Market Outlook for May 20th
The S&P 500 index tested lower on Tuesday after solid gains on Monday. There was some late day selling on headlines about vaccines… go figure. There were warnings from an analyst about the Moderna vaccine for Covid-19 due to a lack of critical data… yes the study group was only 8 people, but all 8 responded to the drug. There are always going to be those who see the glass as half-empty. The challenge is more related to uncertainty about the virus than who will find a cure for the virus and it isn’t just about Covid-19 it is about viruses in general and the uneasy feeling many now have about how each one in the future will impact them. We are in a normal state of recovery. The process is going to take time and the overreaction is going to be here for some time… as much as I would like for it not to be you can see it in people’s faces when you talk to them. The best course of action is doing what you feel comfortable doing and avoid the rest. No one is pressuring anyone unless you go to Costco without a mask… they will remove you from the building… right or wrong? That question will be for someone else to answer, for me, I just don’t go to Costco. The markets remain a tennis match of ups and downs and we continue to manage the risk that is versus the rumors in the media.
In The News:
Senate may vote on a bill that could delist Chinese companies… it is called Holding Foreign Companies Accountable Act… it would force Chinese companies to adhere to US securities law (novel thought). It would ultimately bar many Chinese companies from listing shares on the US exchanges, nor raising money from American investors. They are currently exempt from any meaningful financial oversight. This could get really interesting going forward.
This week is reopening week for many states… all 50 states have begun some form of loosening restrictions. The challenge is every state, county, and municipality is adding their own protective layer of rules. It isn’t easy for anyone to know what to do… i.e. the viral video of a customer be asked to leave Costco for not wearing a mask. Now even companies and enact their own rules. Not saying they are good or bad it is just unclear what and how to follow them all. Communication is the biggest issue for many, but the reality is fear. Fear (False Education Appearing Real) is driving many decisions. Fear of lawsuits from customers, employees, unions, or any other person or group that chooses to enforce their view on others. The Senate is working on a bill for lawsuits pertaining to Covid-19 and they are working on a bill relative to Chineses stocks trading on the US exchanges. They are also in the midst of defining parameters for another stimulus package. The reopening brings hope, but it also is showing how ill-prepared we were for the virus to start with and how we are still not sure or prepared on how to open the country for business again. 17 states have reported an uptick in cases after opening… Florida is unchanged and Georgia has seen a downtick. They are numbers being reported by “THEY” and not sure who ‘they’ are… I can only think that statistics don’t lie, only statisticians.
It doesn’t make sense: Creating a “fairer” world? ‘the crisis must serve as a wake-up call and a call to action for business and government to think, act, and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth.’ Jamie Dimon, CEO JP Morgan. I am not sure what all of that means. If he means addressing the failed healthcare system, infrastructure weakness, litigation and regulatory stranglehold on small businesses, failed immigration policies, and too much government, I am all in… make it fairer (is that a word?). If we are talking about making it a level playing field… that will never happen. The CARES act shows the inability of the government to “help” or be “fair”. There are too many moving parts and too many people with their collective hands out. If we can find a balanced way of giving a hand up (EIDL loans from the SBA) versus a handout (PPP loans from SBA) the world would become more fair and balanced… but, we have too many personal hands in the game for their benefit… not the benefit of the whole.
Unemployment question… Over 36 million workers have filed for unemployment in the last few months… as businesses reopen many will be offered their jobs back. But, here is the dilemma. Unemployment runs through July from the Federal government… many workers are getting more on unemployment than from their jobs. Will they return? Or, will they use the “I don’t feel safe working there” excuse? Will they be motivated to return to their jobs for less money? The virus offers the perfect excuse to stay home and collect. Meanwhile, some places of business are installing plexiglass dividers, sanitizer stations, and wipes for mental comfort… at what cost is this all happening? The unemployment issue will be of keen interest to Wall Street especially if the Senate passes the current bill to allow Federal unemployment to continue until December. Too many questions and too few answers.
