Market drift into the long weekend

Market Outlook for May 25th

The markets ended the week in positive territory and with more concerns about US-China trade tension. The media couldn’t stop identification on what the new ‘national security’ laws will do to Hong Kong an it’s economic outlook. Speculation with a microphone gets the attention near term, but the underlying issues remain the economic outlook for the reopening of the US economy, unemployment, spending, and of course the fall elections. As we head into the long weekend we need to take some time to review and measure the risk of our portfolio and holdings. The risk/reward ratios are rising and thus our need to manage it rises. We outlined below some concerns, some opportunities, and actions we watch in the coming weeks.

In The News:

Retail sector showing positive results and investors put money to work… earnings for TJX, BJ, BBY, and the sector overall responded by XRT rising 2%. SBUX stated they were tracking slightly above forecast. The consumer continues to find ways to spend despite stores being closed for the most part. Online access has been the bulk of sales from many companies reporting. XLY additionally has pushed to higher ground.

It doesn’t make sense: Creating a “fairer” world? ‘the crisis must serve as a wake-up call and a call to action for business and government to think, act, and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth.’ Jamie Dimon, CEO JP Morgan. I am not sure what all of that means. If he means addressing the failed healthcare system, infrastructure weakness, litigation and regulatory stranglehold on small businesses, failed immigration policies, and too much government, I am all in… make it fairer (is that a word?). If we are talking about making it a level playing field… that will never happen. The CARES act shows the inability of the government to “help” or be “fair”. There are too many moving parts and too many people with their collective hands out. If we can find a balanced way of giving a hand up (EIDL loans from the SBA) versus a handout (PPP loans from SBA) the world would become more fair and balanced… but, we have too many personal hands in the game for their benefit… not the benefit of the whole.

Economic data shows jobless claims up 2.4 million… if you include the new federal numbers from the additional relief program it was almost 1 million more. This brings the total number of new claims to 44 million… the question looms to how many are still unemployed with stores, restaurants, manufacturing, and other business reopening. The current tally is 413 jobs lost per CV-19 death. As we have stated in other news related updates, there is an issue of paying people not to work. Many individuals are getting both state and federal unemployment which is paying them more than they were making at their job. As states reopen and they are offered their jobs back, they are choosing to stay home and not work. Why work when I can get paid more to stay at home? With Congress wanting to extend benefits until the end of December this could become an even bigger issue for employers.

President Donald Trump did not wear a mask touring a Ford Motor plant in Michigan… My favorite headline of the day. His response, “did not need it.” He was referring to everyone in the plant had been tested as well as himself. Later there were pictures of him wearing a mask… dark blue with the presidential seal of course.

Economic News…

  • Weekly jobless claims rose 2.4 million with a total of 44 million claims filed since the beginning of the coronavirus.
  • Philly Fed manufacturing index rose to -43.1 vs -56.6 in April when the index hit a 40 year low. Markit manufacturing flash PMI rose to 39.8 vs 36.1 previous and Markit services flash PMI rose to 36.9 vs 26.7 previous. Positive signs with the reopening.
  • Existing home sales hit 4.33 million versus 5.2 million previous, but it did beat expectations of 4.2 million.
  • FOMC Minutes were released and we confirm the Fed is buying assets to stabilize the economic picture, lending overnight money to solidify banks, and buying treasuries on the balance sheet.
  • Housing starts fell 30% in April, permitting fell 20.8%… more depressing data from another sector.
  • Retail sales were down 16.4% in April and well below expectations of -12.3%. Autos fell 12%, Furnishings down 58%, clothing off 78%, Gasoline store sales down 28%, and non-store retailers -8.4%. Not pretty and it did impact the markets on Friday.
  • NAHB home builders index rose to 37 in May up from 30… seeing some activity in the sector that is positive. XHB, ITB, NAIL all rising.
  • Capacity utilization was 64.9 worst ever since started tracking in 1967. This is a telling number as it relates to productivity for US companies.
  • Producer Price Index fell 1.3% and well ahead of the 0.5% expected to fall. Oil prices can take credit for the biggest piece of the decline while food and liquor prices rose.
  • Consumer Price Index fell by 0.8% as expected. The core CPI fell 0.4% (lowest level ever). Food prices jumped as apparel and energy fell.
  • Jobs report shows a loss of 20.5 million jobs in April. 14.7% unemployment rate. Mostly inline with expectations. ADP jobs survey shed 20.2 million jobs, worst in the survey’s history.
  • ISM services data was better than expected at 41.8% but still well below 50% expansion.
  • The ISM manufacturing data to the mix as it was 33.4% well below the expansion levels of 50%.

