Plenty to Consider Going Forward

I would like to say that the FOMC meeting injected volatility back into the market, but the VIX index doesn’t reflect that. However, the bond market, commodities and interest rates do show the effects of a spineless Fed. As we discussed in the video update the last two nights, there is a rotation of money in place and it will eventually impact stocks if the speculation gains momentum. This in turn puts the wall-of-worry back on the table as investors discuss, speculate and attempt to anticipate what will take place in the broad markets. My suggestion is to take this one day at a time and let the trend unfold.

State of the Market:

The S&P 500 index added two point for the week closing at 1761 and held the breakout move from two weeks ago. The five days of trading were more adventurous than the end result. Earnings and economic data were a catalyst to the upside, but the FOMC meeting was wet blanket on the markets overall. The upside target remain 1800 and our support or test zone is 1657-1710 should the sellers make an attempt to push the markets lower. Raised stop on our position in S&P 500 Model.

The NASDAQ tested and actually closed lower on the week down 21 points to close at 3922. I would call the activity selling as much as drifting lower on news and speculation relative to the Fed. 3890 is our support initially and then 3800. The upside is 4000 for now. Technology has been a driver for the index, but it is showing some signs of slowing.

The Dow pushed back to the previous highs at 15,706, but closed at 15,615 up 45 points on the week. The chart shows the trading range for the index and if it going to break to the upside near term it will need a significant catalyst to accomplish the task. 15,400 is the support level to watch near term.

Russell 2000 Small Cap index showed the most downside effect of the week testing key support near the 1085 level on Friday. A break of this level would be the first negative indicator for the broad markets and it is important to watch going forward. 1070 is the next support level to watch. On the upside a move back to the 1120 high would be a good start.

There is plenty of talk about the Fed impact on the markets going forward relative to the stimulus cuts. Until the Fed actually acts investor activity is nothing further than speculation looking for validation. That leads to a news driven market which tends to be very choppy. Don’t beat your head against the wall attempting to guess which direction we are headed. Be patient and disciplined in your approach to the market near term. Remember, cash is a sector.

Economic Data & Outlook:

The economy remains unimpressive relative growth, but steady as it goes again this week. I would have to say the data supports what we have been seeing with steady growth and some modest hiccups along the way. The ISM Manufacturing data on Friday was positive versus the excused of the government shutdown causing a move lower. Maybe because the government jobs don’t manufacture or produce anything it didn’t impact the numbers. The ISM Services number on Monday may show a different story.

Friday is the delayed jobs report and I am not expecting anything positive to result from the numbers. If anything it may reinforce the Fed position on stimulus as the rate of unemployment is expected to rise due to the shutdown. It will build throughout the week as a big event.

The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

Sectors to Watch:

