Buyers remain optimistic as they eye the start of earnings

OUTLOOK: Week of January 16th

Investors shed worries over China and Treasury bonds and focus on earnings. The outlook is positive toward the fourth quarter earnings reports especially in the consumer and retails sectors. There are some new worries on the horizon such as inflation and dollar continuing to weaken, but hope springs eternal as it relates to the markets and the outlook for growth. Only time will tell and we have to stay focused on the goal at hand.

The upside was led by consumer discretionary (XLY), telecom (IYZ) and energy (XLE) on Friday. The jump in energy stocks was a reaction to the move higher in crude. Retail (XRT/XLY) continues to impress with holiday sales ahead of expectations on earnings. The optimism towards earnings is adding some momentum to the move higher. Small caps (IWM) broke higher from the trading range adding to the upside continuing the uptrend. The downside on the day remains with the interest sensitive stocks like REITs (RWR) and utilities (XLU). Interest rates have been trending higher putting downside pressure on the bonds and the dollar.  How this unfolds will be of interest across the board. News is reactionary, beliefs are trend building… watching what belief rises out of the news and short term activity.

The S&P 500 index closed up 18.6 points at 2786 and closed at new highs again. The uptrend remains in control of the index on above average buying volume for the day. All the moving averages are pointing higher with optimism towards the future. The biggest movers in the index were VIAB (test bottom reversal upside gap higher), LOW (breaking higher clearing resistance), STX (gapped higher and confirmed the move), KSS (Uptrend continuation gaps higher), and TGT (continuation of break higher). The downside came from AFL, AWK, FB, VAR, and VTR. Mixed activity on the downside as REITs lead the downside. Watching how the news merry-go-round unfolds with earnings beginning next week. The leadership for the last thirty days has come from industrials, consumer discretionary, and energy… getting some rotation of late with energy, industrials, and basic materials leading over the last ten days.

Gold (GLD) tested lower at the $117.38 support and bounced on the Fed hiking interest rates. The metal cleared the $123.05 resistance mark breaking higher and the $125 mark… watching with stops in place on the vertical move short-term breaks higher from a flag pattern. The dollar (UUP) worries abound relative to the Fed, taxes, and geopolitics. Now it has China to worry about? The downside broke below the November lows now testing the September lows. The emerging markets (EEM) has gone vertical on the weaker dollar and talk of resurgence globally in the economics. The Volatility Index (VIX) surged higher on the news and calmed closing at 10.1 and watching how this unfolds going forward. There is plenty on the table relative to dynamics and agendas from traders and investors alike. The key is to remain disciplined within your trading strategy and not let the anxiety of the situation change your mind. Manage your risk and stay focused on the horizon, not the rear-view mirror.

(The notes above are posted daily based on the activity of the previous days trading)

KEY, INDICATORS/SECTORS TO WATCH:

Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare. There is no clear resolution to that issue and that has now led to money rotating to where is it has better opportunities and clarity. The downside broke support at the $103.65 level only to recover as the challenges remain with a lack of clarity about Washington more than anything at this point. Bottom reversal started? Made move to resistance at $107 level and broke higher last week. Entry $107, Stop $107 (adjusted). Solid upside trend developing short term. 

REITs (IYR) The sector tested the $79 level of support and broke lower to exit the previous trading range. The worries over interest rates continue worry investors and in turn the selling has expanded. This is a growth and dividend holding with a 4.2% dividend from our entry point in April. Entry at $75.75. Stop $76.25 (adjusted). SRS hedge entry $30.25. Stop $30 (adjusted) we added to protect our principle short term. That has worked well and we will adjust our stops and hold the short position if our stops are hit. 

Treasury yields (TNX) moved to 2.55% last week as the worries return on the weaker dollar dropping to the September lows. The lack of commitment from the Fed and Washington’s wanting a weaker currency isn’t helping. Watching how this unfolds, but for now, rates remain in a trading range and we remain out of treasury bonds for now. Short side of the bond remains the trade with worries of yields rising further. 

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility of the trend is speculation and news driving money. The selling speculation on the rumors of the Fed hiking interest rates broke the $120.45 support. On the decision prices moved higher???? Yes, higher. The “worries” about the dollar and the outlook for growth has money rotating on speculation… regardless taking what the market offers. Entry $120.70, Stop $123. Long term view is positive and the short term boost from the weak dollar is helping the commodity. 

Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but speculation about the dollar is impacting the price near term. The last three months the commodity has managed to fight its way back above the $50, $52.50, $57.50, and now $61.60 levels of resistance and confirm an uptrend off the June low. Entry $50.20, Stop $60 (adjusted). The price accelerated on a weaker dollar this week and remains in the uptrend… let it unfold. 

