Weekend Update for September 13th

The wild ride continues, but it was less volatile this week. The news relative to Syria made a turn towards diplomatic settlement versus with weapons. That calmed the global markets and brought the buyers back to the table to put money to work in equities. It still has to deal with the FOMC meeting next week as the Fed reveals what their plans are for the stimulus package and how much they will cut.

Despite all the negative surrounding the broad markets they still have found a way to attract buyers. Below we have updated the sectors of interest, the different asset classes have been addressed and with it our overall market outlook. Patience is the only word I can use to describe what actions need to be taken now relative to existing positions and adding any new positions going forward. The confidence level of investors is still not high and thus the best course of action is to be patient at these levels.

Stay focused and disciplined towards managing your money and your risk.

Sector and Model Notes:

  1. Looking at the Scatter graph below of the S&P 500 index we can define the current bounce off the August 27th low as the trend to watch short term. Of course that has been positive for the last two plus weeks. Which leads to the next question, is it sustainable longer term? There are too many question marks in place to say yes, but we will take what it gives one day at a time moving forward and let the long term outlook evolve. The longer term trend for the broad markets is still in a positive uptrend off the November lows. The question we have to address each week is where is the leadership and what opportunities does it present in relationship to the long term trend? Or, do we just establish trade positions for the short term?
  2. Consumer Staples has bounced off the test of support and is approaching resistance at the 50 DMA and the $40.75 mark on XLP.  If we follow through on the upside we will add the position to the S&P 500 model. Scanning the stocks within the ETF the leadership has come from WAG breaking above $51.25, WFM tracking higher in tune with the sector, SWY breaking above $27 and KR making a move above the resistance at $37.75. Watch List S&P 500 Model.
  3. Utilities are still attempting to gain some upside off support. First, XLU is now paying a 4% dividend. Second, the chart is showing a consolidation pattern or triangle, and it did make a move back above the previous support point of $37.10. All said, it is worth putting on a watch list to own long term. As interest rate risk subsides the stocks will regain some attraction for the dividend and growth opportunity in the sector.  We added to the Sector Rotation Model and we are looking to build a position to hold as well as trade the position as we move forward. Digging into the ETF NRG made a solid move above resistance at $26.80, and D moved above $59 on an upgrade. This is a sector for the patient investor!
  4. Financials moved above resistance at $20.05 and that is support. The indecision in the sector remains a result of the uncertainty around the regulations, fines and lawsuits pending. Slowing in the mortgage origination business isn’t helping either and the whining goes on and on. KBE & KRE are trading sideways at best and still need some kind of catalyst on the upside if the trend shifts. IAI has been the strength of the sector as the brokers added a solid moves higher, but the topping look the last couple of days could test lower if the sentiment shifts gears short term. Watch IAI and KIE for clues short term on direction. Their leadership has pushed the index higher and any downside acceleration would be a negative short term. Manage the risk of the positions in the Models.
  5. Healthcare (XLV) – Moved to the previous high and holding. Manage your stops in the S&P 500 Model. The sector is holding up well and continues in the current uptrend.  Biotech (IBB) has moved above the previous high and consolidating near the $206 mark, stop at $202. AET broke above $66 on Friday. Plenty of upsid in the stocks, but starting to look extended in the biotech. XPH is worth watching as it consolidates for breakout.
  6. Technology is at the previous high and near our target on the play in the S&P 500 Model. Apple sell off this week didn’t help the upside, but there are plenty of bright spots in the sector overall. The semiconductors (SOXX) moved to the previous high at $66.85 leading the broad sector. Internet (FDN) is leading on the upside as well in the sector, but struggled on Friday. IGN and IGV both made solid moves on the upside as well, but struggled on Friday as well. Sector still in a leadership role and we raised the stops accordingly.
  7. Consumer Discretionary is hitting some resistance at the $60.25 mark. We adjusted the stops in the S&P 500 Model on the position.  XRT cleared the 50 DMA and broke the downtrend off the July high. Weaker than expected retail sales for August reported on Friday didn’t help the outlook. Watching for defined leadership and if the upside is to continue this will be an important sector. AN has been a leader on the upside as the auto sector had been strong. DIS jumped 8% the last week adding help from the media sector. Homebuilders did well on the week as well with some selling on Friday. Still holding for now.
  8. Real Estate (REITs) have finally established some short term support and are making a bounce off the lows. Watching and scanning the sector for short term opportunities on the bounce. See the asset class below for more information.
  9. The global markets bounced led by the EAFE index (EFA) moving above the August high and pushing back towards the May high and led by Europe (IEV)  and China (GXC) short term. See sector update below for more on this asset class.
  10. Bonds continue to be challenged by the rising interest rates. Convertible bonds remain the only part of the asset class that offers upside currently. For more on the asset class read below.
  11. Commodities are struggling and that is not really a surprise when you look at the stocks market in comparison. Plenty of moving parts with oil rising, gold falling and agriculture moving higher. For more on this asset class read below.
  12. Volatility index tested support at 13.8 this week and held to end the week at 14.3. SVXY trade in the S&P 500 model has work well on the recent move and we have raised the stop on the position to protect the gains. This also puts VXX back in the post as an opportunity.
  13. The dollar is not able to hold on to last weeks gains. As the anxiety over Syria subsided this week the dollar trekked lower.  $21.90 is still support and the data is updated below on this asset class.

