Trading Notes for Today, July 31st

Notes from Wednesday’s Trading:¬†

The morning headlines state that Argentina could not reach a compromise on their debt and will default on the bonds. The impact will be of interest to the markets both short and long term. Worth keeping on you radar for the emerging markets and Latin America funds.

GDP is 4% and in line with the Feds expectations for second quarter. Is it me or did the announcement of the GDP just happen to be on the same day as the FOMC meeting? And what about the number being exact to the Feds estimate? Interesting how that all happened in perfect harmony. Okay I am sure there is a perfectly good reason for all that to take place now. Large ticket items and business investment were the two drivers for the growth in Q2. The negatives were a rise in spending on inventory and government spending.  The additional positive was the Q3 and Q4 estimates have been revised higher to 3% growth. Jobs, investing and spending are the reasons for the increased growth outlook. Bottom line, optimism from all, and I hope they are all right.

FOMC meeting ends with similar results… no changes in rates and full speed ahead to cut stimulus to zero by October. The next thing will be the minutes from the meeting on August 20th. Will they give better insight into the language and outlook for the economy? That will be interesting as it unfolds, but for now no real impact from the meeting on the financials markets.

The reaction to the good news is the concern. Why the give back in gains on the day? What is the worry? Inventories made up nearly one-half of the GDP gains and sales were not great increasing only 2.3% for the quarter. The further you dig into the report of how we got to the 4% gain the more worrisome some analyst became. Pressure will be going forward to maintain growth above 3%. Thus, reality meets expectations and the result usually creates some selling. Watch how this unfolds and manage your risk accordingly.

We remain positively cautious. One day at a time remains the mantra.

Sector Notes: 

  • Treasury Bonds (TLT),¬†nine basis point pop in rates keeps everyone watching for now. TBT is back on the watch list with solid move higher on Wednesday. It is important to note that bond mutual fund managers are raising their short term cash positions as concerns over yields versus the Feds actions on rates are worrisome. The speculation in the sector continue to find news ways to worry bond investors.
  • China (FXI) had a nice run higher over the last week plus.¬†We closed negative last night after a positive open for second day. The upside is still in play, but depending on your outlook you have to manage your risk. The EGG hit the stop as it is a trade. However, the upside is still worth watching and trading should we test lower and bounce. Watch for the next opportunity.
  • Energy (XLE) back to the bottom of the range as crude remains a challenge moving towards the $100 support mark on Wednesday.
  • Gold¬†drops back to the 50¬†DMA and¬†speculation is running the price up and¬†down. no clear direction in the metal and not interested for now.
  • Natural gas (UNG) inventory is building and the drop in price is reflecting the concerns in the build up. Downside is getting entrenched short term.¬†Watch to see if a reversal sets up or not?
  • Transports (IYT) hit new¬†highs¬†last week and starts the week with two days of selling? Is this another sign in favor of the correction headline? Watching to see if the trend holds on the upside and the 50 DMA is coming into play.¬†Still positive trend in play watch the response to the last two days of trading.
  • Small Caps (IWM) are the weak link as the index tested below the 200 DMA again. The rotation from growth to value is still the question. Downside back on Friday and Monday. Watch as the short trade may set up again (TZA).
  • Retail (XRT) broke support at $84.50¬†to end the week. Does this signal more selling to come? Small loss on Monday and we are watching to see how this unfolds short term.

Practice patience and let this new chapter of the markets story unfold. SEE EGG Scan Page for more sectors to watch short term trades.

Market Story & Outlook:
Current Story of the market still involves uncertainty looking forward¬†and the second quarter results from both economic¬†data reports and earnings have been a positive influence on the markets. The broad indexes have made a statement that investors believe the Fed is correct in their assumptions relative to growth forecasts. Albeit there were outside market events to deal with this past few week, but the buyers believe growth is building in the US economy and they continue to buy on the dips. The sellers¬†continue to¬†believe the market is stuck in a 1-2% growth cycle and not much is changing relative to the outlook for growth.¬†The¬†Fed forecast for the second quarter of 4% isn’t looking to line up with the current data releases. The test will come with the Wednesday FOMC results and minutes. The buyers and sellers continue the tug-o-war of who is right as seen on the charts. The current choppy markets are a result of the growing debate. The bolder the sellers become the bigger the volatility will be day to day. The longer term trend remains on the upside currently.
The second phase of the story line is bond yields which were believed to rise this year as the Fed tapered (cut stimulus) and the economic growth improved. The yields at the¬†start the year on the thirty-year bond were 3.94%. They moved to a low of 3.22% currently. We can lay some blame a the feet of the geopolitical risk, but that is transient in its effect. Despite the stronger jobs report and outlook on employment rates remain near their lows for the year.¬†The Fed has remained committed to low interest rates thus keeping¬†the yields low. The big question for now… will the Fed actually follow through on the extinction of QE by October? And, does the economic growth validate the need to raise rates moving forward sooner? The FOMC meeting will shed some light on Wednesday. Phase two remains a talking point which has not produced changes yet to a¬†point of market disturbance. We, like the rest of the world, will watch and see how this unfolds.