The S&P 500 index closed up 6.9 points to 2955. It was up 0.2% on Friday. For the week the index rose 2.9% and is having a battle with resistance and the 200 DMA. The chart is defining the near term trend and attempting to break from a topping pattern. We are looking for who will take the leadership role… Friday six of the eleven sectors closed in positive territory with REITs and utilities leading the upside. The VIX index moved to 28.1 as it finds a bottoming range and indicates indecision from investors. Watching how the consolidation pattern unfolds and if we can follow through on the upside trend.

The NASDAQ index closed up 39.7 points at 9324. The index tested the uptrend gaining 0.4% for the day. The close held above the 9273 resistance and holding in positive territory for the year. The NASDAQ 100 index (QQQ) was up 0.4% for the day as the large-cap stocks inched higher on the day and up 2.8% for the week. The $218 level is the stop for now and watching how it unfolds near term. Semiconductors (SOXX) closed up 0.4% testing the $243.50 breakout level. Technology (XLK) was up 0.3% testing the new highs. Holding the new leg higher… watching how this plays out near term.

Small-Cap Index (IWM) The sector rose 7.8% for the week gapping higher and attempting to break to a new high from the March lows. The sector has been a laggard but if it can take on a leadership role moving forward it would be a positive for the overall markets.

Transports (IYT) The sector has the greatest exposure to a slowdown due to the virus. Airlines, container ships, trucking, etc. if the production slows transportation slows. A retest of support at the $137 level of support and back to the $153.20 resistance… watching how this unfolds.

The Dollar (UUP) The dollar has worked into a consolidation pattern and testing the lows and 200 DMA. Watching the China-US trade tensions and Fed dollar policy.

The Volatility Index (VIX) Anxiety spiked to 85 at the height of the unknown fallout from the virus. This week the index settled at the 28.1 level. There were moves to the upside during the week as anxiety shows up again for investors. Watching the progress going forward.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector gapped higher to start the week gaining 9% and dealing with resistance at the $170 mark. Positive signs, but still plenty of work to do on the upside.

Biotech (IBB) The sector tested the $121.70 support and moved back to the previous highs… tested $128.67 support… building a flag pattern at the highs. Entry $102.75. Stop $128.36 (adjusted). Looking for buyers to take the sector higher, but we will manage the risk accordingly.

Semiconductors (SOXX) The sector tested support at the 200 DMA again. Watching as the volatility rises on the US/China issues with Huawei Technology and trade. The uptrend remains in play along with volatility. Parts are offering the best opportunity… MRVL, NVDA, SWKS… etc.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $250 (adjusted). Entry $205.10. An interesting week of trading as we adjusted our stop and letting it play out. Parts are doing well… SPLK, ESTC, COUP…

REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. The Federal Reserve has stepped in to stem most of the negative sentiment for now. The sector broke lower last week… bounced back this week… Watching how it unfolds… no positions currently.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.65% up from .64% last week. TLT is now in a trading range. Watching how this unfolds in the coming week.

Crude oil (USO) Crude moved to $33.25 this week and up from the $29.52 level last week. A solid upside move for the week and we have adjusted our stop accordingly. Plenty of news and speculation about the outlook from the analyst. If you take a long term view there will be upside in crude. I like the long-term holding with entry at $13.81 and a two-year target of $45. Trading opportunities as well in the commodity.

Gold (GLD) The metal moved above the high of $163.93 this week as money rotates into the metal. Some testing of the move to end the week and watching how this unfolds going forward and the China-US trade talks. Entry $158.95. Stop $158.90.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from August. Established a bottom at the $30.67 mark and hitting resistance. Cleared $36.40 resistance and tested it again to end the week. Watching how this unfolds.

