Easy come… easy goes

Market Outlook for January 6th

Tough end to the week of trading as the sellers step in and erase the gains from Thursday. The blame is given to the US airstrike that killed a top Iranian military leader. In addition, the ISM manufacturing number was the lowest since 2009 at 47.2% showing contraction in the sector continues. Cyclical sectors such as materials, financials, and technology-led the downside. Utilities and REITs benefitted from the rotation to bonds dropping interest rates again on Friday. It was not the best of days for stocks as investors took the opportunity to bank some gains. We made adjustments as needed and continue to look forward.

The S&P 500 index closed down 23 points to 3234. The index forfeited most of the gains from Thursday. Two of the eleven sectors closed higher on the day with REITs and utilities leading the day. The downside was led by basic materials and technology as money rotated looking for opportunities. The long-term trend is up and the move Friday puts us on guard looking forward. Trade remains a big question mark for everyone. Watching and managing the current risk.

The NASDAQ index closed down 71.4 points at 9020. The move lower held above the 9000 level for now. The index is being led by technology and semiconductors sectors as we start the new year. There was some selling in both sectors on Friday. Adjusting our stops on positions and letting this unfold. Large caps remain in a positive trend overall. The long-term trend remains positive with news driving currently.

Small-Cap Index (IWM) The sector led the move back to the April highs and is in a topping pattern on the charts. The last week resulted in some selling as money looks for opportunity. Watching the dip to the 20 DMA on Friday.

Transports (IYT) The sector moved to $200.55 and hit resistance. Then moved below the $192.42 support level only to manage a bounce-back, but there is still plenty of doubt. Still lagging and testing the $192.42 level of support.

The Dollar (UUP) The buck has been moving down as it struggles against foreign currency changes on the “proposed” phase one trade agreement. Speculation is driving the activity, but the buck did manage to find support.

The Volatility Index (VIX) Bounced higher as anxiety levels rise on geopolitics, military actions, and poor economic data. Close at 14 on Friday and watching how this unfolds in the coming week.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector moved to new highs, stalled into a trading range and not looking healthy on the chart. Watching and managing the risk of the sector.

Biotech (IBB) The sector bounced off support at $96 in October and peaked at $123.50 in December… We hit our stop on our LABU position exiting with a solid gain. LABU $32.55. Stop $58.68 (stop hit). Watching how the test unfolds and the next opportunity… up or down.

Semiconductors (SOXX) Broke higher from topping pattern on the chart following a great run off the October lows. The leadership resumed but checked itself on Friday. Watching for the opportunity.

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. Watching how this unfolds.

REITs (IYR) The upside trend comes into question as money flow declines and rotates to other sectors. The outlook for interest rates rising rattled short term investors creating some selling in the sector. Tested the 200 DMA support and bounced… Fear rose on Friday pushing money back into the sector… watching with interest.

Treasury Yield 10 Year Bond (TNX) The yield closed at 1.78% and lower for the week. Money is rotating again as investor anxiety rises on Iran and economic data. Watching the rotation trade near term.

Crude oil (USO) Crude broke above the $58.25 levels on optimism of a trade deal with China. It spiked higher on Friday with the US airstrike on Iran. UCO entry $16. Stop $20.85 (adjusted). Watching and adjusting our stops… UGA positive move as well on the upside.

Gold (GLD) The upside in gold was driven by speculation of the rate cuts and global weakness overall. Geopolitics is driving currently the break from the consolidation pattern at $139.50. UGL entry $46.90. Stop $49.95 (Stop Adjusted). Letting it run for now.

Emerging Markets (EEM) Bounced from the bottoming range established in August cleared resistance at $42.25 and cleared the September highs. The positive trend higher came from the hope of a US/China trade deal. We cleared the $44.10 level and moving higher. EDC entry $76.40. Stop $88.22.

China (FXI/YANG) hope springs eternal… deal or no deal? The question remains, but there are tweets a deal is done and moving on to ‘phase two’. The upside is in play and the risk remains highs. Moving higher.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for January 3rd: Following the bouncing ball… US airstrike rattles investors, poor ISM manufacturing data, and geopolitics add to the anxiety as money rotates to safety as bonds, utilities, and REITs benefit. We now have the weekend to settle nerves or the result could be more selling. Investors are already nervous based on the current level of stocks. Some believe they are overpriced… whatever, the reality is what we look at and management of the resulting risk.

  • Basic Materials (XLB) breaks support at the $60 mark. Watching how this unfolds near term and the resulting opportunities.
  • Crude Oil (UCO/USO) broke to near term highs. Adjusted our stops on oil and UGA gasoline.
  • Defense & Aerospace (ITA) got a boost in the last two days on money rotating. Airstrike helped on Friday.
  • Gold (GLD/UGL) solid moves higher following the break from the consolidation pattern. The weak dollar and risking political risk helping the upside move.
  • Treasury Bonds (TMF/TLT) making a bottom reversal move the last few days. Watching how interest rates react to the current news and economic data.

