GDP data rocks the confidence of investors

GDP Q2 declined at 32.9% showing the impact of the shutdown due to the coronavirus. Throw in an increase in the jobless claims for the week to 1.434 million and jump in continuing claims of 867,000 to 17.018 million and you can see why the confidence level of investors declined. The outlook is not improving as the virus continues to keep business from hiring or workers willing to go back to work. All of those rosy projections by analysts and prognosticators are starting to unravel. Now comes the debates on inflation or deflation as the economic recovery stalls. Prices fell 1.8% in Q2, but supply remains constrained by the virus keeping workers home and production down… will that lead to inflation? Gold has spiked higher and it would lead you to believe investors are hedging against inflation, but governments are taking on trillions in debt… is the gold rally based on against currency value loss? Look at the dollar (UUP) over the last six weeks. It has declined in an accelerating trend. This is all getting interesting and the longer-term ramifications could be significant. Risk management is priority number one for now.

In The News:

Short news notes of interest… 1) The big four reported earnings on Thursday after-hours and all are trading higher on the news. Watching how they unfold on Friday and if the upside will stick. 2) Crude oil moved back below the $40 mark as the data points to a slower recovery and thus less consumption. All speculation, but then that is what he markets trade on in short term. 3) Weaker economic data with GDP falling brings into question the cyclical stocks. They have tried to recover near term, but not enough data to support the move… thus, what about the mega-cap stocks… will they continue to support the upside? Earnings are positive, but we have to see what investors think moving forward. 4) Warren Buffet increased his ownership in Bank of America to 11.8%. The long term prospects for the bank are positive and one we have owned for many years. 5) Trump tweeted the possibility of delaying the election in November due of course to the coronavirus. There was a reaction from investors, but it was not serious… or was it? 6) More writedowns and cuts coming as corporations trim to meet dividend payments and profit. Kraft Heinz showed a $3 billion charge on several businesses as the food industry continues to struggle. Exxon cut spending and jobs as it faces an $8 billion loss in the quarter. The data is piling up relative to the impact and fallout due to coronavirus.

The S&P 500 index closed down 12.2 points to 3246. It was down 0.38% on the day as the index remains back and forth on the week. The index continues to try and hold the first level of support at 3214. Corporate earnings are showing the impact of the shutdown and it worse than some imagined. Three of the eleven sectors closed in positive territory… showing some weakness on the day. technology and utilities were the leaders on the day. Energy and consumer staples were the weakest sectors on the day. The VIX index moved to 24.7 as indecision has defined the week. Watching how the data points add up looking forward.

The NASDAQ index closed up 44.8 points at 10,587. The index closed up 0.43% for the day. The overall movement on the day was positive as the technology sector added some positive gains on earnings. The mega-cap stocks posted positive earnings after-hours to help the cause. The NASDAQ 100 index (QQQ) was up 0.52% for the day and back to the 10 DMA. The topping pattern broke higher on the chart but failed to hold the move testing the 30 DMA. The $255 level is the stop as we adjust and watch how this unfolds. Semiconductors (SOXX) closed up 1.97% for the day closing at new highs. Technology (XLK) was up 0.56% for the day and holding above the 10 DMA. Watching how this unfolds moving forward as some believe the top is in…

Small-Cap Index (IWM) The sector broke from the consolidation pattern with $144.65 resistance the level to clear. The sector attempted to climb higher this week but failed to hold the move. Looking for upside follow through. Rallied back to close near the highs.

Transports (IYT) The sector moved above the $167.50 resistance as airlines and trucking helped the move. June high is the next level to watch. Entry $167. Stop $171.62. Tested all week as news continues to disrupt the current trend. Breaking higher and watching for the follow-through?

The Dollar (UUP) The dollar broke lower from a consolidation pattern and has moved into a trek lower. The EU stimulus package news didn’t help. There is a concern about the dollar moving into a free-fall. Watching. Dollar continues to get hit hard on the downside… needs to find some support.

The Volatility Index (VIX) Showed up to end the week and the index settled at the 25.8 mark and essentially unchanged on the week. Watching for clarity here as investor emotions are not rattled… yet. Up and down as uncertainty remains in the markets.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector remains challenged as growth stocks still not in favor, but it did manage to break from the consolidation pattern. Needs to follow through to the June highs. Breaking higher on Wednesday… Tested on Thursday… $193.50 target for now.

Biotech (IBB) The sector broke higher from the consolidation pattern and hit new highs only to reverse and test the 50 DMA. We hit our stop on the position and watching how it unfolds from here. Entry $128.50. Stop $139.90 (Hit Stop). Bounce attempt on Monday… gave it back on Tuesday. Thursday bounced at support levels.

Semiconductors (SOXX) The sector remains in an uptrend but challenged by some volatility of late as money rotates. Money flow remains in a downtrend. Taking what is offered and managing the risk. $272 stop. Bounced Monday… gave it up on Tuesday. Bounced back on Wednesday. Broke to new highs on Thursday.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $280 (adjusted). Entry $205.10. Some testing with the markets moving higher and challenging support. Up and down week… watching.

REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. The Federal Reserve has stepped in to stem the downside. The current pattern shows consolidation with a downside bias… watching how it unfolds. Bounced higher from the consolidation pattern… Solid week for the REITs as money flow rises.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.58% down slightly from 0.62% last week. TLT has been a benefactor of the fear trade emerging again. Bonds made a key move higher and watching as they consolidate. Entry $161. Stop $163.55 (adjusted). Hitting resistance at the April highs, but breaks higher on economic data. Money rotating to safety.

Crude oil (USO) Crude moved to $41.34 on the week holding steady near the highs. The data is showing a reduction in production based on the cuts from OPEC+. The EIA raised the forecast for the consumption of the balance of 2020 helping the commodity. I continue to like the long-term outlook with entry at $13.81 and a two-year target of $45. In addition, there are trading opportunities in and around the commodity. UGA. Moved below $40 again as the economic data causes money to rotate.

Gold (GLD) The metal tested lower to $158.94 support and bounced giving a trade opportunity in the trading… added at $158.90. Stop at $172.29 (adjusted). Broke from a consolidation pattern and has started a vertical move. Adjusting stops on the move and letting it run. Chart is vertical… managing stops and watching how it unfolds near term.

Emerging Markets (EEM) Broke from the consolidation pattern as money flowed into the Asian markets lifting the index. Now testing the move higher on tension with US-China rising. The BRIC index fund also showed a break higher. Taking what is offered short term as it unfolds. Bounced Monday… Fell on Tuesday. Moved above resistance on Wednesday and tested on Thursday.

China (FXI/YANG) Gapped lower again this week. The news from China about the economy didn’t help. Add rising tension with the US and it sees money moving out of the sector. Watching and letting this unfold. Heads lower to start the week. Bottom on Wednesday? Not according to the move lower on Thursday.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for July 30th: News and data points are coming like a firehose and it is raising questions as investors look towards safety. Treasury bonds are rallying higher. The dollar is declining and pushing gold prices higher. Consumer staples and utilities are seeing a rise in money flow… plenty to watch and money to protect. Stops are in place as we see how the last day of the week unfolds. Watching if the upside bias holds throughout the day from the earnings of the mega-caps after hours. Not a time to be passive with your management of risk.

  • Semiconductors (SOXX) broke to new highs and showing some resolve in the face of uncertainty about the economic picture.
  • AAPL, AMZN, FB, and GOOG all announce positive earnings after-hours and trading higher. Watching if they can hold the gain in Friday’s trading.
  • Energy (XLE) more pressure from the economic data pushes the sector lower on the day and crude move lower and back below the $40 level.
  • Biotech (IBB) at a decision point testing a key level of support. Looking at how it unfolds near term and what opportunities it presents.
  • China (FXI) stocks remain under pressure as the data from China remains weak and the outlook isn’t promising.

WEDNESDAY’s Scans for July 29th: News drove the day with FOMC, earnings, Monopoly hearing with Congress, and more covid cases. The challenges facing the market are adding up and it has created a week of back and forth for the markets. Watching money flow and trying to determine what and how it all unfolds. The fast money is chasing safety and defensive sectors the FOMO money is still chasing the dips in the old leadership. We are taking what is offered and managing the risk.

  • Gold (GLD) new highs and a vertical chart. Advancing the stop and managing the risk. Gold miners showing some topping and profit-taking.
  • Regional Banks (KRE) posted solid upside on the day. We continue to manage our position and looking to break above resistance near term.
  • Homebuilders (ITB/NAIL) heading higher on the data as housing continues to show strong growth in the current environment.
  • Small Caps (IWM/TNA) positive upside momentum of late and watching to break above resistance and continue higher.
  • Financials (XLF) watching for some upside momentum as the sector approaches resistance.

TUESDAY’s Scans for July 28th: The profits from Monday reversed course on Tuesday as the virus cases and Congress weigh on investors. Taking what is there, but I don’t expect the issues to be resolved easily. There are opportunities in the rotation as well as the fear creeping into stocks. Patience is the key as this all unfolds.

  • REITs (IYR) solid bounce, but needs to follow through as there is plenty of uncertainty in the sector.
  • Utilities (XLU) money rotating to safety. The sector has been a benefactor near term.
  • Natural Gas (UNG) bounced at the lows again… letting this unfold.
  • Treasury Bonds (TLT) moving higher again… adjusted stop and letting this unfold near term as money looks towards safety.
  • Consumer Staples (XLP) showing leadership from the defensive sectors.

FRIDAY’s Scans for July 24th: The selling took a broader path to end the week. This raises concerns about the mega-cap stocks and technology. Watching how this unfolds a the charts are still in good patterns and the overall market shows healthy trading. Some selling is always expected when valuations rise to levels of undue risk. Watching the rotation of money… where does it go? Cash? Bonds? Commodities? Watching and managing our risk accordingly.

