Investors react to interest rates moving higher

OUTLOOK: February 1st

Treasury yields move to the highest level in four years at 2.77%. The impact to the market was one of worry… and the worry is justified as higher rates will slow the economic engine as more money goes to debt versus consumer spending. Couple that with the dollar heading lower still and you get an interesting dynamic for the economy. This does not happen overnight, but over time it does have a negative impact. Stocks were lower again on above-average volume and the leaders were the sector that benefits from the above worries… financials and energy. The Volatility index slowed to 13.4 as anxiety remains, but didn’t climb on the day despite the data points and selling.  Overall the day was seen as negative, but I would say it was more of indecision from investors of how to deal with the news and data affecting stocks longer term. The belief will develop over time, for now, it is more juggling for short-term movement. If the belief of what impacts higher interest rates combined with a weaker dollar happens, the downside will become a trend. In turn that will create new opportunities, we will take advantage of. Don’t forget the jobs report is out this morning.

Thursday the downside returned with interest sensitive stocks responding to the action of interest rates rising and the dollar declining again. There were seven sectors on the negative side with utilities (XLU) and REITs (RWR) leading the day. The yields moved slightly higher, but enough to cause some consternation for investors. The upside came from financials (XLF) and energy (XLE) both benefactors of the cause of the worries. Scanning the charts we now see a break in the first level of support for both materials and consumer staples. The moves are important to the psyche as well as the trend of the markets and will watch how this unfolds day to day. The VIX index moved down to 13.4 but the selling was present again on Wednesday. I continue to evaluate positions based on the activity and outlook. Manage your stops relative to the current risk. I equally am caution as it relates to adding new positions and being patient. We will always take what the market gives and exercise discipline in executing our trading strategies. The news is reactionary, beliefs are trend building… watching what belief rises out of the news and short-term activity.

The S&P 500 index closed down 1.8 points at 2821 and remained below the 10 DMA. The uptrend remains in control of the index for now. I believe the chart remains extended on the upside and a test or pullback is justified before moving higher. I also know what I think only matters to me, not the market. A test or pullback from the highs is normal… we will look to see if the validation for the move is trend building on the downside. Equally important is to understand statistically speaking markets fall faster than they rise by a ratio of nearly three-to-one. The index is still extended above the 200 DMA by more than 300 points and adjusted 50 points on the current selling. The biggest movers in the index were ORVO (gap higher from the trading range), EBAY (bottom reversal in December gapped higher), SWKS (gap higher off current low), ETN (gapped upside in the current uptrend), and T (moved higher from consolidation pattern). Some rotation in the leadership as news again leads the day. The downside came from PYPL, TSCO, UPS, HSY, and CDNS. The weakness in utilities and REITs are impacting the downside move for the index. Watching how the news merry-go-round unfolds with earnings in full swing and talk of profit taking is the buzz. The leadership for the last thirty days has come from consumer discretionary, financials, and energy… getting some rotation of late with technology, telecom, and consumer discretionary leading over the last ten days.

Gold (GLD) gapped lower to support at $127.25 held and bounced back on Wednesday and Thursday. There is some indecision in the metal near term, but holding above our stop. The dollar (UUP) worries abound relative to the buck and remains near the current lows. No signs or talk of this changing anytime soon. Crude oil (USO) moved back to the previous highs after a small test lower. The dollar is helping. The emerging markets (EEM) move lower in reaction the activity in the US markets… watching the 20 DMA and $49.15 as support. The Volatility Index (VIX) settled to 13.4 as some anxiety levels calm on Wednesday. There is plenty on the table relative to dynamics and agendas from the government, traders and investors alike, but the data points remain the key to what trends develop looking forward. Today is the jobs report as January data starts for a state of the economic picture. The key is to remain disciplined within your trading strategy and not let the anxiety of the situation change your mind. There is nothing wrong with banking gains. The goal is to manage money, not markets. Manage your risk and stay focused on the horizon, not the rear-view mirror.

