Financials and energy move higher to lead market.

Markets were higher on Thursday as there was some hope of a new stimulus package, but there is rising concern about the surge in global virus cases. There was plenty of talk about a deal as soon as the end of next week and the markets responded late in the day to comments. What happens if the deal doesn’t materialize? Simply put the markets will sell off… at least that would be the most predictable response. Time will tell as we stated yesterday patience is the name of the game. The final Presidential debate will take place on Thursday night and we will see how that unfolds in the race as well as markets reactions on Friday. Focus on what you know, find a path to your beliefs, and manage the risk between belief and reality.

Short news notes of interest…

  • Initial jobless claims fell 55,000 to 787,000 and continuing claims decreased by 1.024 million to 8.373 million. Some positive takeaways but the high level of continuing claims remains bothersome.
  • Existing home sales increased by 9.4% in September… they increased annually by 34%. The sector remains positive overall despite the lag in stocks.
  • Leading economic index increased by 0.7% in September. It was slower than the 1.4% rise in August… that has some talking about the slowing outlook near term.
  • Pelosi and Mnuchin seem to be the only ones negotiating a new stimulus package. The news was positive overall relative to the topic and sparked some upside in the markets on the day.
  • Ten-year treasury bond yields continue to rise as the outlook for inflation is in play. The thought is that more stimulus will be inflationary as money chases fewer goods. Worthy of our attention on a downside trade in bonds with TBT.

The S&P 500 index closed up 17.9 points to 3453. It was up 0.52% on the day. The index moved higher late on the hope of stimulus getting done within the next week. The action was mixed throughout the day as energy, financials, and telecom led the markets higher. Eight of the eleven sectors closed in positive territory as investors continue to evaluate risk and money flow shows rotation again. The upside showed some signs of hope, but there is plenty to deal with near term. The VIX index closed at 28.1 as investor anxiety remains elevated.

The NASDAQ index closed up 21.3 points at 11,506. The index was up 0.19% on the day as the index struggled on worries. The index had rallied 11.8% from the lows on 9/23… and has now retreated 3.4%… Technology stocks came under pressure from earnings and antitrust lawsuits and remains a laggard. The NASDAQ 100 index (QQQ) was flat with a 0% return for the day. Large caps moved through the $282 resistance level and testing the last week. Semiconductors (SOXX) closed up 0.04% for the day and held above the September highs. Technology (XLK) was down 0.47% and holding support. Watching how this unfolds as the market attempts to find clarity near term.

Small-Cap Index (IWM) The sector bounced at the $144.65 support and managed to hold the move higher… it followed through and this week struggled at the resistance of $162.50. Watching how this unfold in the coming week. Entry $151. Stop $155.52. Letting it unfold near term. A 1.2% decline to start the week and test $160.40 support. Broke support and now we look for the follow through… more downside? NOPE bounced 1.7% on Thursday and watching.

Transports (IYT) The sector topped at $205 and confirmed the upside but struggled on Friday with earnings data. We will see how it changes or if it changes the momentum. Managing the risk. Entry $167. Stop $205.63 (adjusted). The sector fell by 1.1% to start the week. Held support.

The Dollar (UUP) The dollar broke lower and shows a downside trajectory from the 9/25 high. We can blame plenty of data points, but the key thing to understand is we are supporting a weak dollar policy currently and that isn’t helping the cause. Tested lower again elections worries weigh on the buck. Small bounce on Thursday.

The Volatility Index (VIX) Volatility remains a question mark as anxiety rises for the week. The uncertainty remains a challenge for investors and the consistent rotation of concerns weekly is keeping the anxiety level elevated. Watching and letting this unfold around facts versus speculation. Spiked to 29.3 as the anxiety continues to rise and settled at 28.1 for now.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector completed a bottom reversal and cleared the August highs. Taking on a leadership role near term as the sector follows small caps higher. Watching the topping pattern on the chart at the highs. The sector joined small caps on the downside to start the week. Breaking support. Bounced 1.7 on Thursday showing some life.

Retail (XRT) The retail data released for September was positive and the sector continues to show solid growth. The bounce at the support of $48.35 has eclipsed the August highs and the fundamentals confirmed the trend. Entry $51. Stop $52.68 (adjusted). Shows some near term weakness and topping. Nice bounce on Thursday to hold support.

