Trading Notes for Week Starting September 30th

Another week of trading in the books as confusion and frustration levels rise for investors. The headlines have been full of talk as if the current selling was a fire burning down the markets. The indexes dropped 1% on the S&P 500, 1.25% on the Dow, and 0.2% for the NASDAQ. That isn’t really on my scale of selling. If you add the push from the previous week on the downside it looks somewhat worse, but not really. this is a test of the move off the August 27th lows and until it accelerates on the downside we continue to see an upward bias with the buyers still willing to step in. It is okay to speculate about what you think will happen looking forward, you just have to maintain the willingness to allow the market to validate your speculation as true.

As we look towards next weeks trading we have to be mindful of all that is on tap! The budget approval on Monday at the latest. If it doesn’t come over the weekend the deadline is midnight Monday or a shutdown of the government. Throw in the debt ceiling arguments and that adds worry to stocks. Then there is the Fed issues relative to stimulus that will not go away. But, it is equally important to understand that those are outside market events. They have temporary impact on the markets until the reality is revealed over time. Then there is the economic onslaught that starts on Tuesday along with the jobs report on Friday… all assuming the government is still operating on a temporary budget. All said, busy week with fun for everyone.

We have maintained a high cash allocation on the current uncertainty as a result of hitting our stops. You don’t want to force trades, you want to invest based on your strategy. If nothing fits or the choppy markets aren’t worth the risk… play golf, fish, travel, anything other than beat your head against the market.¬†Stay focused and disciplined towards managing your money and your risk.

Sector and Model Notes:

  1. Looking at the Scatter graph below of the S&P 500 index starting at the bounce off the August 27th low as the trend peaked and established a new pivot point on September 18th currently in play as a potential trend reversal. As we have discussed for a trend reversal to take place there has to be plenty of conviction from the sellers. To this point we have not seen that evolved. This has been a slow an methodical progression on the downside. Nonetheless, it is important to track the shifts in leadership and potential opportunities that each may bring. Below address the sector worth watching in the coming week of trading.
  2. Two of the sectors reversed their selling to bounce and turn sideways:
  3. Consumer Discretionary (XLY) the pale yellow line on the chart showed a bounce on the 25th and held the move on Friday to position itself as a potential leader if we are to bounce next week. This will be on my watch list for the week for potential upside. The ability to hold near the 10 DMA is key for the sector short term as a leader. The sector as a whole has leaders from each of the sub-components coming together to hold the trendline. Watching NKE, WPO, GCI, PETM, DISCA, TWX, BBBY, WYNN… plenty of positives in the leaders currently and some positive pattern setups if the upside continues next week in the sector.
  4. Telecom (IYZ) pale purple line on the chart also attempted to move higher, but gave back most of the move on Friday. Still worth our attention heading into the week of trading. Trading range is still in play and looking for a move above $28. Small caps are leading the sector with SHEN, USM, NTLS making moves higher. Watch TDS, SBAC, CCI, LVLT on the upside as well.
  5. Looking at the chart the following sector accelerated lower:
  6. Healthecare (XLV) orange line shows a move below the index or an acceleration on the downside. That is a negative for one of leaders and could add to the downside pressure if the move continues. Looking at the chart of XLV you see the 50 DMA holding to end the week and will be a key area of support next week. It is important to note the uptrend is still in play and currently this is a test of the recent highs as we have not established a lower low. IHF – the providers is attempting to hold the $87.15 level of support, this has been the weakest sub-sector. IBB – biotech has been the leader and bounce off $206 ish support and is worth watching for leadership if the sector is to hold and recover the uptrend. Watch the moves in REGN, ALXN, CELG, CERN, ACT on the upside.
  7. Financials (XLF) green line also accelerated lower and below the index line (white). This was also a leader and now is leading the downside move.   The $20 mark is holding, but the sellers still look ready to push the index lower. We added a position in SKF in the ONLY ETF Model last week. Banks (KBE) is the weak link as the noise of lawsuits from the government, intervention of the Fed with new stress tests and quality of paper on their balance sheets (regulations), etc. Watching the downside as these issues have built up the negative sentiment in the sector again. Watch the move in GNW, NDAQ, CME, PGR, AON, CB on the upside. MS, C, BAC, GS on the downside as they accelerate in selling.
  8. Basic Materials (XLB) red line accelerated lower, but avoided crossing below the index, but still showed a negative trend. The move below $42.30 was a negative on Friday. Broke the 10 DMA and is holding above the 20 DMA. Miners are pulling the sector down while the Agg and equipment industries are holding the upside. Need to hold support for the broader index to resume the upside. Watch CF, MWV, ARG, LYB, FMC on the upside.
  9. The weekend video post addresses the balance of the moves being sideways. Other sectors of interest are covered below.
  10. Interest rates fell to 3.68% and the bond rallied above resistance (TLT). The ten year yield fell to 2.61%. The pressure from the Fed to keep interest rates low is back with the non-action on the stimulus at the FOMC meeting. This activity is something we need to watch going forward. A rotation to bonds would impact stocks and the psyche of the investor looking forward.
  11. Commodities are struggling and that is not really a surprise when you look at the stocks market in comparison. Until we gain some clarity relative to the Fed actions going forward, expect more volatility in the sector. Crude has dropped to the $102.50 support level for now. Still looking for a move to the $98 level.
  12. Volatility index tested support last week and bounced to close the week at 15.4. The slow grind lower on the week was interesting and the spike in volatility on Friday left some concerned about the coming week of trading. Put VXX in play and locked in our profit on the SVXY trade in the S&P 500 model.
  13. Plenty to watch as we head into next week. Economic data, the start of earnings, the Fed talk, Debt talks and worries around stocks. One day at a time with a disciplined strategy in place. Don’t force any trades and let this set up the next opportunity… up or down.

