Notes to Note:
This was a week of news, events, data and tragedy! The combination created a roller coaster ride for investors and I must admit, Friday left me scratching my head. I am of the opinion that some have lost touch with reality and the greed factor has reached a new high. That said, lets look at where we stand and where we may be going.
First, geopolitical issues are still in full swing. Russia/Ukraine has taken front and center stage. Isreal has stepped up with renewed issues in the Gaza strip. Iraq seems quite compared to the others, but still and issue. Portugal hasn’t gone away either with the financial strains put on the EU. Throw in the new BRICS Bank and we round out a great week of international issues that all have some impact of the financial markets if they unfold further. We will be watching all them over the weekend for any new developments and what potential opportunities they may present going forward.
Second, the economic data has not been stellar. The few bright spots like Empire State and Philly Fed manufacturing data have been offset by the disappointments in the housing starts. The projections remain at 3.5% growth for the second quarter. Based on what we have seen thus far… that may be a stretch. Again, the Fed had done a great sales job on convincing investors that the growth on the horizon is coming soon. If this fail to materialize the downside risk will grow proportionately.
Third, earnings have equally a mixed bag of reports, but investors have punished the offender and reward those meeting or beating expectations. There is not much notice in terms of real growth only the meeting of the key quarter earnings and revenue numbers. AMD was down 17.2% on Friday as they disappointed on earnings and guidance. Those that beat have not been as gracious, but they have been rewarded just the same. Plenty on earnings to watch next week and they will again set the tone assuming no outside events or news taking over the trend.
Last, but not least, the Federal Reserve is fully engaged as Yellen made it clear they are concerned about the potential bubble in stocks. This conversation is not over and there will be plenty of additional discussion points for investors. We will continue to watch to see how the Fed proceeds and what actions they will take relative to QE and interest rates.
We still have to stay focused and disciplined enough to the follow the trend. Below are some key notes on the week’s events and what we are watching looking forward:
- Russia/Ukraine… this is far from over and the US will somehow, someway find a way to get involved, verbally or physically. Watch to see how it unfolds. RUSS spiked higher as a short opportunity on Thursday. Watching to see if there is further downside on the news or if the upside returns should the banter subside along with the aggression towards the Ukraine. Thus, RUSL is the long trade if the news turns to the positive short term.
- Volatility spiked higher to 15.3 Thursday on the fear factor climbing relative to a correction in the broader market indexes. The retreat to 12.1 on Friday shows the lack of true concern over the events from Thursday and earlier in the week. SVXY was the benefactor on Thursday as the fund gained 7.6%. Monday will give greater clarity after a weekend to digest the implications and developments to all the worries.
- Banks started the week with positive earnings in the large banks. JPM, C, GS, etc all produced positive results and pushed KBE higher. Thursday changed that picture with BAC missing earnings and the selling in the broad markets relative to Russia. KBE fell over 2%, but Friday gained 1%. This is still an area of struggle. Earnings are hampered by regulations and the continued barrage of lawsuits from the government. KRE bounced as well on Friday following disappointing earnings from some of the regional banks. This sector is still on my watch list for long term positions.
- Small cap stocks broke below the 50 DMA and support on Thursday… rallied back on Friday? Despite the two volatile days of trading the risk off mindset from investors is in play. Will it follow through and a rotation to value continue? That is the big question heading into next weeks trading. Watching IWM to move back above $115 if we are going to add any upside trades in the sector.
Have A Disciplined Week of Trading!
The Third phase of the story line is earnings, or declining growth in them quarter over quarter. First quarter data was not good overall in real data growth. However, the spin by analyst kept investors looking forward not back. The rate of decline in earnings is the primary concern from my view. The focus from the media is the number of companies that beat expectations, but the rate of growth in earnings will determine the rate of growth in stocks looking forward. The quarter is over, the reports are coming in and in the coming weeks we will get a feel for the real data. Earnings are and remain a concern for investors longer term.
This all adds up to worry relative to a lack of clarity and the belief. The underlying concerns have not been removed or dealt with and if anything they were brought to life again this week. We ended the second quarter and the next phase of reports have begun. So far investors have embraced the data as positive, but at the same time worrisome relative to the Fed hiking interest rates. Throw in growing geopolitical issues impacting oil prices and economic uncertainty. As we always say and attempt to do, take what the market gives and protect the downside risk of your portfolio. Patience and discipline are key to success long term.
The models can be linked to below and each has been updated for the current outlook:
Sector Rotation Model (updated – 7/18/14)
ONLY ETF Model (updated – 7/18/14)
S&P 500 Index Model (Updated – 7/18/14)
ONE EGG Model (updated – 7/18/14)
Monday Trade Opportunities:
- With the new chop developments over the last two weeks we have limited our trading. It is not worth getting pushed in and out of stocks just for the fun of it. Willing to let this settle and raise our cash levels as stops are hit. We have booked solid gains over the last six months and willing to avoid the risk and volatility. We continue to run our scans daily, measure the risk relative to the discipline of the strategy and make our decisions accordingly.
- We will publish any trades for Monday prior to the market open.
- Be patient and most of all be disciplined.
