OUTLOOK: Week of August 14th
In the face of uncertainty, all you need to do is give investors a reason to sell… North Korea did exactly that last week. ICBM nuclear capable missiles gave everyone reason for concern, but more importantly, it added to the uncertainty in the global outlook. The major indexes closed the week lower with the small caps leading the downside. The test of the 200 DMA is a negative technically and one thing to watch as we start the new week of trading. Emotions picked up as the VIX index spikes above 16 and settling at the 15.5 mark on Friday. The reaction to the news will settle and then the reality of the current situation will determine the direction and attitude for investors. We will take it one day at a time and look for the opportunities in the outcome.
Six sectors closed Friday on the upside as telecom (IYZ) and technology (XLK) led the upside move. The bounce from the selling on Friday was positive, but the moves showed caution as well. The VIX index remained elevated at 15.5 showing anxiety still in play. The downside was led by REITs (RWR) and energy (XLE) as money continues to look for safety. The bounce on Friday came on light volume and no breadth. This leaves the direction in limbo and with plenty of questions. Do the traders allow the market to continue downward or do they buy the test? The key is to be patient and see how it unfolds moving into the new week of trading. The S&P 500 index closed up 3.1 points on the Friday at 2441 and remained below the 50 DMA. The move also broke the consolidation pattern for a short term short trade signal. Friday left a doji candle adding to the interest for how Monday will unfold. The long term uptrend is still in play but now comes into question. The biggest movers in the index on Friday were TRIP (break from cup pattern at the bottom), VRTX (bounce in a test of the gap higher), LRCX (bounce off support test), ADSK (bounce off support test), and JBHT (moved above resistance). The downside leadership came from IYR, NVDA, MYL, AES, KIM, and KSS. Each showing a continued reaction to the news on Thursday. Gold (GLD) moved through the $120.45 resistance tested lower only to move higher again on news. Gold has taken on a safety role and benefitted from the fear factor. The dollar (UDN) continues to struggle with the dovish outlook from the Fed and their shift to liquidate their balance sheet. The emerging markets (EEM) gapped lower on the political unrest with N. Korea. Broke $43.50 support and hit exit signal for short term positions. The Volatility Index (VIX) closed at 15.5 holding the move higher on the worries present Thursday over N. Korea. The VXX position spiked higher as well on the news and now you adjust your stop and see how it unfolds. Manage your risk and stay focused on the horizon, not the rear-view mirror.
The scans for Friday showed a bounce reaction in some sector while others continued the negative sentiment. The Volatility Index (VXX) again raising plenty of questions as it holds at the 15.5 level showing investor sentiment shift for the day. Telecom and technology bounced on the day, but have plenty of work to do to repair the damage. The consumer is lagging again with retail (XRT) testing lower. Biotech (IBB) bounced slightly after breaking support at the $309 level. Brazil (EWZ) is holding support after some selling early in the week. Energy (XLE) headed lower on the week and continues show little confidence in oil prices rising. Semiconductors (SOXX) are showing a negative pattern with a double top on the weekly charts. Gold miners (GDX) made a positive move along with gold (GLD) with money rotating to where it believes it will be treated the best in light of the speculation. Treasury bonds (TLT) pushed higher as money accelerated the rotation towards safety. Watching how this unfolds near term as it impacts the current trends with reversals, breaks of support levels and moving averages on higher volume… all impacting the technical read for the market. Patience in how you approach this market both short and long term. Let the news settle and the reality develop for the current trends. There are opportunities in all of this activity both long and short various sectors.
