Investors wary of US-China tensions

Market Outlook for May 22nd

The indexes were challenged by the US-China relations growing tenuous over trade, health, and a bill passed by the Senate that could have an impact on Chinese companies listing on the US stock exchanges. In a separate legislation lawmakers approved a bill aimed at censuring China’s move to impose new national-security laws on Hong Kong. Throw in jobless claims at 2.4 million new claims and get a moderate downside day for the indexes. The president stated the US wouldn’t shut down again if there is a second wave of the coronavirus in the fall. To that end, we move towards a three-day weekend and many in the media are restless about the challenges facing reopening efforts in much of the country. How will the holiday impact beaches, travel, hotels, etc? There is speculation this will test the bounds of the social distancing guidelines in many states. Through Thursday the indexes are up more than 3% for the week as we head into Friday’s trading day. Watching and managing the risk… not looking for much activity on the day and not likely to add any new positions in front of the long weekend. Relax and enjoy the extra time off.

In The News:

Economic data shows jobless claims up 2.4 million… if you include the new federal numbers from the additional relief program it was almost 1 million more. This brings the total number of new claims to 44 million… the question looms to how many are still unemployed with stores, restaurants, manufacturing, and other business reopening. The current tally is 413 jobs lost per CV-19 death. As we have stated in other news related updates, there is an issue of paying people not to work. Many individuals are getting both state and federal unemployment which is paying them more than they were making at their job. As states reopen and they are offered their jobs back, they are choosing to stay home and not work. Why work when I can get paid more to stay at home? With Congress wanting to extend benefits until the end of December this could become an even bigger issue for employers.

President Donald Trump did not wear a mask touring a Ford Motor plant in Michigan… My favorite headline of the day. His response, “did not need it.” He was referring to everyone in the plant had been tested as well as himself. Later there were pictures of him wearing a mask… dark blue with the presidential seal of course.

Retail sector showing positive results and investors put money to work… earnings for TJX, BJ, BBY and the sector overall responded by XRT rising 2%. SBUX stated they were tracking slightly above forecast. The consumer continues to find ways to spend despite stores being closed for the most part. Online access has been the bulk of the sales from many companies reporting. XLY additionally has pushed to higher ground.

It doesn’t make sense: Creating a “fairer” world? ‘the crisis must serve as a wake-up call and a call to action for business and government to think, act, and invest for the common good and confront the structural obstacles that have inhibited inclusive economic growth.’ Jamie Dimon, CEO JP Morgan. I am not sure what all of that means. If he means addressing the failed healthcare system, infrastructure weakness, litigation and regulatory stranglehold on small businesses, failed immigration policies, and too much government, I am all in… make it fairer (is that a word?). If we are talking about making it a level playing field… that will never happen. The CARES act shows the inability of the government to “help” or be “fair”. There are too many moving parts and too many people with their collective hands out. If we can find a balanced way of giving a hand up (EIDL loans from the SBA) versus a handout (PPP loans from SBA) the world would become more fair and balanced… but, we have too many personal hands in the game for their benefit… not the benefit of the whole.

Economic News…

  • Weekly jobless claims rose 2.4 million with a total of 44 million claims filed since the beginning of the coronavirus.
  • Philly Fed manufacturing index rose to -43.1 vs -56.6 in April when the index hit a 40 year low. Markit manufacturing flash PMI rose to 39.8 vs 36.1 previous and Markit services flash PMI rose to 36.9 vs 26.7 previous. Positive signs with the reopening.
  • Existing home sales hit 4.33 million versus 5.2 million previous, but it did beat expectations of 4.2 million.
  • FOMC Minutes were released and we confirm the Fed is buying assets to stabilize the economic picture, lending overnight money to solidify banks, and buying treasuries on the balance sheet.
  • Housing starts fell 30% in April, permitting fell 20.8%… more depressing data from another sector.
  • Retail sales were down 16.4% in April and well below expectations of -12.3%. Autos fell 12%, Furnishings down 58%, clothing off 78%, Gasoline store sales down 28%, and non-store retailers -8.4%. Not pretty and it did impact the markets on Friday.
  • NAHB home builders index rose to 37 in May up from 30… seeing some activity in the sector that is positive. XHB, ITB, NAIL all rising.
  • Capacity utilization was 64.9 worst ever since started tracking in 1967. This is a telling number as it relates to productivity for US companies.
  • Producer Price Index fell 1.3% and well ahead of the 0.5% expected to fall. Oil prices can take credit for the biggest piece of the decline while food and liquor prices rose.
  • Consumer Price Index fell by 0.8% as expected. The core CPI fell 0.4% (lowest level ever). Food prices jumped as apparel and energy fell.
  • Jobs report shows a loss of 20.5 million jobs in April. 14.7% unemployment rate. Mostly inline with expectations. ADP jobs survey shed 20.2 million jobs, worst in the survey’s history.
  • ISM services data was better than expected at 41.8% but still well below 50% expansion.
  • The ISM manufacturing data to the mix as it was 33.4% well below the expansion levels of 50%.