  1. As discussed, the FOMC meeting has put the worry back into the market. First, if the Fed is eluding to the possibility of cutting stimulus in December, rewind to the reaction in August following the last announcement of cuts. Interest rates rose, bonds fell, interest sensitive assets fell, dollar climbed, commodities fell. As a result of all that activity stocks fell in price. Thus, we may be looking at a replay if that is in fact what investors interpret from Bernanke and Friends comments in the FOMC statement. This promises to be an interesting week for the markets.
  2. Dollar (UUP) made a move higher again to the $21.75 resistance currently. Stronger dollar equals weaker commodities? Watching both currently for opportunities if this continues to play out according to the Fed’s comments. Short yen (YCS – Only ETF Watch List) and euro (EUO) plays are on the table as well.
  3. Interest rates and the Fed? The initial response was for rates to tick higher. The Fed promised more money, but they also eluded to cuts the amount of money to be used. How much? Doesn’t matter, investors will react to any level of cuts. TBT was added to the ONLY ETF Model.
  4. Natural Gas (UNG) Broke key support at the $17.90 mark. Short trade in KOLD was added on the move Tuesday. Got the continuation break below $17.90. Now commodities are reacting to the dollar, and that is adding to the downside of this play. Nice gain on the move, raised stop and looking at taking some gains of the table on Monday.
  5. Gold was moving higher on what would amount to speculation. That shifted gears on the FOMC statement Wednesday and the downside ‘speculation’ is in play now. The move below the 50 DMA was ¬†negative, but now the $126.50 level is key support or back to $122.50. GLL is the short ETF for the metal. We added DUST is the short ETF for the miners (ONLY ETF Model). Added smaller size due to the gap and higher risk of the trade. Raised stop to break-even and managing the outcome from here. May take some off with the bounce in gold into the close on Friday.
  6. Small Caps (RUT-X) Russell 2000 index posted a new high Tuesday and tested lower on Wednesday (FOMC). The move filled the gap and tested lower on Friday. If we continue lower this could be the leadership on the downside as it was on the upside. Watching for support to hold and trade the bounce. Added to Sector Rotation Watch List.
  7. Energy moved lower first with the market, but then with the drop in crude. This may set up a short trade opportunity going forward. Watch and manage the trade if we hit the entry point on the downside play. ONLY ETF Watch List
  8. Financials (XLF) – The sector hit the previous highs at $20.85. The FOMC meeting didn’t help despite the promise of more stimulus on the way… oops they didn’t say all of it was on the way. The drop Thursday put the downside in play short term. Watch $20.45 support on XLF short term. Bounced late on Friday? Watching to see if it follows through or reverses lower again. SKF was on the pattern list for a trade as well stop at break-even.
  9. Real Estate (IYR) The sector moved through resistance at $67.30, however the Fed on Wednesday evidently said they were cutting stimulus in December. I didn’t see it or hear it, but evidently there was statement in the release following the meeting that eluded to an earlier exit start on stimulus. Great, there aren’t enough rumors to deal with let’s make up some more. Added to the Sector Rotation Watch List as longer term investment opportunity. We also have a short trade (micro term) with SRS, the short ETF for the REITs, as a trade opportunity as well. Trade on Pattern List.
  10. Overall we are looking to see if the chain reaction starts and follows through. Today promises to be interesting for all the sector, but primarily those outlined above.

The models still face the challenge of dealing with the buyers versus the sellers. The sellers are still unwilling to take on any risk short term (i.e. Thursday early selling gave way to the buyers… again, as well as on Friday). We are still adding 1/2 position sizes with the entries hit as the risk remains elevated. Added some short plays on ONLY ETF Watch List for next week. Will the speculation with the FOMC comments continue or is the worst of it over? It is a stretch to believe the Fed will cut stimulus in December… my view. Crazier things have happened, but we will still trade the charts. We continue to see rumbling from analyst about the weak economic picture and now the financial networks are picking up on the theme. Manage your risk on trades more aggressively and monitor your longer term holdings.

Breaking Down the 7 Asset Classes:

As you can see on the Scatter Chart, the latest low posted on October 9th shows the move higher in the US markets as well as the EAFE index. However, at the end of the chart you can see the US market turn lower to sideways while the EAFE index drops lower along with the Emerging markets. The dollar turned higher on the FOMC comments which also impacted real estate on the downside along with bonds and commodities. This week is one to focus on outcome or validation relative to the Fed speculation. Watch the downside to continue in these asset classes if there is any truth to the Fed cutting stimulus in December.

Asset Classes

1) US Equities:

Looking at our sector rotation chart below with the October 9th pivot point, the sectors were trading in step with the index again as the broad markets fail to break away from the one for all mentality. This is not a bad thing, but lends itself to just buying the broad index or the leading stocks. Consumer Services (XLY) remains the leader, with Industrials (XLI) and Consumer Staples. Some downside movement in Basic Materials (XLB), Energy (XLE), Financials (XLF) and Technology (XLK) on the week. Watching as stated above the impact of the Fed going forward.

