Trading Notes for Week of July 29 – August 2

The market sets up for a test, but never makes it to the downside. Friday opened lower, but by the close the buyers were back to the practice of buying. The sellers are not willing to to take a firm stand just yet and that leaves the buyers still in control of the the direction for now. Amazon is the perfect example of the buyers being willing to step in and buy even with bad news. They missed earnings, but it was rationalized by the emphasis of investing in infrastructure and the stock rose 2.8% on the day? Plenty of issues are facing the market, but the momentum remains with the buyers.

How do we deal with it relative to our portfolio? Follow the trend until it is not the trend. Despite the attempts to sell last week the buyers were still willing to step in and put money to work again. Take what the market gives and remain focused on the objective. Manage your stops and determine your exit and entry points cautiously.

There is plenty to cover this week as earnings continue, but the economic reports for July begin. Jobs, ISM manufacturing, FOMC meeting, construction spending and personal income are all out this week. It promises to be informational if nothing else.

Sector and Model Notes:

  1. Technology got my attention this week as the earnings reports were weaker on earnings side, but revenue was slightly better. Some stocks fared better than others, but watch XLK as we start the week. It is holding support on the 50 DMA on the current test of the move off the June 24th low. Semiconductors (SMH) moved lower and tested support at the $37.85 mark. Look for a bounce off this level for a bounce trade.
  2. The Bank ETF (KBE) moved lower to end the week and are worth watching as well. If they test back toward the $30.30 mark worth adding to portfolio. Financials (XLF) are testing the move higher as well.
  3. Emerging Markets (EEM) set up to move above resistance last week, but failed to make the move. A definitive move above the $39.95 level is what we are looking for short term as a trading opportunity on the upside.
  4. The global markets remain a challenge. China bounced on news about the governments commitment to stimulus if needs to add to the system for growth. GXC $68.30 breakout is trade on the upside.
  5. Healthcare (XLV) bounced back from mild selling led by pharma stocks (XPH) and broke to a new high on Friday. IHI, IHF, IBB and XBI are in position to move higher. Watch to see how they unfold to start the week.
  6. We were watching the short play on the NASDAQ 100 for the EGG Model and despite the negative news the index never sold off. In fact, QQQ made a positive move on Friday that shows a potential buying opportunity.
  7. Miners made a solid move higher on the move in the metals last week. GDX, SIL, XME all pushed to the upside. They will need to follow through to validate a trade on the upside for me, but they are worth watching going forward.
  8. 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 again mixed, the existing home sales fell short and the new home sales beat. The housing sector moved lower as earnings reports show the pressure on home prices relative to labor and material costs. Higher interest rates could slow the rate of sales short term. Durable goods orders were improved on airplane sales and consumer sentiment was better than expected. The challenge remains growth or lack thereof. Oil prices calmed some this week, but remain high and could impact the consumer moving forward. Jobless claims were in line, but still no marked improvement in the jobs data and we have the jobs report out on Friday.

Investors are focused on buying now and are looking for improvement into the second half of the year. Time will tell if that happens as July comes to a close and we get are first view of how the last half of the year will start. Plenty of reports out next week to mix with the earnings. The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

1) US Equities:

The S&P 500 index ended the week exactly where it started with some volatility from economic data and earnings disappointments. The index remains near the highs, but as seen in the scatter graphs below the leadership is moving sideways to down. Thus, my comments on a test or pullback in the index overall. The index itself remains the best risk/reward currently versus the the sectors. That is why we say take what the market gives and keep moving forward.

The June 24th pivot point is where we are watching currently as the bottom has been established along with a new high. Lasting rallies tend to have significant leadership with a defined rationale behind it. What we are looking at is broad movement with all the sectors in tow. There is nothing wrong with making money in the index until which time there is separation or defined leadership of the market overall.

June 24th Low Pivot Point

500 Scatter Rot

The shift back to the previous trend is worth looking at the chart off the November pivot point again as a refresher of what is in play currently. Note the previous leadership from financials and consumer discretionary is back in play.

November Pivot Point Low (click to enlarge the chart)

10 Sectors

Sector Rotation of Interest:

Downside Rotation: The downside short term has shifted, but we technology adjusted along with industrials on earnings data. They are on my downside watch. A significant shift in direction for technology would be a significant detraction to the current uptrend in play.

Sideways Trend: The last week this would define the entire market looking at the chart above. Now is a good time to be patient and let the clarity develop along with some conviction about direction.