(The notes above are posted daily based on the activity of the previous days trading)

KEY, INDICATORS/SECTORS TO WATCH:

Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare. There is no clear resolution to that issue and that has now led to money rotating to where is it has better opportunities and clarity. The downside broke support at the $103.65 level only to recover. The up and downs movement comes from the challenges and a lack of clarity about Washington more than anything at this point. Bottom reversal started, made move to resistance at $107 level, and broke higher. Entry $107, Stop $112.02 (adjusted). Solid upside trend short term. Selling all week and watching how it unfolds

REITs (IYR) The sector broke the $79 level of support and continued lower. The rise in interest rates continue to worry investors and in turn, the selling has expanded. Entry at $75.75. Stop $76.25 (adjusted). SRS hedge entry $30.25. Stop $30 (adjusted) we added to protect our principle short term. Bounce is fading and retesting the lows with yields moving higher on the ten-year treasury as bottom continues to build. 

Treasury yields (TNX) moved to 2.66% last week as the worries return on the weaker dollar dropping to the September lows. The lack of commitment from the Fed and Washington’s wanting a weaker currency isn’t helping. Watching how this unfolds, but for now, rates have moved higher and the short side of the bond remains the trade with worries of yields rising further. TMV holding entry $18.50, stop $18. 2.77% hit on Thursday and global yields are rising as well… this is putting some news driven pressure on global and emerging market stocks. Watching how this worry unfolds relative to the reality of the move in rates. FOMC meeting was seen more as hawkish… in short bonds are starting to impact stock prices near term. 

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility of the trend is speculation and news driving money. The selling speculation on the rumors of the Fed hiking interest rates broke the $120.45 support. On the decision prices moved higher???? Yes, higher. The “worries” about the dollar and the outlook for growth has money rotating on speculation… regardless taking what the market offers. Entry $120.70, Stop $125.30 (adjusted). Long term view is positive and the short-term boost from the weak dollar is helping the commodity. Testing lower, but found support and bounced back to the uptrend. Manage your risk accordingly. 

Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but speculation about the dollar is impacting the price near term. The last three months the commodity has managed to fight its way back above the $50, $52.50, $57.50, and now $61.60 levels of resistance and confirm an uptrend off the June low. Entry $50.20, Stop $60 (adjusted). The price accelerated on a weaker dollar and remains in the uptrend… let it unfold and manage your risk.  Crude dropped 1.6% on Tuesday, but Thursday bounced back near the highs and remains in an uptrend.   

Energy stocks (XLE) continues the stair step upside off the August lows and the double bottom pattern clearing $63.22 for entry and a stop at $72 (adjusted). Investors reacted to the decline in price and found support at the $67 mark. With the bounce in price, the stocks are again responding on the upside… A nice break above $72 as money flow shows faith in price. This gave the opportunity to add to positions or trade the move with ERX $32.30 entry, $37 stop (adjusted). Uptrend remains with crude moving higher on higher money flow. Move lower to start the week with double top pattern breaking. Sold half of the position at $39.70 and stops in place on balance of the position. Nice bounce on Thursday to hold the 30 DMA.

Volatility Index (VIX) The mixed week for stocks pushed the index above 12 intraweek and closed at 11 on Friday. The worries are building, but stocks continue to rise. Watching how this unfolds moving into the new week of trading. Held at 13.4 as the nerves calm and selling continue. 

The S&P 500 index closed the week at new highs and posted a positive return for the week gaining 2.2% and it up 7.4% for the year. The drivers last week were consumer discretionary and healthcare as both broke higher on the optimism. All the moving averages are positive and volume was average with the belief that stocks are still affordable. There is plenty to ponder as we start the new week… not the least of which is the heart of earnings season. The question to ask, how low will the dollar fall? How will earnings impact the current leg higher? Will interest rates move to 3%? Will inflation raise its head to disrupt the uptrend? We remain on guard about how the buck will impact the inflation picture as well as commodity prices. Remember rising commodities impact inflation relative to spending and discretionary dollars from consumers. Overall we are still cautious about the direction looking forward. Small caps finally made an upside move to show some risk appetite but failed to make progress this week. Patience is required with this market overall as news leads the parade. Economic data remains mellow to start the year. Plenty of talk on the table concerning inflation as interest rates move higher. We watch as the market and investors settle into the new year.  Closed below the 10-day moving average and watching how it responds to the downside move. NASDAQ showing some topping on the chart. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Daily Scan Results: 