The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data was not good overall in real data growth. However, the spin by analyst kept investors looking forward not back. The rate of decline in earnings is the primary concern from my view. The focus from the media is the number of companies that beat expectations, but the rate of growth in earnings will determine the rate of growth in stocks looking forward. The quarter is over, the reports are coming in and thus far most have been positive. Earning growth for Q2 is 8.7 versus 2.2% in Q1 to this point. The increase is positive and in line with expectations. The big question mark remains looking forward. Sustainable growth in earnings relative to slow economic growth. All questions about the economy remain in play for the near term.

This all adds up to worry as it relates to a lack of clarity and the belief. The underlying concerns have not been removed or dealt with and if anything they were brought to life the last three weeks. The next phase of reports have begun. Investors are showing signs of caution as money rotates to lower risk asset classes and sectors. The data remains worrisome relative to the Fed hiking interest rates, weaker global economies than expected, inflation talk is making its way into the conversation, and the growing geopolitical risks around the world. Throw in issues impacting oil prices and the trickle down effect to the consumer, and there is plenty to worry about going forward. As we always say and attempt to do, take what the market gives and protect the downside risk of your portfolio. Patience and discipline are key to success long term.


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

Sector Rotation Model (updated Р7/30/14)

ONLY ETF Model (updated Р7/30/14)

S&P 500 Index Model (Updated Р7/30/14)

ONE EGG Model (updated Р7/30/14)

Trade Opportunities:

  1. IWM – entry $114. bottom reversal. technically oversold and in position to move higher if the broad markets trend higher.
  2. INTC – entry $34.40. gap higher consolidation and continuation. Semiconductors have sold off 7% and upside bounce on tap.
  3. QID – entry $47. bottom reversal. Volatility in the index has been slowly rising the last week and concerns in the large caps are rising as well. Hedge for other positions.

Pattern Trade Tracking & Follow Up:

  1. JO – entry $34.80. Bottom reversal. Breaking the downtrend line off the April high and looking for upside follow through. I like the outlook. Stop $34
  2. CLF – entry 16.20. Trading range. The bottom reversal has been consolidating the last three weeks and looking for a clear break higher. Stop $16.
  3. QID – entry $46.88. Bottom reversal. The break lower in the semiconductors is a negative for the index and earnings from Amazon will impact the index today. Watch for downside trade as NASDAQ looks toppy. Stop $46.50.
  4. EMB –¬†entry $116. Ascending triangle. New high and outlook is good for the sector currently. Stop $115.30.
  5. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
  6. SCTY – entry $66.50 . Test upside breakout. the support is being tested on the move higher in June. Upside trade setup is positive. Stop $66.
  7. DBB РEntry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside.  Stop 17.50.

NOTE: The pattern trades above are setups that I see for a potential swing trade or short term trade opportunities. Some will fail to follow through on the pattern, some will break and trade according to the pattern. The key is to use discipline in the trades. Entry, Exit and Target on all trades is vital. I am posting these as opportunities that I see when doing scans daily. You can use them as a teaching tool or you can trade them, either way please use discipline. The best way to treat these as a learning tool is to assume a $100,000 portfolio and each positions receives a 5% allocation. If we state to take a 1/2 position as an example you would only allocate 2.5% to that position. I would use a downside risk of $500 per trade as a maximum loss. That will help  you learn position sizing and risk management. All investing comes with risk. Our job as investors is to manage the risk. Keep your focus and discipline in place.

Facebook (FB) Update: (see Facebook research page for archive of posts)

  • 5/27 – Moved above the $60 mark and held… looking for a trade opportunity on the upside. $63.50 next level of resistance for the stock.
  • 5/29 – Add 500 at $63.55 follow through today. Added the shares and set the stop at $61.30.
  • 6/6 – See above on pattern breakout to add to existing position. Add additional 500 shares.
  • 6/10 – Adding shares today on the move higher in pre-market. Added 500 @ $64.20 on Tuesday. News of Facebook adding the President of PayPal to staff prompted investors off the sideline on the idea. Watch and manage the risk after the euphoria evaporates.
  • 7/11 – Added the position back of 1000 shares at $65.15. Upside opportunity is still in play.
  • 7/22 – Raise stop to $67.80. Earnings are tomorrow…. it will be interesting, but based on research all is positive unless their is dirt under the rug somewhere. I still like the longer term outlook for the company.
  • 7/24 – Positive earnings news and trading higher after hours. We will adjust the stop higher today based on how this unfolds in trading. On Options trades use the stock price as exit point. Move stop to $73.90.
  • 7/29 – Stop hit on selling Tuesday. Watch how Twitter announcement impacts the stock today. Upside is still in play and it we fill the gap left on earnings it will provide an opportunity to buy the shares back.