Market Outlook for February 3rd
The coronavirus is spreading and the uncertainty of the impact is spreading to the markets as investors head to safety. The worst sector was energy as crude oil continues to head lower on economic concerns… add in some missed earnings from Exxon and Chevron and the sector fell more than three percent on the day. Treasury bonds continue to be a benefactor to the rotation as money flow accelerates. It is important to step back and evaluate the damage done on Friday, make the necessary adjustments to positions, and ignore the media. The S&P 500 closed the month of January down 0.2%. The biggest drop for the month came from small caps down 3.3%. This is why we manage money with stops to manage near term risk without emotions attached. There will be opportunities presented in the rotation. Relax and get ready for a fun February.
The S&P 500 index closed down 58.4 points to 3225. The index fell 1.8% on the day and closed the month down 0.2%. One of the eleven sectors closed higher on the day with consumer discretionary leading the way. Amazon was the bright spot for the sector on solid earnings. The downside was led by technology and energy. Rotation remains in play as anxiety levels remain elevated. Watching, listening, and managing the current risk.
The NASDAQ index closed down 147.9 points at 9150. Technology led the downside for the index and large caps equally struggled. The NASDAQ 100 large caps fell 1.6% on the day testing key levels of support. Amazon was the lone bright spot gaining nicely on solid earnings. Semiconductors remain challenged closing down 3.5% and close below the 50 DMA and triggered a short sell signal for the sector. We are managing our risk and looking at what unfolds near term.
Small-Cap Index (IWM) The sector has been lagging since the highs on January 16th… short signal offered at $164.74 and confirmed Friday at $163.65. Willing to add a short term trade on the weakness technically. Money has been steadily lower and the break of the 50 DMA is negative. TZA entry $36.95. Stop $37.20 (adjusted).
Transports (IYT) The sector moved to $200.55 and hit resistance. Reversed and tested support at the $192.42 level and broke support on Friday. Closed at the 200 DMA and the bottom of the current trading range.
The Dollar (UUP) The buck has returned to the downside accelerating on Friday. The negative sentiment about the virus and weaker economic data aren’t helping the cause.
The Volatility Index (VIX) Anxiety returned this week with the virus issues in China spreading. The fear of curtailed economic activity has pushed money towards safety and anxiety spiked to 18.8 on Friday. Watching how this unfolds in the coming week.
KEY INDICATORS/SECTORS & LEADERS TO WATCH:
MidCap (IJH) The sector followed small caps lower breaking support at $203 and offering a short side trade opportunity. We didn’t enter the trade as we took the small-cap trade. A negative close below the $200 mark.
Biotech (IBB) The sector hit highs at the $124 mark and since became indecisive. The double top pattern played out breaking lower $117.90 offering short side entry point. Accelerated lower to end the week. LABD entry $13.25. Stop $13.70 (adjusted).
Semiconductors (SOXX) January 24th intraday reversal to close lower was a negative sign for the sector. The gap lower the next trading day was a short side signal. It attempted to bounce but resumed the downside move closing below the 50 DMA. SOXS entry $20.70. Stop $20.25 (adjusted)
Software (IGV) The sector tested the lows of the trading range and bounced at support in October. The steady grind higher has not been easy. The test of support held and the upside resumed with some small tests along the way. Very volatile week for the sector as it shows some weakness near term. Watching with stops in place.
REITs (IYR) The sector has turned into one giant consolidation pattern. The upside resumed clearing the $93.50 resistance and hitting the $95.50 resistance… consolidated and moved lower to end the week… watching how it unfolds.
Treasury Yield 10 Year Bond (TNX) The yield closed at 1.52% down 29 basis points last two weeks… TLT moved higher breaking through resistance as money rotates to safety near term. Taking the trade offered (TMF/TLT) and managing the risk.
Crude oil (USO) Crude moved to $64.22 on speculation. Crude fell to $51.56 on the speculation falling short and China virus. Watching how this plays out with the downtrend in play. Adjusted stop on SCO.
Gold (GLD) The upside in gold was driven by speculation of the rate cuts and global weakness overall. Geopolitics played a part in the China trade agreement. Now throw in the virus fears and it breaks from the consolidation pattern at $146.60. UGL entry $46.90. Stop $52.15 (Stop Adjusted). Letting it unfold.
Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from December. Watching and letting this unfold.
China (FXI/YANG) Finally gets a trade deal to help the upside trend emerge… then the coronavirus erases all the gains. YANG entry $43. Stop $47.20 (adjusted).
(The notes above are posted every weekend and updated daily Bold Italics)
DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT
FRIDAY’s Scans for January 31st: Investors ended the month with a bang. The selling was methodical versus frantic. The volatility index spiked higher. Dollar dropped. Gold rose. Bonds rose. Money was looking for safety as stocks fell to end the week. For weeks there has been plenty of chatter about the markets being overbought… add some fear as a catalyst and you get Friday’s activity. There are plenty of data points with economic data, earnings, and global economics… throw in some geopolitics and you have plenty of headlines and chatter. The plan is the same… avoid the emotions and rumors, focus on the facts, and manage the risk.
- China (FXI/YANG) short signals hit and confirmed on the downside move. Manage the risk of the news.
- Small Caps (IWM/TZA) short signals hit and confirmed. Manage the risk within the sector.
- Semiconductors (SOXX/SOXS) short signals hit and confirmed. Managing the risk of the sector.
- Energy (XLE/ERY/SCO) reconfirmed the downtrend. Adjusted stops and watching how it unfolds
- Treasury Bonds (TLT/TMF) upside trend confirmed. Adjusted stops and watching how it unfolds.
THURSDAY’s Scans for January 30th: WHO issued a medical emergency and working on solutions. It helped calm some nerves but the uncertainty of the outcome is still going to rattle markets daily until resolved. GDP for Q4 came in at 2.1% and the slowest growth since 2016. Thus, the economy continues to show modest growth but it is still in a downtrend. Bonds see the 3 month/10-year bond inversion again… flight to safety has rallied bonds with rates dipping to 1.55%. Earnings have been solid with Microsoft leading the upside move on Thursday. Amazon announced solid beat after-hours. Watching how it unfolds relative to stock prices.
- Financials (XLF) bounced finally… watching how they unfold.
- Energy (XLE) bounced after accelerated selling… watching.
- Technology (XLK) leading the upside charge with solid moves. Software (IGV) leading, Semiconductors (SOXX) and Networking (IGN) lagging.
- Gold (GLD) benefactor to the uncertainty globally.
- Europe (IEV) back on my watch list with Brexit at hand. Watching how it all responds as it unfolds. The British pound has been holding steady at the $126 level.
WEDNESDAY’s Scans for January 29th: Fed takes center stage with comments following no change vote on interest rates. The consumer was downgraded adding some angst to the situation. The repo money is back adding liquidity to the system. End result is more confusion which goes hand-in-hand with the uncertainty already in play. Some interesting moves on the day as telecom drops lower, energy continues the drop, bond rally, gold rallies, the dollar gets stronger, and semiconductors sell-off. Watching how it unfolds and looking for reality in the emotions.
- Treasury Bonds (TLT/TMF) nice move for bonds as the yields continue to move lower.
- Semiconductors (SOXX) showed some downside risk on the day and watch how it deals with support and momentum.
- Energy (XLE) remains weak and managing our short positions. DRIP, GASX, ERY, DGAZ, SCO all doing well. UGA has bounced off the low and attempting a bottom reversal…
- Gold (GLD/UGL) keeping the upside in play with cup and handle pattern on the chart.
- Telecom (IYZ) fell more than 2% on the day. Chipmakers lead the sector lower.
TUESDAY’s Scans for January 28th: the buyers returned on earnings data along with some positives in economic data. Money flow towards the worst-performing sectors on Monday returned. The overall volume on the buying Tuesday was lower than the selling on Monday, but there was enough to give some hope for the markets. Still, the smell of uncertainty in the air as the volatility remains on the upside. Technology was the leading sector on the day along with financials and basic materials. It is a game of patience as the news unfolds and the facts are determined versus the rumors. Taking it one day at a time.
- Semiconductors (SOXX) bounced but not with great conviction… watching how the sector unfolds.
- Volatility Index (VIX) remains elevated. Watching how the storyline unfolds in the next couple of days.
