Weekly Trading Notes for August 5-9

The S&P 500 index makes the move above 1700 this week on economic improvements. The question is can it stay and move higher? The jobs report on Friday left some question marks around the outlook for growth, but it is again a process of time. This problem is not going away anytime soon. The buyers are still in control and they continue to step in at every sign of weakness to keep things running. The sentiment remains on the upside (see VIX index) and the confidence from investors stepped higher this week as seen in the renewed commitment to buying.

The overall view of the market is positive and the indexes remain the better place to be than attempting to pick the winning sector. There is little in terms of divergence between sectors. The laggards have been the interest sensitive sectors and the leaders are those focused on growth or incremental increase in sales and profit. The great rotation may finally be taking hold as interest rates take another shot at moving higher. That puts more upside pressure on stocks as money flow remains positive.

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. August starts positive with the broad indexes gaining more than 1% for the day. The major indexes broke to new highs and held even with some selling on Friday. What does this mean? Simply put the buyers remain in control and the outlook has a positive momentum based on both earnings and economic data. I remain in the mode of taking it one day at a time and focus on what the market gives versus what we think. Thinking too much in this market will get you in trouble.
  2. Treasury yields moved higher again to 3.68% on the 30 year bond for the week. The move is a breakout from the consolidation and a new high. This is not good news for the interest sensitive assets. IYR was down again on the week. We are watching the move in yields short term and the potential impact on bonds.
  3. Healthcare was on our watch list for the week and has netted a gain on the week thus far. The pharma stocks (XPH) was up 2.7%, the providers (IHF) were up 1.1% and medical devices gained 2.3%. The upside remains in play and we will continue to watch for opportunities in the sector.
  4. Technology was on our watch list for the week as well and it was up and down. The SOXX gained 1.2% on Tuesday helping XLK clear the entry point at $31.75. The semi’s continued higher and gained 2.2% for the week. The sector remains volatile, but we will manage the risk of the trade and watch for the upside catalyst from the sector. Banks (KBE) are holding the 10 day moving average and breaking higher. We are still looking forward on earnings, guidance and economic data to drive the sector higher.
  5. Oil jumped 2% on speculation of increase in demand…again on Wednesday. That was followed up on Thursday with a 3% gap higher. After falling back to $103 on Tuesday the price closed at $107.77 Thursday. Gold was off slightly on the day to $1311.
  6. The S&P 500 Model is 80% invested and we are looking for opportunities to add based on the short term activity. Watch for Monday’s Trading notes for more details.
  7. The Sector Rotation Model is lacking in holdings, but we remain cautious at the current levels for stocks. Added banks to the watch list as they are poised to make a move higher – the gap higher negated the entry on the trade and we will see how it plays going forward.
  8. The ONLY ETF Model continues to take on short term trades offering short term upside. Technology (XLK) was also added on the upside as an opportunity on the test lower from earnings. China is on the watch list as the upside is getting a boost from the government comments on stimulus.  Biotech (XBI) hit entry on Tuesday and continued higher.
  9. The ONE EGG Model scans came up with international ETFs this week along with the metals and mining ETFs. The momentum shift towards these sectors is interesting relative to the outlook near term. Australia (EWA) offered the best set up on the chart, not panning out as planned and we have been running new scans for the best opportunities. ¬†TLT broke lower initially on Wednesday as investors continue to lack confidence in the Fed. I was looking for another leg lower in bond prices as yields rise? That question was answered on Thursday with the 30 year bond moving to 3.77%. looking at TBF as the Egg on this development… Cleared the $32.55 level and closed at new high. Watch for the potential play on test or continuation of the upside. Nothing panned out for the model this week.
  10. As long at the trend higher continues maintain your positions and manage your stops.

Economic Data & Outlook:

The data this week was positive relative to the outlook and current data. The challenge was the jobs report on Friday. The miss didn’t help the confidence build on the optimism from the earlier data. This leaves us with a question on direction short term and commitment to catalyst on Thursday. ISM Manufacturing was positive and showed solid growth in the auto sector. GDP was better than expected and consumer confidence rose. The weakness came from the housing sector which continues to show weaker numbers. Thus, we continue to watch the reports and measure them against the outlook short term. The key is patience and waiting for the confirmation.

Investors remain focused on buying and are still focused on improvement for the second half of the year. Time will tell if that happens as July closes and we get our first view of how the last half of the year is playing out. More reports out next week along with earnings. 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% or 17 points. The index accomplished hitting new highs on the week , but as seen in the scatter graphs below the leadership is moving sideways and higher on the bounce this week. Financials, consumer services, industrials and healthcare are leading. Technology and basic materials both has good weeks on the upside. Utilities, REITs, and consumer staples continue to struggle with any advancement. Take the leadership opportunities as they are presented and avoid the weakness.

