Fear levels rising over spread of the virus

Market Outlook for February 25th

It was ugly to watch and worse to listen to all the talking heads pontificating what is going to happen to stocks. The broad indexes shed more than three percent as some panic set in. Emotions are running high as the VIX index spikes to 25 above the highs in August when we last experienced some panic selling in the broad markets. The question of the day… how do we manage our money in light of the reaction on Monday? Answer… same way we always do. We have hit most of our stops the last two days on short term positions and the longer-term holdings have stops in place as well. Emotional money management turns out poorly, thus, we keep our heads while those around us are losing theirs. Take it one day at a time and manage the reality, not the emotions.

The S&P 500 index closed down 111.8 points to 3225. The index closed lower as money flowed out of stocks holding support at the 3214 mark. None of the eleven sectors closed higher on the day with fairing the best down 1.1%. Bonds were a leader on the day showing money moving towards safety. The downside was led by energy and technology as money flow was negative. Watching, listening, and managing the current risk.

The NASDAQ index closed down 355.3 points at 9221. The index moved below the 50 DMA and tested the 9197 support. The NASDAQ 100 large caps equally pushed lower with selling in large-cap tech stocks testing $220 (QQQ) support. Semiconductors moved lower after hitting resistance at the previous highs and back to support at $243 (SOXX). We are managing our risk and looking at what unfolds near term.

Small-Cap Index (IWM) The sector continues to lag since the highs on January 16th… The negative turn off the January 18th high found support at the $160.17 mark and is holding for now. A positive week overall as the sector moves back to the previous resistance at $168.10. Down 3% and below the 50 DMA. Ugly move.

Transports (IYT) The sector moved to $200.55 and hit resistance. Reversed and broke support at the $192.42 level. Found support at the 200 DMA and remains in the current trading range. Worries about the virus in China hanging over the index. Below the 200 DMA. $189 support.

The Dollar (UUP) The buck has returned to the upside accelerating with a test on Friday. Fed is back adding liquidity in the repo market helping the buck, but also promised to lower commitment levels. Held steady on the day.

The Volatility Index (VIX) Anxiety reversed to 13.7 to start the week but Reversed on worries about the virus moving to 17.1 to close the week. Watching how the new week unfolds. UVXY hit entry at $11.14. Stop $14.35 (adjusted). Spiked to 25. Raised our stop.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector bounced off the $203 support and tested the previous highs at $210 only to move lower again on Friday. Looking for some clarity in the uncertainty. Down 3% and $202 is support.

Biotech (IBB) The sector hit highs at the $124 mark and since became indecisive. The double top pattern played out breaking below $117.90. Then bounced off the lows. Cleared $117.92 and $120.89 resistance working back to the previous highs. Finding some resistance at the previous highs again. Down 2.6%.

Semiconductors (SOXX) The sector remains indecisive based on current global events. Watching the downside risk as investors have not been willing to put money to work here. Money flow has negative… short side entry hit on Friday… SOXS entry $17.70. Stop $20.20. Down 4.8% adjusted stop on short trade.

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. Closed the week on two selling days. $256 exit point. Down 3.1% stops hit.

REITs (IYR) The sector broke from the consolidation pattern and put in five solid days of upside and moved into consolidation for the week. Money flow shows rotation into the sector as some investors look for safety. Held near the highs.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 1.47% down eleven basis points and testing the September lows. It has been mixed with money flow moving up and down in bonds. Friday was a large input into bonds as virus fears rise. Watching TLT and adjusting our stops. 1.37% on the ten-year bond… rotation to safety and adjusted our stop on TMF and TLT.

Crude oil (USO) Crude moved to $64.22 on speculation. Crude fell to $50 on the speculation falling short and the China virus. The upside move came on positive news about the virus… Friday reversed that… UCO entry $14.66. Stop $14.66 (Stop HIT). Fell 3.6%.

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 broke higher from the consolidation pattern. Virus news driving the metal higher. UGL entry $46.90. Stop $57 (Stop Adjusted and sold 25% at $58.50). Letting it unfold. Spiked higher on the fear factor and closed well off the highs… watching.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from December. It did bounce at the 200 DMA, but volatility remains on speculation. Watching and letting this unfold. Tanked 3.7% as fear rises.

