Economic data offers upside for stocks

OUTLOOK: May 7th

We discussed the market set up on Thursday for a bounce, and bounce it did on Friday. Solid gains in the major indexes as the jobs report showed 164,000 new jobs with wages increasing a modest 0.1 percent. The news was good enough to show a growing economy, but not great enough to reflect inflation heating up more. That was enough to encourage investors to put some money to work. At least that is what the news headlines stated! I can accept the rationale for now as the market/investors are looking for any positive news to encourage the upside momentum to return.

The S&P 500 index closed up 33.6 points at 2663 and remains below the 2675 level as the index posts 1.2% gain Friday to end the week. Technology and energy led the day as worries over Iran sanctions hit the price of crude. The chart is holding the long-term trendlines off the January/February 2016 low. The consolidation remains in place and volume is below average. Was the question answered with a follow through on Friday about the bounce? Yes, for now. I am approaching this with plenty of caution as the direction unfolds.

The NASDAQ index moved back below the 7103 level of support/resistance and closed at 7206 on Friday. The SOXX showed some buying power gaining 2.3% and technology looked good to lead the sectors up 1.9%. The last four weeks have shown big swings as the buyers and sellers fight for direction. The broad markets are consolidating and transitioning. Patience is required along with a strategic approach to managing money.

Small Cap index moved lower and tested support then headed higher closing above the key $154.90 level to end the week. Solid volume on the day and hanging tough as we look for needed leadership near term. Watching how the opportunity unfolds.

Gold (GLD) bounced off the 200 DMA on Thursday and is hovering near the previous support at $124.50. The weakness remains in the metal near term with a strong dollar and higher interest rates. Looking for confirmation of direction at the current level. The gold miners (GDX) made the move back above the $21.92 mark, but with the turn in the metal moved back to test the 50 DMA. Base metals (DBB) reversed the speculation trade on sanctions against Russia… the metals cleared $19.35, but have sold lower since… news drives the moves, but the reality is a bitch… watching how this unfolds near term with the 200 DMA… too much uncertainty for my taste.

The dollar (UUP) bounced and cleared resistance at the $23.65 level and pushed back above the 200 DMA. The move higher puts the $24.35 resistance on watch. The move is a positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… the rise in interest rates is the cause of the rise in the buck for now. Took the upside trade near term as the move above $23.75 was the entry point for UUP. Stop $24 (adjusted).

Crude oil (USO) made a move higher breaking from the small trading range near the highs of $69… why the move higher? OPEC has agreed to extend the curtailed production and the proposed sanctions on Iran could impact crude up to $10 a barrel according to the analyst. The uncertainty remains around the inventories, production, global discord, and the dollar… my opinion. Moving higher Friday raises some eyebrows about the outlook. UCO entry $26.05, stop at $29 (adjusted).

Emerging Markets (EEM) dumped lower breaking $47.90 support and testing the short side. It did manage a bounce off low and moved back near the 200 DMA. The trend is still on the downside and watching what happens with the next support levels. The dollar, tariffs, trade wars, and interest rates are all playing into the volatility of the sector. We will let the market speak and we will decide what trend to trade.

The Volatility Index (VIX) closed at 14.7 as investors worry remain steady. With stocks stuck in neutral all week, there was little change in the index overall… some intraday volatility as news and speculation rule the day. Watching how the week unfolds.

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

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

Biotech (IBB) remains a sector of speculation… The sector has taken on an emotional ride of ups and downs based on the current belief and market volatility. Testing the support levels again and looking for some leadership… failed to develop to this point… watching and waiting for now. 

Semiconductors (SOXX) Bottoming pattern in play as the sector tests the 200 DMA. Bounced Thursday and moved higher on Friday to break from the bottoming range. Needs to follow through on the upside as this sector is key to the broader index… $176.45 level to clear. 

Software (IGV) bounced off the near term low and test at $171.11 support. Nice move higher on Friday to test the $179 level. Holding the uptrend with some volatility of late. 

