OUTLOOK: Week of May 22nd
The markets continued their positive ways as the broad indexes continued to push back towards the previous highs on Friday. Crude helped lead the upside with a solid gain and break above the $50 resistance level. China (FXI) was back to the previous high after testing the break above $38.75. Why the change of heart? The impeachment talks have quieted down with a special counsel appointed to investigate the situation… of course, that will only prolong the discussions and rumors. All said and done we end the week with the futures pointing in a positive direction. Take the week for what it was… news driven. Take some time this weekend to relax and research what opportunities lie ahead.
All eleven sectors ended the day in positive territory with telecom (IYZ), industrials (XLI) and energy (XLE) leading the day. There were enough positives to keep the sectors in the green as the storm seems to blow over in Washington. Financials (XLF) made a move off the support at $22.90 and showed some signs of life. Crude pushed energy higher as the stocks moved back above the $67.75 mark again. the upside kept the sellers at bay and calm was restored to the markets overall. For the week the defensive sectors RWR, XLU, and XLP led the moves. The growth sectors XLY, XLK and XLV led the downside moves. Watching to see how this unfolds in the coming week before we make any rash decisions on rotation or direction. The S&P 500 index closed up 16 points at 2381 and inching back towards the previous highs. For the week the index dropped nine points and still showing a positive trend overall. There are still plenty of question marks and uncertainty in the broad markets as the issues continue to unfold, but for now, the peace has returned. Gold (GLD) tested the next support of $115.86 and put together a bottom reversal moving through resistance at the 117.38 mark. The metal tested the gap higher from Wednesday and still remains in positive territory relative to the bottom reversal. The dollar (UUP) dumps below the $25.17 support and continues to move lower on questions about the future of the current administration. The rotation from the dollar is pushing the euro (ULE) higher and the break from the consolidation offering and upside trade in the currency. The emerging markets (EEM) bounced after testing the $39.80 support with the weaker dollar getting credit. Watching how this unfolds with the uptrend still in play but coming into question. The Volatility Index (VIX) closed at 10.6 on Wednesday but jumped to 15.5… and closed at 14.6 on Thursday… peace was restored on Friday dropping back to 12. Manage your risk and evaluate the reality of the news, rumors, and speculation. It is business as usual for now… Patience is key.
The scans for Friday take on a positive twist with the buyers returning to lift the indexes. The leadership, however, is shifting. Energy (XLE) got a boost from crude oil (USO) as both sectors break above key resistance levels. The jump in oil is in the hopes of supply falling and a weaker dollar is priced in. Brazil (EWZ) bounced off the gap lower as some see opportunity… I see a dead cat bounce for now. SVXY, the short trade for the Volatility Indes jumped higher on the calm in the markets… emerging markets (EEM) bounced as well off the test lower. Europe (IEV), semiconductors (SOXX), China (FXI), natural gas (UNG), gasoline (UGA), and base metals (DBB) all put in positive reversals following the renewed hope from Wall Street. Watching to see how the charts unfold following the selling on Wednesday… look for more consolidation patterns while investors decide. Buyers step in on bargain hunting and push the charts back to the previous highs for now. Watching the VIX index as it will give a good indication of the anxiety level among investors and Friday showed positive signs returning. Thus, take it one day at a time and take what the market gives.
The worries escalated on the article from the New York Times about the political risk in Washington as talk of impeachment rattled the markets. Throw in questionable economic data and earnings and you have the making of some selling… even if it was only for one day. We still Congress not making progress on promises from the election to deal with as well. Overall the markets are looking for the proverbial catalyst that will give direction to the markets that are sustainable and now just a move based on hope and rumors. It is important to understand that markets trade looking forward… research is based on history… until there is clarity looking forward expect uncertainty to remain. Avoid the news trades (impeachment) and focus on what is really happening in the underlying sectors and stocks. I am looking for some help based on sound economic news or data. This week’s trading tested support levels for the broad indexes. Looking for the bounce to continue next week and the upside to resume. Patience as the week unfolds.
KEY, INDICATORS/SECTORS TO WATCH:
Biotech (IBB) remains a sector of speculation… The speculation from Washington on what will happen with drug prices and the sector overall has the attention of traders. The $287-299 trading range tested the bottom end of the range and held. Entry at $287 with a stop at $286 (adjusted). Tested the bottom end of the range last week with the Trump news and watching how the new week unfolds.
REITs (IYR) have been lagging in response to interest rate worries related to the Fed promise to hike rates multiple times this year. The sector tested the $76 level of support and bounced back to $81 level of resistance. It has now moved back below the $78.22 support and is not looking positive the last five weeks. The big question mark is looking forward… thus, patience is required to hold this position. We continue to focus on managing our risk and collecting our dividend as this all unfolds. This is a growth and dividend holding with a 4.2% dividend currently. Entry at $75.75. Stop $76.25 (adjusted).