The news for the week came from North Korea. The reaction to the news is still in play. It is important to note that investors were already talking about the overbought situation in the markets overall. The news gives them a reason to act. How long and how much they react is a matter of belief near term. Therein lies the challenge for the coming week. Watch for the volume and breadth of moves up or down. Know where money is rotating to and from. The current moves towards gold, bonds, and cash are not a good indication for the near term moves in the market. This can change as we start the week and it is where we will focus our efforts and research. Two charts that validate the rotation last week are IWM -4% the last two weeks and leading the move lower. The move to the 200 DMA is a negative and a break lower would be a bad indication overall. This movement is worth our attention as the new week unfolds. The undercurrent of worry remains along with some speculation on where the markets go near term. The VIX index moved off the lowest point reacting to the N. Korea news spiking above 16 and closing at 15.5. There is plenty to ponder both positive and negative going forward. Earnings have helped with individual stocks, but not the sectors. As seen in tracking the S&P 500 leadership the biggest moves have come from positive earnings. Volume was higher for the week as investor reacts to the news. Data is still not driving… news and speculation are. The key word remains to be PATIENCE. Not something many traders like. We all want to believe we can see forward, but the reality is we can only see today. Thus, we must do what our strategy tells us to do today and tomorrow will take care of itself. Hard lessons to learn as our analytical brain wants us to believe we have the solution and can predict the future. Keep your stops in place and your eyes focused on the horizon taking what the market gives.
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 is back with traders exiting the sector and looking for more interesting ground. The Senate failed to pass healthcare reform and can see the impact. No positions. The break of support at $309 mark offered a short entry. The sector was already under distress from the inability to pass a reform bill… this only gives reason to sell.LABD hit entry at the $7 level.
REITs (IYR) had 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 resistance and tested, and bounced, and… 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 (TNX) moved back to the 2.4% level as the Fed talked of raising interest rates. The move to 2.2% came on the comments from Ms. Yellen and the Fed taking on a more dovish role towards rates. Just when you thought it was safe to go back into the water… the Fed changes its mind. TLT rallied again this week on worries over N. Korea adding to the list of worries. $124.10 entry, stop $122. Yields continue to deline helping the upside for bonds this week.
Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility within the trend is speculation and news driving money. The selling was more of the speculation, just as the current buying is on speculation the dollar and the Fed will remain neutral. Bounced off support at the $114 level, cleared resistance at the $117.38 mark (entry) and heading towards the $123 target. Stop $119 (adjusted). Break higher continues the uptrend on uncertainty in North Korea.
Crude Oil has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but the weaker dollar is having some influence near term. The move above $48 this week brought plenty of speculation and the bottom reversal on the double bottom pattern is in full bloom. Entry hit at $47.50, stop $44.35. Taking what the commodity gives and not asking any questions… purely managed as a technical trade. Positive news on the global supply data helping the short term outlook.
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 lower and test of the $63.70 level kept the downside in question… but, the bounce on the rise in crude only adds to the confusion. More selling to moves back towards support at the $63.72 mark. No buyers showing interest.
Volatility Index (VIX) This week was more interesting for the index closing at 15.5 showing a spike in activity as investor worries over North Korea prompted a response. VXX position plays out well and adjusting stop to $12.75.
The sectors were rotating again last week as money moves towards cash and bonds. We have to take it one day at a time and see how it all unfolds. The S&P 500 index tested the 50 DMA and the Small Caps moved to the 200 DMA. The rotation in response to the N. Korea bantering is where to watch as money shifted to gold and short trades… News and speculation are tough trades. They do provide opportunities as the speculation either validates or invalidates reality. Our job is to let the resulting 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. Have a strategy for every position and trade/invest according to the strategy… don’t let the news or others sway you from the task at hand.
Daily Scan Results:
FRIDAY’s Scans 8/12: Some buying but not enough to convince anyone Thursday was an overreaction. Watching how money rotates and to where it rotates. Thus far we don’t have enough clarity in the activity to determine the direction of choice. Patience as it unfolds.
- VIX index (VXX/UVXY) positive moves in the index continues showing anxiety in place for investors. Adjust your stops and watch how it unfolds on Monday.
- Semiconductors (SOXX/SOXS) the sector remains one big question mark with the sellers holding the upper hand currently. The weekly chart pattern is of interest with a double top showing.