THURSDAY’s Scans 2/1: Not a great start for the month as money starts to rotate. Interest rates rise which in turn pushes bonds lower, crude oil higher along with other commodities, and the dollar remains on the weak side. Number one question I am getting is… do we sell our positions? Second, do we short the market? Both legitimate questions, but both answers ask for speculation and I am not a fortune teller or speculator… let the trends unfold and take the opportunities presented.

  • REITs (RWR/SRS) moved lower on the day in response to rates and the short side setup is in place. We added SRS as a hedge to our positions at $30.50. If it moves above $32.50 we will adjust by adding to our short position and selling our long position to be net short in the sector.
  • Natural Gas (UNG/DGAZ) selling continues and the short side trade is setting up at $24.50. The negative sentiment over the outlook for the economy impacting, but the inventory data is moving the commodity short term.
  • Treasury Bonds (TLT/TMV) short side trade confirms the move above $19.25 and clears the October highs. Adjust your stops to $18.70 and let this play out for now.
  • China (FXI/YANG) uptrend showing fatigue. Watching what transpires near term. Casino news impacting the stocks, but the emerging markets are getting nervous about rates and economic growth. EDZ was higher on the action Thursday.
  • Some short ETFs to watch in the coming days… SQQQ, SMN, SRS, EDZ, YANG, DGAZ, SOXS, and TMV.
  • Other sector charts to watch… UCO, LBJ, OIH, IAI, EWW, ULE, KRE, KBE, SOCL, and DBC.

Watch and act based on a defined strategy… don’t react based on emotions.

WEDNESDAY’s Scans 1/31: January comes to a close and there was plenty to celebrate despite the closing three days of the month. I am still watching the reaction to the State of the Union, FOMC, and interest rates. Earnings are still in play as well with reports coming from the large-cap stocks that have been leading the charge higher. Charts are holding up and the upside is still the trend. Patience is the key along with a clearly defined strategy of how to approach the current market environment.

  • REITs (IYR/URE) building a bottoming pattern as interest rates rise. Did the FOMC make the Fed more positive on rates? The sector responded in that manner on Wednesday and it has my attention. Looking for a follow through the bounce off support.
  • Utilities (XLU/UPW) bottoming pattern has moved to the breakout level $51.12. Good volume on the move higher and watching how interest rate story unfolds. Willing to add a position if this makes a follow-through move.
  • Healthcare (XLV/IBB) the sector is subject to speculation, rumors, and fear. Not a good place to if you are an emotional trader. The downside remained in play on Wednesday and watching how this unfolds and what opportunities it brings. LABD bottoming pattern is on my watchlist… $3.40 level of interest.
  • Natural Gas (UNG/DGAZ) drops on data and watching how that unfolds following the strong upside move. Hit stops at $25.50.
  • Semiconductors (SOXX/SOXL) holding in a consolidation pattern currently and is one of the keys looking forward. Scanning the stocks shows some positives with QRVO up after-hours on earnings, AMD rallied on earnings, MU, BRKS, and ON in good setups, QUIK still in positive trend, and MCHP in holding pattern… all still in position to rise.

There is plenty happening in and around the markets. We have to be patient and let them unfolds. Take what it gives and keep our focus on what beliefs are driving the trends both short and long-term.

TUESDAY’s Scans 1/30: Another negative day of trading as money rotates based on speculation and news. Some money coming out of the market as profits are booked. Large-cap stocks were the hardest hit, but they also had the biggest gains. Managing our stops, looking for the truth in the moves, and looking for the resulting opportunities.