Treasury yields rose in anticipation of the Fed hiking rates and fell following the Fed not acting at the FOMC meeting. The bond is testing the 2.2% low from April as fear and anxiety keep showing up in the news. I am willing to let this unfold further and let the trend evolve. Need clarity and direction before adding any positions.
Gold (GLD) Gold took on a new dimension of worry the last few weeks and the rotation from worry to growth stocks globally and in the US markets pushed the metal lower. Anxiety however over the Trump administration and weaker dollar have revived the interest in gold. The move back towards the $120.45 resistance is still in play… watching as it unfolds further. The move in the gold miners has been of interest for trading with the Entry $21.95, stop $22.15 (adjusted). Patience and stops in place as it plays out.
Crude Oil has become a story of what if’s more than what happened or is happening. OPEC remains a challenge for the overall investor. They have injected speculation and worry overall. The move to $46 support came on the heels of supply data not improving. The supply data showed a drop and the bounce ensued to resistance at $48 and now above $50. Watching the data this week to see if there is a follow through for the drop in supply. USO at $10 would be of interest for upside trade or UCO at $17. Entry $17.10, stop $17.40 (adjusted).
Energy stocks (XLE) have fallen since the December highs as the OPEC deal to cut production has not resulted in any real measurable cut that would impact prices. The move above the $67.75 level is in play again as the bounce in crude prices has helped the stocks bounce as well. For now, we watch and let it play out.
Volatility Index (VIX) settling after we jumped to 15.5 on the Trump news, but managed to drop back to 12 on Friday. Watching patiently to see if anxiety picks up or if investors remain content with the status flow.
The indexes dropped last week in response to the Trump article in New York Times. The challenge with news-driven moves is they take on a life of their own. The impact is uncertainty and that leads to some rotation and a search for new leadership. For now, technology led by semiconductors look healthy. The move in telecom (IYZ) bounced off the lows and is building a bottoming base. Energy (XLE) bounced on the boost from crude oil. The dollar (UDN) is losing ground still and pushing money into the emerging markets and other currency like the euro (ULE). Our job is to let the opportunities develop… have a strategy for trading or investing in them… and then managing the process based on our belief and disciplined approach. Sounds simple? It is except for the six inches between our ears that process what we hear as it impacts our beliefs. Stay focused and let this all unfold and then act based on your strategy and discipline.
Daily Scan Results:
FRIDAY’s Scans (5/19): The bounce continued to follow up on the selling Wednesday. All is well???? Maybe we held serve on the dip and looking how this unfolds next week. Nice move across the sectors to recover some of the losses… patience is key.
- Brazil (EWZ/BRZU) the story continues to unfold after cutting the value by 16%. Watching as the dead cat bounce takes place on Friday and we will see how this plays out.
- Volatility Index (VXX/SVXY) short side trade set up on the bottom reversal Thursday and followed through on Friday… watching how the investor anxiety unfolds. $140 entry as trade with a stop at $137.
- Emerging Markets (EEM/EDC) bounced back from the selling. Watching how the dollar and other issues in Washington impact the sector.
- Crude Oil (USO/UCO) made move above the $17.75 entry level on Friday. Take the trade for what it is and set a stop at $16.90. We will manage this position aggressively on the move.
- Energy (XLE/ERX) double bottom setup for trade if the move follows through on the upside. That is up to the price of crude as much as anything currently. Watch and let it unfold.
More moves on Friday worth attention in the new trading week. UGAZ, UGA, SOXL, FCG, KWEB, YINN, DBC, DBB, EURL and ITB.
THURSDAY’s Scans (5/18): The bounce came from the buyers stepping in and the sellers being willing to step aside. The bounce across the sectors didn’t change anything, but it does put a line in the sand for the short side. Let it trade out and then look for the opportunities in the resulting moves.
- Semiconductors (SOXX/SOXL) sold to support… bounced off support… watching how the leading sector unfolds from here.
- Biotech (IBB/LABU) bounce off support in the consolidation pattern. Watching how it unfolds and what opportunities it will present.
- Russia (RSX/RUSS) short side is back at the top of the bottoming range and showing signs of wanting to move higher as the pressure builds in the emerging markets (EEM). $34 entry level to watch if the short side trade unfolds.
- Emerging Markets (EEM/EDZ) short fund makes a big move off the low as the sellers show signs of moving in. Watching how this unfolds near term.
- Some ETFs to watch… UCO @ $17.75… GREK flag pattern… TNA bounce off support… YINN bounces off support… RWR bottom reversal… SCJ breaking to new high.
Still proceed with caution as the news settles out.
WEDNESDAY’s Scans (5/17): Market turns lower on worries about Trump and Washington. The scans show the leaders on the upside are leaders on the downside move. The chatter of the market being overbought came into play today on the rumors.
