Good isn’t good enough

Earnings at Microsoft, Chipolte, and Tesla were better than most expected, but they weren’t good enough to sustain the market momentum from earlier in the week. In fact, we discussed the lack of momentum yesterday and some weaknesses in the technical data relative to the NASDAQ and technology stocks. That followed through on Thursday as the index fell 2.2% to lead the downside move. This now begs the question… how much selling do we expect? The question is more directed to the mega-cap stocks than the broader market. What goes up too fast will moderate or correct. Our job is to manage the risk and from my view that risk is growing near term. Friday will offer some insight into what if any follow-through there will be to the selling on Thursday. Stops in place and eyes on the goal, not the media.

In The News:

Short news notes of interest… 1) Apple (AAPL) fell 4.5% on news that the Attorney Generals are looking into antitrust issues in the tech company again. The stock held at the 30 DMA but looks technically due for more downside. 2) Jobless claims increased 109k to 1.416 million ahead of expectations. Continuing claims decreased by 1.107 million better as more people find jobs. The impact of states delaying the further opening of business as usual impacted the initial claims last week. 3) Mr. Fauci continues to make headlines as his latest comments stating he would not fly in a plane or eat at a restaurant ruffles plenty of attitudes. Right or wrong the issues around the virus remain a sticking point for the US economy and citizens. 4) There was an announcement from the Treasury Secretary that a preliminary agreement has been reached on another stimulus package near the $2 trillion level. Detail will be surfacing when everyone returns to Washington next week. 5) The President canceled the GOP convention in Jacksonville next month as he calls for citizens to be vigilant in battling the coronavirus.

The S&P 500 index closed down 40.3 points to 3235. It was down 1.2% on the day as the index saw selling in the mega-cap stocks along with some rotation. The index held in positive territory for the year remains cautious near term. The stimulus package remains the top headline as many look for more assistance. Three of the eleven sectors closed in positive territory… showing some weakness on the day. Utilities and financials were the leaders of the day. Technology and consumer discretionary were the weakest sectors on the downside. The VIX index moved to 26 as anxiety stepped up in the index on the day. Watching how the data points all add up looking forward.

The NASDAQ index closed down 244.7 points at 10,461. The index closed down 2.29% for the day. The overall movement on the day was lackluster as the technology sector came under pressure from sellers. Technology and large-cap stocks were lower on the day after testing the new highs from Monday. The NASDAQ 100 index (QQQ) was down 2.61% for the day and as the mega caps moved lower leading the downside. The topping pattern broke higher on the chart but failed to hold the move testing the 20 DMA. The $255 level is the stop as we adjust and watch how this unfolds. Semiconductors (SOXX) closed down 1.5% for the day and testing the high. Technology (XLK) was down 2.6% for the day and testing the new high. 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 question is will it move higher as it stalled the last three days. Looking for upside follow through. Laggard declined to start the week. Gained 1.4% on Tuesday to renew the push higher started last week.

Transports (IYT) The sector moved above the $167.50 resistance as airlines and trucking move up nicely to help. June high is the next level to watch. Entry $167. Stop $171.62. Tested last weeks move higher.

The Dollar (UUP) The dollar remains in a consolidation pattern and is testing the downside of the range. The buck continues to struggle on the outlook of more stimulus and Fed involvement in the financial markets. Struggled as the euro moved higher relative to the stimulus announcement from the EU. Crashed lower on Tuesday to follow the downside started in June. Not pretty as short side in play (UDN).

The Volatility Index (VIX) Buyers showed up most of the week and the index fell to 25.6 and testing the June lows. Watching for clarity here as investor optimism is winning for now. Continues to decline… watching. We added a position in VXX. Entry $32.80. Stop $32.30.

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.

Biotech (IBB) The sector broke higher from the consolidation pattern and hit a new high for the week. Holing our position and managing the risk. Entry $128.50. Stop $139.90 (adjusted). Moved higher with small-cap stocks… new highs. Tested the last three days with the $139 level to hold.

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. Holding near the highs, but testing the move.

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. Closed at a new high. Tested the new highs and in a consolidation pattern.

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. Up day on Wednesday… still consolidating.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.62% down slightly from 0.63% 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). Yields moving lower… bonds higher… raising questions on a flight to quality?

Crude oil (USO) Crude moved to $40.57 on the week regaining the losses from Thursday. 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. Crude climbed $1 per barrel on the hope of the stimulus in Europe. Watching the upside move. Stalling on the market worries.

