Notes to Note:
What is driving the markets? News, events, earnings and speculation simply put. I know that sounds trite and simplistic, but the reality remains that each one had it’s impact on the markets, sectors, stocks or investor psyche all week. The homebuilders (ITB) have declined nearly 5% the last two trading days as the new home sales were well below expectation for June and the May data was revised significantly lower. Yet, Chipotle Mexican Grill jumped more than 13% the last two days on better than expected earnings and margins. My point simply stated is that movement is directly tied to a specific news, events, earnings, etc. versus a trending sentiment based on clarity in direction. The shift started three weeks ago from trending to the current event driven movement. That creates choppy markets and uncertainty relative to short term trading. That translates to the need for discipline and patience. It also comes with the need to understand that cash is a sector and one utilized effectively.
As we conclude a week of ups and downs and look forward I expect more of the same. We still have to stay focused and disciplined enough to the follow the trend, but aware enough to know when to raise cash. Below are some key notes on the week’s events and what we are watching looking forward:
- Russia/Ukraine… this is far from over, but out of the headlines this week. Don’t assume this will not have an impact moving forward. The Russia ETF (RBL) declined on the week, but is finding near term support. If this returns to the headlines Russia will fall further. Watching to see how it unfolds. RUSS is the short ETF for the country and we have been willing to step into the trade when appropriate relative to the risk.
- Volatility spiked to 15.3 six trading days ago and then fell back below 12 this week. We close the week with a jump back to 12.6 on Friday’s modest selling. No real fear in the market… it is purely event driven fear which creates volatility day to day and intraday. The fear that trends with volatility moving higher and markets moving lower is what we are concerned about as we progress toward the future.
- Small cap stocks (IWM) moved back to the 50 DMA after making a run as moving back above $115. The growth versus safety story continues to unfold and the growth side is still not making any convincing moves to the upside or in terms of leadership. Watch this sector along with the technology stocks to determine how much risk investors are willing to hold in their portfolios versus cash.
- Housing is another sector of concern near term. The drop of more than 7% on the new home sales disappointment has rattled investors for the near term. The short interest and the negative sentiment has grown and taken control of the sector short term. This is a negative indicator for the economic outlook. Watch, be patient and let this all unfold in time.
- Patience is a word we all like to use, but struggle with implementing. The last three weeks shows the importance of knowing how to manage the risk and volatility of the broad markets. Knowing when to put on risk in your portfolio versus knowing where to take risk off is vital to the preservation of principle.
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 thus far most have been positive. With 188 S&P 500 companies reporting, 105 have beat on the top line estimates. That is weak compared to long term historical data, but is an improvement over the last two quarters. There are still plenty of reports to come, but the start has been positive for the revenue side of earnings. This is a stat that shows the sustainability of growth in stock prices from my view and one to watch going forward.
This all adds up to worry as it relates 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 the last two weeks. 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, weaker global economies than expected, inflation talk in making its way into the conversation, and the growing geopolitical risks around the world. Throw in issues impacting oil prices and the trickle down effect to the consumer, and there is plenty to worry about going forward. 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 – 7/25/14)
ONLY ETF Model (updated – 7/25/14)
S&P 500 Index Model (Updated – 7/25/14)
ONE EGG Model (updated – 7/25/14)
Monday Trade Opportunities:
- Each weekday we post the trading opportunities we see using technical analysis. As you have seen the last couple of weeks, when volatility results in choppy markets we have less holdings to manage in the portfolio. As the chop subsides and the consolidation period comes to an end we will find breakouts and opportunities to own sectors or stocks that make up the sector. The goal is patience and discipline as this unfolds and filter for the best trading opportunities.
- We will add the opportunities for Monday before the open on Monday.
Pattern Trade Tracking & Follow Up:
- EMB – entry $116. Ascending triangle. New high and outlook is good for the sector currently. Stop $115.30.