- Semiconductors (SOXX/SOXS) sector erased all the gains from the last week. Watching how it deals with the selloff and $139.50 support.
- Volatility Index (VXX/SVXY) upside moves in volatility on the heels of worry. Hit our entry point for VXX at $14.60. Let it unfold and manage your stops according to your risk. Break even for now would be prudent.
- Small Caps (IWM/TZA) downside takes flight for the sector hitting the entry at $18 on the move above resistance for this ETF. Bad news for the rotation out of small cap stocks. Looking for the opportunity outside of the news.
- Financials (XLF/FAZ) downside accelerated for the sector on worries. Strong dollar policy and worries over Washington have pushed the sector lower.
- Treasury Bonds (TLT/TMF) upside accelerats as the flight to safety gains some traction on worries about things they can’t control….
The key for now is to watch how this unfolds. Don’t assume anything and don’t take on unnecessary risk.
TUESADAY’s Scans (5/16): Mixed day for the markets overall… the rotation to global stocks is still the theme along with commodities gaining on the weaker dollar. Plenty of challenges face the markets overall, but money flow is finding areas to invest versus going to cash.
- Semiconductors (SOXX/SOXL) continued the vertical move on the break from the consolidation pattern. Adjust your stops and let it run. AMD, QRVO, CAVM, and ON led the move on Tuesday.
- China (FXI/YINN) consolidated on Tuesday… KWEB moved to another new high.
- Social Media (SOCL) new highs hit on Tuesday… TWTR, IAC and GOOG leading the charge for the sector… global holding helping as well.
- Europe (IEV/EURL) hitting new highs again as well. Look at all the country ETFs as well for the upside moves. EWQ, EWI, EWP etc.
- Silver (SLV) bottom reversal in play and worth trading. The miners (SLV/SLVP) are on the move as well. Both offering trading opportunities short term.
The dollar weakness is worthy of note. The rotation on money is responding to this weakness to take advantage of those sectors and currency that win on a weaker buck.
Moves of note on Tuesday… DGAZ, ULE, GREK, TECL, EWL, SRS, SVXY, and UGL.
MONDAY’s Scans (5/15): Positive day with a positive influence on the broad markets and starting to establish some leadership in technology. Other sectors have made positive moves and looking for the follow through on the upside.
- Semiconductors (SOXX/SOXL) solid upside move adding to the break higher. Digging into the stocks is worth the time and effort as stocks like NVDA, QRVO and MRVL break higher.
- Crude Oil (UCO/USO) upside continues in the commodity with the entry hit for the trade. Now looking to follow through on the break as well as the stocks (XLE) scanning the leadership in the stocks shows some positive moves as well. HAL bottom reversal, WMB attempting to break from consolidation, PXD bottom reversal, and CVX bottom reversal.
- China (FXI/YINN) nice follow through on the upside and looking for the leadership to continue as the emerging markets break higher.
- Networking (IGN) solid reverse head and shoulder break higher on adding to the leadership in technology.
- Mexico (EWW) break from the trading range and renewing the uptrend. Again, emerging markets showing leadership.
Additional move on Monday to watch… UGA (bottom reversal), NUGT (bottom reversal), ITB (break from ascending triangle), TNA (cup pattern), and OIL (bottom reversal).
- XLB – Materials moved higher pushing above the $50 level and moving toward 2015 high. Hit the entry at $48.50 with a stop at $51. Tested the first level of support and bounced to remain above the previous range. All is well as the sector tests the break higher. Testing support at the bottom end of the range.
- XLU – Utilities broke above the $50.88 resistance and remains in yet another trading range. The sideways movement comes from the uncertainty around interest rates, but we continue to collect our dividend (3.4%) and let it ride. Entry $48, stop $50 (adjusted). Practicing patience and collecting the dividend from 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. Downside returned this week on the Sprint earnings. The move back to the support at the $32 mark as quick and sharp… The bounce on Friday begs the question of bounce… again? Watching how it unfolds this week.
- XLP – consumer staples continues to trade sideways near the highs as the trend off the December bottom stalls. Entry at $51.50. Stop $54.30 (adjusted). Bottom reversal pattern made move as the second time (double bottom) was the charm… made a move higher. $55.45 level to clear to keep upside going. Adjusted our stop to protect the gains as uncertainty rises and moves sideways.
- XLI – Industrials – Gapped higher following the election results. Moved into a trading range and has recovered that upside momentum currently… facing resistance on the move at the $67 level and watching how if unfolds this week.
- XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. There is still the issue of uncertainty towards the stocks. The bounce off support at the $67.75 mark failed as crude dips below the $47 mark again and takes the stocks lower again. Watching how it unfolds this week with the bounce in crude on Friday. Bottom reversal? Crude is helping for now on the upside. Move above $67.75 again to end the week.