REITs (IYR) The sector made a break from the trading range Friday clearing $76.22. Interest rates have been the challenge overall… I have been looking for the opportunity to add a position and collect the dividend long term. Added on the move back above $75 and followed through. Entry $75.50. Stop $72. Nice follow through upside would be great this week.  

Treasury Yield 10 Year Bond (TNX) moved to 3.02% and faded the last seven days to close at 2.94 failing to hold the move above the 3% mark. The move pushed rates to their highest levels since February, but the retreat isn’t helping the call for higher rates and worries about an inverted yield curve. Still looking for higher rates to be the trend going forward. 

Energy stocks (XLE) Cleared $68.82 on the upside to break from the current trading range. The move in crude gave cause for the buying. Held the move and establish an uptrend currently in the sector. Entry $70, Stop $71.50 (adjusted).  Flag pattern in play with an attempt to move higher for the continuation of the uptrend.

Natural Gas (UNG) forming a bottoming pattern currently after falling more than 19% off the January highs… watch for the next opportunity in the commodity. Bounced back to the top of the range and gaining some momentum. Failed to hold the move above $22.91 selling lower again… still watching as the commodity remains in the trading range. Back to the bottom end of the range… needs a catalyst. 

(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 5/4: Solid upside gain for the broad markets on lower volume. The upside was praised by the talking heads as they pontificated on slower wage inflation being an upside catalyst. One month of data doesn’t change the trend. Thus we will watch how this unfolds going forward and take what the market has to offer. Always willing to let the data validate along with the trend.

  • Trend changing moves Friday: SOXX, XLK, QQQ, USO, IYR, IHI… looking for follow through moves on Monday and more to follow the lead.
  • Moves of interest on Friday: UCO, SOXL, TQQQ, FAS, CURE, KRE, IEZ, IYT… Need more leadership and these sectors will be key to any upside follow through.
  • Total Market ETF (VTI) Shows clearly the consolidation pattern with the failed attempts to bounce Feb 26th, Mar 9th, and Apr 18th. Any move above the last high of April 18th would be a win for the upside cause.
  • Crude Oil (USO/UCO) upside gets a move on analyst comments concerning the sanction against Iran. We will watch how this unfolds and look for the opportunity to add to our existing position in both oil and energy stocks.
  • Apple (AAPL) gapped higher on earnings and then added to the move with Warren Buffet increasing his stake in the stock. The move above the $181 resistance is a positive for the chart.

Friday’s move was a positive for the day. It put some sectors in a position to continue their upside moves. It put some in a trend reversal position. I curbed the fall of others… the challenge is follow through. There have been plenty of opportunities for a trend change since the low on February 8th… but none have followed through… we are looking for a follow through if the trend is to shift. Equally we need a catalyst that is strong enough to carry the trend forward.

THURSDAY’s Scans 5/3: Lower open, bounced with a nice intraday rally, and spent the last two hours trading sideways. The downside bias is growing from my view and a look at the charts, but you can never assume anything… the bouncing effort helped, but we need to follow through and it is Friday… Watching to see how the day unfolds… the scans were uneventful again as the day was basically neutral.

  • Financials (XLF) dropped to support at the $26.90 mark. This is a key level to hold. It is showing a negative bias short term and the trade with FAS is available should the sector fail to hold support.
  • Healthcare (XLV) equally failed on the day and tested key support. Watching the downside with RXD or LABD. Watching how today unfolds. BIS is set up as well on the short side.
  • Natural Gas (UNG/GASX) failed to break higher and has now reversed on the downside to show a possible short side trade.
  • VIX Index (VXX/UVXY) solid move higher on worries early… failed to hold, but watching how it unfolds today. $43.50.
  • Watching today… FAZ, TZA, SOXL, TMF, YANG… all are at key levels of opportunities.

China is in town to talk trade and that could have some interesting repercussions for the market. Economic data is showing signs of inflation. The economy is slowing, but still growing. Earnings remain in the background and investors are willing to wait and see for now. Patience as the day unfolds along with the future.

