Weekend Notes and Outlook, August 30th

Another month in the books and we head toward September… I fell like the theme to “Jaws” should be playing. The month when bad things seem to happen and we are definitely in a position for that to take place again. We started the week with a surprise announcement concerning Syria and it has been the topic of choice all weeks. As we start the long Labor Day Weekend the news has circled Wednesday as the day for something to happen. Why? France is having a meeting for approval to strike at the regime in Syria that used chemical weapons. I am not going to voice any comments on this political football, other than to state, it will have an initial impact on stocks, as seen by this weeks response. However, if history repeats, stocks will rally back from their initial reaction. Definitely something to watch and manage as we move forward.

The lack of activity relative to Syria on Wednesday and Thursday invited the buyers back into the market producing a modest low volume bounce. Noise from France, the UK and Isreal on the topic stirred the pot some on Friday pushing stocks lower again. Mr. Carey spoke on Friday… that accomplished nothing and now we move into a long weekend. Should be interesting come Tuesday morning.

The review below of the different asset classes reveals where we think the opportunities lie and where we need to avoid ownership. Volatility has increased in the broad markets week with the VIX index climbing back near the 17 mark. This is still a market of stocks and the leadership of the market has offered the best opportunities versus attempting to pick winning sectors or broader based indexes. That is a key shift in mindset and execution for investors. That means we have to do more homework to find the winners versus just owning the index. Being patient is the best course of action for investors and don’t force your opinions on your portfolio and let this all gain short term clarity.

Sector and Model Notes:

  1. Financials attempted to bounce, but it was over they had given back almost all the gains again and remained near the lows for the week. They cannot get out from under the black cloud of lawsuits and image issues. We own SKF, but it hasn’t made any progress either the last four days, but we are looking for a move below the current support of $19.45 on XLF. Watch to see if there is an opportunity to add to our short play.
  2. Volatility spiked on the Syria news sending the VIX index to 16.8 on Tuesday, then fell to 16.4 on Wednesday, and back to 16.8 on Thursday. That explains why investors are confused relative to the outlook currently, uncertainty. The VXX trade held it’s ground, but still not accelerating higher at this point. If the volatility remains it will help the downside plays as well as the volatility index trade. Watch to see if the fear factor rises on the UK news relative to Syria today. Currently the futures are flat which could mean a quite day heading into the long weekend.
  3. Utilities are sitting on support and looking for a reason to bounce and I am looking for a reason to own them. Watching this next week for an upside opportunity.
  4. Healthcare (XLV) has tested support at the $49 level and looking for a move back to the upside. This is another sector next week to look for the upside play opportunities.
  5. Technology has held up well during the last four weeks of selling or testing lower. We will look for the bounce or upside move in this sector as well.
  6. Consumer Discretionary is at or near the current level of support. The uptrend line is in play as well. Looking for upside play in this sector as well.
  7. If the markets fail to find the upside catalyst, the downside will accelerate and the push may come from Syria and the US. If it does it will be quick downside and then bounce. If all gets settled in Syria without issue, the upside bounce will take place, but then the economic picture and the Fed cutting stimulus will weigh the markets down going forward. Thus, we will have a trading plan based on how this unfold going into next week and beyond. Stay focused and disciplined.
  8. The S&P 500 Model. This will be update on Monday for the trading week. Want to see what unfolds if anything with Syria.
  9. The Sector Rotation Model will be updated on Monday along with the Watch List. Same reason.
  10. The ONLY ETF Model will be updated on Monday along with the Watch List. Same reason.
  11. The ONE EGG Model will be updated on Monday for the entry.
  12. The market is focused short term on the news. The lack of any new developments with Syria is pushing stocks around for now, but the uncertainty remains which creates volatility. This is a long weekend and plenty can happen. I don’t expect much in terms of a resolution, but I hope there is some direction relative to how we proceed. Have a peaceful weekend.

Economic Data & Outlook:

The economic data has been lost in the worries about Syria and the Fed cutting stimulus again this week. GDP got a upgrade to 2.5% growth from the 1.7% initially reported. But, the increase came from the trade deficit adjustments. Not a good sign. 3rd Quarter growth forecasts got a haircut as a result. Spending rose just 0.1% in July! The estimates are now 1.5% versus 2% previous. Not to mention we have cut government spending, higher interest rates and gasoline prices have spiked.

Pending homes sales were not good… down 1.3%, durable goods were not good… down 7.3% and consumer spending rose are mere 0.1% vs the 0.3% expected. The Michigan consumer sentiment rose to 82.1 versus 80 in July. Evidently the sentiment surveyors didn’t call those who not so positive about spending.