- Housing starts fell 30% in April, permitting fell 20.8%… more depressing data from another sector.
- Retail sales were down 16.4% in April and well below expectations of -12.3%. Autos fell 12%, Furnishings down 58%, clothing off 78%, Gasoline store sales down 28%, and non-store retailers -8.4%. Not pretty and it did impact the markets on Friday.
- NAHB home builders index rose to 37 in May up from 30… seeing some activity in the sector that is positive. XHB, ITB, NAIL all rising.
- Capacity utilization was 64.9 worst ever since started tracking in 1967. This is a telling number as it relates to productivity for US companies.
- Weekly jobless claims were higher at 2.98 million applications submitted.
- Producer Price Index fell 1.3% and well ahead of the 0.5% expected to fall. Oil prices can take credit for the biggest piece of the decline while food and liquor prices rose.
- Consumer Price Index fell by 0.8% as expected. The core CPI fell 0.4% (lowest level ever). Food prices jumped as apparel and energy fell.
- Jobs report shows a loss of 20.5 million jobs in April. 14.7% unemployment rate. Mostly inline with expectations. ADP jobs survey shed 20.2 million jobs, worst in the survey’s history.
- ISM services data was better than expected at 41.8% but still well below 50% expansion.
- The ISM manufacturing data to the mix as it was 33.4% well below the expansion levels of 50%.
- The bottom line, the economic data is falling as expected and April is the first full month of real data… this will likely get worse before it gets better.
The S&P 500 index closed 30.9 points to 2922. It was down 1.1% for the day. The index held support at the 2820 level and failed to break through the resistance at the 2950 mark. The chart is defining the near term trend along with a topping pattern. We are looking for who will take the leadership role… Tuesday all eleven sectors closed in Negative territory with energy and financials leading the downside. The VIX index moved to 30.5 on the day showing investor sentiment on the upside for the day. Watching how the consolidation pattern unfolds and if we can follow through on the upside move.
The NASDAQ index closed down 49.7 points at 9185. The index held above the 20 & 10 DMA losing 0.5% for the day. The close moved back above the 8972 support level and holding in positive territory for the year. The NASDAQ 100 index (QQQ) was up 0.2% for the day as the large-cap stocks lagged on the day. The $218 level is the stop for now and watching how it unfolds near term. Semiconductors (SOXX) closed down 0.3% as it tested the 200 DMA support and challenges with the China/US trade issues. Technology (XLK) was down 0.3% holding near the previous highs. Holding the new leg higher… watching how this plays out near term.
Small-Cap Index (IWM) The sector tested the move higher and bounced at the 50 DMA as the volatility picked up again. Watching how this unfolds near term. $132.50 level to clear on the upside. 6% gain on Monday helped the cause. Tuesday gave up 2% on the downside.
Transports (IYT) The sector has the greatest exposure to a slowdown due to the virus. Airlines, container ships, trucking, etc. if the production slows transportation slows. A retest of support at the $137 level of support as the sector put in a challenging week. 7.2% gain on Monday to lead the index back toward the previous highs. Tuesday tested down 1%.
The Dollar (UUP) The dollar has been higher as the Fed and White House got involved in throwing everything at the markets… The dollar has now worked into a consolidation pattern and testing the lows. Watching how the tariff tweets impact the buck next week. Declined on the comments from Mr. Powell and the Fed’s willingness to do everything.
The Volatility Index (VIX) Anxiety spiked to 85 at the height of the unknown fallout from the virus. This week the index settled at the 31.8 level. There were moves to the upside during the week as anxiety shows up again for investors. Watching the progress going forward. Declined to 29.3 on Monday showing some optimism from investors.
KEY INDICATORS/SECTORS & LEADERS TO WATCH:
MidCap (IJH) The sector remains volatile as money flowed out of the store with a small bounce to end the week. Stop hit at $157.52. Entry $145.50. Watching how support holds or not. Climbed 6% on Monday and back to the previous highs. Tuesday tested down 1.3%.