Energy stocks (XLE) Continue to climb off the August lows and the double bottom pattern clearing $63.22 for entry and a stop at $72 (adjusted). Investors reacted to the decline in price and found support at the $67 mark. With the bounce in price, the stocks are again responding on the upside… A nice break above $72 as money flow shows faith in price. Broke to new highs currently. This gave the opportunity to add to positions or trade the move with ERX $32.30 entry, $36 stop (adjusted). Uptrend remains with nice gap higher on Thursday. Crude moving higher helps money flow.

Volatility Index (VIX) The positive week for stocks keeps volatility in check. The close at 10.1 was higher, but not enough to get any attention from investors. Watching to see how it unfolds this week as investors continue to have faith in the upside move. 

The S&P 500 index closed the week at new highs and posted a positive return for the week gaining 2%. The drivers last week were consumer discretionary and financials as both broke higher on the optimism. All the moving averages are positive and volume was average with the holding to the belief that stocks are still affordable. There is plenty to ponder as we start the new week… not the least of which is the rotation to commodities of late on the weaker dollar along with emerging markets. The question to ask, how low will the dollar fall? We remain on guard about how the buck will impact the inflation picture as well as commodity prices. Remember rising commodities impact inflation relative to spending and discretionary dollars from consumers. Overall we are still cautious about the direction looking forward. Earnings start this week and the financials will set the tone for how optimistic investors remain. Small caps finally made an upside move to to show some risk appetite among investors currently. Patience is required with this market overall as news leads the parade. Economic data remains mellow to start the year. Plenty of talk on the table concerning inflation as interest rates move higher. We watch as the market and investors settle into the new year.  

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Daily Scan Results: 

FRIDAY’s Scans 1/13: Positive trading day to end a positive week for stocks. Despite the rumor of China stopping the purchase of US Treasuries the markets moved higher. The optimism remains towards stocks with the start of earnings season next week. The financials will be first up and they will set the tone for the week. The scans reflect the upside optimism currently with the downside reactions coming from interest-sensitive stocks.

  • The NASDAQ (QQQ/TQQQ) fell to the 20 DMA to end the year and rose to a new high to start the year. Hit entry at $147 with a stop at $147 for the upside trade. Longer term positions we raise our stop to $140 as well.
  • Crude Oil (USO/UCO) upside in play on a weaker dollar. The demand side is higher, but not enough to warrant the higher move. Dollar and speculation drive move for the commodity. We added to our position at the $21.80 level, stop $$22 (adjusted) and will manage our risk accordingly.
  • Gold Miners (GDX/NUGT) upside trade returned as the test of the $31 support held and the upside resumed… cleared $34.20 resistance and offered another entry point for the miners. $28.67 stop still in place on other positions ($28.67 entry). Gold (GLD/UGL) is the reason for the rise! Breaking above the $123.05 mark. UGL offered another entry point on the break above resistance $40.50 (stop $40).
  • Natural Gas (UNG/UGAZ) making solid move above the $80.20 mark. Bottom reversal in play and watching for the follow through to the upside. Worth trading short term.
  • China (FXI/YINN) upside gapped higher after clearing $33.56 resistance and Friday gapped higher again. Entry $33.60, Stop $39 (Adjusted).

The market is poised for more upside near term as money rotates based on the current outlook. Watching the data points for earnings as we start the new week. The key is patience and observation of how the belief factor unfolds moving forward. Current belief is plenty more upside on hopes of positive earnings season.

The upside leadership:

  • Crude Oil (USO/UCO) positive moves to clear near-term high.
  • Gold (GLD/UGL) positive upside moves setting the pace.
  • Homebuilders (ITB/NAIL) upside remains after a test with flag pattern in place. Looking for the resumption of the uptrend in the leader. $43.25 entry point hit.
  • China (FXI/YINN) positive move higher followed by gaps higher.
  • Brazil (EWZ/BRZU) upside break and positive move on a weaker dollar.

Risk management of positions and a disciplined strategy for any and all trades.

Watching:

  • Homebuilders (ITB/NAIL) upside is back on the upswing and watching how it unfolds relative to the move in interest rates and tax cuts. Closed above the previous highs.
  • Silver (SLV) upside following gold. SIL following the miners higher.
  • Emerging Markets (EEM/EDC) – clear previous highs of interest. $121 entry, stop $130). The dollar is helping the upside move. Added to the move higher after small test.
  • Mexico (EWW) in position to break the bottoming patter. $51.21 level to watch on upside  move.
  • REITs (IYR/SRS) short side trade for the interest sensitive sector. Break above the $31.55 resistance and looking for more opportunity as the yields move higher.

THURSDAY’s Scans 1/11: China denies bond comments and stocks rally on the day. The moves put the S&P 500 index back at new highs and money flow remains positive bias near term. Energy rallies on speculation, industrials and basic materials move higher on commodities, and the consumer is a leader based on the news from retail sales. Plenty of positives on the day as the scans shift gears back to the upside.

