Investors take a breather

There were new closing highs for the NASDAQ and Russell 2000 barely, while the S&P 500 and Dow closed slightly lower. The intraday activity was mixed with investors taking a breath for the most part. Oil climbed for the seventh straight day and hitting 13-month highs as money flow continues to believe that the economic rebound is on the horizon along with production reduction from OPEC+ sticking. Some progress is being made with the vaccination rates and the number of new cases is declining along with hospitalization rates. Throw in all the talk about $1.9 trillion being given away by the government and sentiment is rising again. The VIX index has declined back to previous lows at the 21 levels. All is good for now… watching and managing the risk.

Short news notes of interest…

  • Biden is said to back a proposal by Democratic lawmakers to limit or phase out stimulus payments to higher-income individuals as part of the new stimulus package. The limits would start at $75,000 and phase out up to $150,000.
  • In a recent study, slightly less than half of Americans stated they would not take the vaccine for Covid. Scientists say that 70-85% of people need to be vaccinated to suppress the virus. This puts the current stance of the White House in opposition with the populous. The question is what terms will be made by the government in order to force the vaccinations? Travel restrictions, job restrictions, or mandatory by the state? This will all play out in the coming months.
  • The top 15 hedge fund managers collectively earned $23 billion last year. Not a bad wage for a year worth of work. The pandemic created income years unlike any for the hedge fund industry. The big swing in prices offered opportunities and the top 15 certainly took advantage of what was given by the markets.
  • There is a global chip shortage as seen in the automotive sector, with GM announcing more delays in manufacturing due to the shortage. Does this create an opportunity in the SOXX? Do stocks like NVDA have a greater advantage over others going forward? Good questions and definitely a sector to watch moving forward.
  • Crude oil has moved to nearly $58 per barrel and over the last six days has risen 10.6%. Is this a good sign for the economic recovery? Some say yes, and near term, it is as consumption or demand rises with strength. From my perspective, OPEC+ has reduced supply to meet demand and with demand rising the price is moving too quickly on false assumptions. Thus, we will take what is offered with a clear understanding of what is behind the move… some good news, economic demand, and some speculative manipulation is supply control. Delicate balance.

Sector Rotation and the S&P 500 Index:

The S&P 500 index closed down 4.3 points to 3911. It was down 0.11% on the day. The index never really got started and closed basically flat on the day. The index broke the six-day string of upside and is still near the highs. Five of the eleven sectors closed on the upside as investor sentiment remains positive. The VIX index closed at 21.6 as buyers eased the stress and anxiety of investors. Watching the investor sentiment and how it proceeds of late.

Tuesday: Mixed day for the sectors as money flow was flat. REITs and industrials led the upside move. Not exactly the power sectors on top for the day. The downside was led by energy and basic materials. Energy has been on a run of late and some testing would be in order. The positive undercurrents in the market from the stimulus, vaccine news, earnings, and other positives are keeping the buyer engaged.

  • XLB – Basic Materials testing lower as money flow declines. $70.80 support held and bounced off the test. Added to the bottom reversal.
  • XLU – Utilities hold support on the test lower and find some buyers. Watching interest rates and the dollar currently.
  • IYZ – Telecom moved back below $30.95 support and bounced this week to regain some momentum… watching. Moving back towards the previous highs.
  • XLP – Consumer Staples moving lower to establish near term downtrend and bounced at support. Watching. Held the bounce from last week.
  • XLI – Industrials moving lower and breaks below the support of trading range and bounced. Moving back towards the previous highs.
  • XLE – Energy tested $39.12 support and bounced offering entry. Watching how this unfolds along with the commodities. Entry $41. Stop $41.76 (adjusted). Took a break following the move back to the previous highs.
  • XLV – Healthcare tested the uptrend and watching how it treats near term support at $113. Flag pattern on the chart. Triangle consolidation pattern in play on the chart.
  • XLK – Technology remains in an uptrend but tested the upside and resumed with some challenges near term. IGV leading the sector and SOXX struggles. Added to the new highs.
  • XLF – Financials bounced at the support of $28.95.Solid week but watching the money flow and challenges ahead. Added to the upside move.
  • XLY – Consumer Discretionary holds uptrend line and bounced at the 50 DMA. Resumed uptrend and closed at new highs for the week. Added to the new highs.
  • IYR – REITs have struggled with interest rates, vacancies, and virus talk about people moving out of cities. Held support at the $82 level and moved back to new highs… Watching. Continued the break higher.

