Weekend Notes and Outlook, September 7th

Welcome to Mr. Toad’s Wild Ride, i.e. the stock market. I have written the last three weeks about this being a news driven market and Friday validated it even further. The comments from Russian President Putin sent stocks lower after a positive open on a weaker jobs report. Stay with me on this… the weak jobs report gave hope the Federal Reserve would put off stimulus cuts which sent gold high, bonds higher and stocks higher. Then Mr. Putin made his comments at the G-20 meeting and the markets reacted to that as a negative concerning Syria. Eventually things calmed there was a bounce off the intraday low with buyers stepping in, but it did cause some anxiety from traders. There in lies the challenge with this market currently… too much worry relative to uncertainty with Syria, stimulus, the economic picture, etc. Worry creates volatility and that causes investors to act and react to news.

Once the ride was over it was business as usual? No such thing, but it did go back to trading on the news prior to the bravado from Putin and Obama during their speeches at the G-20 meeting. The broad indexes moved higher everyday this week and continues to show signs of moving higher. What many believe to be a major concern for the markets seems to be overlooked with each passing day… until the reality of the cuts hit and or we attack Syria. I remain cautious and respect the trade opportunities, but as seen Friday morning, if the fear becomes reality the bounce doesn’t take place.

Please note as we do in these situations we took the stops off positions and let the news calm and then make our decisions. I hate to get stop out of positions on news versus real data. As we always state we know there is risk in the action, but experience has validated it to be worth the risk of the downside not continuing without some bounce.

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 the last four weeks with the VIX index climbing higher and then falling back. This is still a market of stocks and the leadership of the market has offered the best opportunities. 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 attempting to bounce with XLF moving above the $19.78 mark and looks to move towards the 50 DMA as the next resistance. The sector remains challenged by outside events and is still lagging the overall market. This is not a straight forward sector short term and it has to be managed from a longer term outlook. I am still looking to add to the position as we move forward the clarity grows. Slow and steady goes the race.
  2. Volatility index started the week at the short term high of 17.75, it had faded to 15.65 on Thursday, but spiked to 16.80 on Friday with Russia stepping into the Syria mix, but settled in an closed lower as some normality returned. This is the state of the markets currently and we are having to manage the risk of the volatility. If the intraday volatility of the VIX picks up we will exit any plays relative to the VIX. For now watch to see how this plays out on Monday.
  3. Utilities broke short term support at $37.10 and set up a potential short trade. A test and close below support is a short opportunity, but $36.50 support is holding. Based on the spike in yield on both the 10 and 30 year bond the sector should have fallen more… leaving an opening for a potential bounce. That is what we got on Friday and now I looking for a potential upside trade on the move through $37.20 upside. Added to the Sector Rotation Watch List.
  4. Healthcare (XLV) has tested support at the $49 level and is making a move back to the upside. The move above $49.95 hit the entry point for the S&P 500 Model as a trade. Made a move above $50.20 to follow through the next entry point. Biotech (IBB) has bounced back nicely and moved above the previous high. Watch and manage the elevated risk on the sector, stop at the entry point of $198. Still lacking momentum short term.
  5. Technology has held up well during the last four weeks of selling or testing lower. We added a play in the S&P 500 Model, but XLK has stalled at or near the resistance of $31.80. The semiconductors (SOXX) cleared resistance at $63.50 and is a leader thus far. Scanning XLK shows some bounce moves off the recent lows that are of interest if the momentum follows through.
  6. Consumer Discretionary bounced off the current level of support also with the uptrend line in play as well. Looking for a upside follow through in this sector if we can clear $58.75 level. It stalled, but held in place so far. Have to be patient and let the trade develop. JCP (again), KSS, M and KMX all put in solid upsides with breakout or reversal moves on Thursday and Friday. The homebuilder stocks were up nicely on Friday to help as well.
  7. The global markets bounced off the downside as the EAFE index (EFA) gained 3.3% for the week. Europe has been under pressure from oil prices moving higher, but Europe ETF (IEV) bounced 2.6% on the week. China (GXC) made a big move higher and has gained 5.5% this week, and cleared the previous highs at 73.10. The emerging markets (EEM) have bounced off the lows and gained 4.6% on the week and heading back to the key resistance at $40. All is good on the bounce as the global markets follow the US lead.
  8. Treasury yields rose again to 3.84% on the 30 year bond, and 2.91% on the ten year bond. The worry is back about the Fed, improving economic data and the overseas growth pushing inflation (like China). So much for the buy signal some have called for in Treasury bonds. We added a short play with TBT in the ONLY ETF Model to capitalize on the short term move in bond prices and it has done exactly that.
  9. Crude oil jumped on the Putin comments over Syria and is flirting with the $110 per barrel level. The upside remains in play as we are now back at the highs from last week at the peak of the worries. Downside risk is still elevated short term and stops should be tight if you are trading the move.
  10. Commodities were lower as DBC is testing support again at the $26.50 mark. Got a bounce on Friday with the move in gold off support. Watch to see if we hold here or break lower. The dollar moved above resistance at the $22.25 mark (UUP) and then ran into the Syria buzz saw on Friday. Watch an let the emotions calm. Gold and silver both bounced finally on the jobs report Friday. Watching to see if there is any follow through on the upside. Natural gas reversed on Thursday losing 3.7% to end the week as the inventory data was disappointing.
  11. As we stated above the focus is on the news and it makes for a volatile market. Trading is working to some degree, but the emotions are running high. The biggest question moving forward is sentiment relative to stimulus cuts and Syria. The optimist are buying, the pessimist are selling, and the rest are watching. Based on the sideways activity… watching is winning.

