Markets rally on EU stimulus money

Market Outlook for May 28th

News continues to be the driver for stock this week. On Wednesday the EU (European Union) plans for a 750 billion euro recovery fund and stocks rallied. The biggest benefactor to the plan were banks, as the Eurozone banks rallied 4.8%. The US banks responded in kind gaining 4.3%. All of the liquidity is driving markets higher as the money searches for a home. On the flip side of the optimism is the economic picture… while we will see increases with the reopening of business around the world… it will take 12-18 months by best estimates for economies to return to 75% capacity. The projections are for unemployment to remain above 10% for most of 2021 according to JP Morgan’s chief global strategist.

In The News:

The US Secretary of State Mike Pompeo certified Hong Kong no longer warrants special treatment… Under British rule, Hong Kong received special economic privileges and the Secretary is ready to revoke them as China flexes its restrictions on Hong Kong. The President will now have to do decide how this will be treated. China/US relations have been strained as a result of the coronavirus and implications surrounding the spread of the disease. The disruption between the two parties continues to escalate in a battle of words… if actions are taken this will not bode well for stocks.

MGM Resorts is set to re-open Las Vegas casinos on June 4th… This is a big step forward as concerns about how to re-open casinos has been a battle with unions and politicians. Much like Disney and Seaworld in Orlando, there will be precautions taken as distancing rule will apply along with the new savior of all things… plexiglass. Evonik Industries is the largest manufacturer of plexiglass… if the world is going to consume the product find a way to invest in it.

US businesses hammered by pandemic… The Federal Reserve’s latest temperature check of business across the 12 districts shed some light on the depth of the economic pain. The Beige Book showed a sharp turn lower due to closed businesses pushing unemployment to 14.7% in April. The recovery will be slowed by the social distancing restrictions still in force. Leisure and hospitality let the downturn as you would expect, but factory activity equally was devastated and we are seeing the implication of that now will shortages of automobiles and food to head the list. The expectations are for things to pick up in the second half of the year… the challenge will be productivity… an issue I continue to raise as factories and leisure implement the six-foot rule… HUGE impact to productivity.

Crude Oil struggles on US/China tension… crude oil fell 4.5% on Wednesday as the verbal chatter between the US and China continues. This is one thing we want to watch as the price of oil has risen more than 20% since the bottom in April… We have taken some gains from positions and watching how the future unfolds and what opportunities it will bring.

Economic News…

  • Home price index rose 4.4% with a strong showing for the housing sector. New homes sales were 623,000 vs 480,000 expected… much better overall.
  • 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 44.3 points to 2991. It was up 1.4% on Wednesday as the index broke above the 3000 level. The chart shows a break higher from the topping pattern. We closed above the 200 DMA. We are looking as the leadership role rotates… Wednesday all eleven sectors closed in positive territory with financials and industrials leading the upside for the second day. The VIX index moved to 27.6 as it finds a bottoming range and indicates indecision from investors. Watching how the move higher unfolds and if we can follow through on the upside trend.

The NASDAQ index closed up 72.1 points at 9412. The index closed higher adding 0.7% 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 0.5% for the day as the large-cap stocks rallied back from early losses. The $218 level is the stop for now and watching how it unfolds near term. Semiconductors (SOXX) closed up 1.5% holding above the $243.50 breakout level. Technology (XLK) was up 0.5% testing the new highs. 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. Solid break higher gaining 2.8% on Tuesday to show some leadership. Added 3.1% on Wednesday.

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. Gapped higher up 5% on optimism about the outlook. Added 2.8% on Wednesday… rally mode.

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. Gapped lower as currency rotation to the euro with risk-on mindset from investors.

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. No movement on Tuesday as late-day selling shows some anxiety remains. Early selling on Wednesday with late-day rally?

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. Gapped higher on Monday gaining 3.4% and showing some leadership. Added 2.6% on Wednesday.

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. Started higher and closed down 1.9% for the day… topping pattern not looking positive. Early selling and late-day rally kept the sector in positive territory.

