Updated Trading Notes from Weekend Update (7/28)

Notes from Friday’s Trading: 

From Weekly Outlook:

What is driving the markets? News, events, earnings and speculation simply put. I know that sounds trite and simplistic, but the reality remains that each one had it’s impact on the markets, sectors, stocks or investor psyche all week. The homebuilders (ITB) have declined nearly 5% the last two trading days as the new home sales were well below expectation for June and the May data was revised significantly lower. Yet, Chipotle Mexican Grill jumped more than 13% the last two days on better than expected earnings and margins. My point simply stated is that movement is directly tied to a specific news, events, earnings, etc. versus a trending sentiment based on clarity in direction. The shift started three weeks ago from trending to the current event driven movement. That creates choppy markets and uncertainty relative to short term trading. That translates to the need for discipline and patience. It also comes with the need to understand that cash is a sector and one utilized effectively.

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

Sector Notes: 

  • Treasury Bonds (TLT) closed at a new high for 2014… wasn’t this supposed to be falling and rates rising? At some point we either believe the economic outlook or we don’t and until their is clarity money is buying bonds. Watch and see if the continues.
  • China (FXI) runaway gap for third day and new high for year as country ETF finally breaks higher. This is the EGG currently and managing the upside.
  • Energy bounced from trading at the bottom of the current range moved back to the top, but could hold the move on Friday with a test lower again. Sentiment has not been strong as the sideways consolidation continues. The sector attempted to break higher from the range on Thursday, but failed to do so. The challenge remains the price of crude and the outlook for demand. Inventory and global data are pointing to higher demand, but now there not as many believers. Buy on the rumor and sell on the news? Watching to see how this unfolds.
  • Gold drops back to the 200 DMA and speculation return to bounce 1% on Friday. Still not a healthy chart nor is the data overly confident. Watching for now.
  • Oil sold again to $101 and held, but it remains below the 50 DMA and potentially testing the $100 support level. Uncertainty and speculation at work.
  • Natural gas (UNG) inventory is building and the drop in price is reflecting the concerns in the build up. Modest bounce and gain of 2% today, but that is following a better than 21% decline. Supply data finally shows slower build in inventory. Watch to see if a reversal sets up or not on the trading opportunity.
  • Transports (IYT) continues to hit new highs and breaking higher. Still positive trend in play and the upside remain in play. Still a positive influence for the broad markets.
  • Small Caps (IWM) are the weak link as the index tested below the 200 DMA again, but managed to close just above. The rotation from growth to value is still the question. This is the key rotation play currently. Downside back on Friday. Watch as the short trade may set up again.
  • Retail (XRT) broke support at $84.50 to end the week. Does this signal more selling to come? Watching to see how this unfolds short term.
  • Russia/Ukraine… this is far from over, but out of the headlines this week. Don’t assume this will not have an impact moving forward. The Russia ETF (RBL) declined on the week, but is finding near term support. If this returns to the headlines Russia will fall further. Watching to see how it unfolds. RUSS is the short ETF for the country and we have been willing to step into the trade when appropriate relative to the risk.
  • Volatility spiked to 15.3 six trading days ago and then fell back below 12 this week. We close the week with a jump back to 12.6 on Friday’s modest selling. No real fear in the market… it is purely event driven fear which creates volatility day to day and intraday. The fear that trends with volatility moving higher and markets moving lower is what we are concerned about as we progress toward the future.

Practice patience and let this new chapter of the markets story unfold.

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, but the true believers are still engaged in buying the dips as seen last Friday. The sellers took a shot the last two week, but the move was based on events, and did not result in any type of trend change only consolidation followed by buying. The buyers remain in control as they create a bounce point for the indexes and remain in a long term uptrend.
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 3.24%. They rose three weeks ago to the 3.48% mark, but that has reversed yet again on the downside thanks to the geopolitical risk. The move higher was prompted by the jobs report and economic data pointing to the Fed following through with rate hikes early in 2015. The move shifted lower this week forfeiting all of the grains as geopolitical issues heat up. The IMF stated this week they believe the rate move from the Fed will be in the second half of 2015 and they pushed rates lower on Wednesday. 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? 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 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. With 188 S&P 500 companies reporting, 105 have beat on the top line estimates. That is weak compared to long term historical data, but is an improvement over the last two quarters. There are still plenty of reports to come, but the start has been positive for the revenue side of earnings. This is a stat that shows the sustainability of growth in stock prices from my view and one to watch going forward.

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 two weeks. The next phase of reports have begun. So far investors have embraced the data as positive, but at the same time worrisome relative to the Fed hiking interest rates, weaker global economies than expected, inflation talk in 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 – 7/25/14)

ONLY ETF Model (updated – 7/25/14)

S&P 500 Index Model (Updated – 7/25/14)

ONE EGG Model (updated – 7/25/14)

Monday Trade Opportunities:

Trade Opportunities:

  1. CLF – entry 16.15. Trading range. The bottom reversal has been consolidating the last three weeks and looking for a clear break higher.
  2. JO – entry $34.80. Bottom reversal. Breaking the downtrend line off the April high and looking for upside follow through. I like the outlook.

Pattern Trade Tracking & Follow Up:

  1. 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.
  2. EMB – entry $116. Ascending triangle. New high and outlook is good for the sector currently. Stop $115.30.
  3. PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
  4. 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.
  5. MSFT – entry $42.30. Break from consolidation. Software sector bouncing back. Stop $44.
  6. DBB – Entry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside.  Stop 17.25.
  7. SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $49.70.

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.