Another upside day for markets

MARKET OUTLOOK FOR July 5th, 2019

Happy Independence Day! There were fireworks on Wall Street Wednesday as the S&P 500 and Dow closed at new highs. The NASDAQ hit a new closing high. All is well as we raise a pint to both our independence and new highs.

The S&P 500 index closed up 22.8 points to 2995 hitting new highs again on Wednesday following through on the upside break. The one thing that continues to shine for me is the economic data, and not in a good way. The focus is on trade with China and the Fed. The President added Europe to the tariff list on Tuesday. The 10-year bond remains below 2% and the inverted yield curve continues to beg for the Fed to act. Ten of the eleven sectors closed higher on the day as REITs and consumer staples led the upside. The downside was led by basic materials. We adjusted our stops and taking what the market offers. The long-term trendline has been looking better, but we will watch closely as the events continue to develop.

The NASDAQ index closed up 61.1 points at 8170 and continues the move back towards the June highs. Technology stocks leading the move higher currently. Semiconductors continued testing the Monday move. QQQ is our indicator adding modest gains clearing the $188.31 resistance. Investors are putting money to work on the hopes that trade will improve with China. Adjust your stops and know your exits on both short and long term holdings. SYMC, TSLA, SBUX, ILMN, and NFLX posted breakout moves on the upside.

Small-Cap Index (IWM) the sector broke below the $146.71 support and turned higher on news. The follow-through from the buyers on move above $154.90 is positive. Emotionally charged activity in the sector currently.

Transports (IYT) The sector pushed through the $186.70 mark and added to the move Monday. The stairstep pattern in play puts the reversal off low a chance on the upside. The weakness in the sector comes from slower economic data. Watching with entry signal on Friday.

The dollar (UUP) The big question mark for the buck has been the trade tariffs with China. Monday it traded as if those issues were resolved… watching how this unfolds along with the tariffs. The buck moved off the lows and the ETF closed at $26.14 and reversing at the lows. Watching as this continues to unfold.

The Volatility Index (VIX) closed at 12.5 hitting the lowest level since May which corresponds to the last high. Uncertainty looking forward is still an issue despite the truce in trade with China. Interest rate worries remain in the mix as well. Watching how this unfolds near term. SVXY trade working well on the ease in anxiety for stocks.

Economic Data: Some positives in the data for the month of March… showing sound improvement over February.

WEDNESDAY, July 3rd: ADP job report was positive with 102K new jobs. We will see how that translates into the jobs report on Friday. Jobless claims were 221,000 and in line with expectations. The trade deficit was $55.5 billion and in line with expectations. ISM services index fell to 55.1% from 56.9% last month and continues to show weakness. Factory orders fell 0.7% as it remains negative showing slowing sales. Mixed data continues, but it remains in a downtrend overall.

TUESDAY, July 2nd: Vehicle sales were at 17.3 million and better than expected, but lagging from the 17.4 million sold in May. Still a positive number overall.

MONDAY, July 1st: ISM manufacturing numbers held above the 50% mark at 51.7% down from 52.1% in May. Not a good number, but it could have been worse. The construction spending fell 0.8% versus 0.4% growth previous. Definitely not a positive data point for housing or commercial. These are the numbers that matter to stocks.

FRIDAY, June 28th: Personal income rose 0.5% same as last month. Consumer spending rose 0.4% down from 0.6% last month. Core inflation rose 0.2% same as last month. Chicago PMI was 49.7 versus 54.2 last month. That shows yet another region slowing economically. Consumer sentiment was 98.2 below the last reading of 100 last month.

THURSDAY, June 27th: Weekly jobless claims rose to 227,000 above expectations and feeds the fuel for next weeks jobs report. GDP remained at 3.1% for Q1. Pending home sales rose 1.1% versus the decline of 1.5% last month. The data is mixed as usual. Next week will be of interest with the month of June coming to an end and all the new data will be released.

It is all about the progress and the data of late has been more mixed than previously. There are still some sectors showing signs of growth, but overall it is still slowing. The data for May has not been impressive and is giving hope to the markets the Fed will cut rates as a stimulus. The June data starts and not exactly stellar. Watching June and second quarter data as it unfolds in the coming weeks along with earnings. Interpret the data versus following our emotions. Let the trend be your friend… and for now, it is sideways.

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

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector found some support at the $182 mark bounced. It has been a low volume move, but up nonetheless. $190 resistance was eclipsed and watching $193.35. We hold no positions in the sector currently. Cleared resistance at $193.35 looking for the follow through.

