Indicies flip to positive

Market Outlook for May 15th

Thursday the buyers showed up, albeit in lower volume, but show up they did. Most posted at least a one percent gain as the indexes fought off some negative news from the Fed chair, more talk of corona expanding again in the fall, jobless numbers that were worse than expected, and WHO said it could be five years before the virus is under control… not exactly great stories for the markets. On the positive side, if we want to look at it that way, the Fed was reported as buying more than $300 million in bond ETFs to maintain liquidity in the credit markets. In turn, the financial sector bounced back from selling and offered some signs of life. Friday is options expiration and it could give some help relative to direction and leadership… keeping our eyes open for the opportunities and managing the risk that comes with the current environment.

In The News:

Uber’s offer to buy Grubhub causes some worries… Uber runs Uber Eats… thus, some worries from the restaurant sector over the commissions charged by these companies. It is a battle of fees as usual… up to 30% commission is charged to small restaurants while large chains like McDonald’s get charged much less. The reality is the merger would give Uber Eats nearly a 50% market share… that is a concern for the industry as competition would be challenged to become profitable. Definitely something to watch as this unfolds.

Unemployment continues to rise as weekly jobless claims rise again… The US labor market continues to shrink with 2.98 million new claims applied for the week ending May 9th. Expectations were for 2.5 million. This puts the latest numbers at 36.5 million people have filed for unemployment! Remember my view on all of this… productivity is going be reduced as factories and other industries don’t reopen at full capacity. Too many rules impacting this. The latest was Disney’s negotiations with unions on measures to be taken to allow workers to return.

It doesn’t make sense: The REIT (Real Estate Investment Trust) sector fell 9% the last two days and broke key support levels. Why? There are many reasons but one specific train of thought we want to follow… Twitter CEO Jack Dorsey wrote an email to all employees that the company would allow almost everyone to work from home permanently. He further explained that this was a course that Twitter was working towards before the pandemic and it only served to accelerate the plans. Now take that impact to the real estate market and look at Google, Facebook, Apple, and other large corporations looking at doing more ‘work from home’ for employees. Analysts are drawing the conclusion that the commercial real estate market will suffer going forward. I don’t disagree with that conclusion, but it will not happen over the next quarter. It may take several years for the current leases to run down and by then who knows what the economy or marketplace will have in store. Thus, rushing out and selling your real estate or REITs is not prudent. In fact, we have the opportunity to trade the downside with SRS and we have the opportunity to trade the upside with many choices. Don’t overreact to what you think to be true looking forward act on what others are overreacting to and follow the money… it always knows.

Dems unveil massive stimulus plan for $3 trillion… this one is going to hurt… 1 trillion dollars in state and local aide! More money for everyone $1200-$6000 per household. $200 billion for hazard pay for essential workers. $75 billion for coronavirus testing and contact tracing (really… that’s all for the cause of the economic collapse?) Extension of the $600 Federal unemployment set to expire in July… really we aren’t even sure if people are going back to work yet? It is MAY! $175 billion in rent, utility, and mortgage assistance. Money for Supplemental Nutrition Assistance Program.. (NO COMMENT!) Subsidies for the Affordable Care Act. $10 billion for small businesses to keep employees on the payroll… slap in the face to small business seeing how state get $1 trillion… money for election safety relative to voting by mail… and of course money for the US Postal Service. The House could vote as soon as Thursday… Don’t expect it to pass the Senate as the Republicans are not on board with this bill… yet.

Economic News… 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. 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 up 32.5 points to 2852. It was up 1.1% for the day. The index held support at the 2820 level after failing to break through 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… Thursday nine of the eleven sectors closed in positive territory with financials and consumer discretionary leading the upside. The VIX index moved to 32.6 on the day showing investor anxiety declining. Watching how the consolidation pattern unfolds as it fails again at the previous highs.

The NASDAQ index closed up 80.5points at 8943. The index held above the 20 DMA gaining 0.9% for the day. The close held below the 8972 support level remaining in negative territory for the year. The NASDAQ 100 index (QQQ) was up 1.1% for the day and testing the move higher. The $218 level is the stop for now and watching how it unfolds near term. Semiconductors (SOXX) closed up 2.6% as it tests the 200 DMA support and moved back above the $232 support. Technology (XLK) was up 1.2% moving above the 10 DMA. Testing 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 and now moving back towards the previous highs and needs to find some momentum. A solid day to end the week and watching how this unfolds next week. Resistance at $133.32 and tested down 3.6%. Wednesday tested down 3.3% hitting stops on the day. Found support at $117.40 on Thursday and bounced.

