Weekly Update – ‘Send In the Clowns’

All hail the elected officials in Washington! There is plenty of blame and finger pointing, but all I can think of is the song, “send in the clowns’. How did we get to this point and equally disturbing… why? All that aside, we have to deal with the day-to-day volatility of buying and selling. The damage for this issue has been minimal as investors continue to believe the end is near. I am not sure which end we are talking about… the budget decision or the government? Either way, I am not convinced at this point that Congress doesn’t stretch it into the debt ceiling argument. That means potentially two more weeks of this fun. Whatever happens we will take what the market gives in response to the challenges.

The volatility picked up this week as the government shutdown took root and investors scramble to determine exactly what it means both short and long term. The tug-o-war between buyers and sellers was interesting, but when you brush back all the rhetoric and look at the end results it was almost a draw. The VIX index returned to August levels, but didn’t hold them for long. If the budget and debt ceiling issues are not dealt with soon we can count on the volatility index moving even higher along with the uncertainty.

State of the Market:
The major indexes rolled over Thursday below support, but Friday managed to salvage some of the damage done. Starting with the weakest index, the Dow which broke below the support at 15,100, managed to bounce back above 15,000, but still remains questionable at best short term. The trendline is coming into play and a break below that level would set up an even uglier picture for the index. 14,775 is the previous low from August and the level to watch for now. Stochastic is pointing to ‘oversold’ (hate that term), but it is still to early to say this is a buying opportunity. Friday’s move helps, but we will have to wait and see. The pressure being placed on the market is an outside event, the budget and debt ceiling, thus applying technical data relative to momentum isn’t going to result in the most accurate indication (my view). However, DXD has played out nicely in our pattern trade picks.

The NASDAQ moved to a new high at 3817 on Tuesday, tested the move lower, but rebounded on Friday. This is still the leader along with the Russell 2000 Small Cap index. Both indexes moved back towards the current high. This discrepancy between indexes is why I call this a tug-o-war.  The S&P 500 index moved below the 50 DMA on Thursday, testing the 1670 support, and moved back above it on Friday. The uptrend line is coming into play and a break would only validate a downside move.

Is it time to be short the market? While some believe that is the play, I am not convinced that is going to be the outcome of the current activities. We have to be patient and let the noise and events impacting the market play out and then we will have a clearer picture of what actions to take. The short trades driven by outside news are dangerous, especially if you get caught on the wrong side of the trade with the wrong news release. Patience remains the best course of action going forward.

As we look towards next weeks trading we have to be mindful of all that is still on tap! The budget, the debt ceiling, the start of earnings, more economic data that was delayed, and more lip service from Washington.  Then there is still the Fed issues relative to stimulus that will not go away, but it has been put on the back burner for now. All said, busy week with something for everyone.

Economic Data & Outlook:

Not as positive with the ISM Services number dropping to 54.4% versus the 57.5% expected. The news didn’t help the broad markets overcome their fear factor concerning the shutdown and budget impasse. Factory orders were delayed and the jobless claims were 308,000 up 1,000 from last week. Yesterday the ADP jobs report did not help as the numbers were below expectations and the August data was revised lower. The private sector is slowing again in the addition of jobs. The blame game for this continues to be a hot news item. Tuesday the ISM Manufacturing was released and it was better than expected at 56.2% and hitting a two year high. 55% was the expected report showing the continued improvement in the manufacturing space. As it has been for the last year, the mixed results continue in the economy. Jobs report was postponed due to shut down.

The calendar link below will take you to the data expectations for next week.

Economic Events & Calendar

Sector Notes:

  1. The broad perspective is you have eight sectors (S&P 500 index) consolidating, moving sideways and showing some leadership. There are two (XLP & XLU) moving in a modest downtrend. This just reinforces the patience comments above. You have to have leadership for the market to advance up or down. Without it we just churn in place and pontificate on what may happen. Since I am not big into speculation or conspiracy theory, I am willing to wait and see.
  3. Solar (TAN) I posted two weeks ago the acceleration in the upside for solar stocks. Some stocks within the ETF have been on fire and others are starting to move. SCTY made a nice move on Friday and could break higher next week as well. FSLR was on the pattern watch list last week as well. One positive sub-sector in the universe of stocks.
  4. Small Cap (IWM) continue to show some leadership as they trade in a tight range near the high ($105-107.50). Looking for some leadership from the sector on the upside if we are going to make any kind of move higher. Watch to see how it unfolds short term.
  5. Healthcare (XLV) retreated back to the 50 DMA and held. This has been one of the leading sectors with Biotech and others pushing the broad index higher.  Some downside pressure from the healthcare providers (IHF) as the media over hypes the Healthcare Act and the potential impact on the sector and the economy. Still looking for the buyers to hold the sector up. Move above $51.25 would be positive. S&P 500 Model Watch List.
  6. Volatility index tested support last week and bounced above 18 on the selling, but closed the week at 16.7. The move put the VXX trade in play in the S&P 500 model. Watch as this week promises to add even more volatility without a budget and earnings beginning.
  8. Dow Jones Industrial Average is leading the downside as it confirmed the move below the 50 DMA and 15,100. The index gets the award for short term volatility. Inside trading day on Friday’s bounce give a rest, but no change in direction yet. Watch and let the volatility play out. DXD trade in the ONLY ETF Model is benefiting from the short term selling.
  9. S&P 500 Index – testing the 50 DMA on the downside, but has not confirmed a move lower. Watching to see how this plays out and if we break support add a short play. SDS is the leverage short and is added to the ONLY ETF & S&P 500 Watch List.
  10. Financials (XLF) – The $20 mark was support, but $19.85 is the attraction for now. The mixed outlook is the challenge for the sector. We added a position in SKF in the ONLY ETF Model last week and we continue to monitor the move, which hasn’t developed yet, on the downside. Banks (KBE) have been the weak link, but posted a nice bounce on Friday. Insurance (KIE) was up 1.2% as well on Friday helping the upside. Earnings are starting soon and that will determine what direction we head short term. Stick with the short for now, but keep your stops in place.
  11. Real Estate (IYR) The sector is struggling to hold support at $63.80. Fear of the government shut down impacting lending in the housing sector, the economy weakening and just good old uncertainty are adding to the downside pressure in the sector. The bounce on FOMC meeting was short lived and it is getting ugly again on the downside. SRS is the short play and a move above $22 sets up a trading opportunity. ONLY ETF Watch List has trade details.
  12. Homebuilders (XHB) $30.20 is support and the 50 DMA is just below $29.82. Makes a short trade tough to entertain, but we are watching to see how the real estate sector plays out short term. Looking for a move back towards the $31 level short term and if we gain some positive momentum a play on the upside may be worthwhile. Patience and information gathering for now.