  • Commodities remain a positive upside influence of late. The rise in natural gas (UNG), crude oil (USO), and gold (GLD) have been the drivers, but the overall view is positive for the near term. UNG hit entry at $23.76 on the day.
  • Energy (XLE/ERX) test and go higher was the theme this week as the upside showed up in Thursday. Upside opportunity at the $40 mark if you don’t already have a position.
  • Homebuilders (ITB/NAIL) bounce back on the denial of the claims China was not buying any more bonds. The rally on Thursday was speculation based.
  • Brazil (EWZ/BRZU) upside with a positive test and go.
  • Small Caps (IWM/TNA) upside resumes finally as the January effect remains a big question for the sector. $73.75 entry hit.

Other moves on the day MVV, IEZ, XME, GREK, XRT, TAN, FCG, IYT, IEO.

WEDNESDAY’s Scans 1/10: China sets the tone for the day as interest sensitive stocks move lower with REITs, utilities, bonds, and telecom lead the downside trek. They broke key support levels and put the short side plays in acceleration mode. Adjust stops and manage the risk of the news causing the move. Today will be of interest to the storyline and the belief factor of investors unfolds.

  • Semiconductors (SOXX/SOXS) downside selling in the sector… reacting to the previous highs resistance? Profit taking? Watching how this unfolds. Stop $166 on positions.
  • REITs (IYR/SRS) short side trade has developed in the recent movement on interest rate worries. Hedge position added at $30.25… move above $31.55 is negative for the sector and could trigger stops for IYR. We would then hold the net short position and watch how it unfolds.
  • Metals and Mining (XME) remains in an uptrend and breaking from the flag pattern at the top of the trend. Commodities are still driving the move in the sector. Stops at $36.
  • Crude Oil (USO/UCO) upside makes move and clears resistance. Buyers are engaged and the speculation remains on the upside… not driven by supply and demand.
  • Banks (KBE/KRE) upside breakout from the trading range as the sector is seen as a benefactor to rising rates. A new entry to add a position or add to positions at $48.75. Stops remain at the $46.30 mark.

Biotech (IBB) still attempting to solidify move higher… we have discussed this and hold a position with a move above the $75.30 mark. Natural gas (UNG) stalls again and test the bottoming pattern. Gold miners (GDX) bounced off support of the test and watching how it unfolds.

Watching how the trends unfold with this development around China. News is news and markets react… belief is an entirely different issue as you can see in the price of crude over the last few months. Despite the lack of demand prices are rising. Belief is key to how trends develop.

TUESDAY’s Scans 1/9: Another day of upside for the broad indexes, but the challenge remains a lack of clarity with the dollar and interest rates. Yields moved higher along with the dollar on the day causing some angst among investors. Still taking it one day at a time with overbought talk in the headlines… it is important to remember the market can remains irrational longer than you can remain solvent betting against the trend.

  • Natural Gas (UNG/UGAZ) the upside is taking the volatile route of progression on the upside. Watching how this unfolds near term and what opportunities it will create. Up or Down?
  • Biotech (IBB/LABU) upside returns after one day of selling… still need validation on the upside move following the break above the $75.30 mark.
  • Treasury Bonds (TLT/TMV) the short side trade is in play and it will be a challenge to change the direction as rates moved above the 2.5% mark on the ten-year bond… short is short for now. $19 entry point to add to short side trades on the bond.
  • Gold Miners (GDX/DUST) follow through to the reversal on Monday… $24.10 entry point for short trade on follow through.
  • Healthcare (XLV/CURE) confirmed break above the resistance at the $49 mark. adjust stops accordingly and let it run for now. biotech (IBB) and medical devices (IHI) breaking higher.

Plenty to watch and scan as this unfolds.

MONDAY’s Scans 1/8: An interesting day with some weakness to start and finishes on the upside. Technology and the NASDAQ still leading the movement with the Dow, S&P500, and NYSE showing some consolidation in volume, breadth, and movement. Take what is there without over analyzing the situation… stops in place.

  • Interesting reversals of leaders from last week… Biotech (IBB/LABD) and gold miners (GDX/DUST). Watching how this rotation unfolds near term.
  • Semiconductors (SOXX/SOXL) upside leader remains on upside move. Watching as it approaches the previous highs. NVDA, AMAT, ENTG, and TER leading the upside move. Networking (IGN) gapped higher as well from the consolidation pattern adding to the upside in technology.
  • Coal (KOL) we discussed this move several weeks ago with the opportunity clearing the $15.40 resistance… it has gone vertical in the move adding to the commodity run.
  • Oil Services (OIH) adding to the move above $26.17 resistance. The sector remains positive with the move in crude above $61. Another part of the commodity storyline. XLE, IEZ, and XOP.
  • China (YINN/FXI) continues to lead the upside charge for the emerging markets (EEM). The solid upside move continues as money looks for opportunities in the sector. KWEB leader in the move higher.

