Weekend Update and Trading Notes

The week concluded with a new mess to unravel. The new home sales fell 13.4% to an annualized rate of 394,000 well off the original report for July at 497,000. That was revised to 457,000, but still shows a significant drop in sales. Should we be surprised? Not really when interest rates have jumped 113 basis points adding nearly a full percent to the average mortgage. This is something to watch as buyers adjust to the higher financing rates. They will make the adjustments and sales will move up again. The other challenge is jobs and wages. They are not increasing at the rate to sustain growth in the housing market. This is just part of the reason the markets are in a sideways trading motion currently. The downside is being challenged, but the push over the cliff is still in need of a defined catalyst. Another housing report like this one for August and we may very well have one.

Thursday and Friday provided the start of a bounce. Is that all there is or do we see more of a push on the upside before the downside resumes? I am still believe the downside will be the next trend, but it will have to validate the move lower. The bounce is in play as we head into next week and we will proceed taking what the market gives one day at a time.

Below we take a tour of what is working and what is not by asset class. Volatility has increased by sector with some holding up well and others are testing near term lows with big question markets hanging over them. The key is to remember the trend is your friend and attempting to a square peg in a round hole isn’t going to work not matter how much you believe if fits. Don’t force your opinions on your portfolio and let this all gain short term clarity.

Sector and Model Notes:

  1. What a week for traders! Selling followed up with some buying, but most of the lift came from the NASDAQ index. Microsoft bumped higher on Friday as Ballmer announced his retirement, AutoDesk jumped on earnings, Expedia still benefiting from the Travelocity marketing deal, and Facebook headed to a new high. The S&P 500 index and the Dow continued to struggle to reverse off the lows.
  2. Housing data on Friday shifted the outlook in the sector as they decline showed the impact of higher rates on sales. The headlines call the report a plunge! The drop was 13.4% to the lowest pace in nine months. XHB fell 1.4% and ITB was off 2.3% on the news. Based on the chart of ITB the sector is off 19% since the May 14th high. I would like to say this is an opportunity long term, but we will have to see how this unfolds going forward.
  3. Treasury yields fell on the housing news Friday! This is good news to bonds? Bad news is good news? Yes, when it is deemed the Fed will reconsider their choice of when and how much to cut the stimulus. This is another area of concern moving forward, but I don’t see this as a buying opportunity for bonds. It does impact the TBF position we own as it hits the stop at $33. The yield fell to 3.8% from 3.88% on Friday.
  4. Volatility is short lived as the VIX index falls back near 14.5 or support near term. There is still rumblings about the outlook for the US economy, but stocks are putting in another concerted effort to rally back from the recent selling. Watch to see how this plays out next week. SVXY will be a trade opportunity if the index continues below support.
  5. Treasury yields moved lower to 3.8% on the 30 year bond, and 2.83% on the ten year bond. The worry over the Fed cutting stimulus in September has been causing challenges for bonds. The question now is will the housing data a bigger impact? Oil moved to $105.92 and holding as it seems to be willing to build a trading range of $103-108. OIL closed at $24.99 after testing the bottom of the range at $24.40 this week. Gold gained $25 to $1396 of Friday after testing all week. GLD continues to move towards the target of $137. The dollar moved back to $21.90 support (UUP) after a little bump from the FOMC minutes. The decline was in conjunction with the housing data pushing bonds lower on hopes the Fed would delay QE infinity again.
  6. The global markets gave up 1.1% (EFA) Wednesday gained 2% on Thursday and Friday after holding support above $60.10. Europe (IEV) was down 1.1% Wednesday, and up 1.8% on Thursday and Friday. China (GXC) was down 2.5% in response to the weakness in the emerging markets and, up 2.5% on Thursday. The emerging markets (EEM) were down 4.3% the first three trading day of the week and bounced 2.6% on last two days. The global markets have reacted to the Fed stimulus cuts and fear of the emerging markets falling. Welcome to the volatility that uncertainty creates. The bounce is in play following the pull back and test of support.
  7. The S&P 500 Model is updated.
  8. The Sector Rotation Model is updated.
  9. The ONLY ETF Model updated.
  10. The ONE EGG Model is looking for the next opportunity.
  11. The market is focused short term on the news. The buyers are grabbing onto any positive news they can find. The sellers are looking for the definitive catalyst on the downside. The tug-o-war is making investors crazy and day traders are loving it. I am of the opinion that the sidelines look great as this gets resolved. The Fed provided zero relative to the stimulus cuts in the FOMC minutes. The next update will be from the Jackson Hole retreat. I don’t expect much from that to help the overall clarity of direction. Mixed data from economics, earnings and speculation is keeping everything in a jumbled mess. Flip a coin on where this goes for now. No guessing, be patient and let the trend play out.

Economic Data & Outlook:

The economic data has been lost in the worries about the Fed cutting stimulus, but the new home sales woke up the sleeping dog. In fact, it was kicked in the head. The interesting part of the data was it surprised everyone. The headlines have been full of reports on rates rising, loan origination falling, etc. etc. But, we are surprised by the lower sales? Okay, sorry it was the size of the drop. That makes it more understandable.

Retail earnings have been mixed as well, but the number of missed earnings and revenue reports has been concerning as we look forward to the August reports. Overall the economic reports are still mixed with little in terms of significant growth. I am not sure where the Fed is looking for the growth in the second half of the year, but thus far we are not seeing much in terms of change from the first half. Maybe they will take a cue from China and just report what works.

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 basically flat with a gain of 4 points to 1659. The price moved back to the 50 DMA and 1643 is the current level of support. The uptrend is still intact and the sellers took their first shot at breaking it down, but thus far it has held tough. Watching to see how it unfolds going forward with support or the bounce following through to move higher.