China (FXI/YANG) Downside accelerated on the coronavirus and has established a low near $34. Bounced back to the April highs… and now the trade conflicts arise again with the US… gapped lower to end the week and watching how this matter unfolds. No positions currently.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for May 22nd: We ended the trading week with questions and anxiety about the China-US trade agreements along with political issues and sanctions towards China. Plenty of challenges are facing the markets looking forward and not the least of which is getting the economy back on track. With the long weekend ahead there will be time to digest the current activity and look at what is offered and what is worthy of our attention. Key is to remains focused and disciplined in our strategy and management of risk.

  • Financials (XLF) remains an area of concern for me. We need the financials to hold the support and confidence to return from investors. The challenge is defaults looming from commercial real estate, loans, bankruptcies, etc. There is plenty of financial risk floating around with the Fed offering some backstop, but the level of risk remains uncertain and that is keeping a lid on the markets.
  • Crude Oil (USO, USL) Moved higher for the week and watching at the current levels. The risk of the positions is now high relative to the upside potential. Looking at taking some profit near term and finding the opportunities as they unfold.
  • Small Caps (IWM) the laggard sector gapped higher to start the week and has held at those levels. What, if any, upside remains? This is a sector that shows if investors are willing to add risk to portfolios near term… it is key to watch how the coming weeks unfold.
  • China (FXI/YANG) watching the downside opportunities here as China flexes its communist muscle in Hong Kong… killing the golden goose will not be a positive for their markets.
  • Internet (WEBL) solid uptrend and leadership for the technology sector remain in play.

THURSDAY’s Scans for May 21st: money was on the move with plenty of headlines for the day. China forcing it’s will on Hong Kong, US lawmakers setting new standards for Chinese stocks trading on the US exchanges, and retail sales data showing positive signs from the consumer. All added up to a day of selling with nine of the eleven sectors closing lower on the day. Watching and managing the risk accordingly as indexes attempt to move higher in the fourth leg of the current trend.

  • Homebuilders (ITB/NAIL) moved higher on positive home sales data.
  • Crude Oil (USO/USL) continues to trek higher.
  • Brazil (EWZ) building a base? Looking for upside follow through.
  • Retail (XRT) moving up again as earnings continue to shine in a sea of bad news. The consumer is finding ways to spend.
  • Small Caps (IWM) in position to break higher and take on a leadership role… is there enough momentum to push the sector higher.

WEDNESDAY’s Scans for May 20th: FOMC minutes out and shows the Fed is fully engaged in buying debt… good for now, but could be an issue down the road. Crude running higher again. Big box retail showing how big a benefactor they were and are of the coronavirus. Money flow picked up again as investors continue to put money to work in the markets. What happens from here is anyone’s guess at this point, for now, money is operating on FOMO (fear of missing out). Taking the good and avoiding the bad… one day at a time.

  • Leaders continue higher… QQQ, USL, XLE, XRT, XLY, SOXX, XLK…
  • Regional Banks (KRE) bounced off the lower test and showing some positive signs. Worth digging into the parts.
  • Semiconductors (SOXX) solid break above resistance and looking for a follow-through. Parts are worth playing as well.
  • Small Caps (IWM) making a move on the upside along with some volatility… Speculation more than fundamentally correct.
  • Internet (WEBL) uptrend is climbing nicely and managing the risk.

TUESDAY’s Scans for May 19th: Day of consolidation and some testing for the leaders. Semiconductors made a solid move higher only to close in negative territory at the end of the day. Watching how the balance of the wee unfolds will plenty of issues on the table. The focus shifted to a vaccine on Monday and some negative analyst questions on the validity impacted the afternoon trading. This will be constant until something is found relative to the virus. Taking it for what it is a reason to take some profits and an opportunity to see what lies ahead.

  • Crude Oil (USO/USL) climbed another one percent near the $32 mark. Wouldn’t be surprised to see some consolidation at this level near term.
  • Gold (GLD) back t the highs. Gold Miners (GDX) up 3.5% and building on the uptrend. Adjusted stops on positions. SIL/SLV uptrends remain in play as well.
  • Financials (XLF) downside back with a 2.4% move lower. Still in a range and watching how this unfolds. KRE gave back 4.3% of the upside move from Monday.
  • Biotech (IBB) showing a topping pattern on the chart and something to watch near term.
  • Solar (TAN) resuming uptrend and positive gain last two days.

