Weekly Update – July 6 – 12th

Investors are torn… buy on the positive data improvements or sell on the worries about the Fed removing stimulus? Friday’s trading day showed the turmoil throughout the day of up and down movement. I does have a tone of the buyers winning short term, but don’t count the sellers out as we progress towards and through earnings.

The bad news on Friday was interest rates resuming the upside and bonds moving lower. The fear built into that move is worse than the up and down movement in stocks. Uncertainty in stocks will find answers and move forward, higher interest rates will impact bonds, housing, REITs, MLPs and automobiles. How big of an impact will depend on how high rates rise. More on this below.

The wildcards remain Egypt, Portugal, EU and Greece, China’s economy, oil prices and a whole list of others. The news has been subdued relative to the globe, but you can see signs of it starting again. The key is to take this one day at a time and define the objectively clearly before putting your money at risk.¬†Below we 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), were discussed last week as opportunities and they have been just that on the upside. I still like the outlook going forward and the stops have to be managed as the upside is still in play. The regional banks stocks continue to look positive short term. RF, HBAN and MTT all added to the upside and remain positive looking forward.
  2. Volatility (VIX) spiked on the selling and we stated last week that set up the upside trade in SVXY. That has happened and gained nearly 8% on the week. A break above resistance on the S&P 500 index at 1630 and the upside will accelerate for SVXY. Manage your stops.
  3. Interest rates have continued to spike higher following a brief leveling off . The trade set up on rates stabilizing was short lived and no entries worth taking. The jobs report on Friday pushed rates higher again and TLT fell nearly 3%. The selling in the interest sensitive assests is back and we have to watch the downside risk. TBT and TBF remains the best trade currently.
  4. The commodities are all over the board. The lack of a trend in the sector makes it a dangerous place to play. Natural gas (UNG) remains a short play as it found support again at the next level of $19. Crude oil bounced off $93.20 level and moved to $102 the last two weeks. Speculation in Egypt is the challenge for now. Gold (GLD) attempted to bounce, but failed on the downside Friday. DBB attempted to bounce higher as well, but failed to hold the move, down 2.3% on Friday. Commodities are not worth the risk 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 (Portugal and Greece) and emerging markets have reversed lower off last weeks bounce. If the US markets take the lead on the upside there could be some opportunities on the move higher for the global markets. One day at a time and they are nothing more than trade setups. Too many issues and unanswered questions.
  6. The dollar has moved higher on the Fed announcement and was hitting resistance at $22.60. The upside resumed this week and accelerated on the jobs report. The buck is back at the high of $22.90 on UUP. Short euro (EUO) trade is working along with the short yen (YCS) trade.
  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 jobs report on Friday was better than expected and the bad news was the Fed will be more likely to start putting an end to stimulus. 195K new jobs were added ahead of the 155K expected. Jobless claims were better as well on the week. ADP employment report was positive as well – a full house on the jobs data.

Construction spending was lower than expected, but still growing.

ISM services data was a disappointment dropping to 52.2% from 53.7% in May and well below the 54.4% expected.

Factory orders were up more than expected as auto sales show solid improvement.

There is plenty of data to digest this week and more on the way next week. Earnings are just around the corner and 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 May 21st pivot point is in play, but the June 24th reversal on the low is making an attempt to reverse the trend… again. The uncertainty in the broad markets remains a challenge for putting money to work with any confidence short term. The downside leader remains Utilities as interest rates move higher again. Materials are moving sideways, but the balance have bounce with the reversal on the June 24th bottom.

We move back within the target range of 1620-1630 and closing the week at 1625 thanks to the jobs report and the EU adding stimulus. The move lower off the May 21st high is being tested with the bounce. If the major indexes find their way above key resistance and reestablish the uptrend then we will add some upside play opportunities to the models.

Based on the bounce starting on Tuesday last week, Financials, Healthcare and Consumer Discretionary are the leaders on the upside. Also accelerating off the lows was Utilities and Telecom. The other five sectors tracked along with the broad index. The broad index was up 2.1% from Tuesday through Friday’s close. The laggards were positive, but failed to outperform the broad index itself.

Decision time for the broad index and the micro downtrend in play off the May 21st high. This week may set the tone, despite the fact it is a holiday week.

May 21st Pivot Point:

SP500Scatter

 

June 24th Low Pivot Point?

Scatter 624

 

The pivot on the low shows consumer discretionary (XLY), financials (XLF) and telecom (IYZ) leading the bounce. Keep an eye on XLV, XLI and XLE as they are picking up some momentum to end the week.

Sector Rotation of Interest:

Downside Rotation: The downside reversal remains for most of the sectors, but the interest sensitive ones reversed lower again on Friday. The downtrend remains for Utilities, Real Estate, Energy, Materials and bonds.