Economic Data & Outlook:

The data released last week as again mixed as we stated in the nightly updates. Nothing overtly negative, but then nothing overly exciting. The real story is next week with the continuation of the new data for September. Did the third quarter continue to grow as July and August posted? If so, it could offer some upside catalyst to the markets depending on the puppets in Washington and the debt ceiling debate. It all promises to be interesting.

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 still in play as the uptrend with the higher highs and higher lows. In fact, the current trend goes back to the November 2012 lows and remains intact. Thus, all the talk about the current selling off the September 18th high is nothing more than a pullback in that trend.

624 Scatter

Below is the current pivot point on August 18th. As discussed above the shift in financials, healthcare and consumer staples is important to watch going into next weeks trading. Remember that pivot points are potential changes in the current trend. They take a shift in sentiment to follow through and become a new trend. Thus, many of these pivot point become nothing more than a short term trading opportunity within the major trend of the market. They are visual way of interpreting what is taking place short term relative to the longer term outlook.

918 scatter

2) Currency:

The dollar got crushed by the Fed stimulus addiction and the outlook isn’t improving as the dollar has flat-lined.

The other currencies have flat-lined as well and we will watch to see how this plays our short term. No purchases in the sector currently and still looking for a defining move short term.


3)  Tracking the Bond Sectors:

Sector Summary:

The bond market continues to an impact from the downside in yields. It has given some trading opportunities, but not much more. We still need evidence that yields will hold at these lower levels moving forward and that is nothing more than speculation at this point. Be patient and let this opportunity develop.


Treasury Bonds РTLT or IEF potential trade on the upside as this sorts out. Broke above resistance on TLT as trade opportunity to watch.

High Yield Bonds РHYG = 6.4% yield. Jumped above the $91.50 for trade, but working on giving back the gains as stocks drop this week. No plays and still watching.

Corporate Bonds РLQD = 3.9% yield. No positions currently. Attempting to break above resistance at the $113.50 for opportunity on the upside. Not willing to make that bet currently.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. The $104 level was a possible entry point for a dividend play longer term. No holding currently.

Convertible Bonds РCWB = 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. Stop at $45 on the trade.

***Fixed annuities have finally returned to the 3% guarantee mark (five years). The best five year CD currently is 2.1%. As these yields grow they will attract more money. I view that as a positive for stability in the markets overall.

4) Commodities –¬†The shift in the sector was lower on August 28th and it has continued the slow progression to the downside since. There is not leadership and nothing to venture into other than trades on news. There is no sustainable trend currently in play and thus we are unwilling to take any speculative risk.

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. The chart below shows the shift in trend on August 30th, but not much to really show for the move. It has been a nice trade, but that is flattening out on worries about the US. This remains a trading asset class for now. Germany is on watch this week as a potential upside play (EWG).

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.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector bounced on the Fed decision and has tested back on the concerns in the markets overall.  Too much noise and not worthe risk. We tried to trade the sector, but were stopped out of our trades. Still willing to watch and see how this unfolds short term.

Sector Summary:

  • IYR¬†– Found a bottom? Current dividend is 4%. No positions.
  • RWO¬†–¬†SPDR Global Real Estate ETF¬†– Trended lower and bounced off support near the $40 mark. Some resistance at the 50 day moving average. Dividend is currently 4.7%.

7) Global Fixed Income:

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

  • PAFCX – 1% dividend. Trending lower, but bounced off the $10.80 mark and going higher now. $11.20 entry point on upside play.
  • PICB – 3.1% dividend. 27.80 support and bounce above $28.70 trade opportunity. Hit entry this week adjust stop to even.
  • EMB – 4.5% dividend yield. Bounced with the Fed decision. Testing with the emerging markets moving lower this week.
  • PCY – current dividend yield is 4.8%. Possible trade above the $27.70 level.

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.¬†