Biotech (IBB) The sector gapped lower on Thursday, hit our stops, and watching how it responds. The Phizer news helped early but managed to give up the bounce on Friday… watching and letting the direction be established. Fell 1.6% to add to the downside weakness of late. Broke $136.50 support and bounced? Watching.

Semiconductors (SOXX) The sector remains in an uptrend and posted a solid move above resistance at $305. The sector is leading the technology space showing some topping on the week. Entry $304. Stop $320.20 (adjusted). Watching how this unfolds. Downside in play, but manageable.

Software (IGV) The sector has been a key part of the leadership since the March lows. Some testing at the highs and watching how it unfolds. Entry $308. Stop $322.76 (adjusted). Testing. Cloud software weaker.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.74% down from 0.77% last week. Yields stumbled as stimulus talks failed. Watching as the uptrend from the August lows remains in play. Short side trade offered in bonds with TLT falling. Watching the trendline for some decision points. Moved to 0.84% and watching as money rotates again.

Crude oil (USO) Crude moved to $$40.85 up from $40.64 for the week. Plenty of speculation to drive prices and watching how this unfolds.No position currently in the commodity. Gave up gains and moved back near the $40 mark. Thursday bounced with energy gaining nicely on the day.

Gold (GLD) The metal broke lower from the descending triangle pattern to continue the negative decline from the spike higher in July. Support at $174 held and is trying to establish a move higher. Watching how this unfolds near term. Breaks higher from the consolidation pattern, but fails to hold the move selling on Thursday.

Emerging Markets (EEM) The sector held support at the $42.50 mark and reversed to move back above the $45.50 resistance as the dollar dips lower on stimulus news. Entry $44.50. Stop $43.50. Holding near the highs with some testing the last four days. Need to hold the $45.40 level of support. No changes as holds support and at the highs.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENTT

THURSDAY’s Scans for October 22nd: The markets remain undecided on many fronts, but the talk of stimulus rallied stocks late on the day. There is plenty of issues facing stocks near term, but the hope of a money infusion sends stocks higher. Energy was up 4% on the day as the hope of a stimulus package would spur the demand. Regional banks were higher again as the sector continues to show signs of breaking to the upside. Utilities and healthcare both posted solid gains on the day as well. Technology continues to be the laggard of late.

  • Energy (XLE) found support and buyers again as the sector move higher on the day.
  • Regional Banks (KRE) Solid rise on Thursday as the sector climbs 4.7% on stimulus talks, higher interest rates, and hope of the impact on the sector… broke above resistance.
  • Technology (XLK) lagging again as the money flows out of the sector and move to other areas of interest for investors. Worries remain on the rise for the sector overall.
  • Small Caps (IWM) posted a solid gain on the day to bounce at support. Keeps the upside option in play and watching how it unfolds.
  • Brazil (BRZU/EWZ) bottoming pattern show a solid move to the upside and looking for upside follow through.

WEDNESDAY’s Scans for October 21st: The sideways movement continues as uncertainty rises about the outlook. The charts are showing topping patterns and the conviction is lagging along with leadership. The good news is the downside test is well within reason, but we have to measure our risk accordingly. Patience is the key for now and we are willing to wait this out.

  • Emerging Markets (EEM) they are a benefactor of the dollar dropping. Watching for the upside trend to continue near term.
  • Biotech (IBB) downside accelerated and hit the 62% retracement from the last trend higher. This is a signal to bounce or sell back to the previous lows. Watching the sector.
  • Gold (GLD) attempting to break from the consolidation pattern and turn higher again. The dollar has moved lower… but gold has yet to respond.
  • Social Media (SOCL) gets a boost from the SNAP earnings report. Breaks higher from the trading range. Need to follow through on the upside.
  • China (FXI/YINN) moving higher and attempting to reverse the current trend. Chile (ECH) broke higher from the consolidation pattern as well.

TUESDAY’s Scans for October 20th: News day as money follows the speculation and noise. No real changes to speak of overall. Energy bounced again after some testing of the previous lows. Tech is dealing with the antitrust suit on Google and the overall sentiment is edginess relative to the uncertainty that is. Watching, tracking money, and letting this unfold near term as we test the move higher.