The S&P 500 index closed down 23.1 points to 2948. It was down 0.7% on Thursday. The index broke through the resistance at the 2950 mark but failed to follow through. The chart is defining the near term trend and attempting to break from a topping pattern. We are looking for who will take the leadership role… Thursday only two of the eleven sectors closed in positive territory with consumer discretionary and industrials leading the upside. The VIX index moved to 29.5 on the day showing investor sentiment finding a base level. Watching how the consolidation pattern unfolds and if we can follow through on the upside move.

The NASDAQ index closed down 90.9 points at 9284. The index tested the uptrend losing 1% for the day. The close held above the 9273 resistance and holding in positive territory for the year. The NASDAQ 100 index (QQQ) was down 1.1% for the day as the large-cap stocks inched lower on the day. The $218 level is the stop for now and watching how it unfolds near term. Semiconductors (SOXX) closed down 2.5% testing the $243.50 breakout level. Technology (XLK) was down 1.4% testing the new highs. Holding the new leg higher… watching how this plays out near term.

Small-Cap Index (IWM) The sector tested the move higher and bounced at the 50 DMA as the volatility picked up again. Watching how this unfolds near term. $132.50 level to clear on the upside. 6% gain on Monday helped the cause. Tuesday gave up 2% on the downside. Back above the $132.55 resistance… needs to follow through.

Transports (IYT) The sector has the greatest exposure to a slowdown due to the virus. Airlines, container ships, trucking, etc. if the production slows transportation slows. A retest of support at the $137 level of support as the sector put in a challenging week. 7.2% gain on Monday to lead the index back toward the previous highs. Tuesday tested down 1%. Solid upside gains of 3% and inching towards the $153.17 resistance.

The Dollar (UUP) The dollar has been higher as the Fed and White House got involved in throwing everything at the markets… The dollar has now worked into a consolidation pattern and testing the lows. Watching how the tariff tweets impact the buck next week. Declined on the comments from Mr. Powell and the Fed’s willingness to do everything. Moved back to the bottom end of the current range.

The Volatility Index (VIX) Anxiety spiked to 85 at the height of the unknown fallout from the virus. This week the index settled at the 31.8 level. There were moves to the upside during the week as anxiety shows up again for investors. Watching the progress going forward. Finding some bottoming on the index as we see some back and forth. Closed at 29.5 on Thursday.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector remains volatile as money flowed out of the store with a small bounce to end the week. Stop hit at $157.52. Entry $145.50. Watching how support holds or not. Climbed 6% on Monday and back to the previous highs. Tuesday tested down 1.3%. Needs to clear resistance.

Biotech (IBB) The sector tested the $121.70 support and moved back to the previous highs… tested $128.67 support this week… bounced on Friday. Some topping in the sector as this unfolds. Entry $102.75. Stop $121.73 for now and allowing for some volatility… longer-term view for this sector. Solid move back to the previous highs and watching how it responds. Tuesday responded down 2%… Wednesday up 2%… needs to break through the resistance.

Semiconductors (SOXX) The sector tested support at the 50 DMA again. Watching as the volatility rises on the US/China issues with Huawei Technology. We hit our stops on some positions and managing the risk on the balance. Gained 4.5% on Monday to recover from Friday’s move lower… back at the previous highs $243.50 resistance. Small test on Tuesday. Solid 3.6% gain on Wednesday to break above resistance the $243.50 level. Testing on Thursday.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $237.50. Entry $205.10. Volatile week of trading as we adjusted our stop and letting it play out. Wednesday cleared the previous highs and watching how it responds to topping pattern.

REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. The Federal Reserve has stepped in to stem most of the negative sentiment for now. The sector moved into a descending triangle pattern that broke lower this week… watching as the short side develops… SRS. Gapped up 5.3% on Monday as money flowed back into the sector on hope… still challenges here. Moving sideways.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.64% down from .68% last week. TLT is now in a trading range. Watching how this unfolds in the coming week. Monday yield jumped to 0.74% and pushed the bond lower. Watching how this unfolds. Tuesday hit 0.71%. Wednesday back to 0.68%.

Crude oil (USO) Crude moved to $29.52 this week and up from the $26.17 level last week. A solid upside move for the week and we have adjusted our stop accordingly. Plenty of news and speculation about the outlook from the analyst. If you take a long term view there will be upside in crude. I like the long-term holding with entry at $13.81 and a two-year target of $45. Trading opportunities as well in the commodity. Crude runs higher on hope… back above $30 level. Watching and managing our stops on positions. $31.96 on Tuesday. Up to $33.92 on Thursday as it continues to climb.

Gold (GLD) The metal moved to a high of $163.93 this week as money rotates into the metal. Watching how this unfolds going forward and the China-US trade talks. Entry $158.95. Stop $158.90. Reverses on stock optimism… watching. Back to the highs on Tuesday. Tested on Thursday.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from August. Established a bottom at the $30.67 mark and hitting resistance. Cleared $36.40 resistance and watching how this unfolds. Gapped higher my 4% as money looks for opportunity. Trying to break from the consolidation pattern.

China (FXI/YANG) Downside accelerated on the coronavirus and has established a low near $34. Bounced and dealing with news and speculation. Closed above the$38.67 level of resistance and watching the previous highs. Gapped higher my 4% as money looks for opportunity. In a position to clear resistance at the $39.80 level. Down 2.7% on Thursday as China tries to enact security laws on Hong Kong (EWH).

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for May 21st: money was on the move with plenty of headlines for the day. China forcing it’s will on Hong Kong, US lawmakers setting new standards for Chinese stocks trading on the US exchanges, and retail sales data showing positive signs from the consumer. All added up to a day of selling with nine of the eleven sectors closing lower on the day. Watching and managing the risk accordingly as indexes attempt to move higher in the fourth leg of the current trend.

  • Homebuilders (ITB/NAIL) moved higher on positive home sales data.
  • Crude Oil (USO/USL) continues to trek higher.
  • Brazil (EWZ) building a base? Looking for upside follow through.
  • Retail (XRT) moving up again as earnings continue to shine in a sea of bad news. The consumer is finding ways to spend.
  • Small Caps (IWM) in position to break higher and take on a leadership role… is there enough momentum to push the sector higher.

WEDNESDAY’s Scans for May 20th: FOMC minutes out and shows the Fed is fully engaged in buying debt… good for now, but could be an issue down the road. Crude running higher again. Big box retail showing how big a benefactor they were and are of the coronavirus. Money flow picked up again as investors continue to put money to work in the markets. What happens from here is anyone’s guess at this point, for now, money is operating on FOMO (fear of missing out). Taking the good and avoiding the bad… one day at a time.

  • Leaders continue higher… QQQ, USL, XLE, XRT, XLY, SOXX, XLK…
  • Regional Banks (KRE) bounced off the lower test and showing some positive signs. Worth digging into the parts.
  • Semiconductors (SOXX) solid break above resistance and looking for a follow-through. Parts are worth playing as well.
  • Small Caps (IWM) making a move on the upside along with some volatility… Speculation more than fundamentally correct.
  • Internet (WEBL) uptrend is climbing nicely and managing the risk.

TUESDAY’s Scans for May 19th: Day of consolidation and some testing for the leaders. Semiconductors made a solid move higher only to close in negative territory at the end of the day. Watching how the balance of the wee unfolds will plenty of issues on the table. The focus shifted to a vaccine on Monday and some negative analyst questions on the validity impacted the afternoon trading. This will be constant until something is found relative to the virus. Taking it for what it is a reason to take some profits and an opportunity to see what lies ahead.

