Day of rest for the markets

Market Outlook for January 15th

If we could apply the word soft to the market on Tuesday it would fit as nothing seemed to be able to gain any footing to advance. Trade news about the China/US phase one agreement due to be signed tomorrow. No one really knows what it is, but it was debated in the media. Overall there was nothing leading in the headlines, no earnings, CPI was below expectations and just a noninteresting day of trading. As we say take what the market gives and manage the risk.

The S&P 500 index closed down 4.9 points to 3283. The index holds the uptrend and closed near the highs. Five of the eleven sectors closed higher on the day with healthcare and utilities leading the day. The downside was led by technology 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 optimism puts me on alert. Watching and managing the current risk.

The NASDAQ index closed down 22.6 points at 9251. Closed near the highs. The index is being led by the NASDAQ 100 stocks. The buying in the technology sector has helped lift the index 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. Finally, some buyers to start the week. Added to the upside on Tuesday… ready to lead?

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. Hitting against resistance. Tuesday made a break higher and watching for follow through.

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. Holding near the lows.

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. Some buyers appear moving up. Tuesday added to the upside and looking for a breakout and leadership.

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. Selling resumed and testing support again. Tuesday bounced back and holding in the range.

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. Back to the previous highs. Tried to break higher but lacked conviction.

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. Resumed the upside move. A small test on Tuesday.

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. Moved higher to follow through on the upside bounce. Small test on Tuesday.

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. Back to the 200 DMA… Small bounce on Tuesday… watching.

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. Testing support.

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. Accelerated on China being taken off the currency manipulator list. Tested the break higher.

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. Accelerated on being taken off the currency manipulator list. Tested the break higher.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scan for January 14th: No much happening on the day as trading was mixed. Small and midcaps led the day, but not really saying much. The market was in a wait and see mood. Technically the charts are showing momentum on the decline along with money flow. Topping patterns are appearing on some of the leaders. All warning signs, but not a conclusion. Thus, we bank some profits, build cash, set our stops, and let it unfold looking to the next opportunity.

  • Biotech (IBB/LABU) posted solid bounce at support and watching as one of the leaders for insight.
  • Healthcare (XLV/CURE) bounced back to the previous highs and watching as part of leadership group as well.
  • Semiconductors (SOXX/SOXL) holding near the highs as well and equally a key part of the leadership.
  • Small Caps (IWM) made move upside finally and looking for some leadership if the upside is to resume.
  • Agriculture (DBA) still a part of the upside picture is in a consolidation pattern.

MONDAY’s Scan for January 13th: Positive day for stocks as upside resumes and closed at new highs. The big question remains about growth looking forward. Optimism over fourth-quarter earnings was in the headlines. Taking the good and managing the risk. All was well on Wall Street to start the week. China was removed from the currency manipulator list helping turn things positive for emerging markets.

  • China (FXI/YINN) broke to near term highs on currency news.
  • Technology (XLK/TECL) pushed to new highs as software and semiconductors rise.
  • NASDAQ 100 (QQQ/TQQQ) new highs as large caps continue to lead the markets higher.
  • Financials (XLF/FAS) solid move to new highs.
  • Social Media (SOCL) going vertical and managing the stops.

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.

(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. Positive bounce at support.
  • 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. Moved back to the previous highs.
  • 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. Solid move upside.
  • 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. Attempted to break to new highs.
  • 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. Struggling to find any buyers.
  • 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. Hit resistance at previous highs.
  • 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. Broke to new highs. Tested the highs.
  • 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. Broke to new highs.
  • 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. Solid upside follows through. Tested on Tuesday the move higher.

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:

Tuesday: ZZZZZZZZZZZZZZZZ boring day of juggling stocks without direction. Looking for leadership to expand the upside or a test of the current levels to develop. This requires patience in letting it unfold. Taking what is offered, booking some gains, and letting it all unfold.

Monday: Positive day in the news, stocks, and money flow. Taking what the market gives and not changing my views. There is plenty to question, plenty to like, and plenty to ignore. Sticking to what I know and moving forward. Don’t overplay your hand and focus on the risk that is.

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.