Economic Data & Outlook:

The economic data remains okay, not strong, not weak, but okay. The calender this week was not nearly as busy, but there was some key data points worth our attention. Consumer credit continues to decline… some see this as a negative for the retail sector, but in the longer term it is better for the consumer. Inventories were slightly higher showing some slowing in spending. Business inventories were higher as well. The slowing in business spending is always seen as a negative. That was validated with Friday’s sales report which missed estimates and was half of the growth in July.

Inflation at the producer level was flat as expected. Consumer sentiment index dropped to 76.8 well below the expectation of 81.5. The numbers remain mixed with the consumer still not fully engaged based on the data.

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 1.9% (2.6% the last two weeks). The run stalled on Thursday and Friday as investors face the infamous FOMC meeting. The uptrend off the November low is still intact as investors continue to buy for the second week. Watching to see how it unfolds going forward. 1710 is the previous high and target currently if the upside continues.

The NASDAQ has held up better than the other major indexes during the last six weeks of volatility. It remains above the 50 day moving average and established a new high this week. The Apple saga stalled the run, but still is in control of the upside. A test back to the #680 level would not surprise me and it would offer opportunities to reenter the index.

Small Cap (IWM) made the move above $102.50 resistance. If we can test and move higher next week it will be to a new high for the index.

Mid Cap (IJH) broke support at $119.15 and set up a short opportunity, but then reversed and bounced. Still lagging the small caps, but a solid move above $103 could get interesting.

The SOX index is offering solid leadership. Hit the previous high and is testing the move. Look for the leadership to continue if the NASDAQ and broad markets are to continue higher. $66.80 is the level to clear on SOXX 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 – See the sector description above for more information on leadership and opportunities.

SP500Scatter

2) Currency:

The dollar is still holding support above $21.90 (UUP). Not much in terms of leadership overall, but a solid move higher this week in FXB, BZF, FXA,FXC and CEW. The bounce came as the dollar retraced from the $22.30 level lower this week. The move was a result of no strike scheduled by the US towards Syria.

No purchases in the sector currently and still looking for a defining move short term.

Currency

3)  Tracking the Bond Sectors:

Sector Summary:

The bond market overall continued it’s sell off as yields rise. The worry relative to the Fed cutting stimulus has the market shifting gears yet again. With the FOMC meeting this next week we have to watch closely to see how it all plays out. Plenty of Volatility currently as bond market continues to struggle with the uncertainty.

  • 30 Year Yield = 3.84% – unchanged for week  —  TLT = $103.53 up 12 cents for week.
  • 10 Year Yield = 2.88% – down 2 basis points for week  — IEF = $99.62 up 32 cents  for week.

Treasury Bonds – The yield on the bond flattened out this week as move towards the FOMC meeting. All eyes will be on what the Fed does relative to stimulus and cuts. We hit our stops this week on TBT and have not positions moving towards the meeting. We will let this play out before establishing any investments.

High Yield Bonds – HYG = 6.4% yield. Starting to establish a sideways trading range short term. Watch and see how this pans out as it stabilizes again. The yield is attractive, but we don’t want to give up principle as a trade off. Looking for a move above the $91.25 market as possible entry point.