  • Regional Banks (KRE) making a move back to resistance and looking for a break higher. We added on the test lower in September and now comes the moment of truth… breaking through on the upside.
  • Solar (TAN) breaking higher from the flag pattern to continue the upside trend.
  • Latin America (ILF/BRZU) cup and handle pattern-breaking higher and showing a continuation of the effort to reverse the drift lower from the June highs. Brazil looks similar on the chart.
  • Treasury Bonds (TLT/TBT) downside showing up for bonds as interest rates creep higher. No stimulus is helping keep interest rates on the upside. Watching the trade to short bonds near term.
  • Precious Metals (GLD/SLV) both metals remain in a consolidation pattern and the upside opportunities are being discussed… Watching and letting it unfold currently.

MONDAY’s Scans for October 19th: Markets are questioning the outlook relative to stimulus and the virus… leads to selling and testing of support at some key levels near term. We see the impact of uncertainty as it builds and the question marks send money looking for the next opportunities… and for some, that is on the downside. Not convinced of anything at this point, just willing to take what is offered and keep our cash supply ready.

  • Energy (XLE) not a pretty picture again as questions arise about production and consumption as Europe starts to respond to the rise in virus cases. The ripple of that is being felt in the US as well. ERY back on my watchlist.
  • REITs (IYR) back below support at the $81 level and watching for a retest of the lows. Banked a small gain on our position as we hit stops. SRS shows opportunity short term.
  • Technology (XLK) drops back to retest the $118 support. Watching how the parts and the whole respond to the current round of worries.
  • NASDAQ 100 (QQQ/SQQQ) watching the selling in the broad sector. A bottom reversal in play on the short side ETF.
  • Agriculture (DBA) still on the rise as the parts continue to find buyers and the weaker dollar is helping. MOO testing the current highs as well.

FRIDAY’s Scans for October 16th: Markets start higher and fade to even on the day… there are still issues facing investors and sentiment has shifted to neutral from buyers. This is not an indicator of direction, but it does impact money flow. Watching how the new week starts with earning in full swing. The transports showed weakness in earnings and retail sales remain positive with solid growth. Data/reality versus speculation/belief in play as the market rests at key resistance points. Below we look at opportunities from the week that was…

  • Natural Gas (UNG) found some buyers and established a new low and bounced. A double bottom pattern on the chart and watching for a trading opportunity in the commodity.
  • China (FXI/YINN) the chart has a ‘V’ bottom pattern that gapped higher tested and gapped higher again. No positions added on the gaps but watching how this unfolds near term.
  • Gold (GLL/GLD) Uptrending chart on the short side… The metal has shown some signs of reversing but failed on each attempt. Watching for a break above the $32.20 level for the short side to continue or a move below $31 for the trend to reverse.
  • Online Retail (IBUY) Solid move above $90 and the uptrend has been renewed. Add the positive retail data with a rising trend in growth and you could see the sector continue to rise. Adjusting stops and letting this run.
  • Broker-Dealers (IAI) the financial sector subsector shows some growth in earnings and pushed back to resistance at the $65.40 level. Looking for follow through on the ‘V’ bottom pattern and break higher.

(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 tested the trends. Added a bottom reversal and moved back to the previous highs. Letting this play out near term. Testing at the current highs.
  • XLU – Utilities bounced from the selling and back above the $61.75 resistance and heading higher. Entry $58.50. Stop $61. Testing near the highs. Attempting to break higher from the flag pattern.
  • IYZ – Telecom broke the $27.60 support created a bottom reversal and cleared the $27.60 level again on the upside. Entry $27.60. Stop $27.20. Testing and breaking $27.60 support.
  • XLP – Consumer Staples tested lower, reversed, and heading back to the previous highs. Positive for the overall market with the recovery stocks improving. Testing the trend.
  • XLI – Industrials moved sideways and testing the move higher. Friday broke above the previous highs and resumed the uptrend. Hit new highs and adding to upside.
  • XLE – Energy gapped lower as a continuation of the trend set from the June highs. Added to the downside and adjusted stops. Managing the risk. The bottom reversal is of interest and watching to see if it follows through. Retesting the bottom support and bounced.
  • XLV – Healthcare tested the $101 support level and held… bottom reversal breaks higher $106.88 break. Entry $106.88. Stop $101. Solid move towards the previous highs. Testing at the $106.90 support is key near term. Broke support and recovered… indecision.
  • XLK – Technology found support at the $110 level and bounced… Watching the bottom reversal attempt currently in play as it clears the $118 level. SOXX leading the move and where we put our money. Solid move towards the previous highs. Testing $118 level.
  • XLF – Financials are challenged by the outlook for defaults and commercial real estate. $23.50 support held. Looking for regional banks to take a leadership role if the upside is to recover. Entry $24.50. Stop $23.50. Testing $24.50 support.
  • XLY – Consumer Discretionary tested the trend, tested below the 50 DMA, and support at the $140 level and bounced. Solid move back to the previous highs.Testing.
  • IYR – REITs have struggled with interest rates, vacancies, and virus talk about people moving out of cities. Tested support at $76.22 and bounced to offer an upside trade opportunity. Entry $80. Stop $81 (Stop Hit). Broke support at the $81 level and offering a short side look.