Upside Rotation: The bounce off the June 24th low remains in play with financials, consumer discretionary, healthcare, etc. leading the upside. They have all reversed short term to push the broad index higher.

The S&P 500 Model: We remain 90% invested and watching the volatility short term for further indications of direction from investors. One day at a time as move forward as we adjust and manage our short term risk in light of the overall objective.

2) Currency:

The dollar made a new high on July 9th and has been lagging the rest of the world with a move lower. The Krona, Franc and the Euro have been leading relative to currency. The Yen jumped on Friday, but the outlook short term is for a lower dollar thanks to our friends at the Fed. Short the dollar was definitely the better play over the last two weeks.

currency

Sector Watch:

  • UUP¬†– We didn’t post a short trade on the dollar, but the downside is in play short term.
  • EUO¬†– The long euro trade has been well defined with the move back above the 50 DMA
  • YCS¬†– The long yen trade is setting up with a break higher on Friday. Watch the upside play with an entry near the $99.50 level. Don’t chase the entry let it come to you.

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 has spent the last two weeks talking about the stimulus and yields have settled into a trading range of 3.5-3.7% on the 30 year bond. Watch and let this settle before taking any long positions in bonds short term.

  • 30 Year Yield = 3.61% – down 3 basis points for week ¬†—¬† TLT = $108.14 up 42 cents for week.
  • 10 Year Yield = 2.56% –¬† down 4 basis point for week ¬†— IEF = $102.17 up $1.61 for week.

Treasury Bonds РThe yield on the 10 year bond found some relief with a modest bounce off the low. $102.75 is the resistance for the bond on the upside.

High Yield Bonds РHYG = 6.7% yield. Tested the bounce $92.30 support held? Watch for trade opportunity.

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

Municipal Bonds РMUB = 2.8% tax-free yield. No positions currently. Detroit bankruptcy is impacting the sector short term.

Convertible Bonds РCWB = 3.6% yield. Bounced and made move above the $42.80 entry. Manage the move higher. Raise the stop to $44.10.

4) Commodities –¬†Sector Summary:

  • Commodity Index¬†(DBC) – The outlook for commodities remains suspect at best. Hit resistance at $26.30 and no looking good short term. The downside may be back for now.
  • Natural Gas¬†– (UNG) Testing support at $18.85 for now. Watch to see if a short play is in order?
  • Crude Oil¬†– (OIL) ¬†Broke higher on speculation in global demand. Testing lower again and at support near $24.40. short play may be of interest if the test move lower.
  • Gasoline¬†– (UGA) Testing along with oil. $61.50 support? Watch the downside risk.
  • Gold –¬†(GLD) Bounced and cleared the $123 level and followed through with a gap higher on Monday. Upside trade? Only if the speculation grows. $125 entry for a trade up to the $137 level as a target short term.
  • Palladium¬†– (PALL) – Got the trade higher and looking positive after test on Friday. Added play and would add to the trade if breaks above the $68 level. Moved above $68 to add to the trade. The stop was raised to $71.90 and hit on Friday with the selling.

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 have been attempting to follow the US markets off the June 24th pivot point. The gains have been slow in coming, but Europe has made a nice steady move to the upside. Since the July 10th low the move has been clearer for Brazil, Australia, China, Canada and the Emerging Markets. We are still taking it slow in the global arena short term. Remain disciplined as the volatility is still present.

Japan (EWJ) has been volatile as seen on the chart it was leading, but reversed this week selling lower. We hit our stops on positions.

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.

Country Watch:

  • FXI– Attempting to break above the 50 DMA and continue the move off the July 3rd low. Watch for trade opportunity.
  • EEM¬†– Emerging markets are attempting to break above resistance at the $40 level short term.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke down and bounced with the markets off the June 24th low. Sitting on the 200 DMA as support currently. If we hold and bounce maybe there will be some upside opportunity, but interest rates are the driving factor short term. Watch and be patient here.

Sector Summary:

  • IYR – Found support and moved back above the $68.70 resistance last week only to test lower again. Will it make the move higher? It is worth watching and taking a small position if positive momentum does return to the sector.
  • RWO –¬†SPDR Global Real Estate ETF¬†– Looks just like IYR currently on the chart. Move above $43.50 and hold is of interest.
  • 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.

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?
  • PICB – 3.1% dividend. No reason to own currently. Formed bottom, watch for move above the 28.60 resistance.
  • EMB – 4.3% dividend yield. Bounced off the low, high risk trace, but moving higher in steps.
  • PCY – current dividend yield is 4.8%. Bounced off the low, move above $30 could get interesting.

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.¬†