- Small Caps (IWM/TZA) short side interest in play as the index tests the 200 DMA. A break lower keeps the short trade in play… a bounce needs to show some follow through and conviction.
- Financials (XLF/FAZ) the downside pressure is showing in the reaction to the news, weaker dollar and lower interest rates. Stops raised.
- REITs (IYR/SRS) short side breaks above the $31.55 resistance and offers trading opportunity. Watching how this sector unfolds even with interest rates declining.
JJU, TAN, ULE, NUGT, SMN made moves of interest on the upside. Downside is building some momentum and watching how this unfolds next week.
THURSDAY’s Scans 8/11: Selling present again and holds this time as the worries over events move the anxiety level higher. Reality vs speculation is the challenge we now face as the selling started in earnest and now we see how it plays out near term.
- Volatility Index (VXX/UVXY) rally in the anxiety as the news rattles investor confidence. The spike to 16 set the tone for the trade signaled on Tuesday. Raise your stop to $12.75 and let this unfold.
- Biotech (IBB/LABD) short side signal hit on the move lower with the sector under pressure already. $6.92 entry and stop at $6.60 (adjust to $6.92 if positive tones return to broad markets). If negative sentiment continues this will move lower.
- Natural Gas (UNG/UGAZ) upside continues with the commodity moving above $6.46 resistance. $6.92 is level to clear for now.
- Small Cap (IWM/TZA) hit the $16.90 entry level for short trade and that would be the stop currently as this unfolds as a trade opportunity.
- Financials (XLF/FAZ) selling in the sector jumps and now setting up downside trade if this follows through. $16.45 level is key to move above. Patience.
Everyone has been taking valuation of the markets and the political issues with N. Korea are only providing a reason to sell… not the reason. Let the air come out of this balloon before running down the street screaming sell everything. First is the reaction to the news, then comes the rationale to the selling, and then comes reality. It is reality where the opportunity lies. Patience is key to letting this unfold and the opportunities to arise.
WEDNESDAY’s Scans 8/10: Attempt to establish downside activity but the buyers stepped in to keep the indexes at par on the day.
- Natural Gas (UNG) positive on the supply data. An attempt on the bottom reversal in place. Watching for follow through and entry at the $6.60 mark.
- Gold Miners (GDX/NUGT) bounced with the price of gold following through on a break above the $120 level.
- Small Caps (IWM/TZA) downside made move and looking for it to hold support near at $139 and broke on the close Wednesday. Short trade setup.
- S&P 500 index (SPY) topping pattern in play. NASDAQ (QQQ) topping pattern in play. Dow (DIA) Testing the new highs. The parts make up the whole, but the whole determines the direction. Watching how all three unfold near term.
- Watching how the leadership unfolds… rotation? hot money? trends? All offer opportunities and we have to be patient in letting them develop.
TUESDAY’s Scans 8/9: downside day, but not dominate relative to the selling.
- Utilities (XLU/UPW) leading the upside move with a solid trend back towards the June highs.
- Volatility Index (VXX/UVXY) anxiety begins! The jump in nerves showed in the index and stocks. Move above $11 worth our attention and trading opportunity at $11.70 entry.
- Biotech (IBB/LABD) watching how the downside unfolds… or bounce off support? Plenty of attention still in the sector short term.
- China (GXC/YINN) the upside gap is a continuation of the uptrend. Positive run for the country ETF and the individual stocks… see Monday notes.
- Base Metals (DBB) vertical move upside as the metals move with copper, aluminum and other gaining on the day.
Some other moves to watch TZA, SLV, TMV, UGAZ, SCO, and SRS.
MONDAY’s Scans (8/8): a positive day for the indexes and the leadership, but no real shifts in the overall trend. Looking for some leadership in the data, but that continues to be lackluster as the economy drags forward. Despite all the whining and complaining the market continues to inch higher and we progress with it albeit with our stops in place.