China (FXI/YANG) Finally gets a trade deal to help the upside trend emerge… then the coronavirus erases all the gains. Solid bounce off the lows and $42.72 is the level to clear currently. Watching how it unfolds. Fell 3.5%.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

MONDAY’s Scans for February 24th: Panic Monday as virus spreads and fear rises of a pandemic. The media had a field day with all the stats and what-ifs and what-fors… It was a day to remember, but we still had to stick with our discipline. We hit stops on positions and benefitted from other positions. Take the bad with the good and focus on what to do when reality sets in. There will be plenty of opportunities as the storyline unfolds and we see where the next opportunity lies.

  • Gold (GLD/GDX) spikes higher and settles off the highs. Took some profits and let the balance play out for now.
  • VIX Index (VXX/UVXY) spiked higher and adjusted our stops. We will lock in some gains if the fear levels subside Tuesday.
  • Treasury Bonds (TLT/TMF) nice rally as yields fall and money rotates to safety… adjusted stops.
  • NASDAQ 100 (QQQ/SQQQ) downside is in play… watching how this unfolds near term with the index losing 3.8% on Monday.
  • Crude Oil (USO) falls back to $51.43 giving up gains and retesting the recent lows. Watching.

FRIDAY’s Scans for February 21st: More selling to end the week as the concerns of the coronavirus spread. The move lower triggered stops in plenty of sectors for short term positions. The long term positions now become a concern as we adjust stops and manage the risk that is. The underlying sentiment on Wall Street is the market is overbought. That triggers sellers at the first sign of concern… this may well offer some downside short term. Stay focused and take your emotions out of the equation… use your stop and let this all play out… there are always opportunities created when emotions drive the market higher or lower without logic.

  • NASDAQ 100 (QQQ/SQQQ) Move lower triggered stops. The selling in the sector on Friday was enough to also hit entry signals on short side trades. SQQQ entry $17. Watch how it opens on Monday… take exit if the buyers show up early. If not, manage the downside move.
  • Semiconductors (SOXX/SOXS) The sector has shown weakness over the last two weeks. $257 is entry-level for short side trade… watching how it unfolds on Monday. Technology (XLK) looking for short side trade as well.
  • Volatility Index (VXX/UVXY) We added a position as the anxiety levels rise. This is a trade to manage as well on Monday. If the buyers are back exit. If the sellers remain let it run.
  • Treasury Bonds (TLT/TMF) we added to our existing position on Thursday. The acceleration on Friday confirmed the trade and stop moved to break even. This may run further based on the sentiment on Monday.
  • Gold (GLD/UGL) upside move accelerated and adjusted our stop on the position. Miners (GDX/NUGT) accelerated as well.

THURSDAY’s Scans for February 20th: Some selling. Some rotation to safety. The dollar still moving higher. Gold moving higher. Large-caps struggle on the day. Small and Mid-caps move higher. It was a day of jockeying money in anticipation or speculation of what is going to happen near term. We will take what happens, manage the risk, adjust our stops, and let others speculate.

  • Crude Oil (USO) continued to rally on US supply falling more than expected. Any news is good news for oil as it tries to establish a bottom and move higher.
  • Small Caps (IWM) show some positive signs amid the selling Thursday… needs to follow through.
  • Volatility Index (VXX/UVXY) Looking for entry on the anxiety move in stocks.
  • Treasury Bonds (TLT) bonds moved higher on rotation Thursday… worth our attention near term.
  • Homebuilders (ITB) moving to new highs again. Housing data remains positive with lower rates in place again.

WEDNESDAY’s Scans for February 19th: Everyone into the water. The rally continues with some of the laggards finding buyers. Crude moved higher and broke from the bottoming pattern. Gold followed through on the break higher. The dollar is moving higher. Semiconductors found some buyers. All is well… for now. Taking what the market offers and managing the risk.

  • Semiconductors (SOXX) bounced back to the previous highs and looking for a break to the upside to resume a leadership role.
  • Solar (TAN) heading vertically again.
  • Gold Miners (NUGT) Solid follow through to the move on Tuesday and gold (GLL) is leading the way.
  • Energy (XLE/ERX) bottoming pattern still in play as crude (UCO) breaks higher. Watching and taking the opportunity in both as it is presented.
  • NASDAQ 100 (QQQ/TQQQ) solid moves higher to keep the upside alive following the January test.

