Market Outlook for week of June 8th

MARKET OUTLOOK: Week of June 8th

Friday was the perfect summary to two weeks of random events driving the markets in either direction. As we have discussed this is a news driven environment and nothing has changed to provide a trending event. In simple terms this remains a choppy non-trending market. The economic data remains mixed and even the solid jobs report on Friday was viewed a negative as it supports the Fed’s hiking of interest rates… thus, rates on the ten-year treasury rose 12 basis points to close at 2.4% and the highest since last November when the same treat was present in the market relative to higher rates. The reaction is speculation on what may take place moving forward… not what will happen.

Where does this leave us heading into the trading week? We have the same approach… take what the market offers and use risk management to deal with the events as they unfold. Speculating only causes anxiety. To me it is like going into a “haunted house” at Halloween, you know something is going to happen you just don’t know what or when. In the void your mind makes up all kinds of possibilities creating the anxiety that leads to irrational reactions. The same is true when you speculate in the markets. This week promises more economic data and more insight to what the Fed will do. Don’t forget the issues in the Euro Zone with Greece and the ECB. Bottom line… proceed with caution and manage the risk.

With this being a news driven market we have to pay attention to the headlines for explanations of the daily events… not my favorite as it virtually changes every day. That explains the volatility we are seeing intraday and some day-to-day. Some headlines to watch this week:

  1. Greece to be one of the top headlines this week as they finalize a deal or exit the EU.
  2. Federal Reserve timing on interest rate hikes. Jobs report on Friday on fuels the debate on when and how much.
  3. Plenty of advice on what to do in anticipation of #2.
  4. Interest sensitive assets like REITs (IYR or SRS), Bonds (TLT or TBT), Utilities (XLU or SDP) will show up in the headlines as well.
  5. Gold in that it is at a critical support level on the close Friday. $1170 broke and $1140 is next. That brings $1006 into play.
  6. Federal government security breached. This is becoming a bigger concern worldwide. The software companies jumped on Friday on the reports and that may well continue as spending is likely to rise as a result. FEYE and ININ are two in view. HACK is a ETF that holds 26 of these stocks worth scanning in view of this news.
  7. Financials like the higher rates as they should equal higher profits… they are showing up in the headlines as well and the bank ETF (KBE) broke to a new 52 week high.
  8. The US dollar spiked higher on Friday in light of the Greece issues. Currency has joined the volatility ranks on the news driving geopolitical issues.
  9. Economic data: productivity fell more than expected and labor costs rose… that equals inflation concerns… that adds to the Fed hiking interests sooner. By the way… who is the IMF to give advice to the US Federal Reserve on interest rates?
  10. Crude oil remains an issue globally as OPEC votes to maintain market share and let price continue to fall or flatten near the $60 mark. The only upside in the sector near term would be the refiners based on what we know now.

News driven markets offer the most risk relative to volatility and trading ranges. If you trade or invest in these events approach them with a defined strategy and risk management process. Don’t assume anything and always understand where you stand relative to an exit plan… See you next week!

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

  1. Semiconductors (SOXX) have managed to give back all the gains from the break above the $97.50 mark. They tested that level again on Friday and now we look to see if support holds and if any opportunity arises from the move. $99.20 upside is the level to watch Monday.
  2. Small Cap (IWM) nice move back to the previous highs and follow through is worth looking to add a position… again.¬†Bucked the trend on Friday.
  3. Retail (XRT) moved above $99.75 resistance and offers some upside possibilities with a follow through. $100.25 entry point for trade higher.
  4. China (FXI) is back in the headlines relative to the US. The banter over nothing continues, but there is plenty of speculation… the outlook for further stimulus on the way has all eyes are on the buy side?¬†Still testing support at this point ($48.70) and looking for direction on direction.
  5. Japan (EWJ) has established a technical wedge of consolidation near the highs. The break higher would be a positive short term for the country ETF. Watching how this unfolds short term. 50 DMA is support break lower??? EWV at 47.05 entry?
  6. Healthcare (XLV) remains a sector in a trading range, but the parts are interesting.
    1. Pharma (XPH) starting to confirm the reversal off the May lows. Sector is of interest looking longer term as a hold and manage the risk. Entry $125.50.
    2. Biotech (IBB) attempting to move higher again with $366 level of resistance level to take out. Use that as level of entry for s short term trade on the break higher, added Friday $366.50. Stop $355.
  7. Transportation (IYT) is attempting a bottom reversal and scanning the index shows stocks like JBHT, MATX, FDX, JBLU and LSTR leading the move. Watching for opportunity to unfold in sector or stocks.
  8. Banks are moving higher and we own KRE as position… the individual stocks are moving obviously and Bank of America hit an entry on break above $17 on Friday. Watching this to see what opportunities is produces short term. Scanning the ETF gives you more opportunities to look at as well.
  9.  China (FXI) testing support, but individual stocks are moving again. WUBA, SFUN, JD, SOHU, etc. digging for the opportunities within the country.
  10. Gold miners (GDX) they broke lower on the price of gold drifting lower. DUST cleared the $15.20 entry and watching today to see how it unfolds.

