Reality vs. Speculation

Market Outlook for January 13th

More talk in the headlines about valuation set tone for the weekend. The challenge investors are facing is the thought of reality versus speculation… Is the market overvalued? That is a question that invites speculation… The better question is how do you protect your gains in the event the market is overvalued? Answer… stops, taking some profits, watching money flow, etc. Money management is really risk management day-to-day. Taking what the market offers and avoiding the higher risk positions based on current analysis. It is a matter of focus, discipline, and a defined strategy. That said, the markets closed the week near their respective highs with some late-day selling/profit-taking. No major changes and the weekend gives us time to review and adjust what is necessary for our portfolios.

The S&P 500 index closed down 9.3 points to 3265. The index holds the uptrend and closed near the current highs. Three of the eleven sectors closed higher on the day with REITs and utilities leading the day. The downside was led by financials as money continued looking for opportunities. The index is trading 9.6% above the 200 SMA. I would say technically the index is extended. The long-term trend is up and the short term volatility raises concerns for me. Watching and managing the current risk.

The NASDAQ index closed down 24.5 points at 9178. Closed near the current highs and sold off the doji candle left on Thursday. The index is being led by the NASDAQ 100 stocks. The buying in technology sector has helped lift the sector to current levels. Adjusting our stops on positions and letting this unfold. Large caps remain in a positive trend overall. The long-term trend remains positive with news driving currently.

Small-Cap Index (IWM) The sector led the move back to the April highs and is in a topping pattern on the charts. The last week resulted in some selling as money looks for opportunity. Watching the cross of the 10 DMA below the 20 DMA… negative signal for the sector.

Transports (IYT) The sector moved to $200.55 and hit resistance. Since it has tested support at the $192.42 level and is now in a wedge pattern and consolidating. What does that mean? Indecision or lack of conviction by investors relative to the near term direction… waiting for the break higher or lower to define the trend.

The Dollar (UUP) The buck has been moving down as it struggles against foreign currency changes on the “proposed” phase one trade agreement. Speculation is driving the activity, but the buck did manage to find support and bounce. Need to clear $26.30.

The Volatility Index (VIX) No anxiety showing on the chart as investors are content about the current market environment. Closed at 12.5 and near the November lows. Watching and letting it all unfold.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector moved to new highs, stalled into a trading range and showing a consolidation pattern on the chart. Watching and managing accordingly.

Biotech (IBB) The sector hit highs at the $124 mark and has since settled into a trading range. We hit our stops and locked in our gains. Now watching to see how this unfolds near term.

Semiconductors (SOXX) Broke higher from topping pattern on the chart following a great run off the October lows. The leadership resumed but checked itself over the last week. Watching and managing the risk.

Software (IGV) The sector tested the lows of the trading range and bounced at support in October. The steady grind higher has not been easy. The test of support held and the upside resumed with some small tests along the way. Solid gains for the week and adjusted our stops accordingly.

REITs (IYR) The sector has turned into one giant consolidation pattern. We don’t have a position in the sector and continue to watch for the next opportunity. Needs to clear $93.50 on the upside.

Treasury Yield 10 Year Bond (TNX) The yield closed at 1.82% and higher for the week. Money is rotating again as investor uncertainty about the future rises. Watching for the opportunity.

Crude oil (USO) Crude moved to $64.22 on speculation. Crude fell to $59 on the speculation not unfolding according to plan. We hit our stops and locked the gains. Now we look for the opportunity that unfolds.

Gold (GLD) The upside in gold was driven by speculation of the rate cuts and global weakness overall. Geopolitics is driving currently the break from the consolidation pattern at $139.50. UGL entry $46.90. Stop $51.01 (Stop Adjusted). Letting it unfold.

Emerging Markets (EEM) Bounced from the bottoming range established in August cleared resistance at $42.25 and cleared the September highs. The positive trend higher came from the hope of a US/China trade deal. We cleared the $44.10 level and moving higher. EDC entry $76.40. Stop $88.22.

China (FXI/YANG) hope springs eternal… deal or no deal? The question remains, but there are tweets a deal is done and moving on to ‘phase two’. The upside is in play and the risk remains highs. Taking what is offered with our stops in play.

(The notes above are posted every weekend and updated daily Bold Italics)

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scan for January 10th: Stocks started higher, but gave way to late-day selling and closed slightly lower. Not a bad week, but one thing is clear, talking heads are worried about valuations… and it is all the week prior to fourth-quarter earnings beginning. Something to watch as the earnings season begins. Adjust your stops accordingly and manage what you know not what you think. Below are some thoughts moving forward I am pondering and exploring for opportunities.