The trends are shifting again based on investor activity. We have added positions, added new stops, and watching the developing trends and patterns currently. Using the six-month charts as an indicator for the short term view… Six sectors are in confirmed uptrends as the testing phase continues. Four are in consolidation patterns showing indecision from investors, and one is in a downtrend. The result for SPY is in a move to sideways trend short term with a downside bias currently. The leadership is rotating as money flow shifts directions.

(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:

Thursday: Some early downside gave way to buying as the rumor and talks of stimulus pushed the indexes higher, but there is still uncertainty surrounding the markets overall. Regional banks, energy, and telecom lead the day as money flows where it believes it will be treated the best. The technology sector continues to struggle under valuation talk and earnings. Watching how the money flow unfolds near term as money is definitely on the move. Follow the money it always knows.

Wednesday: Mixed day as investors juggle money but show little interest in upside or downside. Time to practice patience and let the storylines unfold. The focus on stimulus, vaccines, the virus spread, and politics is distracting investors with too much news. Stay focused on the goal and not the chatter. We have hit some stops on positions and added some new positions based on what we believe to be true, and we continue to be overweighted to cash. The goal is to manage our risk and protect our principle as the market solves the current dilemmas and builds a new trend.

Tuesday: News was the driving factor on the day and there was plenty of it. When there is too much news it makes it difficult for investors to focus on what is happening versus what might happen. There are some leaders, and there are some losers, but the inability to continue the upside move is where we are watching. What is the catalyst to drive stocks higher? Stimulus? Earnings? Economic data? Time will tell as we take what is offered and maintain a willingness to hold cash and wait for the opportunities.

Monday: The sellers showed up as the challenges rise relative to stimulus and the virus. There is plenty to speculate on, but the goal is to manage money, not the events and the emotions relative to the markets. There are some shifts in momentum and thus the downside is being watched. Some sectors are merely testing and looking for the upside to resume. OPEC was in action on Monday as well, promising to take action on production levels as the worries rise about the virus spreading again. Watching and being patient on the outcome near term.

Weekend Wrap & Outlook… The markets spend the last four days testing the moves from the previous lows. The challenges have been reality versus speculation. The speculation was stimulus… the reality is politics over helping the country. Small caps took on a leadership role for the week breaking higher and leading the broader-based moved for the recovery stocks. Technology stocks were challenged as money flow slowed and some rotation took place. The economic data has shifted to September reports and we are seeing some slowing in the recovery but still overall positive. The retail sales data on Friday showed positive growth from the consumer and a positive outlook currently. The politics over the stimulus package is in the headlines again and both sides make the event a political statement for the election versus how to help today. The uncertainty factor about any stimulus package is weighing on the sentiment. The VIX index moved to 27.4 as the anxiety levels moved higher from earlier in the week. The dollar is attempting to bounce near term, but our outlook is for it to continue the downside trek as the weak dollar policies remain. In turn that helped the metals, commodities, and emerging markets rise. Four of the eleven sectors posted gains for the week as worries about the economic picture and stimulus grow. Industrials and utilities led the upside for the week showing some move to safety and recovery stocks gaining. REITs and energy were the weakest sectors for the week as the sellers showed up. Crude oil moved higher and closed at $40.85 a barrel up slightly on the week. Watching the current movement in the broad markets as money continues to search for the best opportunities and cash gets put to work. The goal remains to manage money not the markets or the pundits in the media. Let the future unfold and manage the risk that is. Track the data. Know where the markets stand relative to the facts. Money rotates to where it will be treated the best. Watch the trend, know which side the Fed is on daily, 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.

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.