Q2 Investment Themes and Trading Strategies

NEW YORK ( TheStreet) -- At the beginning of the year, my major theme was that The Stock Market Is a Risky Asset Class in 2013. While making this proclamation I indicated that I could not rule out some additional upside potential first.

I must admit that the gains for the first quarter were stronger than I originally expected, but when key levels were taken out to the upside, I revised my targets to the levels that the major equity averages straddled as the quarter ended.

My post on Friday explains the risk/reward for the second quarter and for the remainder of the year, in S&P 500 Hits 1H Target at 1567, Risk to 1348 by Year's End. Today, I review my investment themes and provide trading strategies for the U.S. capital markets. My original themes were presented on Jan. 4 in 10 Themes for the New Millennium Teen Years.

  1. The Housing Recovery will remain sluggish in 2013. This remains my theme as the National Association of Home Builders Housing Market Index has stalled below the neutral 50 reading with single family housing starts just above 600,000. Note that there are no buy-rated homebuilder stocks and that 11 are rated sell and 9 are rated strong sell. Check my post of March 19, Sell Downgrades Weaken Homebuilder Foundations.
  2. The rebound in home prices will slow. While the media touts a solid year-over-year gain of 8% the fact is that the rise in home prices has stalled at 8.0% above the March 2012 low and remains 30% below the bubble peak of June/July 2006.
  3. The upside for money center and regional bank stocks will be limited in 2013. During the first quarter three of the four "too big to fail" banks were downgraded to hold from buy and all four lagged the market with multi-year highs set between March 11 and March 19. I covered the first two downgrades on March 11 in Downgrading Two of Four 'Too Big to Fail' Banks.
  4. Community Banks will continue to fail. The FDIC List of Problem banks was just 75 at the end of 2007, and at 651 at the end of 2012, more failures seen certain. The FDIC has slowed the pace of bank closures to protect the size of the Deposit Insurance Fund. Since 2007, the FDIC has closed 468 banks vs. my prediction that at least 500 would fail before the "Great Credit Crunch" ends.
  5. Consumer Confidence will remain below neutral. We began the year with a 65.1 reading on the Conference Board's reading of consumer confidence. In March the reading was 59.7 even further below the 90 to 110 range considered the neutral zone for this measure.
  6. The low yield environment for the 10-Year Treasury note will continue. My annual pivot at 1.981% has been a magnet so far in 2013, as any backup above this yield has been a buying opportunity.
  7. The bubble in Comex Gold will not re-inflate. Gold is down year to date, but the precious metal has not broken down, as my annual pivot at $1599.9 has been a magnet.
  8. The bubble in Nymex Crude Oil will not re-inflate. My first quarter pivot at $95.84 was a magnet providing stability and preventing both a break-down and upside price action.
  9. The euro vs. the dollar will maintain a trading range. After trading up to 1.37 into February, my annual pivot at 1.3257 was a magnet to bring the euro back down. My semiannual value level at 1.2797 held on weakness going into the end of the first quarter.
  10. The stock market is a risky asset class in 2013. Based upon being correct on the first nine themes, stocks are stronger than they should be year-to-date. I consider QE3 and QE4 as Fed-induced steroids that will eventually cause adverse effects on the major equity averages as the year progresses.

Incorporating New Monthly and Quarterly Levels into Trading Strategies:

A proxy for trading U.S. Treasuries is IShares Barclays 20+ Year Treasury ( TLT) ($117.75). This month's value level is $113.10 with a weekly risky level at $118.44 and annual risky level at $120.42.

Consider trading gold using SPDR Gold Trust ( GLD) ($154.47). This week's value level is $148.31 with an annual pivot at $153.45 and monthly, quarterly and annual risky levels at $166.65, $174.85 and $179.72.

A proxy for crude oil is the basket of oils-energy stocks in Energy Select Sector SPDR Fund ( XLE) ($79.31). My quarterly value level lags at $63.49 with weekly and monthly pivots at $79.43 and $79.92 and semiannual risky level at $80.38 versus the year-to-date high at $80.14.

You can trade the Dow Industrial Average using SPDR Diamonds Trust ( DIA) ($145.32). My quarterly value level is $137.01 with monthly, semiannual and weekly pivots at $142.65, $143.01 and $145.56. Investors who agree with my bearish call can begin a short position versus the weekly pivot at $145.56.

You can trade the NASDAQ 100 using PowerShares QQQ Trust ( QQQ) ($68.97). My annual value level lags at $60.27 with weekly and quarterly pivots at $68.80 and $68.95 and monthly risky level at $69.54 versus the Sept 19 high at $70.58.

You can trade the S&P 500 using SPDR S&P 500 Trust ( SPY) ($156.67). My quarterly value level is $144.56 with monthly, semiannual and weekly pivots at $156.89, $156.59 and $157.23 versus the first quarter high at $156.85. Investors who agree with my bearish call can begin a short position versus these levels.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.