Breaking Down the 7 Asset Classes:

As you can see on the Scatter Chart, since the Jun 24th piviot point, it has been up and down without much in terms of leadership. The Emerging Markets (light blue) were leading along with the developed markets (EFA, purple), but the last two weeks has been a push sideways. Everything is watching Washington and the Fed looking for direction.

Asset Classes

1) US Equities:

Looking at our sector rotation chart below with the September 18th pivot point, the sectors were trading in step with the index. The last week of trading shows little in terms of overall change, but healthcare and basic materials showing some strength. Consumer staples, utilities, industrials and financials were the weaker sectors. Energy, technology and consumer services were flat on the week and didn’t offer any help. The VIX index played a role in the outcome as investors nerves were on edge. Welcome to trading in an uncertain environment.


2) Currency:

The dollar got crushed by the Fed stimulus addiction, but held some support this week and moved up on Friday. Regardless the but is still in a downtrend and not likely to change anytime soon.

The other currencies have flat-lined, but Brazil (BZF) which made a nice move higher as they continue to make stride in turning their economy around. The consolidation pattern setup on BZF is worth our attention this week with a move above $18.30.


3)  Tracking the Bond Sectors:

Sector Summary:

The bond market has turned sideways and the push lower in rates has subsided and all is calm for now. Once the debt ceiling and budget are out of the headlines this will come back to the forefront as the Fed decides direction on the stimulus. Be patient and let any opportunity develop.


Treasury Bonds – TLT or IEF hitting resistance as yields flatten out. No positions currently.

High Yield Bonds – HYG = 6.4% yield. Bouncing off the $91.25 support and may have some interest if we can hold steady and manage the risk of the trade short term.

Corporate Bonds – LQD = 3.9% yield. No positions currently. Not willing to make that bet currently.

Municipal Bonds – MUB = 2.9% tax-free yield. No positions currently. No holding currently.

Convertible Bonds – CWB = 3.6% yield. bounced off 43.75 support and $44.80 entry point. Watching the upside and volatility. This is the one bright spot in the fixed income class. Stop at $45 on the trade.

***Fixed annuities have finally returned to the 3% guarantee mark (five years). The best five year CD currently is 2.1%. As these yields grow they will attract more money. I view that as a positive for stability in the markets overall.

4) Commodities – The shift in the sector was lower on August 28th and it has continued the slow progression to the downside since. There is not leadership and nothing to venture into other than trades on news. There is no sustainable trend currently in play and thus we are unwilling to take any speculative risk.

Commodities Rotation Chart:


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

5) Global Markets: 

The global markets remain tied to the US and until things change economically that will remain true. The chart below shows the shift in trend on August 30th, but not much to really show for the move. It has been a nice trade, but that is flattening out on worries about the US. This remains a trading asset class for now. Germany (EWG) is attempting to  move  higher from consolidation, VNM, Vietnam broke out on Friday, PIN, India has moved higher as well. Watching Europe consolidate in response to the US issues. In all this is a asset class to watch going forward.

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.

6) Real Estate (REITS):

Real Estate Index (REITS) – The sector bounced on the Fed decision and has tested back on the concerns in the markets overall.  Too much noise and not worth the risk currently as the volatility has returned of late. We tried to trade the sector, but were stopped out of our trades. Still willing to watch and see how this unfolds short term.

Sector Summary:

  • IYR – Found a bottom? Current dividend is 4%. No positions.
  • RWO – SPDR Global Real Estate ETF – Trended lower and bounced off support near the $40 mark. Some resistance at the 50 day moving average. Dividend is currently 4.7%.

7) Global Fixed Income:

Sector Summary: Bounced off the lows and trending sideways. No interest currently.

  • PAFCX – 1% dividend. Trending lower, but bounced off the $10.80 mark and going higher now. $11.20 entry point on upside play. Hit entry and moving higher for now.
  • PICB – 3.1% dividend. 27.80 support and bounce above $28.70 trade opportunity. Hit entry and adjusted stop to the entry. zero risk trade.
  • EMB – 4.5% dividend yield. Bounced with the Fed decision. Testing with the emerging markets moving lower again this week.
  • PCY – current dividend yield is 4.8%. Possible trade above the $27.70 level. Stalled with no follow through.

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.