THURSDAY’s Scans for January 2nd: Markets kick off the new year with some new highs and some money rotating towards stocks as money flow rises. China stated it was adding money to the system… i.e. Federal Reserve in the US… stocks gapped higher in China and emerging markets. The game is on for how the first month will unfold for stocks. The lagging growth sectors such as small-caps is not helping my confidence. The rise in large caps is positive on the day with NASDAQ 100 index leading the day. Watching and adjusting as necessary day by day.

  • Semiconductors (SOXX) led the day on the upside hitting new highs.
  • Software (IGV) added solid gains for technology closing at new highs.
  • Consumer Discretionary (XLY) closed at new highs.
  • China (FXI/YINN) gapped to new highs on stimulus offer.
  • NASDAQ 100 (QQQ/TQQQ) posted new highs on day.

WEDNESDAY’s Scans for January 1st: Happy New Year – Markets closed.

TUESDAY’s Scans for December 31st: Last trading day of the year finds support and holds the uptrend. No big changes as the buyers find there reason to add positions or add to existing ones. A solid day to end the year as some take gains and look for new opportunities to start the new year.

  • Treasury Bonds (TMV/TLT) rotation remains as interest rates are creeping back towards the 2% level. Holding our short position and watching how this unfolds.
  • Volatility Index (VIX/UVXY) declines on the day in anxiety but levels remain elevated. Watching.
  • REITs (IYR/URE) upside returned after tumbling to support. Watching.
  • Brazil (BRZU/EWZ) testing the July highs… solid upside move and we adjusted our stops.
  • Global stocks are enjoying a rise finally. GREK, EWU, EWS, EWC, IEV.

MONDAY’s Scans for December 30th: Sellers took control at the open… buyers stepped in, but some volatility showed up on the day. Watching how the last trading day of the year unfolds. The talking heads are focused on valuations and new year predictions. I am focused on managing money regardless of the day or prognostications. Whatever happens, will happen with or without my opinion. Stay focused and manage the risk along with the opportunities created.

  • Technology (XLK) sold lower on the day… it is the parts that we have to watch with SOXX, IGV, IGN and others dropping more than one percent on the day.
  • NASDAQ 100 Index (QQQ) tested the 10 DMA as the first level of support.
  • Healthcare (XLV) joined technology to lead the downside. Biotech (IBB) has declined to lead the sector lower. Watching how rotation and profit-taking are acting on the sector.
  • Volatility Index (UVXY) jumps for the second day as anxiety levels rise on year in speculations. Hit entry point on the day.
  • Gold Miners (GDX/NUGT) continue to move higher on the decline in the dollar.

(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 on the airstrike worries Friday… watching how it responds this week.
  • XLU – Utilities moved lower in response to interest rates. Broke support at $63.17. Bounced at support… and resumed the upside. Watching how this unfolds near term the current anxiety and geopolitics.
  • IYZ – Telecom picked up volatility with the markets and testing the $29.50 level of support and bounced.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs. Rolling top in play.
  • XLI – Industrials moved back and cleared the $79 resistance. Moved above the July highs and hit new highs. Tested lower and bounced on hopes of another trade deal. Watching the response to Friday’s decline.
  • XLE – Energy remains in at a point of indecision. It did hold $58.19 support and bounced back above the $50.52 mark and stalled at the October highs. Watching for positive momentum.
  • XLV – Healthcare held support at the $86.75 level. Bounced and cleared resistance at the September highs. Rolling top worries as the part struggle. Biotech leading the move lower.
  • XLK – Technology broke to new highs along with semiconductors. Both tested the moves and resumed their respective leadership roles. Watching the parts with SOXX, IGV, IGN, and others moving lower.
  • XLF – Financials got a boost from solid earnings pushing the sector higher. Cleared $28.24 resistance. Broke to new highs, tested, and moving sideways of late.
  • XLY – Consumer Discretionary broke higher on positive sales data for the holidays. Topping again? Watching how this unfolds.
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… only to retest the lows again and bounce… watching. Plenty of anxiety surrounding the sector.

There are currently four sectors in a sideways or consolidation trend. Seven sectors are in confirmed uptrends. No sectors in a confirmed downtrend. The result is SPY in a confirmed upside trend 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.)

FINAL NOTES:

Holiday week with low volume trading to start the week, but then everyone went back to work on Thursday and Friday. The positive results of Thursday were erased by the worries on Friday. The US airstrike on Iran, poor ISM manufacturing numbers, and geopolitics didn’t help the cause. Interest rage moved lower as money rotated to bonds, REITs, and utilities. The sell-side was looking for a reason to bank profits and the strike on Iran was enough to give them a reason. The trade deal is still being rumored as progressing but there is nothing signed yet. The S&P 500 and NASDAQ indices pushed to new highs Thursday and retreated on Friday. Third-quarter earnings were better than expected offering a positive catalyst for the last three months and that will put pressure on the fourth-quarter results that start shortly. Retail is showing positive as the consumer continues to drive the economy as seen in the holiday sales data. The backstop of the Fed for liquidity has been key in the move higher and they continue to be engaged in the liquidity game. The dollar bounced off lows this week as some anxiety steps into the markets with the VIX rising above 14 level. The money flow was lower on the week with the holiday. 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.