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. Mr. Buffet didn’t help with his announcement of selling all his airline stock. A retest of support at the $139 level and bounced. $153.17 is level to clear. Tuesday down 2.8% and remains in a trading range. Down 2.1% on Wednesday breaking lower from the trading range. Trying to find support?

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.

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 27.5 level. The move below 31 is significant for the index and signifies some calm is being restored to the markets. Watching how this unfolds going forward. Support at 27.5 tested and moved to 33 on Tuesday showing some anxiety. Moved to 35.2 on Wednesday and back to 32.6 on Thursday. Watching how VXX unfolds.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector remains volatile with a solid week of gains to respond to last week’s selling. Next is to clear the recent highs to keep the upside trend in play. Stop at $157.52. Entry $145.50. Resistance at $167.81 tested lower down 3.6% on Tuesday. Added 3.4% to the downside and breaks support hitting exit point.

Biotech (IBB) The sector tested the $121.70 support and moved back to the previous highs… watching for a breakout from the consolidation range. Lower volume has been a concern but raising the stops on holdings. Solid break higher gaining 4.2% and clearing the July 2015 highs. Tested down 2.1% on Tuesday and watching. Added 1.1% to the downside on Wednesday. Tested $149.76 support and bounced on Thursday.

Semiconductors (SOXX) The sector tested support at the $223 mark and moved up five straight days. The next hurdle is the $243.50 level. Watching how the new week unfolds follow the test and bounce. Down 2.6% on Tuesday $232.68 is support. Held support and bounced on Thursday.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $237.50. Entry $205.10. Solid five days on the upside for the week to recover from last weeks selling. Adjusted our stop and letting it play out. Added 1.4% to the uptrend on Monday. Fell 2.4% on Tuesday to test the move. Added 2% to the downside on Wednesday. Bounced on Thursday.

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 has moved into a descending triangle pattern. Looking for some conviction… either direction. Broke support at $71.31 and opened the door for short side trade. Confirmed the downside trade on Wednesday with a 2.3% loss. Tested $66.30 and bounce on Thursday.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.68% up from .64% last week. TLT hit resistance at $170.35 and hit our stop at $167.50. Watching how this unfolds near term. No real upside in yields seen currently. Yield climbs to 0.72% on Monday. Moved to 0.67% on Tuesday with some selling in stocks… bonds ready to rally? 0.65% on Wednesday as money is rotating to bonds for now. 0.61% on Thursday more bond-buying?

Crude oil (USO) Crude moved to $26.17 this week and up from the $19.68 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 falls 4% on worries about the return of coronavirus. Rose 4.9% on Tuesday… consolidating at the current highs. Thursday tried to break above resistance at $28. Solid upside move and managing the risk.

Gold (GLD) The metal moved to a high of $163 and then reversed to test support at the $158 level. Holding near the highs and in a trading range. Watching how this unfolds going forward and the China-US trade talks. Remains in the consolidation pattern and moving to the top end of the range. Broke higher form the triangle pattern… need to clear April highs.

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.

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.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

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.

TUESDAY Scans for May 12th: Reversal day? Sectors are hitting against resistance at previous highs and testing the upside momentum. The NASDAQ reversed from the positive trend on Tuesday and the S&P failed at the April highs again. Watching how this all unfolds looking forward and what course of action we need to take relative to the patterns on the charts. We have adjusted our stops and watching how the days unfold.

  • S&P 500 Index (SPY/SPXS) reversal at the previous high is negative. Watching how this unfolds and what opportunity if any it offers.
  • REITs (IYR/SRS) broke support at the $71.31 level and downside trade needs to confirm.
  • Financials (XLF/FAZ) breaking from the trading range on the downside? Watching as the short side trade sets up.
  • Treasury Bonds (TLT) Holding near the 50 DMA and watching for upside move if money starts to rotate again.
  • Natural Gas (UNG/DGAZ) downside entry hit as commodity price is heading lower again.

MONDAY’s Scans for May 11th: Mixed day for stocks without much on the docket relative to change. Crude moved lower as fear of a second wave of coronavirus hits the news. Biotech breaks higher gaining more than 4%. Financials continue to struggle and it was a day of juggling overall. No real breaks in major indices as we look for a follow-through upside.

  • Biotech (IBB) new highs and new hope in the sector. Adjusted our stops. Healthcare (XLV) and pharma (XPH) moved higher as well.
  • Financials (XLF) testing support in the lower end of the trading range.
  • Volatility Index (VXX) remains in a correction phase.
  • Cloud Computing (SKYY) adding to the upside leadership in the technology sector. Software (IGV) adding upside as well.

FRIDAY’s Scans for May 8th: Solid upside for stocks at the debate rages on about valuations and the economic outlook for stocks. My view is to take what the market offers and keep moving forward with your stops adjusted to account for the risk.