Biotech (IBB) The selling found support near the $101 mark. The break lower was the small-cap stocks struggling. The sector sold lower to start the week then bounce the last two days to close back at the $109 level which is where we started the week. Watching how this unfolds. Added some upside clearing the $109 mark…

Semiconductors (SOXX) The downside pressure found some buyers and reversed the trend short term. The reversal started with the Fed talk on rate cuts and now the hope of the tariff talks pushed the sector higher. $192.43 entry. $192 stop. The sector has offered some individual opportunities on the move with ADI and SIMO offering trading opportunities. Watching how this unfolds. Gapped higher gaining 2.5% and adding to the rally. Trade tariff news helped. A small test to fill the gap from Monday.

Software (IGV) The spike lower broke the uptrend at the April high. Tested support near the $200 level and bounced. Moved through resistance and held. No position in the broad ETF, but digging in offered some interesting upside moves in DBX, SYMC, EVTC, and IIIV. A Solid move higher and hitting new highs again.

REITs (IYR) The upside move took a turn lower after hitting new highs at $91. The shift in the economic picture and the housing data sent money to other areas. We hit our stop and locked in solid gains on the position. Looking for support at the $86.30 level to hold. If so, we will consider re-establishing our positions. Holding support. Tuesday posted a solid gain and followed through on Wednesday.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.0% as money rotates to safety and TLT is showing a topping pattern. Flight to safety related to tariff threats and a weakening economy. TLT entry at $124. TMF entry $20.26. Stop $23.50. Tuesday broke below 2% level to 1.97%. Bonds rallied. Wednesday moved lower still.

Crude oil (USO) Supply data worries may get a boost from the OPEC meeting on Monday as many expect production cuts to be announced. Iran/US tensions remain and are also helping the upside for crude prices. The break above the $57.43 level remains in an upside trend. UCO entry $17.15. Stop $18.50. Gained on tariff truce Monday. Dumped lower on Tuesday as worries build about supply. Opened higher Wednesday and failed to hold the gains.

Gold (GLD) built a base of support and started an upside move on worries about trade. The move above $121 was a positive and entry-level opportunity. The upside confirmed and broke higher on the heels of speculation the Fed would cut rates, which in turn weakens the dollar, which favors gold. $122.50 entry-level. Stop $132. Vertical move showing a pennant pattern… watching with stops in place. Buy the rumor, sell the news. Down 2% on the tariff truce. Tuesday bounced back on tariff talks with Europe.

Emerging Markets (EEM) The downside found support and held with a bounce off the lows. China helped as expectation are high for trade talks. Letting the weekend happen and then we will evaluate the opportunities. No positions. Gapped higher as everyone declares China the winner.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. The bottom was established in May. The reversal was established in June. Now we are looking for the confirmation of the uptrend to be established. Trade talks with the US this weekend will shed light on the future. Gapped higher on the trade meetings.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scans for July 3rd: Economic day ruled the day as most were weaker but still manageable. New highs on the major indexes show investor engagement. The patterns and trends are following through on the upside moves. Software hit a new high. Some testing of the gap higher in semiconductors, but overall not a bad day and trend remains in play.

  • Software (IGV) new highs to keep the uptrend alive and well.
  • Interest Rates & Bonds (TLT) ten-year yield fell to 1.95% and bonds moved higher. Inversion of the 3 month and 10-year widen. 2-year tops the 5-year yield. This is not a good thing FYI. The Fed is watching and waiting too long as usual.
  • Semiconductors (SOXX) fills the gap higher with two day test. This is a solid setup for the sector to move higher. Watching for the opportunity to add to positions.
  • Volatility Index (VIX) moving lower as money flow turns positive. SVXY in play and raised our stops.
  • Financials (XLF) move to the May highs and in position to continue the uptrend.
  • FRIDAY is jobs report. Watching for a solid number or it could unnerve the buy side.

TUESDAY’s Scans for July 2nd: One truce turns to another threat. The Europe tariff discussions from Trump set the tone of the day. The consolidation in some sectors was positive on the charts setting up an opportunity to move to new highs and joining the S&P 500. Taking it easy as the volume is likely to be low with the 4th of July holiday sandwiched between the next two trading days. Drop-in crude is of interest to me as it moves back below the $58.25 level. Gold gains back losses as tariff worries remain… it is a nervous market, to say the least, but one thing is keeping it together, the Fed and promise of a stimulus.

  • Crude Oil (USO)- Fell 4.8% and watching how it unfolds.
  • Gold (GLD) – rose 2.1% regaining Monday’s losses.
  • REITs (IYR) led the upside move… defensive sector.
  • Utilities (XLU) gained 1.3%… defensive sector.
  • Small Caps (IWM) lost 0.6%… growth sector.
  • The market continues to juggle between defensive and offensive moves. The mixed signals are of interest as they show the indecision about the outlook and the lack of clarity overall… Trade accordingly.