The June 24th pivot point is where we are watching currently as the bottom has been established along with a new high. Lasting rallies tend to have significant leadership with a defined rationale behind it. What we are looking at is broad movement with all the sectors in tow. There is nothing wrong with making money in the index until which time there is separation or defined leadership of the market overall.

June 24th Low Pivot Point

Scatter 624

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)

SP500Scatter

Sector Rotation of Interest:

Downside Rotation:¬†The reversal in technology, utilities, consumer staples and basic materials have all turned back to the upside short term. Thus, the downside rotation doesn’t exist a this time.

Sideways Trend: Consumer services broke from the sideways trend and moved higher as some positive data was released relative to the consumer. Worth trading the upside move.

Upside Rotation: Consumer services and technology rotated to the upside after trading sideways and lower. All 10 sectors remain in a positive momentum on the upside.

The S&P 500 Model: We remain invested and watching the volatility retreat to the previous low short term for further 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 made a new high on July 9th and has been lagging the rest of the world with a move lower. The Krona, Franc and the Euro have been leading relative to currency. The Yen jumped on Friday, but the outlook short term is for a lower dollar thanks to our friends at the Fed. The attempted reversal on Thursday off support was short lived as the buck moved lower on Friday again.

Currency

Sector Watch:

  • UUP¬†– Watch for support at the $22.10 level to hold if there is any upside opportunity.
  • FXE¬†– The long euro trade has been well defined with the move holding above the 10 DMA and trending. The $131.60 resistance is what to watch this week. A break higher would worth trading.

3)  Tracking Bond Sectors of Interest:

Sector Summary:

The bond market overall has experienced a sell off that is a direct result of the yields rising. The Fed has spent the last month talking about the stimulus and yields have settled into a trading range of 3.52-3.76% on the 30 year bond. Watch as the yield has been making an attempt to move higher. That would put more downside pressure on bonds short term.

  • 30 Year Yield = 3.68% – up 7 basis points for week ¬†—¬† TLT = $106.52 down $1.62 for week.
  • 10 Year Yield = 2.6% –¬† up 4 basis point for week ¬†— IEF = $101.82 down 35 cents for week.

Treasury Bonds РThe yield on the 10 year bond rose again and tested support at the $100.80 mark. Plenty of work to do before we are willing to take any position in bonds.

High Yield Bonds РHYG = 6.7% yield. Broke below $92.30 support on Thursday and is looking lower short term. Watching to see if there is any trade opportunity in the high yield bonds.

Corporate Bonds РLQD = 3.8% yield. No positions currently. Bounced and hit against resistance near $115.50 and testing lower again. The sector is still not worth the risk.

Municipal Bonds РMUB = 2.8% tax-free yield. No positions currently. Detroit bankruptcy is impacting the sector short term.

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.

4) Commodities –¬†Sector Summary: Not worth the risk of ownership. Each attempt to bounce has only led to furhter disappointment. Until there is sound reason to own the sector willing to sit it out.

  • Commodity Index¬†(DBC) – The outlook for commodities remains sideways to down. Unless it can find momentum to move through the $26.50 level… pass.
  • Natural Gas¬†– (UNG) Short is the play.
  • Crude Oil¬†– (OIL) ¬†Broke higher on speculation in global demand. Tested lower and gapped higher on positive economic data… speculation back on demand…
  • Gasoline¬†– (UGA) Flag? Watching move lower? Refiners pushed lower on the cost of production. margins lower in the sector hurting.
  • Gold –¬†(GLD) Bounced and cleared the $123 level and followed through with a gap higher on Monday. Upside trade? Only if the speculation grows. $125 entry for a trade up to the $137 level as a target short term.
  • Palladium¬†– (PALL) – Continues to consolidate with $70.50 support.

Commodities Rotation Chart:

Back to trending sideways without much in terms of direction for the asset class.

Commodity

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

5) Global Markets: 

Global markets have been attempting to follow the US markets off the June 24th pivot point. The gains have been slow in coming, but Europe has made a nice steady move to the upside. We are still taking it slow in the global arena short term. Remain disciplined as the volatility is still present.

Watch 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– Move above $34.70 entry point for the ETF. Looking for more upside short term.
  • IEV¬†– Move above $41.90 adding point for the ETF. Looking for $42.75 resistance short term.

6) Real Estate (REITS):

Real Estate Index (REITS) РThe sector broke down and bounced with the markets off the June 24th low. Moved back below the 200 DMA and holding $65.90 as support? 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.¬†