Market Outlook for the Week of June 29th

MARKET OUTLOOK: 

Nasdaq index leads the downside Friday with the semiconductors dragging the index down. 5050 is the next level of support to watch as this unfolds. Small cap biotech and financials didn’t help the index either. The leader is testing and that is never a good sign for the micro term view. Longer term the trends are still on the upside and nothing has changed other than a little heartburn to end the week.

Uncertainty is still the issue… it is putting worry back in play… which in turn is putting some downside pressure on stocks this week. Bonds are equally under pressure as the Fed is committed to raising interest rates and the bond market is moving in advance of that taking place. We cannot force trades nor can we make the market clear relative to direction… we just have to practice patience and let it all unfold one day at a time moving forward. I know you as well as myself are tired of hearing that song… but, we have to play the hand we are dealt.

Soft agriculture commodities moved higher on the week with DBA moving to the top end of the base trading range. Soybeans, wheat, corn and others have been moving higher the last couple of weeks. Cotton even moved higher on Friday. Watching this to see if it follows through on the upside next week.

Downside pressure is showing in several sectors with telecom, technology, utilities, REITs, industrials, security software, semiconductors, networking and biotech. Some of these are new developments others have been trending lower for months. The reversal in some of the leaders is where the concern lies, but we will let this unfold and make the adjustments necessary. We hit exit points on sectors and stocks this week as result of the moves. We added new positions where the upside was of interest, but overall there is still a lack of confidence in any short term move up or down. One day at a time is all we can do.

Below I cover all the major indexes and what transpired of interest. The leaders, the laggards and what we hold. It is imperative that we remember the overall theme of this market currently is a lack of clarity which leads to a lack of conviction. The offspring being volatility day to day driven by news. Use discipline as your friend in the management of your portfolio.

Have a great day.

NOTE: The following are things to watch and evaluate during¬†the trading day…

  1. Emerging markets (EEM) attempting to build a bottom near the $39.60 level after a 10% decline on worries about the dollar. Bottom reversal is what I was watching relative to¬†the oversold technical conditions in the sector. Target on bounce $42. Entry at $40.15. Stop $39.80. Nice upside follow through on Monday and Tuesday as it move back to the 200 DMA. Hit some resistance at the $41 mark and¬†reversed 1.1% on Thursday… watching the stop point and how this unfolds early in the trading day.
  2. China (FXP) short side of the country ETF is back in play with the downside confirmed on Friday. FXI is holding at the $46.60 support level currently and a break would offer a trade in FXP or YANG.
  3. Agriculture (DBA) Moved back to the top end of the base trading range. $22.80 breakout is worth looking at going forward. Target on the move would be $23.65. WEAT – broke from the consolidation at $11 to lead the sector. SOYB – moving higher as well with an impressive move off the low. CORN – broke from consolidation as well. MOO – started to move in response, but still testing and looking for validation of the move higher in the sector.
  4. Semiconductors (SOXX) hit the short entry on break below the $95.15 support. $92.60 target on the downside and SOXS is the trade on the move lower. Look for entry point… bounce in sector is the best action for adding the position on the short side.
  5. REITs (DRV) short side of the trade is still in play and a continuation of the move is a move above $27.90. IYR continues to be under pressure from the rise in interest rates. The dividend assets are getting pushed down on the expectation of the Fed hiking rates near term.
  6. Treasury Bonds (TMV) short side gets boost with bonds selling lower on Friday. The short side is in full bloom for now.
  7. Crude oil is a wedge pattern on UWTI. $3.50 entry is attractive at this point. There are supply and demand issues to deal with relative to the US production and Iran coming back on line from the lifted sanctions. The test lower on Friday bounced, but the downside move could accelerate if supply is an issue going forward. Watching how this unfolds near term.
  8. Japan (EWJ) bouncing back to the top side of the trading range as a upside trade could develop. $13.35 entry. Be patient. Testing currently and we will let it unfold patiently.
  9. India (INDL) Bottom reversal followed through and at the $21.25 resistance. Break higher offers upside trade on a breakout move. Small pennant pattern forming on the move… look for upside continuation of the move.
  10. Energy (XLE) is attempting ¬†to accelerate the downside move as crude tests lower. ERY is the short side trade for the sector which broke higher on Friday. $20.40 entry point if tests… be patient with the trade.

Below I outline the major indexes, sector¬†stories¬†and management of existing positions.¬†Stay focused, stay disciplined and don’t chase rabbits down a hole.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) The move higher gave way to some selling this week with the index giving back most of the gains from the previous week and thus the trading range remains. The move above the $211 mark give way again and we test the range. Keep your stop on positions at the $204.50 level. The lack of leadership in the index remains a challenge. Telecom and Technology led the downside move on Friday to set the tone for the coming week.

NASDAQ 100 Index (QQQ) Set the tone for the selling on Friday. Semiconductors were the challenge losing 2.7% as Micron (MU) missed earnings and lost 18.4% on the day. This presents a new challenge for investors as the previous leaders lose as a result of global exposure. Tech is key to the index and we will look at how this unfolds in the coming weeks. Our stop remains at $104.40 on short term positions (3-9 month horizon). Watching $109 level of support.