Biotech (IBB) The sector tested the $121.70 support and moved back to the previous highs… tested $128.67 support this week… bounced on Friday. Some topping in the sector as this unfolds. Entry $102.75. Stop $121.73 for now and allowing for some volatility… longer-term view for this sector. Solid move back to the previous highs and watching how it responds. Tuesday responded down 2%…
Semiconductors (SOXX) The sector tested support at the 50 DMA again. Watching as the volatility rises on the US/China issues with Huawei Technology. We hit our stops on some positions and managing the risk on the balance. Gained 4.5% on Monday to recover from Friday’s move lower… back at the previous highs $243.50 resistance. Small test on Tuesday.
Software (IGV) The sector established a bottom at $185 and bounced. Stop at $237.50. Entry $205.10. Volatile week of trading as we adjusted our stop and letting it play out. Monday failed to clear the previous highs and watching how it responds to the balance of the week.
REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. The Federal Reserve has stepped in to stem most of the negative sentiment for now. The sector moved into a descending triangle pattern that broke lower this week… watching as the short side develops… SRS. Gapped up 5.3% on Monday as money flowed back into the sector on hope… still challenges here. Tested on Tuesday.
Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.64% down from .68% last week. TLT is now in a trading range. Watching how this unfolds in the coming week. Monday yield jumped to 0.74% and pushed the bond lower. Watching how this unfolds. Tuesday hit 0.71%.
Crude oil (USO) Crude moved to $29.52 this week and up from the $26.17 level last week. A solid upside move for the week and we have adjusted our stop accordingly. Plenty of news and speculation about the outlook from the analyst. If you take a long term view there will be upside in crude. I like the long-term holding with entry at $13.81 and a two-year target of $45. Trading opportunities as well in the commodity. Crude runs higher on hope… back above $30 level. Watching and managing our stops on positions. $31.96 on Tuesday.
Gold (GLD) The metal moved to a high of $163.93 this week as money rotates into the metal. Watching how this unfolds going forward and the China-US trade talks. Entry $158.95. Stop $158.90. Reverses on stock optimism… watching. Back to the highs on Tuesday.
Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from August. Established a bottom at the $30.67 mark and hitting resistance. Cleared $36.40 resistance and watching how this unfolds. Gapped higher my 4% as money looks for opportunity.
China (FXI/YANG) Downside accelerated on the coronavirus and has established a low near $34. Bounced and dealing with news and speculation. Closed above the$38.67 level of resistance and watching the previous highs. Gapped higher my 4% as money looks for opportunity.
(The notes above are posted every weekend and updated daily Bold Italics)
DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT
TUESDAY’s Scans for May 19th: Day of consolidation and some testing for the leaders. Semiconductors made a solid move higher only to close in negative territory at the end of the day. Watching how the balance of the wee unfolds will plenty of issues on the table. The focus shifted to a vaccine on Monday and some negative analyst questions on the validity impacted the afternoon trading. This will be constant until something is found relative to the virus. Taking it for what it is a reason to take some profits and an opportunity to see what lies ahead.
- Crude Oil (USO/USL) climbed another one percent near the $32 mark. Wouldn’t be surprised to see some consolidation at this level near term.
- Gold (GLD) back t the highs. Gold Miners (GDX) up 3.5% and building on the uptrend. Adjusted stops on positions. SIL/SLV uptrends remain in play as well.
- Financials (XLF) downside back with a 2.4% move lower. Still in a range and watching how this unfolds. KRE gave back 4.3% of the upside move from Monday.
- Biotech (IBB) showing a topping pattern on the chart and something to watch near term.
- Solar (TAN) resuming uptrend and positive gain last two days.