MONDAY’s Scans for May 18th: Vaccine and Fed lead stocks higher to start the week as investors were willing to add risk to their portfolios. I have on my desk a simple note… “Markets can remain irrational longer than you can remain solvent going against the trend.” Nothing makes sense, but then over the short term when does it ever really make sense. FOMO is fully in play and we will ride the wave and manage the risk. One concern to voice from Monday’s activity… the leaders gapped higher but failed to hold it as they faded from the open. The weaker sectors showed hope…

  • Energy (XLE) solid upside on the day and back to the previous highs. The move higher in crude is helping as oil moves to $31. Managing our stops and letting this run.
  • Gaps higher from laggards… XLI, IYR, XLF, KRE, ITB all produced solid moves… now they need to follow through on the upside.
  • Utilities (XLU) reversed the downtrend and needs to follow through.
  • China (FXI) and Emerging Markets (EEM) moved back to previous highs and need to follow through.
  • Homebuilders (ITB/NAIL) solid move higher in the gradual uptrend off the lows.

(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 solid break above the $45.87 resistance level offering upside trade opportunity. Cleared $52.50 resistance and watching.
  • XLU – Utilities continue to struggle as they fell off the $61 highs and testing the $55.24 support. Watching how this unfolds near term. with a downtrend established.
  • IYZ – Telecom moved to $28 and tested and testing support at $26.25. Watching how this unfolds… parts are better than the whole currently.
  • XLP – Consumer Staples cleared resistance at the $54.92 mark and offered short term trading opportunity. Stalled at the 200 DMA and tested support at $57.20 level.
  • XLI – Industrials remain in a consolidation pattern. Watching. Gapped higher still in trading range.
  • XLE – Energy moved above the $31.20 entry-level as the bottom was established. The uptrend remains in play with a consolidation pattern emerging on the chart. Watching.
  • XLV – Healthcare moved above $88.50 level and offered upside opportunity. Letting it play out and adjusted our stops. Leadership role. Resistance at the $101 level showing consolidation.
  • XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently and watching how it unfolds adjusting the stop.
  • XLF – Financials broke below $21.30 support and bounced… barely. Watching as this unfolds next week.
  • XLY – Consumer Discretionary broke from the trading range and watching.
  • IYR – REITs broke lower below $71.30 support and bounced… watching how this unfolds.

The trends have worked into consolidation patterns and uptrends as we experience less volatility and more trading. We took the entries based on our defined strategies and managing the risk accordingly. Using the six-month charts as an indicator for the short term view… Four sectors are in confirmed uptrends. Five are consolidation patterns, and two are in downtrends. The result for SPY is consolidation pattern short term with a positive bias. The leadership is lagging as plenty of questions develop on the charts.

(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:

Weekend Wrap & Outlook… The coronavirus remains center stage, but the added issues with China-US trade tensions are challenging investor confidence about the reopening of the US economy. The Covid-19 battles have now become political issues more than the virus itself. It always turns political once the immediate threat is gone. The drama being played out in the media is amazing how this has turned into a political issue more than a medical one. The medical side is the pawn in the chess game that Washington, states, and municipalities are playing. This presents opportunities and expectations from stocks and the economic picture. There is no lack of question marks for the markets moving forward as money is rotating again and some moving to the sidelines. The jobless claims added another 2.9 million people to unemployment. Retail sales fell 16.8% in April and the data is showing how deep the impact is from the shutdown due to the coronavirus as companies file for bankruptcy. We are not likely through the worst of it as the reopening process is slowly progressing. The VIX index settled at 28.1 as some anxiety creeps back into the markets. We were presented with short term opportunities and put some money to work over the last few months. Our job remains to manage the risk accordingly. We hit stops on several sectors and have added to others as money rotates. The rotation is showing up on the charts as some sectors shift into downtrends over the last few weeks. Healthcare, energy, and technology are the leaders currently. Gold has moved to new highs. Crude oil has bounced off the lows showing signs of life as demand rises in China. Earnings have been somewhat positive for the markets, but the focus is starting to turn to the future outlook for growth and how long it will take to see a reversal. Many analysts are now saying the fourth quarter. All said the goal is to manage money not the markets or the pundits in the media. Let the future unfold and manage the risk that is. Track the data. Know where the markets stand relative to the facts. Money rotates to where it will be treated the best. Remember fear and speculation create opportunities. Watch the trend, know which side the Fed is on (they keep telling you almost daily), 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.