Corporate Bonds – LQD = 3.9% yield. No positions currently. Support at $110.75 held as the rising yields are hurting any positions in the bond. Has to reverse the trend before any interest in owning.

Municipal Bonds – MUB = 2.9% tax-free yield. No positions currently. Downtrend still in play, but turned up off teh $101 bottom. Watch as the solutions to the various municipalities is in motion. Not over, but restoring some confidence.

Convertible Bonds – CWB = 3.6% yield. bounced off 43.75 support. Watching the upside and volatility. This is the one bright spot in the fixed income class.

***Fixed annuities have finally returned to the 3% guarantee mark (five years). The best five year CD currently is 2.1%. As these yields grow they will attract more money. I view that as a positive for stability in the markets overall.

4) Commodities – The shift in the sector was lower again this week as the test of the recent move continues lower and testing support. DBC held support at the $26.20 mark and the 50 DMA. Watch to see if support holds, and if so, where the forward looking opportunities are. As you can see on the chart below GLD, SLV, JJC and UGA are holding the sector down with decisive moves lower. DBA is the sole bright spot for the week.

  • Natural Gas – (UNG) tested support at the $17.10 level and bounced. Tested support at $18.50 and pushed back to the recent high at $19.40. Looking for follow through on the upside. FCG was put in play on the Sector Rotation Model this week as a play on the move in the commodity. Adjust stops and and track as we near the target on the trade.
  • Crude Oil – (OIL)  Crude jumped to $110 Syria issues, but has tested lower this week, but the buyers continue to believe/speculate in the upside. Watch the downside risk going forward as the commodity is overpriced relative to the fundamentals. Trend is still to the upside.
  • Gasoline – (UGA) Testing the lows near the $57.75 mark. The volatility in gasoline versus oil has not been level. Holding this level for now, and worth watching to see how it plays going forward.
  • Gold – (GLD) The metal hit resistance two weeks ago at the $1420 level and has continued to move lower since. Testing $1310 support now after dropping $40 the last two trading days. Silver is in the same boat for now. Watch the downside as it continues to be the trend for the precious metals.
  • Agriculture – (DBA) Attempting to find some upside momentum. A break above $25.50 short term would be a opportunity on the upside. The speculation around soybeans is driving prices higher, but with volatility. We will stick with DBA as the opportunity if this breaks higher. SOYB for those who want to play the move directly.
  • Base Metals (DBB) moving back towards the recent lows at $16. SLX has been the bright spot holding the ETF up. Watch and let this reverse before putting any money to work in the sector.

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 led by the EAFE index (EFA) moving above the August high and pushing back towards the May high and led by Europe (IEV)  and China (GXC) short term. The chart below shows the move from China, India, Emerging Markets and Brazil last week. The shift from negative sentiment over Syria and the stimulus cutting in the US has helped the global markets follow the US higher.

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.

Sector Watch:

  • GXC- China is leading the global markets again this week on the upside and breaking to a new high.
  • IEV – Europe bounced after a bout of selling. Hit new high this week and holding for now.
  • EEM – Solid bounce and cleared the $40 resistance again. Now at the 200 DMA as resistance.
  • PIN – India bounce off the lows last week as their currency leveled off from selling. $16.50 resistance.

6) Real Estate (REITS):

Real Estate Index (REITS) – The sector broke down tested new low at $61 and bounced, tested again and bounced again last week and has now made it above the $63.80 mark? We did add a position in IYR, but the interest issues which have impacted the sector are still in play. Looking to build a position and manage the opportunities as they present themselves.

Sector Summary:

  • IYR – Finding a bottom? Watching to see if the upside can build a new trend. current dividend is 4%.
  • RWO – SPDR Global Real Estate ETF – Trended lower and bounced off support near the $40 mark. Some resistance at the 50 day moving average. Dividend is currently 4.7%.

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 this week. Watch?
  • PICB – 3.1% dividend. No reason to own currently. Formed bottom and trending sideways. 27.80 support?
  • EMB – 4.5% dividend yield. Bounced off the low, but no clarity yet.
  • PCY – current dividend yield is 4.8%. Bounced off the low and trending sideways. Nothing worth trading.

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.