- Semiconductors (SOXX/SOXL) bounce from the recent test and remain challenged on the upside… individual opportunities look better, but the risk is also higher in the current environment. ON, LRCX, NVDA, TSM, and MCHP offer positive looks.
- Brazil (EWZ/BRZU) showing positive upside again in the current uptrend.
- Energy (XLE/ERY) downside weakness showing again as the oil services (OIH) stocks show more weakness.
- China (GXC) holding the uptrend with KWEB, SINA, BABA, HTHT, BZUN and other pushing higher in the current uptrend.
- Technology (XLK/TECL) upside in play with a move to the top of the consolidation pattern. Worth digging into the sector for the leaders versus the whole. AAPL, NVDA and MCHP are few on the move.
Still proceeding with caution as this current environment unfolds. LBJ, DBB, EDC, TAN and KOL all in positive uptrends as well.
- XLB – Materials moved higher pushing above the $50 level and moving toward 2015 high. Hit the entry at $48, Stop $54.50 (STOP HIT). The move lower is negative and short interest is growing.
- XLU – Utilities bounce off support at the $50.88 level and have followed through nicely the last month. Entry $52.25, Stop $51. Moved to the previous highs and testing currently.
- 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. Watching for now how this unfolds as sector moved back above the $31.35 mark. Entry $31.60, Stop $30.90. Some buying? Some selling? Watching the $32.65 mark for the upside continuation.
- XLP – Consumer Staples moved lower on economic worries and higher interest rates. The Fed talks last week to stand still on rates put a positive reversal in play. Watching for a move above $55 to get my interest near term. Moving sideways for now and looking for a directional decision.
- XLI – Industrials – remains in a positive uptrend since the break higher in November. Entry $67, Stop $66. The positive trend was questioned with the downside move. An uptrend in place as the money flow remains positive but watching how it starts the week. Moved below $67.93 support and watching.
- 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. Held $63.70 support and bounced as the dollar weakness helps the price of crude. To many question marks for now to take any positions. The retest of support the last two weeks is showing the lack of interest from investors.
- 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 worked itself into a break above the $71.78 resistance level. Entry at $70 as cleared resistance. Stop at $78.50 (HIT STOP). The selling advances and the uncertainty in play. The break of support is negative as we watch how this unfolds short term.
- XLK – Technology moved lower, but the uptrend remains in place. The semiconductors are weaker putting pressure on the sector overall. The sideways activity is testing the $56.75 support currently and the level to watch. Entry $48.50. Stop $56 (adjusted). Let the decision unfolds with a stop in place this week.
- XLF – Financials pushed lower on worries about interest rates, the Fed, and now N. Korea. The retest of support at the $24.64 level is a concern for the short term uptrend. Entry $23.85, Stop $24.50 (adjusted). Patient for now. Let the direction unfolds and manage your money accordingly.
- XLY – Discretionary Consumer broke above resistance with a positive trek higher and has now moved back to key support levels. Entry $83.50. Stop $88.50 (adjusted). Retail has been negative for the sector overall and we continue to manage our stops and let it unfold.
- RWR – REITs reacting to the current uncertainty around the Fed and positive attitude towards risk as money made some rotation. 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%. Tested the bottom end of the range on worries as we manage the position and let it all unfold.
Markets react to the North Korea banter on missiles. The challenge is bigger than this news… investors are worried about the current valuations and projected growth looking forward. There is little to cheer about the short term. The weaker dollar favors the multinationals and commodities… lower interest rates favors bonds… and negative sentiment favors the short side trades. Watching how the week unfolds with the rise in volatility in play.
Investors are nervous plain and simple. Volume is favoring the sell side. Data is positive overall for earnings and the winners are being rewarded. Money is rotating to safety. This remains a market in transition and with that comes opportunities. Those are outlined above in the scans and sector notes. 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 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.