  • For the Week: no big changes as indexes moved slightly higher overall. Seeing some rotation of money flow, but nothing alarming. Taking it one day at a time and focusing on risk management.
  • Commodities: the sector is beginning to show signs of a reversal in the long term trends. A look at the weekly and monthly charts show some bottom patterns in position to reverse. This will provide some solid opportunities going forward.
  • Earnings: The S&P 500 index is trading at 18.4 times forward twelve-month earnings… that is a 23% premium to the ten-year average… accordingly to FactSet data. That puts the fourth-quarter earnings period under some pressure to perform to expectations. In addition, earnings have been on a three-quarter run of declining earnings.
  • Crude released the speculation premium this week… now we see if it holds or continues lower. Watching this for the trade opportunity.
  • Economic data: another issue facing investors. Despite a positive jobs report on Friday the overall data has been declining for the last seven months. In some cases, longer. A trend doesn’t matter until it matters. With the rise in talking-head chatter about overvaluations… economic data may start to matter… watching how the truth unfolds.

THURSDAY’s Scan for January 9th: Stocks moved higher on average volume and large-cap leadership. The small caps are still lagging. The overall tone of the market is positive, but the technical data is looking overextended. We have taken some profits from positions and continue to manage the risk that is in the markets. Opportunities have been positive in the dollar as it bounced off the current lows. Financials showing positive moves in GS, AXP, and V. Crude moved lower as speculation comes out of the sector on Iraq resolution and China offering to sign the agreement. One day at a time.

  • Technology (XLK) strong leadership from the sector remains with IGV, HACK, SOCL, FDN, and WEBL leading the upside move. NASDAQ 100 (QQQ) adding to the strength as well.
  • China (FXI/YINN) attempting to break higher on the comments of being ready to sign the ‘phase one’ agreement.
  • Financials (XLF) solid upside activity with IAI leading the charge.
  • Consumer (IYC) leading and breaking to new highs.
  • Jobs Report – Due Friday and will have the market’s attention for the open and beyond based on the outcome.

WEDNESDAY’s Scans for January 8th: News was the mover all day. Early news about war with Iran ruffled the futures market. Iran’s statement of no war rallied the markets. The Ukranian plane crash sent stocks lower again. Then false news of rockets and mortars shot at the US embassy in Iraq… sent stocks lower and they rallied when verified they were shot by militias and not Iran. It was a day of challenges relative to news and varified facts. Another reason we use stops-on-the-close to avoid intraday volatility. Taking what is there and managing the risk.

  • Software (IGV) continued the upside run showing solid leadership for technology. SAIL, CLDR, FIVN, CRWD, WDAY, and others looking good.
  • Internet (FDN) continued upside move as well helping technology. WEBL leveraged ETF to play the sector. KWEB also moving higher as China stocks bounce.
  • Commodities (DBA/DBC) have been tracking higher as the dollar weakened and the geopolitics expanded… the news on Wednesday pushed the commodities lower… watching how that unfolds as we hit stops on some areas.
  • Cybersecurity (IHAK) an area drawing plenty of attention of late. The sector hit a new high on Wednesday with a cup and handle pattern breakout to the upside.
  • ADP jobs report showed better than expected numbers boosting the expectation for the December jobs report on Friday.

TUESDAY’s Scans for January 7th: Boring day for scanning the markets as money was jockeying for position. REITs moved lower, semiconductors moved higher, and many traded in place. Sticking with what we know and looking to discover how this unfolds near term. Economic data improved with durable goods and capital expenditures adding some positive notes.
After-hours Iran launched some missiles at US military bases… that should make Wednesday interesting. Watching and measuring the opportunities near term.

  • Semiconductors (SOXX) reverse selling to hold near the current highs.
  • ISM services rose to 55% showing some optimism for economic data. The trade deficit continues to shrink thanks to the tariffs. Watching how the economic data unfolds this month for December and 2019 overall.
  • Energy (XLE) sector continues to made strides on the upside. FCG broke above resistance. OIH, IEO also making nice moves on the upside. Watching crude UCO (overbought technically), gasoline UGA (sold lower on Tuesday), and energy XLE (sold lower)…
  • Silver (SLV) gold not the only metal making moves on the upside… solid trend in play for silver.
  • Social Media (SOCL) making a vertical climb and managing our stops.