  • Crude Oil (USO/USL) climbed another one percent near the $32 mark. Wouldn’t be surprised to see some consolidation at this level near term.
  • Gold (GLD) back t the highs. Gold Miners (GDX) up 3.5% and building on the uptrend. Adjusted stops on positions. SIL/SLV uptrends remain in play as well.
  • Financials (XLF) downside back with a 2.4% move lower. Still in a range and watching how this unfolds. KRE gave back 4.3% of the upside move from Monday.
  • Biotech (IBB) showing a topping pattern on the chart and something to watch near term.
  • Solar (TAN) resuming uptrend and positive gain last two days.

MONDAY’s Scans for May 18th: Vaccine and Fed lead stocks higher to start the week as investors were willing to add risk to their portfolios. I have on my desk a simple note… “Markets can remain irrational longer than you can remain solvent going against the trend.” Nothing makes sense, but then over the short term when does it ever really make sense. FOMO is fully in play and we will ride the wave and manage the risk. One concern to voice from Monday’s activity… the leaders gapped higher but failed to hold it as they faded from the open. The weaker sectors showed hope…

  • Energy (XLE) solid upside on the day and back to the previous highs. The move higher in crude is helping as oil moves to $31. Managing our stops and letting this run.
  • Gaps higher from laggards… XLI, IYR, XLF, KRE, ITB all produced solid moves… now they need to follow through on the upside.
  • Utilities (XLU) reversed the downtrend and needs to follow through.
  • China (FXI) and Emerging Markets (EEM) moved back to previous highs and need to follow through.
  • Homebuilders (ITB/NAIL) solid move higher in the gradual uptrend off the lows.

FRIDAY’s Scans for May 15th: positive day overall with money moving as it deemed best. SOXX fell on US/China Huawei issues. Crude moved higher with demand rising in China. Worries remain about the coronavirus and states make political decisions more than logical ones. The economic picture is ugly as many analysts now looking to the fourth quarter for growth to resume. Taking one day at a time and exercising patience as this all unfolds.

  • Crude Oil (USL/USO) solid upside for the day as well as the week. Adjusting our stop and remained focus on the longer-term view. Gasoline (UGA) looking positive as well on the upside.
  • Financials (XLF/FAZ) remained below the support of $21.32 and offering some short side trade opportunities.
  • Biotech (IBB) solid bounce at support and letting this unfold as well with a long term view.
  • Silver (SIL) solid break higher for the miners and the metal (SLV). Gold (GLD) same upside move and looking positive near term. Gold Miners (GDX) solid upside as well.
  • Natural Gas (DGAZ) leader on the week as the downside trade unfolds yielding nice gains.

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

Sector Rotation of S&P 500 Index:

  • XLB – Basic Materials solid break above the $45.87 resistance level offering upside trade opportunity. In a trading range after testing support. Cleared $52.50 resistance and watching.
  • XLU – Utilities continue to struggle as the fell off the $61 highs and breaking the $55.24 support. Watching how this unfolds near term. with a downtrend established. Reversal of the downtrend? Watching.
  • IYZ – Telecom moved to $28 and tested and broke support at $26.25. Watching how this unfolds… parts are better than the whole currently. Back above the $26.25 level…
  • XLP – Consumer Staples cleared resistance at the $54.92 mark and offered short term trading opportunity. Stalled at the 200 DMA and tested support at $57.20 level. Reversal of the downtrend? Watching. Bad showing on Tuesday.
  • XLI – Industrials remain in a consolidation pattern. Watching. Gapped higher still in trading range.
  • XLE – Energy moved above the $31.20 entry-level as the bottom was established. The uptrend remains in play with a consolidation pattern emerging on the chart. Watching as diverging from oil prices. Back to the previous highs and in range.
  • XLV – Healthcare moved above $88.50 level and offered upside opportunity. Letting it play out and adjusted our stops. Leadership role. Resistance at the $101 level showing consolidation. Failed to hold the break above the previous highs?
  • XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently and watching how it unfolds adjusting the stop. Broke to new highs.
  • XLF – Financials broke below $21.30 support and setting up a short side trade based on the technical data. Watching as this unfolds next week. Solid bounce off the lows? Watching for reversal or follow through? Bad action on Tuesday…
  • XLY – Consumer Discretionary in a trading range and watching. Broke to new high showing some leadership.
  • IYR – REITs broke lower below $71.30 support. Short side trade setup and watching how next week unfolds. Reversed the downtrend? Watching.