- XLV – Healthcare hit the low and established a pivot reversal relative to rumors around the election… then the election… attempted upside move and trend reversal… but, failed to hold the move. The second attempt with double bottom has now worked itself into a break above the $71.78 resistance level. Entry at $70 as cleared resistance. Stop at $73.45 (adjusted). The downside move off the March highs tested $73.48 and has bounced again. Patience is key as this unfolds. IHI and IHF helping the upside move along with the reform bill passed in Congress.
- XLK – Technology made the move back near the highs as the semiconductors bounce off support. Uptrend remains in place as the sector continues to be the leadership overall. Entry $48.50. Stop $52 (adjusted). Nice upside move and follow through with SOXX and other leading the way higher. Managing the risk.
- XLF – Financials pushed lower on the speculation around Washington and the lack of progress on the campaign promises. Earnings were good… not great, but good enough. That failed to impact the stocks and thus, the downside was in play… with at trading range of $22.90 to $23.82. It attempted to break from the range on the week but failed to accomplish the goal. Now watching how this week unfolds.
- XLY – Discretionary Consumer broke above resistance and has continued a positive trek higher. Retail (XRT) has managed to bounce off the lows and start higher on a break above resistance. Entry $83.50. Stop $85. Positive break to new highs and some leadership from the sector to boot. Flag pattern to end the week… watching for upside continuation from the pattern. Positive leadership from the consumer.
- RWR – REITs reacting to the current uncertainty around the Fed and positive attitude towards risk as growth stocks moved higher last week. The longer term view clearly shows the trading range and the opportunity to collect the dividend while investors continue to make up their collective minds on direction. We added the position in December on the move off the lows and continue to babysit the dividend of 4%. Bottoming again and looking for trade within the current range.
The sector rotation has stalled on the growth sectors… the inability to gain clarity about the economic picture and what plans are coming from Washington, keeps everyone guessing. We continue to manage with the longer term view in mind, but the short term remains in control currently. Discipline trading around long term positions is the strategy currently for these sectors.
The market has transitioned near term in reaction to the Trump news. The leadership from technology and semiconductors was tested on the news last week but managed to bounce to end the week. The move in the global markets equally validates the movement of money to where it will be treated better. Europe is showing a vertical move on the charts as money rotates. The longer term view is still in an uptrend with volatility in the action last week. Sectors bounced off key support levels and held so far but there are plenty of opinions on how this will play out moving forward. Financials are struggling to hold any momentum currently as they test support at the $22.90 mark. Earnings are hot and cold with some winners (technology) and some losers (telecom) but, not really offering the clarity needed. The economic data, earnings, and fundamental data all show mixed results. The short-term trend off the November lows had a dip and then some sideways movement with some downside and a rally to end the week. How this unfolds to start the week will be a key component of the near-term trend. Keep your stops in place and let the opportunities present themselves up or down. Practice patience as this all unfolds day-to-day.
The longer term trend-off the February 2016 low is fully intact on the upside. Don’t forget the longer term view can offer greater clarity than the short term news. Sectors to watch moving forward: 1) Healthcare and the outcome of any reform… the belief has been for that to materialize and the action in Congress last week is the first accomplishment… that could lead to some volatility as it is entertained by the Senate… puts it back in the news. 2) Financials were the leader from the November low and that is in jeopardy as well… watching how this sector reacts to earnings and the economic outlook. The bounce off the bottom of the range is a positive, but it has stalled at the top end of the range. This is one sector we need a renewed leadership from if the broad indexes are going to progress on the upside. 3) Energy remains a sector under pressure from supply and demand… too much supply and not enough participation in cutting or limiting supply… the speculation with supply last week pushed crude above $5o again and the stocks bounced back in response. Watching how the short term impacts the longer term view currently. 4) Telecom bounced off the lows and to key levels of resistance and failed on earnings from Sprint … the move lower is a negative overall as well as for the sector. Building a base and potential trading opportunity if it follows through. 5) Emerging markets found renewed hope with the weaker dollar positive money flow to the global market. For now, it has taken a leadership role in the short term trend off the December low positive. 6) Semiconductors are bellwether for the growth stocks and they turned higher again and has renewed the leadership with technology heading higher short-term and the longer term trend positive as well. It pushed the NASDAQ to a new high. 7) The dollar is becoming a bigger story line than I would like. The drop is on the heels of Washington wanting a weaker currency for better export opportunities. It has never worked in history to devalue currency for growth. The move is helping gold, emerging markets, and the bond. Watching how this all unfolds and managing our stops on all positions daily.
ONE DAY at a time is the key for now. Take a longer term view for your overall portfolio and manage the risk of your short term trades accordingly. See you next week.
“Vision without action is a daydream… Action without vision is a nightmare.” Japanese Proverb.