MONDAY’s Scans for July 1st: Tariff truce with China sets the tone for the open. The gap higher faded with a bounce into the close. The biggest gains came from semiconductors and emerging markets as they are seen as the biggest benefactors. The reality nothing changed! Nothing. Some believe we will see a trade agreement signed soon… I believe nothing changed and until it does the market is trading on speculation. That as it may be the entry signals given last week paid off on Monday. Stops must be raised and diligence remains as we manage the risk of the current environment. As much as I may disagree with the headlines and prognosis for the future… I will still trade the charts.

  • Semiconductors (SOXX/SOXL) upside continues to gain on the news with China. Adjust stops and let it run.
  • China (FXI/YINN) upside gained momentum on the trade truce. Adjust stop and let it unfold.
  • Crude Oil (USO/UCO) upside on OPEC agreement to maintain production levels for crude.
  • Financials (XLF/FAS) solid gain adding to previous move as banks seen as benefactor to the Fed.
  • Europe (IEV/EURL) upside in play and hitting resistance at the previous highs. Watching.

FRIDAY’s Scans for June 28th: The end of the quarter and the first half of the year. Plenty to look at and discussions will be all the rage next week. The S&P 500 index is up more than 17% for the year. That is awesome but worrisome. It raises questions of sustaining the increase based on the current environment. But, it is not ours to speculation on what will happen, but to invest based on our beliefs, strategies, and discipline. The markets will always lead the way to where our money should be deployed. For now, we watch how the trade talks unfold this weekend. OPEC meeting on Monday. Both will impact specific sectors as well as the broad markets.

  • Financials (XLF) Banks were given a green light by the Fed approving their capital plans and the sector rose 1.4% along with KBE and DPST posting solid moves higher.
  • Biotech (IBB) solid bounce reversal the last two days following some early week selling. Upside remains in play. Digging into the ETF offers some solid opportunities in SRPT, SYRS, CERS, UBX.
  • Small Caps (IWM/TNA) attempting to show some positive moves on the upside. Watching how this unfolds and digging into the sector for the leadership. Midcaps (MDY/MVV) moving higher as well.
  • Europe (IEV/EURL) solid move higher and trading in a flag pattern… looking for more upside from the country ETF.
  • Oil Services (OIH) bottom reversal followed through and upside in play. Watching how the OPEC meeting impacts the sector next week.

THURSDAY’s Scans for June 27th: The markets respond to rumors of the trade talks offering a truce on tariffs. Not likely to be that simple, but hope was in the headlines nonetheless. Watching patiently as it all unfolds… some notes to watch from Thursday’s trading.

  • Semiconductors (SOXX) followed through on bounce and added to the upside move. Earnings are the catalyst, but trade will be the deciding factor.
  • Small Caps (IWM) bounce following four days of selling to remain in the current trading range. Positive, but still not convincing.
  • Treasury Bonds (TLT) yields dropped again as money pushed back towards bonds on the day.
  • G20 Talk – plenty of speculation on trade. The bigger storyline from my view is the discussion on the world economy. The weakness is evident and it elevating the rhetoric about global leadership. Brexit is still an issue to be discussed relative to economic impact. Plenty of news worthy of attention away from tariffs.
  • Dollar (UUP) strong dollar generally means a strong economy and healthy consumer spending. Watching how the dollar responds currently after selling back to support with weaker data.

Sector Rotation of S&P 500 Index:

  • XLB – Broke support at the $54.15 mark and bounced at $52.49 support. Reversed and break above the April highs. Entry $55.25. Stop $55.95. Watching for follow-through. Follow through to break higher.
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Starting a topping pattern. Tested lower and watching. Tested the 50 DMA and bounced.
  • IYZ – Telecom cleared $29.50 resistance and looking for near term direction. Moved back below the $29.50 level and watching. Breaking from trading range on the upside.
  • XLP – Consumer Staples moved lower, bounced and hit new highs. Rotation of money to safer havens helping… watching the upside move. Rolling top. Moved higher on Wednesday.
  • XLI – Industrials moved below support $74.17 and reversed back into the previous trading range. Broke above resistance at $75.72. Cleared the $76.80 resistance.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Crude moved higher on Iran speculations taking stocks higher as well. Watching how this unfolds as stalls near the 50 DMA. Attempted break higher failed? Watching on the OPEC news. Sector falls 1.6% despite the continued promise to lower production from OPEC.
  • XLV – Healthcare fell below the 200 DMA and accelerated. The cause of the doom-and-gloom for the sector is a proposed “Medicare for All” healthcare from Washington. Obviously rumor-driven… Found support bounced, offered reversal trade at $86.80 entry. Stop $91. Hit some resistance at the $93.32 level. Broke to a new high on Wednesday.
  • XLK – Technology sold and found support and moved above the entry point at $75. Stop $75. Low-risk trade and watching how it unfolds this week. Semiconductors and Software push the upside. Hits new high on Wednesday.
  • XLF – Financials moved to recent lows and bounced. Resistance at the $27.15 mark as rate cuts tend to not favor banks. Capital plan approval by the Fed gave a boost to the sector to end the week. Watching how it unfolds. Moving higher and breaking above resistance.
  • XLY – Consumer stocks fell to the 200 DMA and bounced. Solid upside reversal moving above the 50 DMA with some solid retail sales data ex-autos. Watching how the topping pattern unfolds. Added upside Wednesday.
  • IYR – REITs broke lower… housing data, worries about consumer slowing and some overall rotation in the markets. We will watch how this unfolds near term. A nice move higher on Tuesday and follow through on Wednesday.