  • Short side ETFs – they were the biggest movers the last two days. Plenty of emails about buying them currently. You can always trade speculation in markets as they create changes in charts, but they also come with the higher risk probability and that is not my strategy for managing money. My view… let this unfolds further and then take the positions when there is clarity and measurable risk. DRIP, ERY, SOXS, YANG, SCO, TECS, and DUST are the ones on my radar following Tuesday’s move.
  • Energy (XLE/ERY) downside move is worthy of attention. Cleared $7.62 entry level for bottom reversal trade. Speculative at best based on the news. If this holds the move above $7.62 worth trading with a stop at $7.38… measurable risk, and target of $8.86… measurable reward… strategy defined.
  • Healthcare (XLV) downside move of two percent. Closed on the 10 DMA. $88.06 level to break on the downside to interest me in the short side trade. Watching biotech (IBB) as well as this unfolds. The news impacts the providers (IHF) and watching how that unfolds as well.
  • Financials (XLF) some downside and below the 1o DMA. The uptrend is in place and the sector has been a benefactor of the move in rates and optimism towards the economic picture. $28.50 level to watch on the downside. KIE is where the risk resides in the sector based on the current news.
  • Treasury Bonds (TLT/TMV) short side continues to gain momentum and confirms the move above $19.25. Added to our position at $19.60 with a stop at $18.90.

Plenty to watch, avoid the speculation, focus on the horizon, and measure the outcome on the charts. Takeing it as always… one day at a time.

MONDAY’s Scans 1/29: Negative day to start the week and we will watch as one day does not a trend make.

  • VIX index (VXX/UVXY) gap higher, but it corresponded to the selling. This is normal… watching for the VIX to remain elevated when stocks rise as a negative sign for stocks. SVXY could test $115 and bounce? Watching what opportunities arise from the current movement. UVXY cleared resistance at $10 and watching.
  • Energy (XLE/ERX) the downside was worthy of attention on Monday. Topping pattern in play and if the sentiment shifts in the sector the downside could accelerate. Crude would need to turn negative and it doesn’t currently show any signs of that.
  • S&P 500 Index (SPY/SPXL) the index is extended. The 200 DMA is at 2523. The index closed at 2853… big gap on the current surge higher since November. All I am saying is technically the market is extended. Earnings for some of the key players MSFT, AMZN, GOOG, and others are coming soon… they will likely set the tone for what is ahead short term.
  • Treasury Bonds (TLT/TMV) yields moved to 2.75% and the move above $19.25 on short ETF keeps the short trade in play and hits next entry for the ETF.
  • Wheat (WEAT) upside building some momentum on the bottom reversal pattern. Hit entry at $6.12 last week and nice follow through on Monday. JJG is breaking higher as well. SOYB has been positive off the January lows. Commodities are benefitting from the buck and watching.

Interesting day for the markets and it brings with it plenty of speculation. We will watch to see how this unfolds and what the opportunities are that come along with the activity. Downside on the day was present, but it will take more than that to shift the momentum tide. Caution and patience as we watch for the leadership to unfold on earnings.

FRIDAY’s Scans 1/26: Positive trading day to end a positive week for stocks despite the up and down activity on below-average volume. There was plenty to ponder and there is plenty to watch as we move to the next week of trading. The consumer continues to lead the upside along with financials and healthcare. Interest sensitive stocks struggle and commodities found near-term resistance… letting this unfold one day at a time.

  • Semiconductors (SOXX/SOXL) bounced back gaining most of the losses back as the sector finds support ($167.45). This was positive for technology and the NASDAQ going forward. Holding our positions with our stop at the $165 mark.
  • Healthcare (XLV/CURE) the sector has gone vertical as the optimism returns to biotech (IBB) and healthcare providers (IHF). Closed at another new high with the gap on Friday. Stop adjusted to $57.
  • Emerging Markets (EEM/EDC) upside accelerated again this week after modest test of the upside move. Entry $120, stop $152 (adjusted). A weak dollar and money rotation helping the upside move.
  • Brazil (EWZ/BRZU) upside accelerated again after testing early in the week. The upside accelerated past the September highs and shows little sign of slowing down. The entry $$39.35, stop $54 (adjusted).
  • China (FXI/YINN) upside continues the vertical move with positive gains all week. We adjusted our stop to $46.50 on the move and watching how it unfolds. Entry $33.60, Stop $46.50 (Adjusted).
  • Natural Gas (UNG/UGAZ) cleared $82.30 entry and has followed through this week. The move on Friday helped as we face some resistance at the $102 level. Stop $85 (adjusted).