Economic Data & Outlook:

Let’s start with the jobs report. Not awful, but bad enough to prompt investors to believe the Fed would defer stimulus cuts. We added 169,000 jobs in August (below expectations), we cut the July report more than expected and the unemployment rate fell to 7.3% due to less participants in the workforce. In fact, it was the lowest participation rate since August of 1978! Not good news. But, it was good news for traders who believe it will slow the Fed relative to stimulus cuts.

Other data this week was positive as ISM Manufacturing and Services numbers were better than expected and showed there is some growth in the economy. Productivity numbers were better than expected and factory orders were ahead of expectations, albeit lower in August.

Bottom line… the data still shows a sluggish but growing economic picture for now. 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. For now the buyers are pushing the market higher on news… not fundamentals.

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 up 1.7% and erasing the 1.8% decline from last week. The 1663 level is what to watch on the bounce and determine if the buyers are willing to stay and play or runaway at the first sign of bad news. The uptrend is still intact, but under attack. Watching to see how it unfolds going forward.

The NASDAQ has held up better than the other major indexes during the last four weeks of volatility. It remains above the 50 day moving average and support is 3580 and resistance at 3660 gave in on Friday. The index gained 2.1% for the week and 3694 is the next level to watch on the upside.

Small Cap (IWM) has been consolidating sideways and looking for a move above $102.50 resistance. Closed there on Friday, but no much in terms of conviction on the move. If we can test and move higher next week it offers an opportunity to own the index. Adding to the Sector Rotation Watch List for next week.

Mid Cap (IJH) broke support at $119.15 last week after setting up a potential short opportunity. Look for a move above $120.50 as entry and break of the current downtrend in play off the July high. Added to the Sector Rotation Watch List.

The SOX index is tested support on the downside and bounced to close last week. This week the sector was the primary market leader. The index gained 4% even with a negative showing on Friday. Look for the leadership to continue if the NASDAQ and broad markets are to continue higher. $65.20 offers a entry point for SOXX play short term.

The June 24th pivot point is still in play on the downside, with another bottom reversal attempt on August 27th in play. Without some clarity a reversal or bounce will be tough to maintain at this point. The index is in need of leadership if the move off the recent low is going to materialize into some or anything meaningful.

June 24th Low Pivot Point

SP500Scatter

Sector Rotation of Interest:

Downside Rotation: Got a reversal off the low this week and that stemmed the moves lower. Looking at the chart above the downside belongs to the Utilities (XLU). Financials (XLF), Consumer Staples (XLP), Consumer Services (XLY) and Telecom (IYZ) all bounced off their respective lows this week. Consumer Staples are testing the near term low and attempting to bounce on the current move this week. Financials are attempting to reverse the downtrend and resume the longer term uptrend in play.