(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.)

WHAT DID WE LEARN:

WEDNESDAY: Positive follow through to the upside started on Monday. The buyers are still engaged and willing to put money to work. This is a good lesson in how the data doesn’t matter… until it matters. The hard data on the economy is weakening. The yield curve is screaming for the Fed to act. The earnings have not been stellar. But, the hope of stimulus from the Fed is acting as a backstop to stocks currently. Thus, follow the trends, manage your stops, and let this play out one day at a time.

TUESDAY: A market without direction is a market that will make you nauseous from the ups and downs. Tariff truce on Monday. Tariff threats on Tuesday. Economic data is mixed. Earnings on the horizon. Fed promises. It is like a juggler with too many things to keep in the air. We must remain disciplined in our approach… take what the market gives, but protect against the risk. Manage the part where they meet the criteria and manage the whole when it works.

MONDAY: Talk is better than action? There were no actions taken on trade agreements with China only more talk. Markets rallied on the relief of no new tariffs and the hope of an agreement soon. The little boy who cried wolf comes to mind… this has been the promise since January. I was taught that actions speak louder than words… thus, may be why the market failed to keep the early gains. Watching how all of this unfolds… stops in place and watching how the economic data unfolds.

FRIDAY: Trade talks remain the driver… what happens this weekend will define Monday’s trading. Speculation is like going to the horse track and betting on something you know nothing about. We will take what we see and manage the risk accordingly… that means what we see on Monday will offer some opportunities. Be prepared and do your homework. Trade with China is only one piece of the puzzle. Economic data and stats for June, second quarter and the first half of the year will be delivered.

THURSDAY: It is interesting to note how the media and investors will ignore the important data to report sound bites of information. The G20 summit isn’t about trade with China… it is about the state of the global economy and what can be done to improve the role of each country. There is plenty of weakness globally currently and we have to take note of how this all unfolds. Take time to read between the lines instead of just the headlines. There are some positive takeaways as well as some not so positive.

WEDNESDAY: Weaker economic data. The hope of trade agreement with China. The hope of interest rate cuts from the Fed. End result mix trading day. For me, another day of watching the parts unfold and the direction move sideways. We need clarity. That will come with defined action or inaction in all three areas above. Until then, we watch and act based on our strategy and discipline.

We remain in heavy cash positions for now. Looking for the opportunities worthy of the risk. Taking our time to understand the current environment of emotions versus logic. Patience wins the race in periods like this.

FINAL NOTES:

Markets remain focused on the speculation the Fed will now cut rates as the economic data shows signs of weakness. The FOMC meeting shed some light on that speculation but deferred the decision to the next meeting in July. We now look at the China/US trade talks this weekend as the next piece of the puzzle to unfold. The indexes closed up 1.9% for the week keeping the bounce from the current lows in play. We exited where the risk rose and we added positions where the risk was appropriate for our risk tolerance. Watching how traders respond in the coming week and if they are willing to put on risk or run for safety. We saw some risk on trading as small caps posted solid gains during the last two days. Some rotation is in play as money moves to where it believes it will be treated the best. This is where we find ourselves as well. Plenty of question marks and only time will tell the outcome. We will continue looking at positions to take profits, adjust stops, and manage the risk of the current environment. The goal is to avoid speculation and follow our disciplined strategy for each position. Taking it one day at a time.

Only four of the eleven sectors managed to close the week in positive territory as money continues to look for the best opportunities. Basic materials and financials led the upside for the week with news driving money flow. Gold holding near highs, the dollar found support, and the economic data was overall mixed with some positive signs. Four sectors are moving sideways in large trading ranges. Six sectors are bouncing from their micro downtrends. One is executing a bottom reversal short term. Crude followed through on a bottom reversal helped by the ECB and Fed stimulus talks and Iran tensions rising. Watching how that unfolds. We continue to take this one day at a time. There are plenty of influencers in the markets currently and headlines are the drivers.

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.