Investors remain cautious overall

By October 12, 2017Jims Notes, Research Post

OUTLOOK:  October 12th Happy Columbus Day!

The market moved higher again on Wednesday with earnings season ready to begin. The overall theme remains a move higher on hope from Washington, worries about the realities of the current highs if earnings and data don’t add some validity to the current move. It is important to know the environment you are trading and investing in from both a short and longer-term perspective. For now, all signals are positive, but there are signs of warnings throughout the scans technically and the data fundamentally. Stops are important to protect from your own emotions and a disciplined approach to your money management.

Eight sectors closed Wednesday on the upside with utilities (XLU) and REITs (RWR) leading the upside move. The interest sensitive sectors moved higher as interest rates declined just enough to spark some interest in the sectors. Overall it was another quiet day as the broad markets showed some upside movement. The downside was led by telecom (IYZ). Patience is the key as investor continue to digest the move higher. The S&P 500 index closed up 4.6 points at 2555 as the upside remains in control. The biggest movers in the index were PYPL (Gap higher in the current uptrend), FLIR (gap higher in the uptrend), CL (gap higher from the cup and handle pattern), DLTR (continuation of the uptrend), and JNJ (gap higher within the trading range). The downside leadership came from NAVI, RHI, SIG, BBY, and COH. Mixed activity on the downside as laggards continue lower. Gold (GLD) tested the next level at $120.45 support and bounced Monday, followed by another move Tuesday as the commodity shows positive signs… technically. The dollar (UUP) moved lower again as Washington remains in a stall mode. It held the move above the $24.08 level didn’t look good on Wednesday either. The emerging markets (EEM) tested support $44.28 and moved a new high.  The Volatility Index (VIX) closed at 9.8 as the worries are more intraday than the short-term outlook. The key is to remain disciplined within your trading strategy and not let the anxiety of the situation change your overall strategy. Manage your risk and stay focused on the horizon, not the rear-view mirror.

The scans on Wednesday show little change with crude oil (USO) continuing the move higher on OPEC news, REITs (RWR) and utilities (XLU) move higher on interest rates retreating, semiconductors (SOXX) continued higher in the current trend, and emerging markets (EEM) close at a new high. Commodities made moves higher with PGM, CHOC and PALL posting solid upside moves. Gold miners (GDX) bounced off support at $23.25 to continue a bottom reversal pattern. The NASDAQ 100 continued higher with GOOG, PYPL and DLTR leading the sector. The country scans show a continuation of the reversal and long-term uptrend continuation as EPOL, TUR, EWY and RSX leading the day. Overall the trends are positive in the broad indexes and leadership is more narrow than some want to believe… we continue to watch how this all unfolds. No big changes on the day.

The buyers have engaged in putting money to work despite the challenges ahead. The belief in tax cuts, healthcare reform, peace with North Korea and the tooth fairy are keeping money flowing into growth stocks. There are plenty of mixed signals and with the Fed now engaged in liquidating their balance sheet there is pressure on bonds and the interest-sensitive sectors. Throw in the rattling this week above the rate hikes in December and you have more pressure on these assets. Technology, financials, and consumer discretionary posted positive weeks to lead the broad sectors. The key is to watch for rotation and number of sectors making new highs. The week was positive and managed to hold the upside for another week. The volatility has evaporated on the optimism short term. We all want to believe we can see forward, but the reality is we can only see today. Thus, we must do what our strategy tells us to do today, and tomorrow will take care of itself. Hard lessons to learn as our analytical brain wants us to believe we have the solution and can predict the future. Keep your stops in place and your eyes focused on the horizon taking what the market gives.

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. Nice upside move and follow through, but the sector has stalled near the highs. Entry $318. Stop $330 (adjusted). Uptrend remains in place from the vertical move higher. Large caps (XBI) breaking higher to lead the sector.  Watching the upside leaders with the sector stalling again at the current highs. Positive moves from AERI, SGEN, DBVT. 

REITs (IYR) The sector tested the $76 level of support and bounced back to resistance and tested, and bounced, cleared the $81 resistance… only to test lower again. We continue to focus on managing our risk and collecting our dividend versus the near-term volatility and uncertainty. This is a growth and dividend holding with a 4.2% dividend from our entry point in April. Entry at $75.75. Stop $76.25 (adjusted). Found support from selling this week and watching how it unfolds.  Small bounce off support and holding within the range. HHC, KRC, BSX showing positive moves within the trends. 

Treasury yields (TNX) moved back to 2.37% last week as money continues to move towards growth and away from the Fed hike rumors. Just when you thought it was safe to go back into the water… the Fed changes its collective minds. The short side of bonds is in play at TMV gaps above $18.70 entry level. Watching how this unfolds near term. Stalled at the 2.35% mark and the move higher on Friday stalled with North Korea concerns. Momentum is for higher yields and lower bond prices (TBT). Yields moved lower on Tuesday… nothing changed overall for the yields or the bonds. 