 

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) index isn’t acting well based on the current indecision from investors. The 10 DMA has formed a resistance over the index and close lower at $209.77¬†Friday. That coincides with moving below the¬†50 DMA and the next level of support near the $207.50 mark.¬†Keep your stop on positions at the $204.50 level. The trends are still intact on the upside, but they are being tested near term.¬†Don’t rush to any conclusions on the downside yet, let it play out.

NASDAQ 100 Index (QQQ) held above the $109 support, but intraday tested below the support. Uptrend is being tested off the March low and the 50 DMA. Our stop remains at $104.40 on short term positions (3-9 month horizon). Mixed reaction with software (IGV) rising and semiconductors falling (SOXX)

Russell 2000 Index (IWM) The index moved back above¬†the¬†$123.75 level. The¬†stop at $122.50 on trades (0-13 week)¬†holding. Nice gain on Friday as index bucks the selling in other indexes. Don’t assume anything as this unfolds… expect volatility short term. The last three days defines the uncertainty in the sector and the market overall.

Volatility Index (VIX) Closed at 14.2 with divergence between the volatility lower and the index higher? That is truly a great picture of what is going on the broader markets. Sellers fighting it out with buyers on direction, but the VIX shows no anxiety in the process even when the index moves lower on the day. Watching to see how this unfolds. Close above the 15.3 mark would be of interest relative to the downside in stocks.

Transportation (IYT) Broke support but has created a potential bottom reversal the last week. 50 DMA crossed below the 200 DMA as technical sell and it is still in play.¬†The index is in a downtrend¬†short term and looking at the sub-sectors we still don’t see any leadership. Trucking is leading the bounce and one sector to watch.

Dollar (UUP) Oops… the dollar gets a thump in the head again as things a looking good in Europe… Oops, forgot about Greece and the dollar jumps higher. The $24.88 level is next for support to hold. News is driving and not willing to trade emotions for now.

Crude Oil (OIL) Tested support again at $56.75 and bounced again to close at $59.13 for the week. News driven on OPEC, supply, demand, rig counts, etc. etc. It is a moving target and not one worth aiming at currently. Energy stocks broke support and are in position to test the March lows. This shows investors sentiment towards the price of crude near term.

SECTOR STORIES: 

Energy (XLE) the short side has set up and now is a good time to add to the positions on break from consolidation at the $19.20 level (ERY). Hit the entry point and watching how it unfolds. Stop $18.80.

Telelcom (IYZ)¬†telecom moved to support at the $29.70 mark. Bounce or break lower? The break lower takes out the trendline from the October low and offers a downside trade opportunity. In a four week trading range near support… watching for the opportunity if it develops.

Internet (FDN) tech moving and internet is part of the move higher. Breakout at 67.70. Hit entry and the stop is at $66.75. Following through short term on the upside for the sector. Trend remains on the upside.

Emerging markets¬†(EEM) breaking lower opens short trade opportunity if you are willing to take the risk. EDZ is the ETF on short side with 3 times leverage… you can adjust your trade size to account for the leverage and allow for more volatility in the trade. Entry hit at $29.60. The stop should be $30.57 on move higher in EDZ.

Regional Banks (KRE) – breaking 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… questions answered for now on upside direction.¬†$41.75 is the stop. Manage the move accordingly.

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. Nice bounce for the day… Watching the near term opportunity.

  1. HACK – the software security stocks are running on the breach in government systems. Watching and letting it run for now. Don’t get greedy and ladder your stops on the upside move. Stop $30.60.

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. That happened on Wednesday and looking for follow through¬†Thursday, didn’t happen, test lower for now. May report showed slight move higher, but nothing great. Trend fundamentally on the consumer is flat and that is keeping things in check for now. $74.50 exit point on the downside.

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. Tested $24.50 support again, but bounced on Friday with banks leading he way.

Healthcare (XLV) РFound support at the $71.25 mark and reversed and headed towards a new high as the confidence returned to the sector. Short term $74 level to watch for support or move above the $75.25 level of resistance. Stop $73.50.

Industrials (XLI) – if the global economies continue to recover and growth takes root… industrial stocks should rise from the dead. This story will take time to validate, but it is one worth our attention as we move forward.¬†Trading range and downtrend off the February high are the key issues for entry. $55.50 exit point if sellers remain.

  1. Kansas City Southern (KSU) shows why the transports continue to struggle. Put in a low and¬†a reversal… looking for follow through and possible upside trade technically. bought the follow¬†through and $93.75 entry on the bounce. Stop $90.40.

Dow Jones Industrial Average (DIA) selling returned to the index and broke $179.75 support offering trade on the short side with SDOW. $18.60 entry on the leveraged ETF and stop at $18.20. Aggressive short trade, but the set up was the way I like to see when adding a short play.

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