The market looks poised for more upside near term as money rotates based on the current outlook. Watching the data as we start the new week. The key is patience and observation of how the belief factor unfolds moving forward. Current belief is plenty more upside on hopes of positive earnings season. Take what the market gives but focus on the risk of positions and don’t be afraid to take profit on part of the positions as reach reasonable targets.

The upside leadership trailing ten days:

  • Natural Gas (UNG/UGAZ) made move on the upside following test at $60. Needs to accelerate through the $82.30 resistance. $112 target for the move.
  • Healthcare (XLV/CURE) the break above $49 is going vertical. Entry $49, Stop $54.40 – Biotech (IBB/LABU)
  • China (FXI/YINN) positive move higher in a vertical uptrend. Let it run and manage your stops.
  • Brazil (EWZ/BRZU) upside break and positive move on a weaker dollar.
  • Crude Oil (UCO/USO) upside remains in play on the move above $$27. Let it run nd raise stop to $25.50.

Risk management of positions and a disciplined strategy for any and all trades.

Watching:

  • Small Caps (IWM/TNA) solid upside move and holding break above $74… watching for leadership as a sign of risk on trading.
  • Mexico (EWW) Made the break above resistance we discussed and hit the entry $51.21, stop $51.21 (adjusted).  Resistance at $54.47 and looking for follow through on the move higher.
  • REITs (IYR/SRS) short side trade for the interest-sensitive sector. Break above the $31.55 entry and looking for more opportunity as the yields move higher.
  • Semiconductors (Above) looking to hold support at the $181.60 level and add to the upside move.
  • NASDAQ 100 (TQQQ/QQQ) upside accelerated and looking at leveraging the p0osition with a short-term trade.

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Sector Rotation: 

  • XLB – Materials continue the wave type pattern of rolling up and rolling down in an uptrend. The upside resumed in August and the positive wave has ensued. Cleared $58 and continues to hold near highs. Entry $54.75, Stop $61 (adjusted). Moved to new highs, climbing and adding to the upside. Moved above the congestion at $63.75. Break of support at $62.75. Watching and managing the risk. 
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed and a weaker dollar. Now that rates are pushing above 2.66% look for more pressure on the sector. Looking for support and the next opportunity as the fear evaporates and reality settles in. bounced off $50 support and looking to clear $51.10… willing to add a position if we clear the resistance. Downside remains in play as it retests the lows on selling Thursday.  
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Some buying? Some selling? Some consolidation. The bounce was positive and we added a position on the upside move… $28.55 entry. Stop break even $28.55. Stalled at the $29.50 level of resistance in a trading range the last eight weeks. Trading range remains. 
  • XLP – Consumer Staples remain in an uptrend and broke from the consolidation pattern offering another entry at $57.25. Entry $54.80, Stop $57.25 (adjusted). Break higher from the trading range and upside continuation. Moving back to the trading range and closed at the 20 DMA. 
  • XLI – Industrials moved higher and they accelerated to a flag pattern… stops in place as we look for a decision from the consolidation. The long-term uptrend remains in play. Stop at $77.50 (adjusted). Trading range. 
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. The cards have been dealt a straight with the climb higher as a result of the rise in crude oil. Entry $65.20 with a stop at $72 (adjusted). Let it run and manage the stops. Tested at the highs. Negative move to support and the a break of support $76.18. Sold 1/3 of position at $75.50. Bounced on the move in crude and keeping the uptrend in play. 
  • XLV – Healthcare has been a big roller coaster ride with a promise to reform healthcare and then the failure to follow through. The test of support at $81 bounced and followed through on the break higher. Entry $83.85, Stop $87.75 (adjusted). Money flow rose on the buying as biotech large caps (XBI) positive upside helping the sector. Watch the parts as well as the whole here… IHF, IHI, XBI, XPH. A vertical move higher with a gap up on Friday. Manage the risk of the move higher as it continues to move. Dumped lower on news. Watching how it unfolds. Modest bounce on Thursday, but still negative sentiment. 
  • XLK – Technology uptrend remains in place with some testing. Entry $48.50. Stop $63.75 (adjusted). Semiconductors (SOXX) created some angst last week with the selling to support but bounced on Friday. Watching how the parts unfold near term. SOXX, FDN, HACK, IGN, IGV, and SOCL. Moved lower and watching how it unfolds with SOXX in consolidation pattern as well. 
  • XLF – Financials remain in an uptrend as money flow remains positive in the sector. Moved above the $28.25 level adding upside and current trend. Entry $26.40, Stop $27.75. IAI and KRE also worth trading as they lead the sector higher. Earnings were positive, dividend increases helped, stock buybacks and optimism driving… manage the risk. Upside benefactor to interest rate moves. 
  • XLY – Consumer Discretionary has been a key leader since the November move higher. Entry $83.50. Stop $104 (adjusted). The clarity about the consumer is a challenge for investors, but the positive earnings and outlook are leading the stocks. The uptrend is in play. Watching how the retail (XRT) add to the move with flag pattern in play. Raised stop and watching how the sector reacts to the current highs. Topping and watching how this unfolds. 
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. The longer-term view clearly shows the trading range and the move near the December 2016 lows as support. We added the position last December (entry $91) on the move off the lows and continue to babysit the dividend of 4%. Moved back to the previous lows and breaks support. Stops in place ($87.50) and watching for the opportunity. Does the current bounce evolve into a bottom reversal? Retesting the lows… interest rate worries resume. 