MONDAY’s Scans for May 18th: Vaccine and Fed lead stocks higher to start the week as investors were willing to add risk to their portfolios. I have on my desk a simple note… “Markets can remain irrational longer than you can remain solvent going against the trend.” Nothing makes sense, but then over the short term when does it ever really make sense. FOMO is fully in play and we will ride the wave and manage the risk. One concern to voice from Monday’s activity… the leaders gapped higher but failed to hold it as they faded from the open. The weaker sectors showed hope…
- Energy (XLE) solid upside on the day and back to the previous highs. The move higher in crude is helping as oil moves to $31. Managing our stops and letting this run.
- Gaps higher from laggards… XLI, IYR, XLF, KRE, ITB all produced solid moves… now they need to follow through on the upside.
- Utilities (XLU) reversed the downtrend and needs to follow through.
- China (FXI) and Emerging Markets (EEM) moved back to previous highs and need to follow through.
- Homebuilders (ITB/NAIL) solid move higher in the gradual uptrend off the lows.
FRIDAY’s Scans for May 15th: positive day overall with money moving as it deemed best. SOXX fell on US/China Huawei issues. Crude moved higher with demand rising in China. Worries remain about the coronavirus and states make political decisions more than logical ones. The economic picture is ugly as many analysts now looking to the fourth quarter for growth to resume. Taking one day at a time and exercising patience as this all unfolds.
- Crude Oil (USL/USO) solid upside for the day as well as the week. Adjusting our stop and remained focus on the longer-term view. Gasoline (UGA) looking positive as well on the upside.
- Financials (XLF/FAZ) remained below the support of $21.32 and offering some short side trade opportunities.
- Biotech (IBB) solid bounce at support and letting this unfold as well with a long term view.
- Silver (SIL) solid break higher for the miners and the metal (SLV). Gold (GLD) same upside move and looking positive near term. Gold Miners (GDX) solid upside as well.
- Natural Gas (DGAZ) leader on the week as the downside trade unfolds yielding nice gains.
THURSDAY’s Scans for May 14th: upside day on lower volume. Watching how options expiration impacts the leadership on Friday. The short side trade setups got a reprieve on Thursday and watching how they unfold as well. Financial bounced nicely off the lows. The new chatter about how long it will take to deal with Covid-19 is growing as many try to jump on the fear factor of the virus. You want to ask why, but you already know the answer… power and money. We can call it many other things to make it palatable, but the reality lies with both. Practicing patience on all fronts as we end the trading week.
- Financials (XLF) solid bounce but needs to follow through on the upside or this will give us a better entry for the downside trade.
- REITs (IYR/SRS) bounced off the lows and now watching how this unfolds with the downside still in play… my view.
- Crude Oil (USO/USL) upside on the day and look for a move above $28.40 level. This is a long term proposition. UGA made a solid upside move as well on the day.
- Small (IWM) & Midcap (IJH) both tested lower and bounced… watching the downside trade still as weakness remains.
- Gold (GLD) in position to break higher… watching the metal as it has been gaining strength of late.
WEDNESDAY’s Scans for May 13th: More downside movement as the talking heads hit the media with negative speculation on the economy and the virus. In America is it is easier to believe bad news than good news thus, the downside the last two days. We hit some stops on positions and watching how the near term unfolds. There are still positive patterns on the charts, but some are breaking near term support. How much of a test will we get at this level is still uncertain. Manage your risk accordingly.
- Midcaps (IJH) hit our stop on the position and locked in a solid gain, but the downside acceleration the last two days is worthy of note. Small caps (IWM) were even more pronounced on the downside.
- REITs (SRS) downside accelerated and added to the position.
- Financials (FAZ) added to the downside move and adjusted the stop.
- Natural Gas (DGAZ) accelerated the downside as well and adjusted our stop.
- S&P 500 Low Volatility (SPLV) broke support and showing some weakness in the broader index… watching how this unfolds 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 level offering upside trade opportunity. In a trading range after testing support. Cleared $52.50 resistance and watching.
- XLU – Utilities continue to struggle as the fell off the $61 highs and breaking the $55.24 support. Watching how this unfolds near term. with a downtrend established. Reversal of the downtrend? Watching.
