Weekend Update and Trading Notes

The decline on Thursday was the prophecy of many analyst and talking heads over the last couple of weeks. If you talk about it enough eventually it will happen. You just have to break down the resistance barriers for the holdouts who think differently. The bigger question isn’t about Thursday’s decline, but is the downside sustainable? Will the prophets keep the pressure on the sell side? Currently I would not bet against them. Just as markets stair-step their way higher, they will stair-step their way lower… I am looking for more downside going forward.

If we do bounce this week, I expect the downside to return. Why? There is not a catalyst on the upside to deter the sellers at this point. Economic data improved slightly last week, but that was ignored and the focus was on the missed earnings reports. Two weeks ago as the market was rising, we ignored bad earnings and focused on the economy improving going forward. It is called focus on convenience. Or as Benjamin Graham state, “In the short term the market is a voting machine, in the longer term it is a weighing machine.” Right now the votes are for selling based on negative data as the vote. Please note, I am not attempting to be prophetic about the markets I am simply stating what I believe based on the data presented, what the market does in reality will determine the action taken. Have a belief, and let the market validate. But, if the belief is wrong adjust and make the changes necessary going forward.

Below we take a tour of what is working and what is not by asset class. The best place to be currently is US stocks and Global stocks. The other five asset classes are suspect on the upside and the risk/reward is too high currently for my taste. Take it one day at a time as this all unfolds.

Sector and Model Notes:

  1. We ended the week with back to back selling days. 1655 and the 50 DMA for the S&P 500 index. It is time for investors to decide… up or down. Looking for a bounce off support and then the selling to resume short term. Thus, the downside is where we are looking going forward. That means we will use the bounce to close out positions that are not doing well and lock in profit on those that have. The key is to be patient and let this all play out. As stated above, what we believe is where we start, what the market does is how we act.
  2. The Statisticians are out again with the Dow down 7 of last 10 sessions, NASDAQ 6 of last 10 and S&P 8 of last 10… must be time for a statistical rally? Relief rally? Bargain rally? At least their is strategy behind the thinking… right?
  3. VIX index is up again or is it? 14.75 is the level to watch on the upside and break would add to our play on VXX.
  4. Treasury yields moved higher to 3.85% on the 30 year bond, and 2.82% on the ten year bond. The worry over the Fed cutting stimulus in September is causing challenges for bonds. The TBF trade is still working on this move. Oil moved to $107.50 and holding as it seems to be willing to build a trading range of $103-108. OIL closed at the previous high $25.40 and we are watching for a break higher or retest of support at $24.40. Gold gained $14 to $1375 and above resistance at the 1340 level. It broke above resistance of $130 on GLD and moving towards the target of $137. The dollar moved back to $21.90 support (UUP) as all the Fed worries creep into the dollar. Question… Why is the dollar dropping if the Fed is cutting stimulus and economy is better? Watch the support level and see how the dollar plays out. Base metals (DBB) broke higher as well adding to the upside in commodities.
  5. The global markets are holding their own after an initial reaction to the US markets dropping last week. Europe (IEV) ended week even with the previous weeks close versus the S&P 500 index ending down 2.1% for the week. China (GXC) was up 2.6% on the week. The emerging markets (EEM) were flat or unchanged. Australia (EWA) was was up 1%. Global markets remain positive (data) and worth owning if they don’t react to the US markets completely going forward.
  6. The S&P 500 Model is updated. Stops were hit on XLP, XLY, XLE, SPY, XLV and XLF last week and we are watching the downside to start the week and we have added the opportunities to the Watch List in SH and VXX. We will also monitor any upside opportunities as this unfolds going forward. The stops on the balance of our positions are set and we are watching the short term to make the necessary adjustments.
  7. The Sector Rotation Model is updated. Watch stops on EEM and T as we start the week, if we get a bounce we will use it to take some exits as necessary. The Short Dow play remains and I adjusted the stop for the move. Looking at some downside opportunities on the bounce for entry points.
  8. The ONLY ETF Model updated and heavy in cash. We added SKF (short financials) last week and managing the risk moving forward. If the downside continues we will add more short opportunities this week. Patience is the key.
  9. The ONE EGG Model in cash and looking for the best short opportunity to start the week.
  10. Too much talk about the market outlook and not enough understanding in the choppy reactions. That leaves us with plenty of cash on hand and no willingness to chase the ups and downs relative to news. Looking for the catalyst of direction short term. The bias is towards the downside and that is the direction we are leaning, but the market still has to validate the move. Set you stops accordingly and focus on what is happening versus what others are saying.

Economic Data & Outlook:

The economy was lost in the worries about the Fed cutting stimulus, earnings disappointments and rising interest rates. Retail sales were not great, but looked better ex-autos. Inflation data was favorable as PPI and CPI were below expectation as oil prices settled in at the current levels. Weekly jobless claims were positive, homebuilders index rose helping the sector and housing starts were below expectations taking back some of the good. Productivity rose in Q2, but consumer sentiment fell to 80 with the expectation at 85.1. That may explain the sales data for July? Bottom line… the data continues to be mixed with both positive and negative data points. Thus why the market is reacting to the Fed stopping the stimulus, uncertainty if the economy can stand on its own two feet with the assistance of the Fed.

Overall the data isn’t hurting, but then it isn’t helping either.¬†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 2.3% or 40 points. The price moved below the 50 DMA and 1683 support. The index is now sitting at the 1653 level as the next support. How low do we go? I am looking first at June type pullback which was 5% with some volatility. The index has fallen 3.2% off the July high, but the volatility just picked up this week. 1634 support? Be patient and let this play out. There will be plenty of adventure as this unfolds and the market establishes a direction.