TUESDAY’s Scans for February 18th: Worries about Apple revisions to their revenue forecast sent some investors to the exit. Some saw opportunities. The end result was mixed activity in stocks with semiconductors moving lower, gold moving higher, the dollar making gains, and bonds moving higher. Not the kind of day you want to see with indecision on the direction as well as leadership. Taking it in stride and managing what we know as we try to avoid the speculation.

  • Gold (GLD/NUGT) the upside breakout is a positive for the metal and the miners were equally a benefactor on the day breaking higher from a consolidation pattern. Silver (SLV) followed with a move higher.
  • Natural Gas (UNG/UGAZ) bottom reversal is unfolding with the positive move off the lows.
  • Semiconductors (SOXX) still not looking good on the chart with some consolidation and move lower at resistance.
  • Financials (XLF) struggled to start the week. Watching.
  • Treasury Bonds (TLT) money flow picked up as yields declined and money moved towards safety.

(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 $58.10 level and back near the previous highs. Remains in long term uptrend and watching. Down 2.8%.
  • XLU – Utilities are the current benefactor of lower rates and money looking for safer havens. Broke higher to continue the uptrend. Raised stop. Tested lower.
  • IYZ – Telecom picked up volatility with the markets and tested the $29.50 level of support. Held and moved back to the previous highs finding some resistance. Lower and remains in trading range.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs. Down 2.3%
  • XLI – Industrials held support at $81.10. Managing the risk that is. Tested lower all week. Watching. Down 2.8%
  • XLE – Energy remains in downside move as anxiety rises about China and consumption. A bottoming pattern in play. Broke lower down 4.6%
  • XLV – Healthcare breaks lower from the topping pattern. Closed at the 50 DMA and support is at 101. Watching. Down 3.1% and support at $100.
  • XLK – Technology in an uptrend and providing leadership. The test lower on Friday is a challenge as we closed below the 20 DMA. Watching the downside risk. Exit on short term positions hit. Down 4.1% at near term support.
  • XLF – Financials have been in a trading range as moves back to the previous highs. We need some interest in the sector with money flow and volume lagging. Down 3.2%
  • XLY – Consumer Discretionary tying to be the bright spot for the markets. Holding solid uptrend with some testing to end the week. Down 3.4%
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… Solid upside. Entry $93.50. Stop $96 (adjusted). Holding near the highs. Held up in midst of the selling Monday.

There are currently three sectors in a sideways or consolidation trend. Seven sectors are in confirmed uptrends. One sector in a confirmed downtrend. The result is SPY in an uptrend 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:

Monday: Not a pretty day for investors as markets tumble lower on fear of a pandemic virus. The leaders fared the worst as they declined more than three percent. Bonds moved higher as money flow rose. Gold was a benefactor as well as moving higher. Emerging markets were slammed lower. Italy (EWI), South Korea (EWY), China (FXI) and Europe (IEV) all moved lower. We now step back look through the wreckage and determine how this unfolds as the reality sets in. The greatest challenges remain the uncertainty around the virus and how far it will spread.

The coronavirus remains center stage as the number of cases continues to rise. The spread to Europe and other countries is unsettling to the markets and citizens. The markets showed reactions on Thursday and Friday to the news. The speculation took hold on Friday with markets tumbling on worries. Those worries are reflected in the VIX index rising above 17. We hit stops on short term positions that were in harms way. We locked in positive gains. But our attention turns to downside trade opportunities as well as protecting our long term positions should the selling accelerate. Money flow showed rotation as it rose in gold, bonds, and safe havens sectors. The dip in technology money flow showed investors shifting toward safer sectors or cash. 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 continues to be positive with 77.4% of the stocks reporting in the S&P 500 index have beat expectations. The data points will be important to how this unfolds moving forward. Economic data remains okay as January shows improvements all-around with a few exceptions. Yields on the ten-year treasury bond fell to 1.47% with money flow strong into bonds. The dollar remains solid. Gold broke out to new highs with worries still backing the metal. Money is rotating to where it will be treated the best as seen this week. Energy struggles as crude prices continue to decline with the news around China. Watching how the price of crude reacts moving forward as the commodity did find a bottom. Watching with interest how the new week unfolds… 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.