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. Up 1% for the day as fades from the highs. Added 1.5% upside on Wednesday.

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… Not a great showing on Tuesday as gives up early gains and closes in negative territory. Rallied back from early losses on Wednesday. Watching.

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. Gapped higher gaining 3.6% as money flows back into the sector. Solid two-day rally on the upside…

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. 0.68% and holding.

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. Climbed 3.3% Monday as cuts show up in the data reports. Fell 4.4% on US/China challenges.

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. Falls 1.2% as a risk-on mindset shift for investors.

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. Gapped up 2.2% as money flow pics up in global markets.

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. Gapped higher on Tuesday, but the political issues heat up in Hong Kong. Some downside on Wednesday… Watching.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scans for May 27th: The day started lower, but rallied back to positive territory as traders liked the news from the Eurozone financial backing. The laggards continue to rally as the benefactor of the re-opening news around the world… increased money supply helps as well.

  • Financials (XLF) continue to rally gaining 4.3%.
  • Industrials (XLI) rally continues with gain of 3.3%
  • Technology (XLK) struggling with money in rotation mode.
  • Healthcare (XLV) money is rotating as the sector remains flat.
  • Homebuilders (XLB/NAIL) upside accelerating on the data.

TUESDAY’s Scans for May 26th: Day starts with a gap higher for stocks on the hope of a speedy recovery for the global economies. The laggards and losers were the winners on the day as REITs, Industrials, financials, and small caps stocks rose on the day… the leaders were the laggards as technology, software, and healthcare were lower on the day. Selling in the last hour showed a lack of confidence in the rally or some profit-taking from early buyers. Topping on the charts is not a plus and watching how this all unfolds near term.

  • NASDAQ 100 (QQQ) closed in negative territory as the index didn’t participate in the move higher… watching.
  • Technology (XLK) saw some aggressive selling from the gap higher open… negative sign for us to watch how it unfolds the balance of the week.
  • Financials (XLF) solid upside gain of 5.2%. Remains in a trading range, but strong showing on the day… can it follow through?
  • REITs (IYR) solid upside gap higher and hope springs eternal for the sector. Needs to follow through.
  • Small Caps (IWM) gapped higher and held the majority of the gains on the day… watching for follow-through.

MONDAY’s Scans for May 25th: Memorial Day Holiday.

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.

(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. Broke to new highs following the March lows.
  • 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. Trying to reverse the downtrend.
  • IYZ – Telecom moved to $28 and tested and testing support at $26.25. Watching how this unfolds… parts are better than the whole currently. Nice bump higher last two days.
  • 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 a trading range. Gapped to new highs from March lows.
  • 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. Solid move higher last two days.
  • 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. Testing and remains in the range.
  • 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. Tested lower to start the week.
  • XLF – Financials broke below $21.30 support and bounced… barely. Watching as this unfolds next week. Solid move higher to break from the current range.
  • XLY – Consumer Discretionary broke from the trading range and watching. Gapped higher to start the week.
  • IYR – REITs broke lower below $71.30 support and bounced… watching how this unfolds. Gapped higher to start the week.

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:

Wednesday: Another day of gains for stocks as they started lower and rallied on the Eurozone news. The rotation continued with financials and industrials leading the upside and technology and healthcare standing still. Crude struggled on the chatter between the US and China. The dollar remains lower and gold was headed lower with money rotating to other sectors. More risk-on from investors as small caps continued the upside rally. All said, taking what is offered, tightening our stops, and watching how this all unfolds.

Tuesday: Solid gains to start the day, but the sellers showed up in the leaders… Money flowed into the laggards as hope shows up as a reason for buying the non-COVID sectors. Financials, small caps, industrials, and others posted solid day. The technology, healthcare, and other leaders sat out the upside move. Maybe… just maybe some normalcy is returning to stocks. Watching how the week unfolds and managing what the market gives.

Monday: Memorial Day Holiday.

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.