MONDAY’s Scans for January 6th: Worries settle as buyers step in to prop up the markets. Taking this all in stride as we sort through the news to find the truth. Plenty of talk about a correction and the markets falling more than ten percent near term. If that is the underlying thought all it will need is a reason. Friday the Iran strikes gave some reasons. But, it will take more news to drive stocks lower. Patience as it unfolds and stops in place. Remember the Fed is stepping out of the repo market this week and money supply will be left to itself. That could be of interest as the week progresses.

  • NASDAQ 100 (QQQ/TQQQ) solid leadership on the day.
  • Software (IGV) solid bounce higher to close at new highs.
  • Semiconductors (SOXX) more selling raises questions about the sector. Watching how it unfolds.
  • Gold (GLD) moving vertical… adjusted our stop.
  • Oil Services (IEZ) breaking higher in a positive trend.

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

Sector Rotation of S&P 500 Index:

  • XLB – Basic Materials bounced at support $55.95 level and moved new highs. Then fell on the worries rise… watching how it responds this week. More selling leading the downside.
  • XLU – Utilities moved lower in response to interest rates. Broke support at $63.17. Bounced at support… and resumed the upside. Watching how this unfolds near term the current anxiety and geopolitics.
  • IYZ – Telecom picked up volatility with the markets and testing the $29.50 level of support and bounced. Remains in the current trading range.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs. Rolling top in play.
  • XLI – Industrials moved back and cleared the $79 resistance. Moved above the July highs and hit new highs. Tested lower and bounced on hopes of another trade deal. Watching the response to Friday’s decline.
  • XLE – Energy remains in at a point of indecision. It did hold $58.19 support and bounced back above the $60.52 mark and stalled at the October high and moving back below the $60.52 mark.
  • XLV – Healthcare held support at the $86.75 level. Bounced and cleared resistance at the September highs. Rolling top worries as the part struggle. Bounced at support.
  • XLK – Technology broke to new highs along with semiconductors. Both tested the moves and resumed their respective leadership roles. Watching the parts with SOXX moves lower and, IGV, IGN, SOCL, and others moving higher.
  • XLF – Financials got a boost from solid earnings pushing the sector higher. Cleared $28.24 resistance. Broke to new highs, tested, and moving sideways of late. Rolling top on the chart.
  • XLY – Consumer Discretionary broke higher on positive sales data for the holidays. Topping again? Watching how this unfolds. Broke to new highs.
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… only to retest the lows again and bounce… watching. Plenty of anxiety surrounding the sector.

There are currently three sectors in a sideways or consolidation trend. Seven sectors are in confirmed uptrends. One sector in a confirmed downtrend. The result is SPY in a confirmed upside trend short term. We have to remain patient and let this all unfold. Remember the parts make up the whole.

(The notes above are posted Weekly based on the activity of the previous weeks trading. The BOLD/ITALIC comments are current day changes worth noting.)

FINAL NOTES:

The first full trading week of the year ends on a negative note but posts a positive gain for the week. The positive week is overshadowed by the talking-heads rambling about valuations. While that is important in the bigger picture… the valuations have been an issue for the last 18 months while the indexes continue to hit new highs. The lesson… manage your money, not the data. Markets can remain irrational longer than you can remain solvent betting against the trend. Yields remain flat near the 1.8% level and the dollar finally bounced back from the sell-off. The expectations on my side are for the news to give money a reason to rotate towards safety. Watching interest rates and/or bonds to benefit if this happens. Don’t assume let it happen first. The trade deal is still being rumored as progressing but there is nothing signed yet. The S&P 500 and NASDAQ indices pushed to new highs Thursday with a small retreat on Friday. Third-quarter earnings were better than expected offering a positive catalyst for the last three months and that will put pressure on the fourth-quarter results that start shortly. Retail is showing positive as the consumer continues to drive the economy as seen in the holiday sales data. The backstop of the Fed for liquidity has been key in the move higher and they continue to be engaged in the liquidity game. The money flow was lower on the week despite the gains. The key is to watch the trend, know which side the Fed is on, and ultimately the data will establish the longer-term trend. We remain focused on what is working and what is failing. Therein lies the opportunities. Manage your risk accordingly and let this unfold… one day at a time.

Disciplined entry and exit points allow you to manage your risk in up or downtrends. Investing and trading is a matter of a defined strategy implemented with discipline. It is not magic. It is not being a prophet. It is about following your strategy one day at a time.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese proverb

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.