- IYZ – Telecom moved to $28 and tested and broke support at $26.25. Watching how this unfolds… parts are better than the whole currently. Back above the $26.25 level…
- XLP – Consumer Staples cleared resistance at the $54.92 mark and offered short term trading opportunity. Stalled at the 200 DMA and tested support at $57.20 level. Reversal of the downtrend? Watching. Bad showing on Tuesday.
- XLI – Industrials remain in a consolidation pattern. Watching. Gapped higher still in trading range.
- XLE – Energy moved above the $31.20 entry-level as the bottom was established. The uptrend remains in play with a consolidation pattern emerging on the chart. Watching as diverging from oil prices. Back to the previous highs and in range.
- XLV – Healthcare moved above $88.50 level and offered upside opportunity. Letting it play out and adjusted our stops. Leadership role. Resistance at the $101 level showing consolidation. Failed to hold the break above the previous highs?
- XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently and watching how it unfolds adjusting the stop. Moved back to the previous highs.
- XLF – Financials broke below $21.30 support and setting up a short side trade based on the technical data. Watching as this unfolds next week. Solid bounce off the lows? Watching for reversal or follow through? Bad action on Tuesday…
- XLY – Consumer Discretionary in a trading range and watching. Broke to new high showing some leadership.
- IYR – REITs broke lower below $71.30 support. Short side trade setup and watching how next week unfolds. Reversed the downtrend? Watching.
The trends have worked into consolidation patterns and uptrends as we experience less volatility and more trading. We took the entries based on our defined strategies and managing the risk accordingly. Using the six-month charts as an indicator for the short term view… Two sectors are in confirmed uptrends. Four are consolidation patterns, and four are in downtrends. The result for SPY is consolidation pattern short term with a negative bias. The leadership is lacking as plenty of questions developing on the charts.
(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.)
Tuesday: Some testing of the move on Monday as some take profits and others look for opportunities… we always do both as the market presents them. Financials were most notable on the downside move along with energy. Plenty of opportunities along with challenges facing investors daily. We have to remain diligent to manage our risk and keep a shorter-term perspective than normal.
Monday: Fed and vaccine… make for a positive day on Wall Street. You take what the market gives and watch how it responds. We saw the laggards gap off the lows. We saw some renewed hope for sectors. We saw leaders gap higher and fail to hold the move. Signs of profit-taking from leadership worthy of attention. For now, you take what is given and manage the risk. Avoid the talking heads and the nonsense that is pontificated in the media. Focus on what is true, what is perceived to be true, the trend, and the Fed. Good day overall and watching how the balance of the week unfolds.
Weekend Wrap & Outlook… The coronavirus remains center stage as the number of cases continues to flatten and more states have started to reopen businesses. The lastest how this has turned into a political issue more than a medical one. The medical side is the pawn in the chess game Washington, states, and municipalities are playing. This presents opportunities and expectations from stocks and the economic picture. There is no lack of question marks for the markets moving forward as money is rotating again and some moving to the sidelines. The jobless claims added another 2.9 million people to unemployment. Retail sales fell 16.8% in April and the data is showing how deep the impact is from the shutdown due to the coronavirus. We are not likely through the worst of it as the reopening process is slowly progressing. The VIX index climbed to 31.6 as some anxiety creeps back into the markets. We were presented with short term opportunities and put some money to work over the last few months. Our job remains to manage the risk accordingly. We hit stops on several sectors and have added to others as money rotates. The rotation is showing up on the charts as more sectors shift into downtrends over the last three weeks. Healthcare, energy, and technology are the leaders currently. Gold has moved to new highs for the week. Crude oil has bounced off the lows showing some signs of life as demand rises in China. Earnings have been somewhat positive for the markets, but the focus is starting to turn to the future outlook for growth and how long it will take to see a reversal. Many analysts are now saying the fourth quarter. All said the goal is 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. Remember fear and speculation create opportunities. Watch the trend, know which side the Fed is on (they keep telling you almost 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. 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.