Talking about leadership this week is relative to what is leading the index lower. Consumer services (XLY) was down 3.2%, Telecom (IYZ) off 3.1%, healthcare (XLV) down 3% and Financials off 2%. The downside is where we are focused short term as the index looks for direction.

The June 24th pivot point has given way this week to the next potential pivot point on August 15th to the downside. You can see on the chart below the August 1st potential pivot higher failed and started the current pivot lower. Consumer Staples, Utilities, Telecom and Consumer Services accelerated on the downside since August 1st to lead the index lower.

June 24th Low Pivot Point

Scatter 624

November Pivot Point Low or longer term trend shows the impact of trading this week. If you look at the chart there are five stages to the current trend off the November low, the pullback on the fourth stage is the most volatile and the last stage is setting up on the downside currently. We have to determine if this is the final stage of the move higher or just another test? Be patient and manage your risk according to your objectives.

SP500Scatter

Sector Rotation of Interest:

Downside Rotation:¬†The reversal in financials, industrials, consumer discretionary, utilities, healthcare, telecom and energy didn’t help the direction at all on the week. As stated above we have officially rotated lower, but now we determine if the trend is going to change.

Sideways Trend: This has defined the trend over the last month and some sectors are still moving sideways for now. Technology and Industrials are still moving sideways, but at the lower end of the trend. Watching to see if they join the downside moving forward.

Upside Rotation: Commodities have moved to the upside after struggling all year. Oil is back near the previous high, gold broke through resistance short term and base metals have moved up nicely as well.

The S&P 500 Model: We hit stops in the model and raised our cash positions. indication the buyers are back for now. One day at a time as we move forward. Adjust and manage our short term risk in light of the overall objective.

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 that is a directly a result of yields rising again. The worry relative to the Fed cutting stimulus has the market shifting gears. Why higher rates if the Fed is cutting stimulus? Fundamentally makes no sense and is a contrary move. But, when you factor in the lack of Fed backing rates are searching for a level that will attract private money to replace the Fed stimulus of $85 billion per month. That is a big task and thus, yields are on the rise.

The Fed talk of cutting stimulus continues to get the blame for the move higher in yields, but they also get credit for talking enough to get rates to settle in the trading range of 3.52-3.76% on the 30 year bond. For now that is a positive, but with the upside resuming this week we have to watch how this impacts stock prices.

  • 30 Year Yield = 3.85% -up 22 basis points for week ¬†—¬† TLT = $103.37 down $3.92 for week. (down 3.6% for week)
  • 10 Year Yield = 2.82% –¬† up 24 basis point for week ¬†— IEF = $100.13 down $1.97 for week. (down 1.9% for week)

Treasury Bonds РThe yield on the bond has risen again pushing the bonds down 2-4% depending on maturity. TBF and TBT are back in play again as a hedge or exit the bond.

High Yield Bonds РHYG = 6.7% yield. Broke below the $91.30 support and could test $89.75 support next. Watching to see if there is any trade opportunity in the high yield bonds, but for now that only seems to be on the short play.

Corporate Bonds РLQD = 3.8% yield. No positions currently. Bounced and hit against resistance near $115.50 only to move back to test the low at $111.20. Short play only thing working for the bonds.

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

Convertible Bonds РCWB = 3.6% yield. Bounced and made move above the $42.80 entry. Continues to move in the uptrend established off the $41.50 low. Manage the move higher. Raise the stop to $44.10. Hit stop on the selling this week, but still watching going forward.

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 last week 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.
  • Natural Gas¬†– (UNG) is testing support at the $39.30 level. if we hold and bounce higher it offers some opportunities to trade the move. A continuation of the downside can become a short play.
  • Crude Oil¬†– (OIL) ¬†Broke lower on the week and tested support at the $24 level. The move back to the previous high is positive for the commodity. Watch the volatility, but a break from the double bottom pattern higher would be a positive.
  • Gasoline¬†– (UGA) Pushed lower to the 200 DMA and bounced with oil on Friday. 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 $130 and is moving towards the target.
  • Palladium¬†– (PALL) – Consolidated near the $70.50 support and bounced back towards the high near $75.
  • Base Metals – (DBB) – Broke from the consolidation pattern at the low ($16.80) and heading higher. I like the move and am looking to add the whole are the parts to the watch list for next week.
  • Silver (SLV) – big move higher this week and outpacing everything.

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: 

Global markets have followed the US markets off the June 24th pivot point. Now they are gaining momentum on their own accord and economic data. The positive comments from analyst and money flow have accelerated this week. Europe (IEV), China (GXC), Australia (EWA) and Emerging Markets have accelerated their respective moves higher. With the move lower in the US markets on Thursday the gains have stalled globally. We will see how they hold up on the their own should the US pullback or correct short term. I am not betting on any trend bucking by the global markets.

Watch IEV, FEZ, EWK, EWH, EWN and EWG on the upside. EFA continues to be sideways with a upside move the last week.

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.
  • IEV¬†– Move above $41.90 adding point for the ETF. Looking for $42.75 resistance short term.
  • EEM¬†– Bounced off $38.50 and still looking for a move above the $40 level.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke down with the markets off the June 24th low. Moved back below the 200 DMA and has now headed lower again with a break below the $63.50 low in June. There is no reason to own this sector currently and we are willing to sit it out for now and let a trend develop short term.

Sector Summary:

7) Global Fixed Income:

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

  • PAFCX – Bounced off the lows and trading sideways.
  • PICB – 3.1% dividend. No reason to own currently. Formed bottom and trending sideways.
  • EMB – 4.3% dividend yield. Bounced off the low and trending sideways.
  • PCY – current dividend yield is 4.8%. Bounced off the low and trending sideways.

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.¬†