Finished the week with the S&P 500 and NASDAQ indexes at new highs. The market environment is now being driven by the whole as 8 of 11 sectors are moving higher with many at new highs. As a result, the S&P 500 is at new highs. This activity has resulted in us taking some money off the table as it relates to specific positions. We keep some invested and let it run. Our stops are adjusted and our mindset is one of risk management as we look for the next opportunity. Some rotation into technology, healthcare, and consumer sectors as investors look for the best opportunity near term. Healthcare pushed to new highs this week on a positive continuation upside. Eight sectors are trending higher, two trending lower, and one moving sideways… broad range movement on the upside currently. We have to remain disciplined in our approach to investing our money. The goal is risk management as the story-lines continue to unfold.

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

Another week of upside for the markets with the angle of assent turning higher. Traders are driving the short term swings and opportunities with news as the catalyst and underlying strength the justification. The week was filled with questions, speculation, and buying overall. Volume was average with the selling on Wednesday slightly higher. The focus remains on the impact of the tax cuts, earnings, and interest rates. That has been enough to drive the markets higher and bring money into stocks. The speculation relative to the highs being to high continue, but for now the charts are showing no real signs of weakness or correction… that could all change on Monday, but for now, we see positive movement in the data and the charts. Our goal is to take the opportunities that meet our strategies and allow us to manage our money with the least amount of risk. The rationale for the current trading environment is more speculation and belief than fact. The economic reports remain mixed and allow speculation to remain in control. Earnings and retail sales for December have been positive helping the consumer sector. Positive employment data and raises all bode well for the economic picture going forward. Healthcare is running higher with the removal of mandatory purchasing seen as a positive? That is definitely worth watching going forward. Since the market trades looking forward and evaluates based on past data investors have been buying in advance of the reality and hoping the data will confirm the belief. That is why we manage positions with stops daily. There is still plenty of work to be done in order for the rumors becoming truth, especially as it relates to the Washington impact. The outlook for the dollar is not helping. The comments from the Treasury Secretary didn’t help the cause last week. Commodities are moving higher as a result of the dollar weakness and it will impact the consumer spending if gas prices continue to rise. Patience is the key for now. There are plenty of short-term trading opportunities and the long-term remains in an uptrend overall. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long-term.

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly. 

“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.