500 Scatter Rot

2) Currency:

The dollar shifted gears on the rumor of cuts in Fed stimulus. True or not? We will see, but the dollar responded to cuts in excess spending from the Fed. All of the currencies on the chart responded lower as a result. The short yen and euro play are on the table it the trend continues this week.

currency

3)  Tracking the Bond/Fixed Income Sectors:

Sector Summary:

The sector turned sideways, but thanks to the FOMC meeting they are heading lower on the rumor of stimulus cuts as rates rise. Risk is too high and hit stops on all bond positions this week. Looking at the downside play with TBT on Treasuries, but that is it for now. We will watch for the upside opportunities if the rumor proves to be false going forward.

Bonds

Treasury Bonds РTLT or IEF dumped lower on the Fed rumors. No positions currently, too much volatility for my taste in owning bonds.

High Yield Bonds¬†– HYG = 6.4% yield. Bouncing off the $91.25 support and may have some interest if we can hold steady and manage the risk of the trade short term. Gave an entry signal at $92.30 and moved above the 200 DMA. Don’t own the bonds, and I would move my stops to break even on the recent events with the Fed impacting bond prices.

Corporate Bonds¬†– LQD = 3.9% yield.¬†No positions currently. Broke higher on the resolution to the budget with entry at $113.75. I would have a stop at break-even on any position short term. Big dump on Friday in response… keep stops in place or take your exit if you don’t like the rumors.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Bounced off the 50 DMA and moved higher short term. Still no interested in a position currently risk remains high.

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. Continued trek higher and put stops at $45.50. Not much in terms of reaction to the Fed.

4) Commodities –¬†The chart below shows the move lower on the week in the sector. The rumor mill relative to the Fed cutting stimulus sooner started on the FOMC notes and that hit commodities. Gold and oil dropped as the dollar gained strength. Agriculture fell and base metals have held their ground for now. The outlook is negative for now, but that only means opportunity on the reactions will result in these commodities. Watch and set levels of opportunity on the move.

We did short the gold miners (DUST) and crude oil (DTO) on the move lower. These are trades only in reaction to the news. Watching and measuring the exit points.

Natural Gas (UNG) made a solid move lower and we took the short play here as well (KOLD).

Commodities Rotation Chart:

commodity

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. However, last week we did see a bigger reaction in the global markets to the FOMC notes. The fear of a stimulus cut globally would be a negative. Looking at the chart below you can see the short lower off the 10/22 high. Brazil is the obvious loser with the issues they are facing economically. Europe has reacted along with Japan. China was higher on economic data, but don’t expect that to last short term. We don’t own the global markets currently and willing to wait and see how this plays out short term.

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 has become erratic and volatile relative to tracking every rumor on interest rates and the Fed. We have attempted to manage positions in the sector, but they have been up and down. If you want to own this you have to take a long term view and manage the position for the dividend. Looking at adding this to the Sector Rotation Model and using SRS to manage the risk of the trade.

Sector Summary:

  • IYR¬†– Bounced off the low and managing the trade for the dividend currently. Current dividend is 4%. See Sector Rotation Model for update.
  • RWO¬†–¬†SPDR Global Real Estate ETF¬†– Not willing to deal with this volatility currently. 4.7% dividend on the ETF worth watching for play. Uptrend is in play.

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 hit stop at $11.30. Watching for support at the $11.24 level currently.
  • PICB – 3.1% dividend. 27.80 support and bounced. $28.70 entry. Hit entry and adjusted stop to the entry. zero risk trade on dividend. Negative reaction to the Fed. this is a dividend play hold the stop at break-even and see how it plays out from here.
  • EMB – 4.5% dividend yield. Exited positions at break-even. Watch to see how this unfolds.
  • PCY – current dividend yield is 4.8%. Trading sideways as it should, but the risk is still elevated in the emerging markets due to the Fed stimulus rumors.

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.¬†