WEDNESDAY’s Scans 5/2: Downside day as the market continues to test within the range. Not much in terms of volume, breadth or leadership to discuss. The scans are more of the same as we see the day-to-day movement that remains lackluster. These are the type of markets that create anxiety for investors… they want action, not lethargy. I remain patient and let it unfold one day at a time.

  • Emerging Markets (EEM/EDZ) still trying to confirm the move above the $42.42 level of resistance to continue the uptrend in the short side ETF.
  • NASDAQ 100 (QQQ) Bounced off the April lows and continues to test within the range. No leadership despite the gain from Apple, Facebook, and ADP on Wednesday. Look at the parts more than whole for opportunities.
  • Coal (KOL) bounced finally after five days of selling lower. Watching the short side trade.
  • Small Caps (IWM) nice bounce to hold near the $154 mark and the sector still shows upside potential.
  • Dollar (UUP) another solid move on the upside as the buck continues to find strength in the Fed and globally.

Another day within the consolidation… financials, consumer staples, and healthcare show some weakness on the day, but remain within the current range.

TUESDAY’s Scans 5/1: Testing day again on the downside early and then worked higher in the afternoon. Failed to make any real moves and the fact only four sectors closed in the green didn’t help the cause. Telecom continues to struggle on merger news, financials are stuck, energy is testing, tech bounced nicely on the day, and REITs are seeing money flow… overall not much changed as everyone seems content to watch and see…

  • Semiconductors (SOXX) lead the day with a bounce off the current lows. This is a positive, but there is plenty of work for the sector to recover from the damage since the March highs. INTC, AMAT, INFN, and MSCC leading the sector. XLK was a benefactor of the move as well.
  • Homebuilders (ITB) tested the bottom of the current range and bounced. Higher interest rates are keeping the sector in check.
  • Agriculture commodities continue to rally… WEAT, CORN, SOYB, DBA
  • Interest rates resume upside with yields moving to 2.97% and watching the short side trade again with TMV. $21.05.
  • REITs (RWR/IYR) making upside move with money flow rising into the sector. DRE, EDR, SPG, and KIM leading.
  • Dollar (UUP) making a solid move higher and watching how it unfolds against the rest of the basket of currency. EUO trade is working well on the rise in the dollar.

The consolidation continues along with the lack of leadership near term. Watching and letting this unfold daily as we find what works and avoid the rest of the volatility and uncertainty.

MONDAY’s Scans 4.30: End of the month rebalancing? Call it what you want… the sellers had control of the day as the buyers remain reticent to put money to work. As stated above, there are plenty of good reasons for stocks to rally… just no commitment from the buyers. Taking it one day at a time as the ups and downs keep most of my money on the sidelines. 

  • Gold (GLD) shows more downside as it now resides at key support. A break lower opens the short side trade for the metal and potentially the minders (GDX). Silver (SLV) is suffering the same fate on the downside along with the miners (SIL).
  • Biotech (IBB/LABD) gave up some of the gains and continues to show little to no leadership… the same is true with semiconductors (SOXX). The leadership is lacking and that is keeping the buyers away… but, the sellers haven’t exactly taken advantage either.
  • Emerging Markets (EEM/EDZ) remain on the downside trend. The small bounce off the lows didn’t hold and watching how our short position unfolds.

No big changes from Friday’s list as we continue to watch the paint dry and for trends to emerge. KWEB followed through on the bottom reversal started last week. Crude (UCO) remains near the current highs. Treasury bonds (TMF) reverse off their lows and watching how rates unfold. CORN, WEAT, SOYB rally on with the commodities gaining interest. Overall the market remains lethargic… we remain diligent.