Russell 2000 Index (IWM) Testing the $126.50 mark after clearing that level several weeks ago.. Rebalancing of the index on Friday had little effect. The stop $123.60. The market likes the leadership from this sector. We will see how it unfolds going forward.

Volatility Index (VIX) Closed at 12.2¬†Tuesday testing the previous lows, but bounced back to 14.4 on Friday.¬†I am not expecting much in terms of volatility based on where we are, but the uncertainty factor can raise it’s head at any teim… question is will it last longer than a couple of days. SVXY hit stop Friday. VXX trade if moves above $17.95.

Transportation (IYT) Broke below the¬†$148.50 support on Thursday… tested it on Friday? The sector is confused and the lack of clarity is still causing downside pressure despite the move on Friday. Looking for downside confirmation. 50 DMA crossed below the 200 DMA as technical sell and it is still in play.¬†The index is in a downtrend¬†short term.

Dollar (UUP) The¬†dollar sold lower on the FOMC announcement, but bounced on the data and confidence in the Fed. The $24.88 level of support¬†broke with $24.48 next level held. The bounce back above the $24.88 mark was prompted by the Greece issues. News is driving and not willing to trade emotions for now. Dollar index (DXY) held¬†support at the¬†93.25 key level¬†and bounced back on dollar rally… too many moving parts.

Crude Oil (OIL) Remains in the trading range and speculation is day to day on the commodity. Until it gains some clarity not willing to put money at risk. It remains a supply/demand story and nothing more from my view. $61.61 is top side of the range. Closed Friday at $59.81.

SECTOR STORIES: 

Treasury bond (TLT) The FOMC meeting shed some light on the Fed’s intentions to hike rates prior to year end. That puts pressure on yields to move higher and bond prices lower. That is the current transition in place and the downtrend off the February high is well established currently. TBT hit entry at the $50.25 mark, stop $48.75.

Vietnam (VNM) attempting a bottom and trend reversal. (technical setup only as the emerging markets are under selling pressure short term.)  The ETF cleared the $17.90 mark to end the week and held the move on Friday. Entry $18 on move higher. Stop $17.70. Holding $18 support on Friday.

Homebuilders (ITB) double bottom consolidation pattern setting up to break higher on the momentum in the news behind the housing market (technical setup and trade). Fundamental data starting to confirm the upside move with improved numbers in sales for May. Hit¬†our¬†$27.40 entry. Stop $26.50.¬†Hitting against resistance at the $28.10 mark… watch and manage your risk.

Healthcare (XLV) The sector has been in a consolidation pattern which we have tracked for the last five weeks. We finally hit the entry with the move above $75.50.¬†Stop $73.50. ACA news from the Supreme Court driving some upside this week… IHF was the benefactor as the decision confirmed government payments to the providers. Best source of income available for the providers. Subsectors to watch:

  1. Pharma (XPH) confirmed¬†the reversal off the May lows with break higher above $126. Sector is of interest looking longer term as a hold and manage the risk. Entry $125.50. Stop $123. ¬†dumped 2.2% Friday… watching the move lower.
  2. Biotech (IBB) attempting to move higher again with $367.80 resistance level to take out. Added a small position at $366.50. Stop $374. HIT STOP on the selling Friday.

Retail (XRT) moved through the top side of the current¬†trading range and moving higher.¬†We were looking for a move above the $100.25 resistance level for entry point to¬†trade higher which did hold on. Stop $99.50 on trade.¬†Scan the sector and trade the parts… they offer better upside potential than the whole. Consumer sentiment positive on Friday with bump higher in May from the consumer.

Financials (XLF) This sector is all about Fed speculation. Will they raise interest rates¬†or not. Jobs report puts more pressure on the Fed to hike rates soon. This is one sector in favor of higher rates.¬†If that is true, we would want to hold long term positions… wide stops and ignore the volatility based on speculation¬†from analyst. Focus on what you believe. Stop $23.80. Hit new high and sold lower¬†next day… speculation at it’s best… More selling¬†and testing in the sector overall. Watch manage the risk. Willing to add on test of the $24.50 level of support.

  1. BAC – Bank of America trade on the upside entry at $17 on confirmation of the reversal. This is one of the large cap banks and the upside opportunity is to $18.20. Stop raised to break even or $17.

Regional Banks (KRE) Рbroke higher from the trading range short term and this time nice follow through. After a small test back towards the $41.85 entry hit and the upside was in favor of rates moving higher. $42.85 is the stop. Speculation selling last week as doubts about the Fed crept into the sector. My view is fast money rotated to faster moving sectors. This left consolidation near the highs and now looking for the upside to resume. Monday and Tuesday validated that belief for now.

Software (IGV) leading sector for tech is testing support at the $100.50 level currently. Keeping the uptrend in play needs some help… manage positions. Selling is to be watched and stops in place at $100.¬†If the sector gets a positive pushes to new highs willing to add to the position. $102.65 added. Stop is $100. Testing as the leader, security software gets downgraded and the prices adjust. Upside leadership is still attractive.

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 would be of help for the trend to continue upside move. Trend fundamentally on the consumer is flat and that is keeping things in check for now. $74.50 exit point on the downside. Nice upside over the last week, but starting a smaller and tighter trading range at the new high? ¬†Not an easy sector to own, need to be patient even with the move higher.

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