Sideways Trend: The bounce is in play and some sideways movement is in play. Financials, healthcare, industrials, consumer discretionary, technology, consumer staples and telecom.

Upside Rotation: The bounce off the June 24th low remains in play with resistance at the 1630 level on the S&P 500 index. Look for a break higher in financials and consumer discretionary.

2) Currency:

As seen below the dollar moved higher off the June 18th pivot point. ¬†Thanks to the FOMC meeting the dollar has regained the upside rotation and other currencies have moved lower. The question mark is will it last or is this just a reaction to the news. Friday’s move shows some conviction with the dollar regaining the previous high at $22.90.

Currency

Sector Watch:

  • UUP¬†– Move back above the $22.20 mark was the entry point for the dollar. The dollar has continued to move towards the short term target of $22.65. Upside remains in play for now as the $22.90 high is the next resistance point to move through.
  • EUO¬†– The short euro trade entry was $18.80 and has continued higher. Plenty of downside worries about European markets currently in play. Gapped to $19.83 on Friday. Adjust your stop.
  • 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. Still moving higher with the target now $69.70.

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. There was some calming for a few days, but the concerns resumed on the jobs report Friday. The calm was only a rest to resume the selling as investors worry about the withdrawal of stimulus allowing rates to rise. You know the level will overshot on the upside initially and then settle into a reasonable zone for yields.

  • 30 Year Yield = 3.67% – up 18 basis points for week ¬†—¬† TLT = $106.73 down $3.70 (-3.3%) for week.
  • 10 Year Yield = 2.71% –¬† up 24 basis point for week ¬†— IEF = $100.58 down $1.92 (-1.8%) for week.

Treasury Bonds РThe yield on the 10 year bond is up 107 basis points (1.07%) over the last eight weeks. At what point do these bonds become a buy? If you believe the economy is not strong enough for the Fed to withdraw the stimulus in place, bonds will snap back. However, if you believe the Fed will let rates rise as they cut stimulus, the downside is the play. Thus far the vote is for the Fed to cut stimulus based on the move in bonds.

Jim’s Notes Article on Bond Yields rising.

High Yield Bonds РHYG = 6.5% yield. Bounced, but selling off and testing the previous lows.

Corporate Bonds РLQD = 3.8% yield. No positions currently. Bounced and sold on Friday in response to jobs.

Municipal Bonds РMUB = 2.8% tax-free yield. No positions currently. Bounced and sold Friday.

Convertible Bonds РCWB = 3.6% yield. Bounced and and may offer short term play on move above $42.80.

4) Commodities –¬†Sector Summary:

  • Commodity Index¬†(DBC) – The outlook for commodities remains suspect at best. Not interested currently unless things improve fundamentally and technically. Short plays are working.
  • Natural Gas¬†– (UNG) The break lower offered short trade in KOLD. Manage the stop.
  • Crude Oil¬†– (OIL) ¬†Broke higher on speculation in Egypt. Risk is elevated on the move.
  • Gasoline¬†– (UGA) Breaking higher on oil move, $57.80 resistance move on Friday? Can this hold based on rationale behind the move is the bigger question. Trade is there if willing to accept the risk.
  • Gold –¬†(GLD) Downside resumes with the move lower following the jobs report.
  • 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.

Commodities Rotation Chart:

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

Commodity

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

5) Global Markets: 

Global markets shifted to the downside and have not changed course yet. The May 21st pivot point lower has been more dramatic than the US markets, but the pivot correlates to the struggles facing the US markets relative to interest rates, as well as China, Japan, Europe and the Emerging Markets.

Japan (EWJ) has become volatile, but still taking the lead on chart below. Canada and Europe are still moving sideways with limited upside. China offers more downside based on the continued weakness in the economic data. Brazil has been the weakest along with the emerging markets.

The chart below shows the downtrend over 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:

  • FXP– Short play on China as the downside has been the leader. Looking for entry off the recent bounce.
  • EEV¬†– Short emerging markets reversed off bounce and heading lower again.
  • EWJ¬†– Still looking for an upside move from the country accompanied by volatility.
  • EPV¬†– Short Europe is still possibility relative to the conditions. Watch

6) Real Estate (REITS):

Real Estate Index (REITS) РThe 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 $64.80 level, but is testing again on interest rates moving higher on the jobs report. Break above the 200 DMA would be attractive.
  • RWO –¬†SPDR Global Real Estate ETF¬†– Looks just like IYR currently on the chart. Move above $42.50 is of interest and the 50 DMA.
  • 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. Fell again on Friday as interest rates move higher yet again.

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 looking for 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.¬†