Using the six-month charts as an indicator for the short term view… Seven sectors are in confirmed uptrends with some testing near-term. Four are in consolidation patterns showing indecision from investors, and none are in a downtrend. The result for S&P 500 index is a sideways trend short term with an upside bias currently.

(The notes above are posted at the end of each week based on the activity of the previous week’s trading. The BOLD/ITALIC comments are the current day changes worthy of note.)

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

The NASDAQ index closed up 20.6 points to 14,007. The index was up 0.14% on the day with solid activity overall. The NASDAQ 100 index (QQQ) was down 0.02% for the day as money flow into the sector was slower. The large caps have been lagging of late and remain a concern. Semiconductors (SOXX) closed 0.29% after breaking from the consolidation pattern to the upside. Technology (XLK) moved down 0.12% after testing the $128.57 level of support and hit a new high. Watching how this unfolds as investors look for opportunities.

Semiconductors (SOXX) The sector remains in an uptrend with interesting consolidation near the highs. Technology stocks continue to struggle near term as money rotates. Money flow in the sector has been declining since January 21st. Solid gains for the sector to break from the consolidation pattern… Parts are better but need the whole to break higher and resume leadership.

Software (IGV) The sector has come back to life after six weeks of consolidation and volatility. Broke to new highs this week and showing solid money flow into the stocks. Entry $361.77. Stop $364 (adjusted). Another new high as the sector leads.

Biotech (IBB) The sector broke higher after testing support closing the week up 5.4%. The uptrend from the November low remains in play as the sector is a benefactor to the virus. Entry $164.70. Stop $164.70 (adjusted). Social media speculation alive and well in the sector. Holding the highs.

Small-Cap Index (IWM) The sector moved 7.8% for the week as it reverses last week’s selling and moves to new highs. Support is at $204.83. Hit entry at $213.76. Stop $216.19 (adjusted). The uptrend remains in play as we watch how it unfolds moving forward. Added to the upside and closed at new highs.

MidCap (IJH) The sector turned higher gaining 6% for the week and reversing last week’s selling. We don’t own anything in the sector but continue to watch for opportunities. Joined the small caps at new highs.

Retail (XRT) The retail sector volatility dropped this week and some normal returned following the GME frenzy. In the last three days, XRT has traded more in line with the previous volume. $79.20 is the level we are watching to clear on the upside. Social media money is still moving sector albeit less and watching for opportunity.

Emerging Markets (EEM) The sector recovered from last week’s selling gaining 5.5%. Uptrend resumed… no positions and watching the previous highs. Back to the previous highs and follows through to new highs on Tuesday.

Transports (IYT) The sector has struggled but found some buyers for the week to rise 5.7% with a head and shoulders pattern on the charts. Watching for a decision on the direction near term. Watching airlines for direction in the sector. The sector is being challenged near term… a key indicator to the future valuation of stocks. Solid move higher on Tuesday.

The Dollar (UUP) The dollar has risen steadily over the last five weeks… Friday dipped lower on the stimulus talks and projections of approval… looking for the dollar to fall if the stimulus is passed as proposed. Watch commodities prices if that unfolds. More downside for the buck? The answer is yes thus far… watching the impact of the lower dollar on other sectors and globally.

The Volatility Index (VIX) Volatility closed 20.8 down from last week’s 33.1 level as buyers returned to the market and anxiety levels subsided. We are back at previous support and watching. Small increase despite the buying?

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 1.17% from the 1.09% last week. Rates are holding above the 1% level and rising again… negative for bonds. TBT hit entry at $17.84. Stop $18 (adjusted).

Crude oil (USO) Crude moved to $56.89 from $52.18 for the week or up 9% for the week. Plenty of speculation to influence prices as OPEC cuts to supply start to take effect. As we stated nearly seven months ago… the greatest opportunity was in crude. Taking what is offered and managing the risk. USO Entry $29. Stop $36.60 (adjusted). UCO trade position entry $25.78. Stop $44.50 (adjusted). Higher to add to the upside as the price approaches the $60 level.