Pattern Trade Tracking & Follow Up:
- MSFT – entry $42.30. Break from consolidation. Software sector bouncing back. Stop $42.30
- T – entry $35.60. Reverse head and shoulders pattern. Telecom wants to break higher. Stop $34.75.
- DBB – Entry $16.75. Break resistance and continuation of reversal. Cooper reversing along with steel. Added position on test lower and continuation of upside. Stop 17.25.
- SMH – entry $45.65. Triangle breakout. the consolidation pattern is breaking to the upside. technology leadership. Stop $49.50.
- AMAT – entry $20.20. Flag following a trading range break on upside. Look for volume to pick up on the move higher. Stop $22.55
Breaking Down the 7 Asset Classes:
As you can see on the chart below the US stocks have been leading the move to the upside. Despite the test they remain the strongest of the asset classes with a test lower again this week. Real Estate REITs bounced back the last two weeks. The EAFE and Commodities lead the downside and we continue to track the opportunities in each of the sectors below. Patience and focus on opportunity.
For the week of July 21st:
- Treasury bonds bounced reversed from the selling last week to create a another move higher for the bond short term. If the economy is growing faster in the US it will still be a negative for holding bonds. The move is a reflection of uncertainty about the direction and for now we watch to see how it plays out.
- Commodities remain on the move lower, oil fell last week, gold bounced and reversed, natural gas is lower and agriculture remains near the current lows. Patience as the opportunity will develop short term.
- Emerging market moved up slightly, down and up and… you get the picture. Need to see some conviction in the sector if we are to put money to work.
- REITs moved higher as rates declined yet again. Watching the sector for the opportunity, up or down.
- The dollar was drifting lower, but found some support short term and has been moving modestly higher. Up is good for now.
- Emerging market bonds bounced back as well with rates leveling off this week.
1) US Equities:
Using the latest pivot point (May 15th) you can see the sideways activity for the broad index with the big dip on Thursday and reversal on Friday. There are no real standouts in the chart on the upside the last two weeks. The sideways activity is considered consolidation, but it is also starting to show a lack of clarity on the leadership side. We have to be patient and not read more into the charts than it is saying at this point. Stops at $195 on SPY for short term outlook and let it work through the outside market influences as well as the inside data reports being released.
For the week of July 21st:
- S&P 500 index returned to the consolidation phase this week along with a big decline on Thursday followed by a recovery on Friday. Trend remains on the upside and we are testing that upside move. Very mixed week of trading in the index and the leadership is testing as the broad index looks for direction and commitment.
- NASDAQ Index moved lower to the 4350 level held to close at 4428 on the week. The index is still in a positive trend and continues to hold above support. The large caps stocks (The NASDAQ 100 index) continues the hope for the index to hit a new highs as money did rotate into that direction on the week. This is a result of the risk off trading in play. Stops in place and see how it plays out near term.
- Small Caps (IWM) – Small caps broke the 50 day moving average and moved back near that level on Friday. Watching to see if the upside resumes next week as a trade opportunity or is the downside in play as a part of the risk off strategy in play.
- Energy (XLE) holding in the trading range and has not recaptured the uptrend. Patience for now on direction. Looking for the trading opportunity into next week.
- Technology (XLK) tested lower and bounced back on Friday. Upside still in play and we manage our risk going forward. SOX still leading the sector higher.
- Healthcare remains in a leadership role. Tested with the other sectors on the week, but still putting in some leadership. Biotech (IBB) has been the weakness for the sector overall short term. Yellen comments didn’t help the matter.
- Transports (IYT) hit new high and validating the Dow Theory and that should reflect well for the industrial stocks as well.
- Retail recovered nearly 2% of the decline on Friday to keep the sector in play short term. The sales reports earlier in the week were not positive for the sector. This is definitely a stock picking sector overall.
We are working off the June 11th pivot point with the dollar moving lower gradually, but some shift to upside the last two weeks. UUP is the leader using the May 30th as a pivot point of the low. Watching for any opportunities as this unfolds further.
3) Tracking the Bond/Fixed Income Sectors:
Using May 28th as pivot point to push lower we see the down, up, down again and up again activity relative to bonds. The move in interest rates shows very clearly the influence on the chart. Yield volatility continues to bounce around and no conviction in either direction at this point. Manage your stops and use the bounce to lessen exposure if rates start higher again.
- Utilities – The dividend play remains, but it has experienced volatility and this week bounced modestly, but continues the micro downtrend. The 4% dividend (entry point) remains. Added again on the move above $42. Stop at $42 and break even on the trade plus the dividend.
- REITs – This is still a sector to watch and manage for the dividend of 3.2%. We continue to monitor the short term volatility and sideways trading has been drifting higher the last couple of weeks. Support at the $70.60 mark for now and exit point.
- Mortgage REITs – has slowly worked higher from the gap lower in March. Made the break through resistance at $12.50 (REM) added $12.50 position and $12.35 stop. Dividend distribution of 29 cents, that explains the drop in price on June 24th. Hanging tough for now and willing to see how it unfolds going forward.