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility within the trend is speculation and news driving money. The selling was more of the speculation, just as the buying is from speculation around the dollar and the Fed. The price of gold moves lower as the dollar gains strength and the Fed speculation of hiking interest rates. Testing the $120.45 support all week. $121.75 short entry on a downside move. Crude Oil has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue. The last three weeks the commodity has managed to fight its way back above the $50 level of resistance. Entry $50.20, Stop $49. Nice bounce to start the trading week. 

Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue. The last three weeks the commodity has managed to fight its way back above the $50 level of resistance. Entry $50.20, Stop $49. The move below $50 to end the week is a challenge for the upside trade with a topping pattern in play. Watching how it opens on Monday and honoring the stop if the downside resumes. Moved back above $51 on hopes OPEC will stem production. 

Energy stocks (XLE) have fallen since the December highs as the OPEC deal to cut production has not resulted in any real measurable cut that would impact prices. The double bottom pattern clears $63.22 for entry and stop $65 (adjusted). The move above $67 completes the ‘V’ bottom pattern and puts the sector in a position to move higher. The positive momentum for the stocks comes from crude moving above the $50 level. The testing of the upside move is from crude moving back below the $50 level. Watching how it unfolds. Trading in a tight range near the current highs and resistance. 

Volatility Index (VIX) This week remains at the bottom of the VIX index on the chart as investors are content to have faith in the current outlook. Back to the lows closing at 9.6 on the week. Short side trade of the index remains in play. Moving lower as buyers return to the scene. A spike higher in the VIX would not surprise me based on the current headlines and rumblings.  More downside hitting 9.8 as same ole complacency remains from investors content to ride the current trend. 

The positive follow-through move for the week helps build some upside confidence again as investors continue to bounce on both sides of the market. The move to new highs for the S&P 500 (SPY) and the NASDAQ (QQQ) following suit this week. Financials (XLF) showed some upside with a new high. Technology (XLK) posted a new higher led by the semiconductors (SOXX) with solid buying on the week. There are issues in the commodities and interest-sensitive sectors. The Fed in play relative to interest rates. The drug retailers were challenged on the rumor that Amazon was eyeing getting into the sector. Emerging markets (EEM) are getting nervous as China (FXI) continues to lead the group. There are more questions than answers for this market and we will continue taking it one day at a time. Stay focused and disciplined in all trades or positions. Speculation remains the primary driver in the current market environment. The key remains patience and as the tug-o-war for position continues.

Daily Scan Results:

WEDNESDAY Scan 10/11: Lazy day for the broad markets and some movement in commodities, emerging markets, and Europe. It was a day of further digesting the upside movement and looking towards the beginning of earnings season. Focused on risk management and taking what the market offers.

  • Emerging Markets (EEM/EDC) breaks to new high and offers opportunity to add new positions or add to the existing one. $115 level to hold on the move higher.
  • Gold Miners (GDX/NUGT) reversal off the lows/support at $32 is in play. The $35.80 level is on my radar for trade if the dollar continues to decline and money rise.
  • Homebuilders (XHB/NAIL) upside continues at the money flow wains. Watching how this topping pattern unfolds near term. Pullback or test of the move would be of interest. Stops remain at $56.
  • Base Metals (DBB) at the previous highs and holding. JJC, PALL and JJN posting positive moves higher.
  • Dollar (UUP) continued lower all week and setting the tone for commodities. The euro is moving higher a result and watching ULE on the move $17.50 level of interest.

Slow day again as we move towards earnings and worries about valuations. Expect some testing of the current move higher as we move forward.

TUESDAY’s Scan 10/10: Nice upside day led by the laggards. Utilities and consumer staples head the upside moves on the day. Crude bounced on OPEC talking. Semiconductors hit another new high and all is well for the broad market uptrend currently in play. Taking what the market gives and moving forward.

  • Crude Oil (USO/UCO) upside resumes on OPEC talks. Still watching for the driver to be something more substantial than OPEC asking the US oil industry to stop drilling. This is a trade only with $17.50 entry if upside resumes. $16.15 support.
  • Brazil (EWZ/BRZU) upside is back on the scan list. Double top in place, but the upside move is of interest if oil and the dollar remain in play.
  • Emerging Markets (EEM/EDC) moved to new highs as the dollar slips and China (FXI/YINN) renews upside momentum. $114.30 mark is of interest to add to positions. Bounce off $101.75 support is in play currently.
  • Semiconductors (SOXX/SOXL) moved to new highs again and the uptrend remains in play. The stop needs to move to $119. Protect our gains and let this unfold.
  • Europe (IEV/EURL) moved to new highs as well with the global ETFs moving higher overall. EWP, EWY, EWU, EWL, EWQ and other making positive waves for the global markets.