 

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

Sector Rotation of S&P 500 Index:

One big change of note concerning sectors… The Global Industry Classification Standard is making a change to the Telecommunications Services Sector. It will become the Communications Services Sector which sounds minimal but could have a significant impact going forward. They are adding NFLX, DIS, CSMSA, FB, and GOOGL. The new structure will be enforced the end of September. This will make it more of a growth sector overall but could dampen some of the volatility the sector has experienced over the last two years.

  • XLB – Materials remain below the $58.44 entry point and holding above the April lows. The trend remains down from the January highs. Watching how this unfolds going forward. FCX and NEM have been a key weakness the last two weeks for the sector. 
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed and a weaker dollar. I waited for support and the next opportunity as the fear evaporated and reality settled in. $48.55 entry. Stop $49.50 (adjusted). The ETF pays a 3% dividend and I am willing to stick with the slow-moving sector for now. The close above $51.11 with a test this week is a positive for the chart. The break above consolidation range ($51.11) offers another entry point to add to the position.  
  • 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? Bounced off support again and making another possible move higher… watching $27.25 entry level.
  • XLP – Consumer Staples broke the February lows, March lows and is in the process of establishing the April low. The downtrend remains in place and the short side has paid nicely the last two months. Unless there is some leadership in the sector we remain short XLP. Stop $50.63. Grocery stores have been the big drag in the sector.
  • XLI – Industrials broke support at the 200 DMA and testing the $71.43 mark. Watching for the next opportunity to unfold from here. Defense contractors are the drag on the sector currently.
  • XLE – Energy broke from the bottoming trading range move up 7.5% and is now in a flag pattern. Looking for the continuation of the trend by clearing $74. Entry $68.82. Stop $$71 (adjusted). Crude move on Friday gave little benefit… need to confirm the upside in crude and stocks will follow. 
  • XLV – Bounced off $79.50 support. No upside follow through as the sector moved back below the $81.81 mark… tested support from April low and not looking very positive near term. Positive bounce on Friday, but we need to see more to have interest in the sector. 
  • XLK – Technology tested $64 support after failing to hold the bounce off low in March. The bounce on Friday was a positive to help restore the uptrend short term. SOXX is key to move as it added solid gains on Friday. Software (IGV) moved higher as well. SKYY and HACK looking positive in uptrends as well.
  • XLF – the sector has become a hot potato with the interest rates moving, dollar struggling, and geopolitics in the news daily. Held support at $26.90. Sluggish response to the positive earnings data. The sector is weaker than I would like. Need to follow through to the bounce on Friday. KIE has been the weak link. 
  • XLY – Consumer Discretionary sold to support at $99.40. Bounced and cleared $102.51 resistance. Testing the move higher and watching the upside. Entry $102.50. Stop $99.37. XRT key to the upside. 
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. Bounced off the $84 support again and cleared the $85.65 resistance. Entry $86.45. Stop $84. KIM, HCP, DLR, SPG, and CUZ leading the bounce higher. Sector broke through resistance and showing positive upside opportunities short term. 

The trend since January high is down. We are in a short-term downtrend despite all the talking heads stating and hoping otherwise!

The long-term trend off of the February 2016 low is up. Testing with a consolidation pattern currently that will determine a continuation of the trend or a trend shift. 

We continue to look for a solution to the consolidation which is leadership… none in place for now. A catalyst would be equally helpful… Patience is the key.

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

FINAL NOTES:

The question remains about direction and volume. There is a lack of conviction from either side as the volume remains below average and neither side seems to want control. The leadership has not appeared yet. We are do see Energy, Dollar, and Commodities and taking on some leadership… but, they are not sectors you want to lead. Only four of the eleven sectors moved higher for the week. The S&P 500 index closed slightly lower on the week and needs some leadership if it is to follow through on the move Friday. The key is to focus on the strategy you want to take during the current market environment. News and speculation will drive the short-term while fundamentals drive the long term. Earnings helped earlier in the week and modest economic data offered some upside Friday to end the week. Short term we are in a process of a bounce off support and a test. We need to break through the resistance on higher volume if anything is to materialize on the upside. The goal remains money management, not market speculation…

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.