  • Consumer Discretionary (XLY) will this be the sector of choice moving forward? Watching at it has done well but the parts are where to dig.
  • Gold (GLD/UGL) definitely has been a benefactor of rotation and concerns about the global economies. Gold miners (GDX) also benefitting from the price move in gold.
  • Silver (SLV) equally a benefactor to the move higher in metals. Gapped on the week and raised our stops to account for the move.
  • Semiconductors (SOXX) Intel laid an egg and pulled the sector lower… questions is how the sector as a whole responds. Watching for the next opportunity here.
  • NASDAQ 100 Index (QQQ) topping pattern is back… watching the large-cap rotation and how the index responds. This will offer an opportunity near term.

(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 solid break above the $45.87 resistance offering upside trade opportunity. Tested the $54.15 support levels and bounced. Solid bounce above the June highs and holding. Testing upside move.
  • XLU – Utilities found support again at the $55.24 mark and bounced. Trading higher in the current range and moving back towards the previous highs. Finding buyers motivated by safety.
  • IYZ – Telecom found support again at the $27 level and bounced. Moved off support and heading back towards the previous highs.
  • XLP – Consumer Staples moved lower again testing support at the $57.17 mark and bounced back to the previous highs. Then broke higher and showing near term leadership. Defensive money moving into the sector. Taking on a leadership role.
  • XLI – Industrials moved sideways and managed to break above resistance at the $71.43 level. Watching how this unfolds near term.
  • XLE – Energy broke the trendline moving lower and found support as the downtrend remains in play. Testing the bounce and letting this play out with short side bias. Tested lower on the outlook for economies.
  • XLV – Healthcare broke above the $104 resistance. Watching as it posted a solid follow-through. Upside back in play for now. Pushing higher on the hope of vaccine and earnings.
  • XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently with a solid uptrend on the chart. The testing this week has us on watch… testing support and stops in place. Bounced back from the test lower last week.
  • XLF – Financials broke below the $23.50 support moved sideways and back above $23.50 on banks (KBE) rising on earnings. The challenges remain for the sector overall and watching how this unfolds. Showing some positive signs.
  • XLY – Consumer Discretionary broke from the trading range and established a solid uptrend. Stalled and is trading in a consolidation pattern. Watching the outcome of the renewed leadership.
  • IYR – REITs struggle to find money flow. The move below $77.90 was negative but bounced at support and holding for now. Descending triangle pattern in play. Bounced in the bottoming pattern and followed through upside.

The trends are being challenged by news and investor activity. Plenty of consolidation patterns building the last few weeks and watching how they unfold going forward. We have positions based on our defined strategies and managing the risk accordingly. Using the six-month charts as an indicator for the short term view… Seven sectors are in confirmed uptrends as the consolidation phase continues. Four are consolidation patterns showing indecision from investors, and none are in a downtrend. The result for SPY is in a move to sideways trend short term with upside the bias for the week. The leadership is seeing some rotation 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: Plenty of anxiety swirling around the markets… earnings have been positive overall, but there are plenty of issues in specific sectors like retail, restaurants, energy, etc. The write-downs and losses are mounting. Bankruptcy filings rising. Economic data slowing. Elections to be decided…. and of course the everlasting coronavirus fight. The uncertainty leads to rotation as money looks for a safe haven or opportunity created by the uncertainty. We have to manage the risk and watch how it all unfolds.

Wednesday: Markets move higher continuing the ups and downs of the week. The earnings are helping the upside and the government rattling about covid, interest rates, and stimulus are fueling the downside. Either side is looking for leadership and finding it in different sectors. We will take what is offered and manage the risk. Thus far, money flow has been into precious metals, natural gas, REITs, banks, and homebuilders. Follow the money it always knows.

Tuesday: Another day of worries back from Monday optimism. Taking what is offered, but the worries are rising along with some day-to-day volatility. Patience is the name of the game as the near term direction works through the worries and news. Watching money flow and rotation as some money moving towards safety and some taking the short term opportunities. Plenty to weigh as this all unfolds near term.

Weekend Wrap & Outlook… The coronavirus remains a headline impacting markets with the record rise in new cases in eight states. That puts caution in the markets and money begins to rotate looking for opportunity. The broad indexes posted a negative week as the investor psyche turns to some worries about large-cap stocks. The NASDAQ’s was the weak link for the week closing down 1.3% at 10,363 on the week. The Fed and the Treasury continue to mouth support for further stimulus and helping get the economy back on its feet. The EU chipped in to help the European countries offering a stimulus of more than 2 trillion euros. The hope of a strong recovery in the second half is dwindling on comments from the Fed as they warn of slower recovery. The jobs data was steady as more jobs are being found, but first time climbs actually climbed for the first time in seven weeks. The reopening process is being challenged by the spike higher in coronavirus cases. California closed again causing some grief to businesses as each state and city makes decisions independently. They also took the lead for the most cases in the country. The VIX index moved down to 25.8 showing settling at support but didn’t raise on the selling this week. We continue to find opportunities near term to put money to work even in some sectors that have been lagging. Our job remains to manage the risk accordingly. Eight sectors posted gains for the week and three closed in the red. Technology saw money flow shift to negative as money was on the move again. Gold went verticle posting new highs as money flow rises. Crude oil remains near the highs and closed above the $41 a barrel level. The focus is starting to turn to the spread of the virus versus vaccine development. Something to watch as the markets remain in an overall uptrend since the March lows. 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.