- Gold (GLD) metal reacts to the activity for the day. The downside has my attention relative to the chart. Miners (GDX) still in an uptrend, but showed some weakness on Tuesday.
- Treasury Bonds (TLT) yields dipped to 1.6% on Monday showing the rally in the bond the trailing six weeks. Watching how it plays out as we approach the October highs.
- Dollar (UUP) rallied back from the gap lower in December. Watching as the FOMC news today will have some short term impact.
MONDAY’s Scans for January 27th: The uncertainty of the coronavirus continued, but the news was worse over the weekend as the numbers rose along with the number of countries with active cases. Uncertainty breeds fear and fear creates selling. Too many questions with too few answers lead to anxiety. VIX spikes higher and with this comes opportunity. The key is patients and a defined strategy going forward. Take what you know mixed with what we learned the past few days and manage the risk accordingly. We did hit stops on Friday… more on Monday… and we added positions that warranted the risk. One day at a time with discipline… not emotions.
- Semiconductors (SOXX) hit stops and watching how this unfolds.
- Volatility Index (UVXY) raised stop on position added Friday and watching how the day unfolds.
- Energy (XLE/DRIP/GASX/ERY) raised stops again on the short side trades.
- Crude Oil (USO/SCO) raised our stops again on the downside move.
- Emerging Markets (EEM/EDZ) hit a short signal on Friday. We waited for Monday, not liking the risk of the trade over the weekend. It gapped higher on Monday leaving not room for entry based on risk. This is all a reaction to the news on the virus and the uncertainty it creates. Thus, no trade is taken, but you can see what emotions do the charts.
(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 bounced at support $55.95 level and moved new highs. Then fell as the worries rise… watching how it responds to close below the 200 DMA.
- XLU – Utilities are the current benefactor of lower rates and money looking for safer havens. Adjust stop on the vertical move.
- IYZ – Telecom picked up volatility with the markets and testing the $29.50 level of support.
- XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs.
- XLI – Industrials shifted lower the last two weeks and watching the support at $81.10.
- XLE – Energy remains in downside move as anxiety rises about China and consumption. Short entry $53.40. (ERY) entry $40.20. Stop $51.35.
- XLV – Healthcare breaks lower from the topping pattern. Closed below the 50 DMA and support at 101. Short signal issued.
- XLK – Technology in an uptrend and showing a flag pattern at the current levels. Watching how leadership unfolds.
- XLF – Financials have been in a trading range with IAI being the key leader within the sector. Bank issues in the headlines not helping matters and Friday broke support… looking at the downside trade options.
- XLY – Consumer Discretionary tying to be the bright spot with Amazon earnings leading upside to end the week. Watching.
- IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… Solid upside follows through. Entry $93.50. Stop $93.50. Flag pattern broke down on Friday and watching how it unfolds.
There are currently four sectors in a sideways or consolidation trend. Five sectors are in confirmed uptrends. Two sectors in a confirmed downtrend. The result is SPY in a transition pattern short term. We have to remain patient and let this all unfold. Remember the parts make up the whole.
(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.)
The coronavirus remains center stage and money flow heads towards safety for the second week. The challenge is the unknows… those create speculation… which creates volatility short term… resulting in the rotation of money. The uptrends are being challenged with some reversing short term. The rising speculation is also playing havoc on money flow. If we add this to the rising concerns from the talking heads about market valuations you see why volatility rose and money rotated for the second week. We need to focus on what is happening and not on what could happen. Let the future unfold and manage the risk that is. The earnings season has been positive with some solid results posted again this week. The data points will be important to how this unfolds moving forward. Economic data remains okay in that it is not getting worse. With the close of January on Friday, we will start the week with fresh data on the economy. Yields on the ten-year treasury bond fell to 1.52% raising plenty of red flags as it shows more rotation towards safety and a revisit to the inverted yield curve. The dollar reversed to the downside on the virus fears. Money is rotating to safety as bonds rise, utilities rise, gold rises, and cash levels rise. Energy has taken the worst hit along with the emerging markets. The downside trade opportunities arose this week along with several other sectors offering entry points. Proceed with caution and discipline. The key is to watch the trend, know which side the Fed is on, 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.