  • Technology (XLK) remains the bright spot for the markets as it remains the leader.
  • Healthcare (XLV) a benefactor of the money from the CARES act to help find a cure for the virus remains a positive for the markets overall.
  • Energy (XLE) crude has bounced off the lows and remains somewhat steady at the $25 mark. Watching how this sector unfolds moving forward.
  • Treasury Bonds (TLT/TBT) coming under pressure as the yield start to creep higher. Watching the downside play for bonds.
  • NASDAQ 100 (QQQ) leadership remains in place for the sector and watching how it 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. A solid move higher for the week and looking at the previous highs. Negative move to support on Wednesday. Bounced on Thursday…
  • XLU – Utilities continue to struggle moving off the $61 highs and testing the $55.24 support. Watching how this unfolds near term. Moved to support and in position to break lower. Bounced on Thursday…
  • IYZ – Telecom moved to $28 and tested support at $26.25 and remains in a trading range. Watching how this unfolds… parts are better than the whole currently. Moved lower in the trading range and broke support at the $26.25 mark.
  • 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. Broke below $57.20 support on Wednesday.
  • XLI – Industrials remain in a consolidation pattern. with $65 level to clear on the upside. Watching. Moved to the bottom of the trading range and broke support on Wednesday. Bounced on Thursday…
  • XLE – Energy moved above the $31.20 entry-level as the bottom was established. The uptrend remains in play with plenty of testing along the way. $38.90 level to clear to break through resistance. Selling showing up in the chart.
  • 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. Solid upside added with biotech rising to new highs. Resistance in play at the $101 mark and testing support at the lower end of the range.
  • 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. Leadership remains strong but testing the last two days. Bounced on Thursday…
  • XLF – Financials remain in a consolidation pattern as the outlook for stocks remains questionable. $23.50 level to clear on the upside. Testing support again. Short side trade taken. Bounced on Thursday…
  • XLY – Consumer Discretionary tested the 20 DMA and bounced back to the previous highs. In good shape to continue the current leg higher. In a trading range. Bounced on Thursday…
  • IYR – REITs have worked into a consolidation pattern with the support at $71.31 holding for now. Watching how this unfolds with plenty of concerns around the commercial real estate sector. Short side trade with break of support on Tuesday. Added to the downside move. Bounced on Thursday…

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… Four sectors are in confirmed uptrends and seven are in consolidation patterns. The result for SPY is consolidation pattern short term. The strong leadership is helping overall, but 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.)

FINAL NOTES:

Thursday: upside on lower volume helped calm some nerves, but the reality is still looming… what is happening with the economy and fear building over the virus. If we can keep the fear going it will allow the government to dump money into the economy and justify the existence. The hope is for things to start improving with workers returning and economic engine revving up. It sounds more like a car trying to start on a winter morning. Patience as we head towards the weekend and expiration Friday.

Wednesday: more downside as the talking heads take the confidence out of the markets the last few days. Watching as this unfolds. There is always plenty to be concerned about, but when the talking heads get the attention of investors the emotions run higher (VIX) and the markets test the move… the big question is how high to emotions run (VIX), and how big is the test on the downside. Time will answer, we have to manage the risk that is in the current environment.

Tuesday: the downside close put some sectors in a position to correct or test the downside. Others gave up solid gains from Monday and the nerves of investors are showing up again in the volatility index. All that negative said, we still have to let it unfold on the charts and take what the markets offer. There are set up defined on the downside. There are tests of the uptrends. But, at the end of the day we follow what happens, we don’t speculate on the outcome. Stay focused and disciplined with your money.

Monday: consolidation day from my view as some indexes struggle at resistance points. Watching how they unfold as the week progresses and the data continues to unfold. Biotech breaks to new highs and technology continue to provide leadership. Patience and risk management remain the name of the game.

Weekend Wrap & Outlook… The coronavirus remains center stage as the number of cases continues to flatten and more states have started to reopen businesses. This presents opportunities and expectations from stocks and the economic picture. There is no lack of question marks for the markets moving forward, but for now, investors are willing to put money to work. The jobs report on Friday was dismal as expected with 20.5 million jobs lost in the month of April. Unemployment jumped to 14.7% and average hourly earnings rose 4.7%. Despite the ugly news stocks rose higher on Friday and for the week. The major sectors ended the week all in positive territory. The optimism about reopening the country for business is helping, but it is being weighed against future damage. The VIX index fell to support at 27.5 and shows some lower anxiety from investors. 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. There is some testing in play, but the bounce back this week started a new leg higher. Healthcare, energy, and technology are the leaders currently. Gold has moved to near term highs and stalled. Crude oil has bounced off the lows showing some signs of life. 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. 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.