $27.80 resistance to continue the upside.
  • EWJ¬†– The upside move from the country is accompanied by volatility, but I like the trade up to $12.30 target.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke down and is still looking for a bottom. There was a small bounce this week off the lows, but there is still plenty of work to do before the upside looks attractive. Be patient with the sector. If you like to trade there is opportunities to trade the sectors short term swings.

Sector Summary:

  • IYR – Found support and moved back above the $68.70 resistance this week. Will it make the move higher? It is worth watching and we added a position if positive momentum does return to the sector. Short term oversold and if interest rates level look for money flow to pick up in the sector.
  • RWO –¬†SPDR Global Real Estate ETF¬†– $44 resistance at the $50 DMA currently. Breaks higher worth adding a position.
  • MDIV –¬†First Trust Multi- Asset Income ETF¬†is a good alternative to picking through all the choices of income funds. This multi-assets income fund pays a 5% dividend. Made similar move to the REITs and upside may be in play again short term. $21.70 resistance and move higher?

7) Global Fixed Income:

Sector Summary: Downtrend in play and uninterested in the sector currently.  We will continue to watch for the next opportunity, but for now no positions.

  • Watching these funds for a bottom.
  • PAFCX – Spike to the downside. Attempting to bottom? Bounced, but still suspect currently. $11.30 the level to clear.
  • PICB – 3.1% dividend. Bounced off the low and building a trading opportunity at $28.30.
  • EMB – 4.3% dividend yield. Bounced off the low, but no reason to own currently.
  • PCY – current dividend yield is 4.8%. Bounced off the low, but no reason to own currently. $27.95 level to clear.

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.¬†