Weekly Notes for July 15-19th

We end the week at a record high and headlines are full of what if… scenarios. This remains a challenging market relative to emotions and worries. One day everyone is worried about the Fed and the cutting of stimulus and the next everything is okay and the market trek higher. The bottom line is what’s on the chart and for now that is a ‘V’ bottom reversal on the pullback in May/June. The move above the previous high is positive for the buyers and the upside is confirmed to be back in play of the previous trend from November.

How do we deal with it relative to our portfolio? Follow the trend until it is not the trend. To second guess the move or try and make any sense of the fundamental data versus the charts will only drive you towards insanity.

There is plenty to cover this week below as we look forward and determine where to put money to work and how to manage the positions we currently have. Earnings are going to speed up this week and they will play a role in the outcome. There is more economic data on tap and of course the Fed will continue to attempt to make everyone feel better. Despite all that we have to follow the money.

Below I evaluate the impact and outlook for each asset class and how we want to find the opportunities for putting money to work next week.

Sector Moves of Note:

  1. The Bank ETF (KBE) and Regional Bank ETF (KRE), we discussed last week as opportunities and they came under fire from Bernanke’s comments relative to the Fed actions looking forward. They declined on Thursday, but recovered on Friday as earnings from JP Morgan and Wells Fargo showed solid improvement in the fundamentals. The test lower may be a good entry point if you are willing to accept some short term volatility.
  2. Volatility (VIX) spiked on the selling and has disappeared on the buying, the trade in SVXY has been solid as a result. The break to a new high on the S&P 500 index to 1680 puts the upside firmly in play short term. Holding SVXY for anow and we will manage our stops.
  3. Interest rates have settled again. How long with the Bernanke comments keep the calm in place? Anyone’s guess and I am not willing to take the upside trade currently. Watch to see how this pans out going forward, if nerves step in again we will look to add the short trade on bonds again, but for now willing to watch and see.
  4. The commodities have shifted to the upside in oil based on speculation relative to supply. Gold has bounced off the lows as buyers have been willing to step into the trade again. Overall still a very questionable sector based on what we know now. The technical data points to a bounce trade off the lows and nothing more currently.
  5. The global markets remain a challenge. China’s economy is questionable, Japan is volatile, Europe is not recovering, sovereign debt remains a big question mark and emerging markets can’t gain any momentum to speak of. All of the country ETFs could set up for a trading opportunity, but still not willing to risk much in the sector.
  6. The US indexes have hit new highs again? This puts the upside firmly back in play technically, but of course the speculation around the data points are still an issue. Take what the technical shows currently as the fundamental data is being ignored. At some point it will all matter, but for now traders are pushing the indexes higher.
  7. Don’t assume anything at this point. If the buyers were willing to step in and push the markets higher so be it, but expect the V bottom to test at some point near term.  The uncertainty remains relative to direction and we remain focused on discipline versus chasing trades.

Economic Data & Outlook:

The data this week was mixed, but mostly on the positive side. Consumer credit jumped showing that the consumer is spending again and retail responded. Small business index fell (big surprise), Wholesale inventories were lower, weekly jobless claims rose to 360,000 (higher than expected), mortgage applications dropped on the rising rates (expected, but not liked), import prices declined (positive news), Core PPI was up 0.2% and more than forecast, gasoline impact on the topline was bit pushing prices up 0.8% on the PPI data, consumer sentiment was lower than forecast (it was ignored) and the bottom line… none of it mattered.

Investors are focused on buying now and the future will take care of itself. Market runs like this never end well. There is plenty of data to digest next week and it will have an impact (supposedly) if the numbers don’t measure up. Earnings are in play will add to the pressure on the markets. The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

1) US Equities:

The June 24th pivot point is where we are watching currently as the bottom has been established along with a new high. The scatter chart below, from my view, shows a lack of true leadership in the broad market index. Wit all the sectors near the index itself is shows a broad move in the market, but is lacks leadership. Lasting rallies tend to have significant leadership with a defined rationale behind it. What we are looking at is broad movement and buying it all, or just buying the index itself as a trade on the upside.

The ‘V’ bottom move has been significant and the buyers are still willing to step in and believe that Bernanke and friends are not going to make any drastic changes to stimulus and all is well in the US markets. Right or wrong that is what the markets are trading on currently. Our job is to take what it gives one day at a time and then make our changes accordingly.

June 24th Low Pivot Point

10 Sectors

The shift back to the previous trend is worth looking at the chart off the November pivot point again as a refresher of what is in play currently. Note the previous leadership from financials and consumer discretionary is back in play.

November Pivot Point Low (click to enlarge the chart)

10 Sectors

Sector Rotation of Interest:

Downside Rotation: The downside short term has reversed and for now we are just on correction/reversal watch in the current upside move.

Sideways Trend: The bounce is in utilities has pushed the index sideways and wants to re-establish the upside move. Real Estate is like utilities upside move off the low and now facing resistance to shift to an uptrend. Telecom made a move on Friday to push higher and has joined the upside rotation.

Upside Rotation: The bounce off the June 24th low remains in play with financials, consumer discretionary, healthcare, etc. leading the upside. They have all reversed short term to push the broad index higher.

Updated the S&P 500 Model Watch List to reflect the moves this week and looking into next week’s trading. We are close to being fully invested in the model and you need to manage your risk accordingly.