Gold (GLD) The commodity is struggling against the background of uncertainty relative to the dollar and inflation. Watching as we test $166.50 support levels. Gold broke lower from the trading range on the stronger dollar… Friday the dollar fell on stimulus noise… gold rose… worthy of attention in the coming week. Jumped back to the previous support at $172 and watching. We add positions in the metal.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENTT

TUESDAY’s Scans for February 9th: Some are pointing to the rise in sentiment as too positive of late and are calling for a correction… That is simply an opinion and one that may very well prove to be right… however, we cannot assume anything in this market. Our focus has to be the facts we can have beliefs, but the market must validate those beliefs on the charts. We continue to take what is offered in the moves and maintain our stops. Tuesday was a consolidation day as money flow was slower and less directive. Patience as this unfolds.

  • Dollar (UUP/UDN) the dollar has been moving lower on the stimulus package pushing forward. Remember a lower dollar influences crude, gold, and other commodities… watching how that unfolds.
  • Small Caps (IWM) makes it seven days on the upside and pushes new highs… raised the stop.
  • Cannabis (POTX) up 17.2% on the day… stop raised.
  • China (FXI/YINN) moving off the test low and cleared $27.50 (YINN) offering a second entry point. Watching and managing the risk of the reversal trade.
  • Regional Banks (KRE/DPST) breaking higher after the test. This is a sector we have favored since December. It has come with some volatility and management issues but looking for the upside to continue.

MONDAY’s Scans for February 8th: Markets continued higher as the leadership from energy and financials remains in place. Technology has been helping, but semiconductors have been a strain. Software has picked up the slack with solid gains. Investors continue to focus on valuations while speculators continue to push stocks higher. The goal remains to take what the market offers and manage the risk accordingly. Plenty to like, plenty to understand, and plenty of risk for all.

  • Crude Oil (USO/UCO) upside continues with a gain of 2% on the day. EIA reported November saw a rise of 692,000 barrels per day, averaging 11.124 mmbd. That is the highest since March. Watching how production unfolds in light of expected demand rising.
  • Energy (XLE) moved to new highs as the money chases the stocks following the rise in oil prices. Other benefactors are XOP, OIH, IEO and others.
  • Gold (GLD) bounced off the lows and back to the previous support levels offering an opportunity in the metal. The key is to let this unfold and be patient as the bounce plays out.
  • Biotech (IBB/LABU) Big jump higher to start the week as social media takes on the sector and short selling. We own the sector and much like XRT we will manage the risk based on the charts and not the news.
  • Homebuilders (ITB/NAIL) breaking to new highs on speculation of more being more. Again, we take what is offered and don’t get into the argument of valuation… statistics don’t lie, only statisticians. After all four out of five dentists choose Crest.

FRIDAY’s Scans for February 5th: Investors were willing to ignore the jobs report thanks to the stimulus talks. Money flow was flat to negative on the day in many sectors. Watching how this moves forward. Is there enough momentum to keep the trend moving higher? There are plenty of issues as we have discussed and they are not resolved yet… thus, we proceed with caution and manage the risk that is.

  • Energy (XLE) leading sector for the S&P 500 index gaining 8.2%. Hit entry point at $41. Stop $40.50.
  • Transportation (XTN) gained a solid 7.3% for the week and watching to move above the January highs.
  • Financials (XLF) up 6.7% for the week and showing positive move off support… the challenge is money flow move sideways to down on the move.
  • Homebuilders (ITB/NAIL) solid upside bounce for the week and back to the previous highs… can it break higher and hold as interest rates continue to creep higher?
  • Biotech (IBB/LABU) solid upside move on the week as vaccines continue to be the key headline.

THURSDAY’s Scans for February 4th: Positive day as the slow churn to the upside remains in place. Earnings helped the NASDAQ move higher and the S&P 500 followed suit with financials and technology leading the upside moves. Yellen met with top regulators for the financial sector to discuss the recent volatility resulting from Reddit and investors. Of course, there is no news currently on the outcome. Oil prices continue to push higher on optimism and tightening supplies from OPEC+. Watching how the opportunities present themselves and happy to remains solvent with cash as investors make decisions on the direction.