Bottom line… the data still shows a sluggish economic picture at best. Earnings announcements all week have seen revisions to both revenue and profits looking forward. As I have said many time, fundamentals don’t matter… until the matter. In time this will matter and stocks will adjust for the data. The good news is the Fed believes the second half economic picture will improve and is cutting stimulus.

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 down 1.8% for the week to 1632. Last week the index moved back to the 50 DMA with 1643 as the level of support to watch. That all ended with the news from the White House concerning a possible strike on Syria. The uptrend is still intact, but under attack from the sellers. The June low is coming into play as well. ¬†Watching to see how it unfolds going forward as we are now watching for Wednesday to Syria day… at least according to the French.

The NASDAQ has held up better than the other major indexes during the last three weeks of selling. It remains above the 50 day moving average and support is 3580. If the index reverses course and breaks lower that will be a bigger negative for the balance of the market short term. NASDAQ 100 index is similar with support at 3040 and a break lower would open more short opportunities.

Small Cap have seen big swings daily this week as the buyers and sellers attempt to duke it out. Watching $100.50 as support. A break lower may offer some short opportunities for the index.

Mid Cap (IJH) broke support at $119.15 and that is a short opportunity for the index. MZZ and MIDZ are the ETFs, but both have extremely low volume. Short IJH is the better play on the downside.

The SOX index is still testing support as well at 457. A break lower would be a negative for the sector as well as the NASDAQ. The news on the PC front was not good this week as the numbers were worse than estimated. The good news is the shift of business within the sector to other technology to replace the business. Watching to see how this pans out. SSG is the short ETF for the sector.

The move lower off the high of August 2nd is still in play as well for the broad index. No clarity on issues and that keeps speculation in play. Watch, be patient and let it all play out before jumping on the wrong side.

The June 24th pivot point is still in play on the downside. Without some clarity a reversal or bounce will be tough to manufacture at this point. The index will need to move above the 1689 level to resume the upside and avoid a reversal of the short term trend.

June 24th Low Pivot Point

SP500Scatter

Sector Rotation of Interest:

Downside Rotation:¬†Consumer Staples (XLP) dumped to support at $39.15. Break further is short and bounce could offer some upside trades. Utilities (XLU) holding the $37.20 support, but can’t find any buyers. Move to $36 could be the next trek. Industrials (XLI) at support of $44 and holding for now. A move below opens the downside to $42. Short opportunity on the break lower. Financials (XLF) broke support at the $19.70 opening the downside rotation. SKF is the short we added to our model and a move below $19.40 opens opportunity to add to the position. Telecom (IYZ) accelerated lower, but the last two weeks has bottomed or found support at the $26.75 level. Looking for an upside reversal in the sector short term?

Sideways Trend: Energy (XLE)  is holding up as a result of commodity prices moving higher. No upside, but worth watching for an opportunity looking forward. Basic Materials are in the same boat with the mining and metals getting a boost from the current environment. Holding support and could bounce back towards the previous high. Healthcare (XLV) is testing support at $49.10 and it breaks it will join the downside rotation list along with a short opportunity. $47 would be the next support level. Technology (XLK) is holding the sideways trading range. We are currently at the bottom of that range with $31.30 the level to hold and bounce. Downside move opens the door for a short play on the sector. Consumer Services (XLY) looking to hold support at $57.50 near term. A break lower would offer yet another short opportunity.

Upside Rotation:¬†Unfortunately this is reserved for the inverse funds of the sector mentioned above. Taking the short play opportunity using ETFs gives us a diversified approach the sectors versus attempting to pick the worst stock. Be patient and manage the downside… remember it accelerates twice as fast as the upside and magnifies the moves lower and we have to deal with the speed in our stops and targets.

The S&P 500 Model: We are short the index and playing the VIX index currently. We will stay on this side until things reverse relative to the trend.

2) Currency:

The dollar is still holding support above $21.90 (UUP). The big news this week was Syria and that shifted the outlook for the dollar. As you can see on the chart below the downside pivot point of July 9th is still in play and not much to deal with here short term. Watching the euro and yen for opportunities, but for now we are on hold.

Currency

Sector Watch:

  • UUP¬†– Support at $21.90 – break lower put UDN play back on the table.
  • FXE¬†– The euro ended the week with three days of selling. The news relative to oil prices and Syria are hurting the outlook for Europe. Watch and see if we can hold support at the $$130.50 mark.

3)  Tracking the Bond Sectors:

Sector Summary:

The bond market overall continued it’s sell off as yields rising again. The worry relative to the Fed cutting stimulus has the market shifting gears yet again. The stall on Friday from the new home sales was the first relief in the rising yields. Watch next week to determine if the move lower in bonds is over or at least delayed for the short term.