- PLUG – entry $5.10. Base breakout. Looking for the move from the base to accelerate as the trend is drifting higher. Stop $5.10
- SCTY – entry $66.50 . Test upside breakout. the support is being tested on the move higher in June. Upside trade setup is positive. Stop $66.
- MSFT – entry $42.30. Break from consolidation. Software sector bouncing back. Stop $44.
- 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 $49.70.
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.The last week plus the emerging markets are making a move higher while the US moves sideways. That shows some rotation in money along with the rise in treasury bonds and the dollar. The picture will gain further clarity as we move forward and we will make the appropriate allocation changes as we go.
For the week of July 28th:
- Emerging markets are up 3% from the 7/17 reversal. I like the outlook for the sector and expect volatility, but the upside growth will justify the risk.
- Treasury bonds continue to see money flow as a result of news and events around the world. Yields on the 30 year closed at near term low of 3.24%. How much lower? That depends on how much more fear we generate.
- Commodities are attempting to build a base or low currently. Base metals are the best performing currently as noted below as well as the other commodities outlook.
- REITs moved higher as rates declined yet again. Watching the sector for the opportunity, up or down.
- The dollar was drifting higher off support short term and UUP 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 last week and reversal to drift slightly higher. Technology remains the one consistent in the trend higher, but that also means we don’t see any selling that it putting pressure relative to the downside. Thus, we remain patient and willing to take what the market gives and protect the downside risk.
For the week of July 28th:
- S&P 500 index chopped around this week and remained in the consolidation phase for the broad index. Trend remains on the upside long term and we are testing that upside move daily as the volatility comes back into play day to day. Very mixed week of trading in the index and the leadership is testing as the broad index looks for direction and commitment.
- NASDAQ 100 Index is maintaining the leadership as the large cap stocks are the driver versus the broader composite index which looks more like the S&P 500 index. I still like the upside outlook going forward.
- Small Caps (IWM) – Small caps still testing the 50 day moving average. 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.
- Energy (XLE) sideways trading and remains in the range.
- Technology (XLK) is leading the broader indexes with a solid uptrend. Watch the selling in the semiconductors on earnings data as it may put some downside pressure on the broader sector.
- Healthcare remains in a leadership role. Still in the near term trading range mirroring the broader index. I like the outlook near term for more upside as this plays out.
We are working off the June 30th pivot point with the dollar moving higher gradually. 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 sideways 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 with the downside gaining near term traction on treasury bonds. 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 consolidation, but continues the uptrend long term. 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 3.24%. TLT tested support and we 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. Hit stop last week and locked in the gains. Watching to see how this plays out and look for the next opportunity. Bounced off the $93.50 support and we will see how it unfolds. Plenty of negative analyst reports publish of late on the sector overall.
- 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. The parts have offered some trading opportunities and we continue to watch those.
For the Week of July 28th:
- Natural Gas – UNG has been the dog of the sector and KOLD has been the trade and could still be if support at the $20.80 mark doesn’t hold.
- Oil (USO) is undecided currently on direction. The inventory data shows demand rising? Economic data globally looking near term positive and should have positive influence on crude. However, it is volatile and without clarity, watching for the right signs and trade.
- Agriculture (DBA) building a base short term and could develop into a short term upside trade.
- Gold developing a trading range near term. Watching for some clarity of direction if we are going to own it.
- Base Metals (DBB) moved higher again. Raise your stops on the trade to $17.25 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 trading sideways as the EAFE index cannot gain any upside traction. 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 28th:
- 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 as we addeed to the positions. Entry $44.30. This is a sector to watch the parts as well with THD, PIN, VNM and other moving higher.
- China (FXI) found momentum this week on positive news and moved to a leadership role on the chart.
- 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 to new highs with some testing to end the week. The upside opportunity panned out nicely and now we are watching to see if it can hold the move higher. Patience and look for the leadership within the sector.
For the Week of July 28th:
- The leaders remain 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.