- Treasury Bonds – Yields moved lower this week on money flow. Risk on trade is in motion short term. The 30 year yield which is now at 3.29%. TLT tested supportwe are watching the move higher this week back to June highs. I still see this as a trade opportunity and nothing more at this point. Be cautious here and don’t fight the Fed for now.
- High Yield Bonds – HYG = 6.4% yield (from entry). Bounced off the $91.25 support (Sept 2013) and held to close back above the 200 DMA. Was moving higher, but dropped on rumors in the high yield sector. Still watching how it moves from here. Stop is $94.25 and hit this week. Locked in the gains. Watching to see how this plays out and look for the next opportunity.
- Corporate Bonds – LQD = 3.6% yield. Entry off the low at $113.20 (12/2013). Cleared $117.50 resistance level as traded through top of the consolidation range and now near the $119 off the test lower last week. Watch how it plays out and keep your stop at $117.50.
- Municipal Bonds – MUB = 2.9% tax-free yield. tested support at $107.80 and holding. Manage your risk and still looking to collect the dividend. Stop at $107.50 (entry 104.50 12/2014) and the dividend is the play. Muni’s tested lower with corporate’s on the week.
- Convertible Bonds – CWB = 3.6% yield. bounced off $43.75 support (Sept 2013) and $44.80 entry point. We hit our stops at $47.50 4/10/14. (locked in a 2% dividend + 8.6% capital gain) That was a good fixed income trade. We added the position back at $48.75 on the bounce off support. Moved higher and trading near the high. Stop is $49.50 for now.
- Preferred Stocks – PFF = 5.2% yield. Modest uptrend continues. Tested the 50 DMA and bounced back to the previous highs only to test lower again. Watch and maintain your stops at $39.50 currently (entry 38.50 3/13).
4) Commodities – The commodity index (DBC) made a pivot lower June 22nd and has not looked back. The mixed issues within the sector and the reversal in natural gas have contributed to the downside trek. We have to be patient and let it all play out versus forcing any positions.
For the Week of July 21st:
- Natural Gas – UNG moving lower off the $26.30 high in June. $24 level of support broke and offered the trade in KOLD as a short trade on the commodity. The stop $47.55. The entry was $43.50. Still in downside trek.
- Oil (USO) Broke lower again this week and the SCO trade is panning out. entry $25.45 and stop at $25.50 currently. Expect some resistance at $27. Hit the resistance and reversed. Holding the stop for a breakeven exit.
- Agriculture (DBA) building a base short term and could develop into a short term upside trade.
- Gold bounced on the issues in Russia. Watch as it is event drive.
- Base Metals (DBB) moved higher again. Raise your stops on the trade to $17 with entry at $17.
Commodities Rotation Chart:
DBC – PowerShares Commodity Index ETF (click to view) Composite of 14 commodities tracking index.
5) Global Markets:
The global markets have shifted to the downside as the EAFE index establishes a lower low this week reversing the current trendline to the downside. Geopolitics gets most of the credit for the shift in momentum. Despite the shift in trend there are parts worth watching.
For the Week of July 21st:
- Emerging Markets (EEM) bounced and made move to near June highs and temping to hold. This is one sector to watch currently. Watching for continuation next week and opportunity to add to the positions. Entry $44.30
- China (FXI) tested lower this week and bounced with the volatility relative to Russia. I like this country ETF and could see further upside going forward.
- Japan (EWJ) tested, but has moved back near the previous highs and worth upside trade if pans out.
- Patience here and look for further opportunity.
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.
6) Real Estate (REITS):
Real Estate Index (REITS) – Pivot point on May 16th shows gradual move to the upside. A move back above $72.25 shifted the trend back to the upside. Simply put there is some indecision in the sector short term and hopefully some opportunity on how it plays out. Patience and look for the leadership.
For the Week of July 21st:
- Nice move on the upside from EQR, HST, SPG and BXP the last couple of weeks. Playing the sector versus the parts currently. It may be time to shift money back into the parts if the worst is over. Patience and discipline.
7) Global Fixed Income:
Sector Summary: Bounced off the lows and Trading higher on the bounce in the global markets over the last couple of weeks. Any positions are for the dividend play only, thus manage your stops.
- PAFCX – 1% dividend. Trading and trending higher the three months, and cleared the previous highs. $11.15 entry. Stop at $11.15 break even and collect the dividend.
- PICB – 3.1% dividend. $27.80 found support and bounced. $28.70 entry (Sept 2013) stop at the entry. zero risk trade on dividend. This a dividend play. Tested the move lower near support and holding for now. Adjust your stops accordingly.
- EMB – 4.5% dividend yield. Looking for bottom? Found the low and bounce. A break above $109.27 would be of interest. entry $109.30. Adjusted our stop to $113.50 on volatility. Watch and manage risk and dividend. Again the gains are more than the dividend, thus we have to look at protecting the gain should this reverse. Made move back to the previous highs on reversal in sentiment.
- PCY – current dividend yield is 4.8%. Trending sideways again as emerging markets remain a question. Found support and bounced. entry $27.30. stop $28.75 and manage your risk as the gain is more than the dividend yield. support at $28.80 in play. Watching to see how this unfolds going forward.
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.