2) Currency:

As seen below the dollar moved higher off the June 18th pivot point, but this week gave some back as the Fed comments towards stimulus and the markets hit the dollar. The resistance at the previous high came into play and the trend is being questioned along with Mr. Bernanke and his intent towards both interest rates and stimulus.

10 currency

Sector Watch:

  • UUP – $22.90 high is resistance point to move through. The test back to $22.40 is in play and the upside could come back into play depending on how the Fed would like to talk about it this week.
  • EUO – The short euro trade entry was $18.80 and has continued higher. Hit stop at $19.65 on the trade. Still looking for more downside in the euro going forward.
  • YCS – The short yen play off the reversal at $59.75 was the entry which we did post and add to the ONLY ETF Model. Hit stop this week on the bounce in the yen versus the dollar. Still looking at the downside trade on the yen to set up again as we move forward.

3)  Tracking Bond Sectors of Interest:

Sector Summary:

The bond market overall experienced a sell off that is a direct result of the yields rising quickly. The Fed may have finally succeeded in talking bond investors in off the ledge. The rates did calm again this week on the comments from Bernanke as he attempted to explain the Fed actions and what they mean to interest rates. The Fed doesn’t want or need higher rates currently. upside trades are there if you are willing to accept the risk associated with the news.

  • 30 Year Yield = 3.64% – down 3 basis points for week  —  TLT = $107.72 up 99 cents for week.
  • 10 Year Yield = 2.6% –  down 11 basis point for week  — IEF = $100.58 up $1.27 for week.

Treasury Bonds – The yield on the 10 year bond found some relief with a modest bounce off the low. The 30 year held its ground, but looks to bottom at the current level as the Fed talks calm to the bond market. The proof is in the yield so to speak and this is something to watch as we move forward.

Jim’s Notes Article on Bond Yields rising.

High Yield Bonds – HYG = 6.7% yield. Bounced and looking for an opportunity versus speculation.

Corporate Bonds – LQD = 3.8% yield. No positions currently. Bounced and hitting against resistance near $114?

Municipal Bonds – MUB = 2.8% tax-free yield. No positions currently. Bounced and near resistance?

Convertible Bonds – CWB = 3.6% yield. Bounced and made move above the $42.80 entry. Manage the move higher.

4) Commodities – Sector Summary:

  • Commodity Index (DBC) – The outlook for commodities remains suspect at best. The index bounced off the lows the last two weeks as oil moved higher. Gold joined the party this week and going forward this is nothing but a trade if you can stand the volatility of the sector and the news.
  • Natural Gas – (UNG) Hit stop on short play and is now trading sideways. Watch for a direction change.
  • Crude Oil – (OIL)  Broke higher on speculation in Egypt. Continued higher as supply questions rise. Upside in play.
  • Gasoline – (UGA) Breaking higher on oil move. Broke above the $57.80 resistance gave the entry and hasn’t looked back since. The risk of the trade has paid off nicely on the move higher.
  • Gold – (GLD) Bounced and cleared the $123 level and holding for now. Upside trade? Only if the speculation grows. $125 enty for a trade up to the $130 level.
  • Palladium – (PALL) – Got the trade higher and looking positive after test on Friday. Added play and would add to the trade if breaks above the $68 level. Moved above $68 to add to the trade this week. The stop would now be $68 on all shares to protect the gain.

Commodities Rotation Chart:

You can see OIL is accelerating higher along with gasoline (UGA) and Palladium (PALL). Others are rotating down or moving sideways currently on the chart.

10 Commodities

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

5) Global Markets: 

Global markets shifted to the downside and are attempting to make a move off the low, but have not really be able to gain any momentum as the economic outlook remains questionable. Japan, Europe and Canada have been outpacing the index, but even that is questionable. Take it slow in the global arena short term.

Japan (EWJ) has become volatile, but still taking the lead on chart below. The emerging markets continue to lead the downside risk short term.

The chart below shows the downtrend in play.

10 Country

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:

  • FXP– Short play on China reversed as investors want to trade the reversal? Stops hit, but watch for opportunity.
  • EEV – Short emerging markets reversed, but the downside is still worth watching short term.
  • EWJ – The upside move from the country is accompanied by volatility, but I like the trade.

6) Real Estate (REITS):

Real Estate Index (REITS) – The sector broke down and is still looking for a bottom. There was a small bounce this week off the lows, but there is still plenty of work to do before the upside looks attractive. Be patient with the sector. If you like to trade there is opportunities to trade the sectors short term swings.

Sector Summary:

  • IYR – Found support and moved back above the $68.7 resistance this week. Will it make the move higher? It is worth watching and taking a small position if positive momentum does return to the sector. Short term oversold and if interest rates level look for money flow to pick up in the sector.
  • RWO – SPDR Global Real Estate ETF – Looks just like IYR currently on the chart. Move above $43.50 is of interest.
  • MDIV – First Trust Multi- Asset Income ETF is a good alternative to picking through all the choices of income funds. This multi-assets income fund pays a 5% dividend. Made similar move to the REITs and upside may be in play again short term.

7) Global Fixed Income:

Sector Summary: Downtrend in play and uninterested in the sector currently.  We will continue to watch for the next opportunity, but for now no positions.

  • Watching these funds for a bottom.
  • PAFCX – Spike to the downside. Attempting to bottom?
  • PICB – 3.1% dividend. No reason to own currently. Still attempting to form a bottom.
  • EMB – 4.3% dividend yield. Bounced off the low, but no reason to own currently.
  • PCY – current dividend yield is 4.8%. Bounced off the low, but no reason to own currently.

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.