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 $170.10 (adjusted). Broke from a consolidation pattern at the top. Moved to new high near term. Gapped higher this week to renew the uptrend. Adjusted stop.

Emerging Markets (EEM) Broke from the consolidation pattern as money flowed into the Asian markets lifting the index. Now testing the move higher. The BRIC index fund also showed a break higher. Taking what is offered short term as it unfolds. Moved higher on the day. Added to the upside Tuesday on the EU stimulus package. Some struggles on China/US rift.

China (FXI/YANG) Gapped higher and tested since. The news from China has some to do with the testing, but the gap was too much too soon for the country ETF. Watching and letting this unfold. Added to bounce off the low. Higher on Tuesday to follow through on the bounce. Tested the move on Wednesday and Thursday as US news rattles markets.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for July 23rd: Technology large caps take a toll on the markets pushing the indexes lower. What leads higher can be what leads lower… watching the storyline relative to the large-cap technology stocks. It was kind of like a warning shot from investors as money has been moving all week, but not heavily. There is a modest migration from technology. The question is where is the money going? TLT? IYR? XLU? All are defensive solutions. Watching how this unfold and taking what is offered.

  • Treasury Bonds (TLT/TMF) broke higher as money flow continues to rise. Adjusted our stop… and considering adding some money near term.
  • Volatility Index (VXX) interesting move on Thursday at support. The bounce came from the selling in mega-cap stocks. Important to look at the NASDAQ volatility (VOLQ) as well with the current news surrounding that index.
  • Regional Banks (KRE) posted a solid upside day to help the financial sector… worthy of our attention in a bottoming pattern.
  • Natural Gas (UNG/BOIL) bounced off the near term lows… is it rally time for natural gas? Watching how this unfolds.
  • Oil Services (OIH) moved higher on the day and shows a positive five-day trend. Watching how this sector unfolds.

WEDNESDAY’s Scans for July 22nd: The rotation in sectors continues as money looks for alternatives to technology stocks. The recovery stocks made moves but nothing to write home about. It was a positive day overall and some movement due to earnings and existing home sales. Taking what is offered and managing the risk looking forward.

  • Gold (GLD/UGL) turned vertical as the dollar remains weak. Adjusted the stop on the move. Silver (SLV) was up 9% on the day.
  • Homebuilders (ITB/NAIL) solid boost from the existing home sales on the upside. People are buying homes as the thought of coronavirus being here to stay pushes people to ownership.
  • Healthcare (XLV) moved higher on vaccine news and earnings.
  • Treasury Bonds (TLT) Moving back towards the April highs. Holding for now.
  • Europe (IEV) moved back to the June highs… stimulus is a great drug for stocks to move higher. Dig into the parts and leaders for opportunities.

TUESDAY’s Scans for July 21st: The leader’s rest and the recovery stocks post modest gains on the day. The movers were energy stocks as they jump on the move in crude prices. Natural gas (FCG) and oil services (OIH) joined the upside as well. Gold jumped higher as well with the stimulus in Europe and the dollar taking a dump lower. Silver (SLV) followed the upside in gold jumping higher as well. Financials bounced after struggling following earnings announcements. Retail (XRT) broke higher from the trading range. All was upbeat despite the leaders lagging on the day. Letting this all unfold.

  • Energy (XLE) positive day for the sector to add to the bounce from the recent lows. Watching how this unfolds with the parts all posting a positive day… FCG, OIH, XES, UGA, USO, XOP.
  • Precious Metals (DBP) gapped higher as gold (GLD) and silver (SLV) lead the upside.
  • Gold Minders (GDX) moved higher in the uptrend as well. Silver miners (SIL) were moving higher as well.
  • Retail (XRT) moved higher and is challenging the January highs. A Positive trend in play for the sector.
  • Financials (XLF) moved higher on the day as banks make a move off support… plenty of work left to do in the sector.

MONDAY’s Scans for July 20th: The mega-caps return to lead the upside as other sectors struggle. Narrow rise for the markets but that is where the money flow remains. Watching how this unfolds moving forward as the volatility declines, money flows into the leaders and the balance of the market watches. There is plenty to consider with the new promise of the EU to offer stimulus and the hope of a vaccine by the end of the year. We are playing follow the leaders and not much left to say about it… manage your risk and let this all unfold.

  • Technology (XLK) rose to new highs as the leadership remains in the narrow parts of the market.
  • Semiconductors (SOXX) rose to new highs maintaining the leadership role. Adjusted our stops.
  • Biotech (IBB) rose to new highs. Adjusted our stops.
  • Volatility Index (SVXY/VXX) Adjusted our stop on the short side trade as the index continues to show less volatility with investors taking a more confident role.
  • Natural Gas (KOLD/UNG) short side trade continues to work… adjusted our stop and watching.