Talking about leadership this week is not stellar with the REITs (IYR) leading with a 1.9% gain. The consumer discretionary was next up 0.7% for the week. For the most part is was a flat week overall. The two positive days offset the negative days and we move to next week.

The move lower off the high of August 2nd is still in play as well for the broad index. Watching to see it it holds support at the current levels or do we push lower from here? No clarity 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 has given way to the next potential pivot point on August 15th to the downside. 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: We have not accelerated in the downside rotation, but we are still watching to see how the bounce plays out near term. REITs (IYR) bounced off the low and looking better, but still in the downtrend. Energy (XLE), Healthcare (XLV), Utilities (XLU), Consumer Staples (XLP), Telecom (IYZ) and Financials (XLF) all continued lower, but have landed on support. Watching to see if we get any bounce or reversal short term.

Sideways Trend: Technology continues to move sideways and got some help from Microsoft on Friday. Basic Materials (XLB) and Industrials (XLI) have continued to trend sideways as well.

Upside Rotation: Gold (Precious Metals) moved higher on Friday to continue the reversal to an uptrend.

The S&P 500 Model: We have some long positions and some short positions to balance the account, but looking for a swing in one direction or the other in next weeks trading. Be patient and let the indecision and clarity determine direction.

2) Currency:

The dollar is still holding support at $21.90 (UUP). The big news this week was in BZF heading lower and breaking support at the $17.20 mark. As you can see on the chart below the downside pivot point of July 9th on the dollar was a positive for FXE, FXY and FXB. FXA and BZF have been the most volatile relative to the downside. Watch to see if the buck breaks lower or holds at the current support.

Currency

Sector Watch:

  • UUP¬†– Support at $21.90 – break lower put UDN play back on the table.
  • FXE¬†– The long euro trade has been well defined with the move holding above the 50 DMA and trending. Looking for a move above the $133 mark short term as a continuation of the uptrend off the July low.

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 = 3.8% – down 5 basis points for week ¬†—¬† TLT = $104.17 up 80 cents for week.
  • 10 Year Yield = 2.82% –¬†unchanged for week ¬†— IEF = $100.09 down 4 cents for week.

Treasury Bonds РThe yield on the bond has risen again pushing the bonds down lower. Friday bounced on home sales, but no upside play. If anything use this move determine if buying TBF or TBT is worthwhile.

High Yield Bonds РHYG = 6.7% yield. Broke below the $91.30 support and tested $89.75 support this week. Watching to see if there is any trade opportunity in the high yield bonds, but for now willing to sit tight.

Corporate Bonds РLQD = 3.8% yield. No positions currently. Support at $111, but still not interested in owning the sector.

Municipal Bonds РMUB = 2.8% tax-free yield. No positions currently. Detroit bankruptcy and other potential ones impacting the sector short term. Failed to hold $103 support and now moving towards $101 support.

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

4) Commodities –¬†Sector Summary: Finally seeing a shift in the sector as the parts start to move. The sector is moving higher and some trading opportunities in the sector overall exist. See below.

  • Commodity Index¬†(DBC) – commodity ETF jumped off the low and has now moved back to the top end of the previous trading range at $26.40. Positive speculation driving the upside for the commodities. Watch the upside to confirm if the trend is going to continue higher. Adjust any stops on this to $26.25.
  • Natural Gas¬†– (UNG) is testing 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 lower on the week and tested support at the $24.50 level. The move back towards the previous high is in play currenty. Watch the volatility, but a break from the trading range higher would be a positive.
  • Gasoline¬†– (UGA) Pushed lower to the 200 DMA and bounced with oil. Watch a move above $61.35 as continuation off the test lower. Target of $63 on the move.
  • Gold –¬†(GLD) Tested support at $123.15 and bounced? Is it ready to move towards the $137 target? Yes, as the upside continued above $132 and is moving towards the target. GDX is positive on the move as well.
  • Palladium¬†– (PALL) – Consolidated near the $73.70 resistance moving back towards the high near $75.
  • Base Metals¬†– (DBB) – Broke from the consolidation pattern at the low ($16.80) and heading higher. $17.50 resistance and then clear sailing for the sector.
  • Silver¬†(SLV) – big move higher and outpacing everything. Watch the risk of the trade and see if it keeps going.

Commodities Rotation Chart:

Attempting to start and upward move in the trend. Silver, Copper, Gold, Oil and Gasoline leading the upside.

Commodity

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

5) Global Markets: 

The global markets gave up 1.1% (EFA) Wednesday gained 2% on Thursday and Friday after holding support above $60.10. Europe (IEV) was down 1.1% Wednesday, and up 1.8% on Thursday and Friday. China (GXC) was down 2.5% in response to the weakness in the emerging markets and, up 2.5% on Thursday. The emerging markets (EEM) were down 4.3% the first three trading day of the week and bounced 2.6% on last two days. The global markets have reacted to the Fed stimulus cuts and fear of the emerging markets falling. Welcome to the volatility that uncertainty creates. The bounce is in play following the pull back and test of support.

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– Moving above $34.70 entry point again on the upside. Looking for more upside short term, but with volatility.
  • IEV¬†– Move above $41.90 adding point for the ETF. Still remains volatile on the moves off support. Watch upside to follow through and break to new high.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke down tested new low at $61 and bounced.  $63.50 is the key level to clear for now. 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 – Trending lower again. No interest.
  • PICB – 3.1% dividend. No reason to own currently. Formed bottom and trending sideways. 28.25 support.
  • EMB – 4.3% 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.¬†