Overall moves are in line with the bounce off the December test to end the year and the last five trading days have been impressive on the upside. Proceed with caution and stops in place as this all unfolds.

 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Sector Rotation: 

  • XLB – Materials continue the wave type pattern of rolling up and rolling down in an uptrend. The upside resumed in August and the positive wave has ensued. Cleared $58 and continues to hold near highs. Entry $54.75, Stop $57.60 (adjusted). Moved to new highs and climbing adding to the upside.
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed, but they have attracted buyers the news of rates moving higher erased the gains and more. Looking for support and the next opportunity as the fear evaporates and reality settles in. Bounced off support and then continued lower… risk remains high for the sector.  
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Some buying? Some selling? Retested the lows as the downside took root and broke support at $30.40. The bounce was positive and we added a position on the upside move… $28.55 entry. Stop break even $28.55. Stalled at the $29.50 level of resistance. 
  • XLP – Consumer Staples remains in an uptrend and is stalled in a consolidation pattern. Need to confirm the move above the $57 level. Entry $54.80, Stop $56.25. Trading range remains with some downside pressure
  • XLI – Industrials moved higher and they have accelerated to a vertical move… stops in place as this continues to play out near term. The long-term uptrend remains in play. Stop at $75.50 (adjusted). 
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. The cards have been dealt a straight with the climb higher as a result of the rise in crude oil. Entry $65.20 with a stop at $72 (adjusted). Let it run and manage the stops.
  • XLV – Healthcare has been a big roller coaster ride with a promise to reform healthcare and then the failure to follow through. The test of support at $81 bounced. Money flow rose on the buying as biotech large caps (XBI) positive upside helping the sector. Watch the parts as well as the whole here… IHF, IHI, XBI, XPH. 
  • XLK – Technology uptrend remains in place with some testing. Entry $48.50. Stop $63.75 (adjusted). Semiconductors (SOXX) are creating the move higher with positive gains towards the previous highs. Watching how the parts unfold near term. SOXX, FDN, HACK, IGN, IGV, and SOCL. 
  • XLF – Financials pushed lower on worries. Moved back above the $26.40 level adding upside. Entry $26.40, Stop $27.75. IAI and KRE also worth trading as they lead the sector higher. Moved higher on interest rates for now. Earnings on the table as well.
  • XLY – Consumer Discretionary has been a key leader since the November move higher. Entry $83.50. Stop $99 (adjusted). The clarity about the consumer is a challenge for investors, but the positive earnings and outlook are leading the stocks. The uptrend is in play. Watching how the retail (XRT) continues to add to the move. Raised stop and watching how the sector reacts to the preliminary sales data for December.
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. The longer-term view clearly shows the trading range and the move near the December 2016 lows as support. Tax cut worries added to the downside move and now comes decision time for investors. We added the position last December (entry $91) on the move off the lows and continue to babysit the dividend of 4%. Moved back to the previous lows and breaks support on higher interest rates worries around the China news. Stops in place and watching for the opportunity. SRS position in play as a hedge.

Finished the week with the S&P 500 and NASDAQ indexes at new highs. The current market environment is being driven by sectors and not an overall driving belief despite the move to new highs for the major indexes. We continue to take what the market offers and nothing more. Some rotation into technology, healthcare, and energy sectors as investors look for the best opportunity near term. Energy pushed to new highs this week on a positive breakout. Six sectors are trending higher, two trending lower, and three moving sideways… about what you would expect in the current environment. We have to remain disciplined in our approach to investing our money. The goal is risk management as the story-lines continue to unfold.

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

Investors are happy with the upside activity as it relates to the current trends. Traders are driving the short term swings and opportunities. The week was filled with optimism about the new year. The focus remains on the impact of the tax cuts and which sectors win… there are political and geopolitical issues in the headlines, but the worry factor has not escalated enough to warrant any downside except in bonds. I expect more of the same as we settle into the new year of trading. Our goal is to take the opportunities that meet our strategies and allow us to manage our money with the least amount of risk. The rationale for the current trading environment is more speculation than fact. As seen in the economic reports it remains mixed and allows speculation to remain in control. Earnings and retail sales for December will all be reviewed in light of expectations in 2018 as we move forward. Since the market trades looking forward and evaluates based on past data investors have been buying in advance of the reality and hoping the data will confirm the belief. That is why we manage positions with stops daily. There is still plenty of work to be done in order for the rumors becoming truth. The outlook for the economy is partly cloudy at best, the dollar is not helping as commodities will impact the consumer spending if gas prices continue to rise. Patience is the key for now. There are plenty of short-term trading opportunities and the long-term remains in an uptrend overall. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long-term.

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly. 

“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.