  • 30 Year Yield = 3.67% – down 13 basis points for week ¬†—¬† TLT = $106.20 up $2.03 for week.
  • 10 Year Yield = 2.74% –¬†down 8 basis points for week ¬†— IEF = $100.52 down 43 cents for week.

Treasury Bonds¬†– The yield on the bond fell back this week as the flight to quality over the Syria issues were front and center. Throw in some speculation that the poor economic data will delay the Fed’s cut in stimulus and you get a small bond rally on the week. If anything use this move determine if buying TBF or TBT is worthwhile.

High Yield Bonds РHYG = 6.4% yield. Broke below the $91.30 support and tested $89.75 support held this week and we are making a move back above the previous support closing at $91.55. Watching to see if there is any trade opportunity in the high yield bonds, but for now willing to sit tight.

Corporate Bonds РLQD = 3.9% yield. No positions currently. Support at $111 held on the flight to quality play with Syria, but still not interested in owning the sector.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Detroit bankruptcy and other potential ones impacting the sector short term. $101 is the current support.

Convertible Bonds РCWB = 3.6% yield. bounced off 43.75 support. Watching the upside.

4) Commodities –¬†Sector Summary:The shift in the sector as an upside play lost traction this week as the selling hit some of the metals and oil pulled back as well. The sector is testing the move higher and we are still looking for some trading opportunities in the sector.

  • Commodity Index¬†(DBC) – commodity ETF jumped off the low and proceeded higher getting a boost from the Syria issues. Positive speculation driving the upside for the commodities until Thursday and they have reversed course on the uncertainty about the outcome of any action in Syria. If there is not action taken that is the worst case scenario for the markets currently. Adjust any stops on this to $26.25.
  • Natural Gas¬†– (UNG) tested support at the $17.10 level and bounced. Now at resistance at the $18.80 level. Watch for the upside move short term.
  • Crude Oil¬†– (OIL) ¬†Broke higher on the week on the Syria news. Will it hold these levels if we do nothing in Syria relative to war type actions? The move back to the previous high and beyond is in play currently. Watch the volatility, but the break from the trading range higher would be a positive, and if holds upside for all.
  • Gasoline¬†– (UGA) Pushed to the previous high at $63 and testing back. Watch to see how this plays from here. upside in play.
  • Gold –¬†(GLD) Broke higher and hit the target at $137. Now testing lower. Hit stop and now watching again for upside play.

Commodities Rotation Chart:

Silver and Gold moved higher with Syria news and now testing back as there are questions on if the US will or will not do anything to strike. Not holding my breath here and took profits. Now willing to see how it plays out short term.

Commodity

DBC –¬†PowerShares Commodity Index ETF¬†(click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

The global markets have progressively moved lower on the week as oil prices have spiked in response to Syria and the is causing doubts about the European recovery. EAFE (EFA) dropped 3.8% for the week. Europe (IEV) was down 4.1%. China (GXC) was down 1.7% in response. The emerging markets (EEM) were down 1.9%. The global markets have reacted to the Fed stimulus cuts and fear of the emerging markets falling and of course Syria. Welcome to the volatility that uncertainty creates.

Global Mkt

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 –¬†Consolidation wedge with support at $34.75. hold and move higher enter trade for FXI. Break and move lower, trade in FXP.
  • IEV¬†– Sold below the 50 day moving average on Friday? EPV broke above $20.80 for downside play if it follows through next week.
  • EEM – attempting to put in a bottom near $37? Watching to see if this presents any opportunities as well.

6) Real Estate (REITS):

Real Estate Index¬†(REITS) – The sector broke down tested new low at $61 and bounced. ¬†$63.50 is the key level to clear for now… failed on the last attempt. Watching the bounce to see if there is any substance or just a bounce.

Sector Summary:

  • IYR – Finding a bottom? Watching to see if the upside can build a new trend.
  • RWO –¬†SPDR Global Real Estate ETF¬†– Trended lower and looking for support.
  • MDIV –¬†First Trust Multi- Asset Income ETF¬†is a good alternative to picking through all the choices of income funds. Finding support at the $20.40 level? Watch to see if any opportunity develops.

7) Global Fixed Income:

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

  • PAFCX – 1% dividend. Trending lower again. No interest.
  • PICB – 3.1% dividend. No reason to own currently. Formed bottom and trending sideways. 28.25 support.
  • EMB – 4.5% dividend yield. Bounced off the low and trending lower again.
  • PCY – current dividend yield is 4.8%. Bounced off the low and trending lower again.

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.¬†