  • Financials (XLF) positive upside as the dollar rises again. There is renewed interest in the sector of late. Regional Banks (KRE) showed solid move on Thursday.
  • Natural Gas (UNG) has been attempting to break from the consolidation range and with a 6.9% gain on Thursday accomplished just that. Cold weather is aiding the move.
  • Small Caps (IWM) solid upside move to regains previous leadership.
  • Gold (GLD) broke lower on the day showing the impact of the stronger dollar of late. Watching the downside move. Gold Miners (GDX) equally showed downside pressure.
  • Treasury Bonds (TLT) continue to head lower with money moving back to stocks and interest rates on the rise again. Watching how this storyline unfolds.

WEDNESDAY’s Scans for February 3rd: Some testing in sectors, some moves higher in others, but at the end of the day it was juggling for positions based on where investors believe the market is heading near term. Energy was a benefactor from the move higher in crude to $55.70. Retail is working through the GameStop volatility. Financials moved up as the dollar remains in a positive light near term. Cannabis is heading higher as it inches towards Federal approval. More rules on the way from the regulatory agencies on trading. Antitrust bill heads to the Senate floor. Plenty to ponder, but the key is to remain focused on what you are invested in and managing the risk of your money. We remain highly allocated to cash on the stops hit last week and focused on how this unfolds. We remain with a negative bias overall but watching what is moving higher as well.

  • NASDAQ Index (QQQ) took a break and watching the chart as the upside subsides… AMZN, NFLX, FB all faded on the day. MSFT solid, GOOG up on earnings, NVDA flat but volatile on the day, and ORCL and CSCO moving lateral.
  • Retail (XRT) scanning the sector to find the leaders. KIRK, ZUMZ, BKE, and others showing solid uptrends in play.
  • Energy (XLE) Bottom reversal and follow through. Entry $40.67. Stop $39.10. Crude is higher and with the current trend in the Middle East likely to stay near term. OIH was up 4.8% as well.
  • Treasury Bonds (TLT/TBT) moving lower as the yields resume upside move. Economic data is good, dollar has been stronger, inflation is actively moving higher… bonds lower.
  • Cannabis (POTX ) moved higher again on Tuesday… raised stops and letting it run.

(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.)

FINAL NOTES:

TUESDAY: Day of rest for the markets overall. The positive buzz around vaccines, lower cases numbers, etc. investors remain positive and the sentiment validates the optimism for now… remember this can change with one headline. Take what is offered and manage the risk that is versus the one you imagine.

MONDAY: Great day for the upside moves in many sectors and major indexes. The challenge remains speculation on the upside versus money flow on the charts. Without trying to be negative it is a simple concern and one that is addressed in managing our stops. As seen two weeks ago we did hit plenty of stops and raised our cash positions significantly. However, the bounce last week provided new and renewed opportunities and we added positions. We manage those positions with the same due diligence and address the risk of each daily based on the objective and adjust our stops accordingly. No one knows what lies on the right side of any chart… thus, protect your money in the event what happens isn’t in alignment with your beliefs.

Weekend Wrap & Outlook… The markets shift gears as the sentiment turns positive again with the VIX index dropping back to support at the 20.8 level. The major indexes posted solid gains on the hopes of trillions of dollars to fat the golden calf. We will take what is offered, manage the risk, and avoid the speculation that is. No comments or thoughts on why or how, just using technical data here to trade and make some money on the move. When the markets get emotional I get technical… the only way to stay of the illogical arguments about valuations and hope. The long-term trends remain on the upside following the test of momentum. For the week all eleven sectors closed in positive territory showing the impact of sentiment on stocks. The VIX index closed at 20.8 down from 33 last week. An interesting time for the markets. The dollar has been strong, but with the talk of stimulus on Friday, it moved lower… watching the commodities on the move. Crude moved higher hitting the $56 level the highest since February 2020. UGA moved higher with prices at the pump elevated. Watching the current movement in the broad markets as money continues to rotate and money flow shifts. The goal remains to manage money not the markets or the pundits in the media. Let the future unfold and manage the risk that is. Track the data. Know where the markets stand relative to the facts. Money rotates to where it will be treated the best. Watch the trend, know which side the Fed is on daily, and ultimately the data will establish the longer-term trend. We remain focused on what is working and what is failing. Therein lies the opportunities.

“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 your trading strategies with a disciplined approach to investing and managing the risk of our money.