The moves have been positive, but the overall temperature of the market remains lukewarm technically and fundamentally. Looking for the catalyst that will define the next leg of this trend up or down. Proceeding with caution… stops in place and eyes on the horizon.

MONDAY’s Scan 10/9: Some modest testing on the day and watching to see how the week unfolds as the general consensus is a market that is overbought. My only suggestion is to realize that the market can remain irrational longer than you can remain solvent attempting to outsmart the direction.

  • Healthcare (XLV/CURE) double top forming on the chart and watching how it unfolds in the coming days. Uptrend remains intact and the hope for some type of reform in Washington remains a dream. Taking it one day at a time with a stop raised to $81.
  • Gold (GLD/UGL) bounced off support on Friday and followed through Monday with a solid upside move. Cleared $3940 resistance and added some hope to the metal. Patience as this unfolds and the buyers look for the opportunity in the metal. GDX moved higher as well clearing the $23.50 level.
  • Volatility Index (VIX/VXX) the upside bounce is purely a matter of too much optimism towards stock. It only takes a bad report or sneeze on Wall Street to disrupt this type of environment.  Looking to see if things heat up in the volatility circle.
  • Dollar (UUP) the greenback has turned higher reversing the downside trend. The move to the upside has come on the speculation surrounding the Fed and interest rates moving higher. Plenty of work to be done on the upside and we will let this unfold.
  • Semiconductors (SOXX/SOXL) leading the upside for technology again on Monday with a solid follow through on the upside. Taking what the market offers here and letting it run.

Slow day for markets overall as there was quasi holiday with banks and the government closed. Watching how tomorrow unfolds for the broad indexes.

FRIDAY’s Scan 10/6: boring day for the markets and the scans. Most moves came on news or rumors. We end the week in good shape overall and will look to how it unfolds next week.

  • Crude Oil (USO/SCO) downside move puts the buyers on notice and the short trade as an opportunity. SCO cleared $35.85 resistance and could offer a trade on confirmation. Natural Gas (UNG/DGAZ) short side cleared $26.24 entry level and followed through on Friday… UGA gave up the gains from Thursday and tested support at the $27.76 level. ERY setting up a bottom reversal pattern.
  • Gold Miners (GDX/NUGT) bottom reversal in play? Gold held support and looked positive on Friday with the North Korea missile rumors. Watching.
  • China (FXI/YANG) the upside trading was positive all week hitting new highs… the selling on Friday was minimal, but showed on the scan… the upside remains in play.
  • Homebuilders (ITB/NAIL) vertical move continues with a positive outlook on hurricane rebuilding. Adjust your stop to $56.
  • Treasury Bonds (TLT/TMV) Short side of bond still in play as the renewed talk about interest rates and the Fed were in the headlines on the jobs report Friday. TMV cleared resistance at the $19.40 level and looking for follow through and adding to the position on Monday.

Positive moves to watch… IGN, TECL, HACK, SOYB, SKYY, IAK, IHI, FDN, QQQ.

THURSDAY’s Scan 10/5: Positive day for large-cap stocks as the NASDAQ hits new highs joining the other major indexes. Taking the move for what it is and adjusting our stops according to the risk. Positive day for the current leaders…

  • Financials (XLF/FAS) Nice push to new highs again as the banks lead the charge. GS, C, SCHW, STT, and BAC leading the upside charge showing good diversification across the sector.
  • Technology (XLK/TECL) new highs for the sector finally. The upside push came from the leaders with large caps showing some muscles once again. PYPL, RHT, ADP, GOOG, and MSFT leading the move on the day.
  • China (FXI/YINN) back to lead the emerging markets again. EEM back to previous highs and YINN gapping to new highs. BABA, BIDU, SOHU,  HTHT leading the move.
  • Crude Oil (USO/UCO) bounced to move back above $50 and looking for next leg higher. Hurricane in the Gulf could help the speculation side grow. UGA rose off support as well.
  • Base Metals (DBB) continues to head higher showing positive momentum on the break from the flag pattern. Copper and steel both showing positive momentum. XME is a benefactor as well.

New highs… questions about correction? Manage your positions by managing the risk of the current environment. Raise your stops on short-term positions and manage your expectations on longer-term positions.