FRIDAY’s Scans for July 17th: Some rotation in the sector on the day as money moves from mega-cap to defensive stocks on the day. Is this the coming trend? Time will tell, but I wouldn’t bet on the move. We will watch how the coming week unfolds and what surprises it may have in store. Utilities, telecom, healthcare, and REITs were the leaders on the day. The weakness in financials returned along with energy. It was a day for jockeying positions and looking forward. We adjusted our stops and went boating. What else is there to do in this environment.

  • Utilities (XLU) moving higher in the trading range as we let this unfold. The target for the move is $63.
  • REITs (IYR) bounced at support and watching for follow-through and potential trade opportunities.
  • VIX (VXX/SVXY) short side trade in the volatility index is still in play. Watching for a break above resistance at the $34.85 mark.
  • Cyber Security (HACK) back to the top of the current range. Looking for a break higher and willing to add to our position. The underlying parts are worth scanning as well.
  • Gold (GLD) stalled at the highs and watching how it unfolds. I like the upside prospect of the metal long term as the global economic situation plays into the upside outlook. Willing to add to positions if the chart breaks 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 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.
  • 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. Moving higher in the bottoming range.
  • IYZ – Telecom found support again at the $27 level and bounced. Moved off support and heading back towards the previous highs. Defensive money moving into the sector.
  • XLP – Consumer Staples moved lower again testing support at the $57.17 mark and bounced back to the previous highs. This week broke higher and showing near term leadership. Defensive money moving into the sector.
  • 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. Solid upside moves on Tuesday to add to the bounce from the lows.
  • XLV – Healthcare broke above the $104 resistance. Watching as it posted a solid follow through on Friday. 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. Moved to new highs and tested the move.
  • 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. Bounced at support.
  • XLY – Consumer Discretionary broke from the trading range and established a solid uptrend. Stalled and is trading in a consolidation pattern. Watching the outcome. Moved to new highs and tested the move.
  • 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. Holding support.

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… Four sectors are in confirmed uptrends as the consolidation phase continues. Six are 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 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: Sellers show up in the leaders. This raises questions about the near term trend and where the money is flowing. It is too early to make come to a conclusion, but we are willing to follow the money. Treasury bonds, utilities, telecom, consumer durables, precious metals, all moving nicely on the upside. Technology, biotech, consumer discretionary, dollar, are all testing with sellers present. Watch, strategize, execute based on discipline… there is always something offering opportunities.

Wednesday: Positive moves for the markets overall, but still some jockeying for positions as the leader’s rest, recovery stocks rise modestly, and money flow heads to metals and commodities. Taking what we see in movers such as homebuilders, gold, silver, euro, Europe, and other areas benefitting from money rotation. Plenty of news driving along with earnings for now. Manage the risk and take what the market gives.

Tuesday: The leadership took the day off after a positive start to the day it faded into negative territory. The recovery stocks did post a positive day led by energy and financials. Watching how this unfolds on Wednesday and looking for the two parts to move higher together. The worries remain, but the stimulus from the EU helped across the board. The talk in Congress of a new bill from the US is in motion to help stimulate the economy. The challenge from my perspective is it will be more spending focused by giving money to the people versus the small businesses that were forced to shut down. Watching what unfolds and who are the winners.

Monday: Positive results but some parts were ugly. The mega-caps lead the indexes higher and the NASDAQ to a new high again. The balance of the markets remains stuck in place. Money flow is to towards the leaders as they resume their role after some topping last week. The EU promise of stimulus helped, the hope of a vaccine helped, and the willingness of investors to continue to put money to work helped. Everything is good… right? Time will tell. We will manage the risk that is and look forward day by day.

Weekend Wrap & Outlook… The coronavirus leads the headlines for the fifth week 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 positive week as the investor psyche remains upbeat overall. The NASDAQ’s was the weak link for the week closing down 1.5% at 10,503 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 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. The reopening process is being challenged by the spike higher in coronavirus cases. Disney moved forward to reopen the Florida theme parks. California closed again causing some grief to businesses as each state and city makes decisions independently. The VIX index moved down to 25.8 showing some optimism from investors. 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. Ten sectors posted gains for the week and one closed in the red. Technology saw money flow shift to negative as money was on the move again. Gold remains near the current highs with some testing to end the week. Crude oil remains near the highs and closed above the $40 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.