Sideways Trend: Real Estate (IYR) bounced again off the lows trading sideways. A move above the $63.40 level would be a positive for the sector and a rotation back to the upside. Consumer Services (XLY) needs to clear the $59 level to complete the reversal of the downtrend in play from the July high. Technology (XLK) and Basic Materials (XLB) are moving sideways, but attempting to resume leadership for the broader index. Telecom (IYZ) consolidating from the move lower off the July highs.

Upside Rotation: Energy (XLE) is attempting to make a move higher short term. Need to clear the $84 level on the ETF. Healthcare (XLV) cleared the $50.20 level to resume the move to the upside.

2) Currency:

The dollar is still holding support above $21.90 (UUP). The big news this week was Syria and Russia impacting the dollar after a solid move off the lows. As you can see on the chart below the downside pivot point of July 9th is still in play.

BZF – Brazils currency has bounced after establishing a volatile low the last three weeks. The move above $17.20 is worth watching for an upside trade currently. Target at $18.65.

FXA – Australia made a nice move higher this week as well. $92.25 entry looks good if the upside continues with a target near the $96 mark going forward.

Currency

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. Plenty of Volatility currently as bond market continues to struggle with the uncertainty.

  • 30 Year Yield = 3.84% – up 17 basis points for week ¬†—¬† TLT = $103.41 down $2.79 for week.
  • 10 Year Yield = 2.9% –¬†up 16 basis points for week ¬†— IEF = $99.30 down $1.22 ¬†for week.

Treasury Bonds РThe yield on the bond rose again this week as the fear factor over the Fed resumed. TBT was the play and we continue to hold the position for now.

High Yield Bonds РHYG = 6.4% yield. Starting to establish a sideways trading range short term. Watch and see how this pans out as it stabilizes again it is a good place to capture the dividend yield. Patience for now.

Corporate Bonds РLQD = 3.9% yield. No positions currently. Support at $111 held on the flight to quality and fear.

Municipal Bonds РMUB = 2.9% tax-free yield. No positions currently. Downtrend still in play.

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

4) Commodities –¬†The shift in the sector was lower again this week as the test of the recent move is in play. DBC held support at the $26.40 mark and bounced on the move in gold an silver on Friday. Watch to see if support holds, and if so, where the forward looking opportunities are. Silver still leading on the chart below off the August 7th pivot point.

  • Commodity Index¬†(DBC) – commodity ETF held the breakout level on the test and I still like the outlook for the commodities longer term.
  • Natural Gas¬†– (UNG) tested support at the $17.10 level and bounced. Hit resistance and testing the $18.10 support. Watch for the upside move short term.
  • Crude Oil¬†– (OIL) ¬†Crude jumped to $110 on the Russia/Syria comments. Watch the downside risk going forward as the commodity is overpriced relative to the fundamentals. Fundamentals don’t matter when emotions are in control of the direction. Tight stops if you are long crude.
  • Gasoline¬†– (UGA) Pushed to the previous high at $63 and testing back to support at $60. Oil at $110 look for gas to creep higher if oil remains elevated.
  • Gold –¬†(GLD) Broke higher and hit the target at $137, tested lower at the $132 support and bounced. Now testing lower.Watch for the best entry as the direction unfolds.

Commodities Rotation Chart:

Commodity

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

5) Global Markets: 

The global markets bounced off the downside as the EAFE index (EFA) gained 3.3% for the week. Europe has been under pressure from oil prices moving higher, but Europe ETF (IEV) bounced 2.6% on the week. China (GXC) made a big move higher and has gained 5.5% this week, and cleared the previous highs at 73.10. The emerging markets (EEM) have bounced off the lows and gained 4.6% on the week and heading back to the key resistance at $40. All is good on the bounce as the global markets follow the US lead.

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:

  • GXC-¬†China is leading the global markets this week on the upside and breaking to a new high.
  • IEV¬†– Europe bounced after a bout of selling. Watching for the upside to resume.
  • EEM¬†– Solid bounce and testing the $40 resistance again. Breaks through add to the position.
  • PIN – Indea bounce off the lows this week as their currency leveled off from selling. $15.65 resistance.

6) Real Estate (REITS):

Real Estate Index¬†(REITS) – The sector broke down tested new low at $61 and bounced, tested again and bounced Friday? Looking for a move above the $63.50 level… failed on the last attempt. Breaks add a position in the sector.

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. Same view $40.90 breakout level
  • 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 on move above $20.65.

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.¬†