The trends have worked into consolidation patterns and uptrends as we experience less volatility and more trading. We took the entries based on our defined strategies and managing the risk accordingly. Using the six-month charts as an indicator for the short term view… Two sectors are in confirmed uptrends. Four are consolidation patterns, and four are in downtrends. The result for SPY is consolidation pattern short term with a negative bias. The leadership is lacking as plenty of questions developing on the charts.

(The notes above are posted Weekly based on the activity of the previous weeks trading. The BOLD/ITALIC comments are current day changes worth noting.)

FINAL NOTES:

Thursday: Economic news continues to show some improvements from the reopening of business. The bottom seems to be in for now, but the bigger question is about the valuation of stocks. Technically and fundamentally they are overbought and overpriced… does that matter to investors? This is something to manage against moving forward. While we are not willing to speculate about the outcome, we are willing to manage the risk. Make sure you know where you are and the risk associated with each position in your portfolio.

Wednesday: solid move back to the upside for stocks as buyers return to erase the downside from Tuesday. All is good with the markets as the belief factor is higher. This is fostered by a Fed willing to print money regardless of cost. It makes for an interesting future when we determine how to pay for all the handouts. The election is on the horizon and many see this as a possible decision point for the markets. For now, we take what we see and trade what we know… leaving the speculation to others.

Tuesday: Some testing of the move on Monday as some take profits and others look for opportunities… we always do both as the market presents them. Financials were most notable on the downside move along with energy. Plenty of opportunities along with challenges facing investors daily. We have to remain diligent to manage our risk and keep a shorter-term perspective than normal.

Monday: Fed and vaccine… make for a positive day on Wall Street. You take what the market gives and watch how it responds. We saw the laggards gap off the lows. We saw some renewed hope for sectors. We saw leaders gap higher and fail to hold the move. Signs of profit-taking from leadership worthy of attention. For now, you take what is given and manage the risk. Avoid the talking heads and the nonsense that is pontificated in the media. Focus on what is true, what is perceived to be true, the trend, and the Fed. Good day overall and watching how the balance of the week unfolds.

Weekend Wrap & Outlook… The coronavirus remains center stage as the number of cases continues to flatten and more states have started to reopen businesses. The lastest how this has turned into a political issue more than a medical one. The medical side is the pawn in the chess game Washington, states, and municipalities are playing. This presents opportunities and expectations from stocks and the economic picture. There is no lack of question marks for the markets moving forward as money is rotating again and some moving to the sidelines. The jobless claims added another 2.9 million people to unemployment. Retail sales fell 16.8% in April and the data is showing how deep the impact is from the shutdown due to the coronavirus. We are not likely through the worst of it as the reopening process is slowly progressing. The VIX index climbed to 31.6 as some anxiety creeps back into the markets. We were presented with short term opportunities and put some money to work over the last few months. Our job remains to manage the risk accordingly. We hit stops on several sectors and have added to others as money rotates. The rotation is showing up on the charts as more sectors shift into downtrends over the last three weeks. Healthcare, energy, and technology are the leaders currently. Gold has moved to new highs for the week. Crude oil has bounced off the lows showing some signs of life as demand rises in China. Earnings have been somewhat positive for the markets, but the focus is starting to turn to the future outlook for growth and how long it will take to see a reversal. Many analysts are now saying the fourth quarter. All said the goal is to manage money not the markets or the pundits in the media. Let the future unfold and manage the risk that is. Track the data. Know where the markets stand relative to the facts. Money rotates to where it will be treated the best. Remember fear and speculation create opportunities. Watch the trend, know which side the Fed is on (they keep telling you almost daily), and ultimately the data will establish the longer-term trend. We remain focused on what is working and what is failing. Therein lies the opportunities. Manage your risk accordingly and let this unfold… one day at a time.

Disciplined entry and exit points allow you to manage your risk in up or downtrends. Investing and trading is a matter of a defined strategy implemented with discipline. It is not magic. It is not being a prophet. It is about following your strategy one day at a time.

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

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.