 

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. Watching how it unfolds this week after making move from the previous topping pattern. Entry $54.75, Stop $56.50 (adjusted). Break to new high and follow through last week in a positive uptrend. 
  • XLU – Utilities are under pressure from the speculation of higher interest rates from the Fed. Breaks support and looking for a shift in momentum, but it has not appeared with rotation back towards growth stocks. Watching how this unfolds to start the week. Short trade alive and well on the break of the next support. Holding support with modest bounce. Nice move above resistance at $53.65 and solid move to confirm on Wednesday. 
  • 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? Retested the lows as the downside took root and bounced off support. Moved back below the $30.95 mark last week and spike higher for entry $31 on Tuesday. Stop at $30.70. 
  • XLP – Consumer Staples moved lower on economic worries and higher interest rates. The test of the $54.50 support and the August low at $54 are cause for concern. There little in terms of buyers and the bias remains on the downside. Break and confirmation lower offer short side opportunity. Holding support with little activity. 
  • XLI – Industrials moved sideways for two months and then back to the previous highs breaking out as money flow increases. The long-term uptrend remains in play and the move to a new high showing strength with some topping last week. Entry $69, stop $$69. 
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. Some of the uncertainty has come out of the sector with crude moving back above the $50 mark. Entry $65.20 with a stop at $66.50. Watching as this unfolds short term with the move above $67 holding to end the week. Testing on Friday. Trading range at the current highs. 
  • 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 held this week and bounced to end the week. Watching how this unfolds and any opportunities that result. XBI broke from the flag pattern upside and offered opportunity. IHF equally bounced off support and looking positive again as well. Gap higher off support with follow through. Biotech driving higher along with Pharm this week… watching.  Test of the move higher and double top formation setting up. 
  • XLK – Technology tested near the current highs as the uptrend remains in place. Entry $48.50. Stop $56 (adjusted). Semiconductors tested support along with other subsectors. 50 DMA held as support and moved back to the previous highs. SOXX leading in the bounce off support. Break to new high Monday and nice follow through on Thursday to lead the uptrend. Posting new highs. 
  • XLF – Financials pushed lower on worries about interest rates, the Fed, and N. Korea. The retest of support at the $23.82 level was a concern for the short-term uptrend. The move back above the $24.65 mark offered the entry at $24.75, stop $25.50 (adjusted). Nice upside momentum returned on speculation of rates moving higher. The upside has remained in play along with the rumors and the buyers willing to put money to work. Let it climb and manage the risk of the trade. Stalled at the current high. 
  • XLY – Consumer Discretionary moved lower to support at the $88.50 level with retail earnings pushing stocks lower. Entry $83.50. Stop $88.50 (adjusted). The sideways movement remains in the sector as clarity is a challenge for investors as it relates to the consumer, but the sector did manage to clear $90.70 resistance back to the previous highs. XRT showing signs of positive upside with a reverse head and shoulder pattern breaking above $41.45.  Hit entry point at $41.50. Stop $40. Positive upside clearing the $90.70 resistance level on XLY to add to the position. 
  • RWR – REITs reacting to the current uncertainty around the Fed potential increase of rates. The longer-term view clearly shows the trading range and the opportunity to collect the dividend while investors continue to make up their collective minds on direction. We added the position in December on the move off the lows and continue to babysit the dividend of 4%. Big triangle pattern still in play. Moved lower on the interest rate rumors with the Fed. Another bounce off support to keep the trading range alive.  The move above $93 again is hopeful for move back to the previous highs. 

The positive move is back… investors like what they hear and see enough to put money to work and let the upside play out accordingly. Patience in taking what the market offers and nothing more. The move to new highs has come on rumors relative to tax cuts and renewed belief the Fed would hike rates prior to the end of the year. This is all good for now, but the rumor needs to validate moving forward or the move higher will unravel. Taking each trade and opportunity for what it is currently a trading opportunity in a news-driven environment. Patience and a defined strategy are a must in this environment. Practicing patience as this plays out with our stops in place.

Modest test to start the week and watching how it unfolds. No real conviction showing across the board it is a market of sectors versus an overall move higher. Practice patience. 

FINAL NOTES:

Investors are happy with the upside activity. Traders are driving the short term swing opportunities. 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 the rumored belief the Fed will hike interest rates soon. The other is a political belief there will be tax cuts on the horizon and a bill to reform healthcare. Sinc the market trades looking forward and evaluates based on past data investors are buying in advance of the reality and using the data to confirm the belief. Now comes the challenge, the rumors became truth. The outlook for the economy is cloudy at best, the past data is not helping as it remains mixed with some good some bad. The positive results last week from the buyers keep the upside in play. Commodities, interest-sensitive sectors and bonds react to the interest rate moves and financials, industrials and technology are leading the upside move. Patience is the key for now. This remains a market driven by news more than facts. There are plenty of short-term trading opportunities, but the long-term remains less confident but has produced equal opportunities for those willing to be patient. 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 for your overall portfolio and manage the risk of your short-term trades accordingly. See you next week.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese proverb