Markets celebrate new year moving higher

Market Outlook for January 3rd

Happy New Year! The markets started 2020 with a positive day to start the year in positive territory. The major indexes all close in the green and sectors like semiconductors rose more than 2% on the day. Money flow ticked higher on the day showing new money being put to work to start the new year. Large caps were the clear winner on the day adding to the new highs. Volume was above average as traders returned to work following the holidays. All is well on Wall Street to start the year. The question for me, how much ‘new money’ is there to drive the markets higher. A second question, where are the small-cap/growth buyers? The answer to those will give us a clue of how the year begins to unfold.

The S&P 500 index closed up 27.1 points to 3257. Solid gain to start the new year. Seven of the eleven sectors closed higher on the day with industrials and technology leading the day. The downside was led by utilities as money looks for opportunities. The long-term trend is up and the move Thursday established another new high. Trade remains a big question mark for everyone. Watching and managing the current risk.

The NASDAQ index closed up 119.9 points at 9092. The move puts the index back above the 9000 level and new highs. The index is being led by technology and semiconductors sectors as we start the new year. Adjusting our stops on positions and letting this unfold. Large caps remain in a positive trend with the bounce on Tuesday. The long-term trend remains positive with news driving currently.

Small-Cap Index (IWM) The sector led the move back to the April highs and in a consolidation pattern and finally made a break higher at the $162.50 level. The last week made a move higher to take on some leadership. Watching the dip to the 10 DMA on Friday. Still not taking a leadership role as the index lagged on Thursday.

Transports (IYT) The sector moved to $200.55 and hit resistance. Then moved below the $192.42 support level only to manage a bounce-back, but there is still plenty of doubt. Diesel fuel stockpiles are growing… they should be dropping in December delivering goods? Watching how trucking stocks perform near term. Still lagging and testing the $192.42 level of support. Added to selling on a bullish day for stocks.

The Dollar (UUP) The buck has been moving down as it struggles against foreign currency changes on the “proposed” phase one trade agreement. Speculation is driving the activity. More selling in the dollar. Finally a bounce on Thursday.

The Volatility Index (VIX) Dropped back to the previous lows all week until it showed some anxiety on Friday closing at 13.4. Watching how the new week unfolds. Added to Friday’s anxiety closing at 14.8… Fell to 14 on Tuesday and 12.4 on Thursday’s buying activity.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector moved to new highs on Friday and joined the upside party. Adding some leadership finally. Best of the day on Monday. In a defined trading range at the current highs.

Biotech (IBB) Tested support at $96 bounced and moved back above the $101 and $105 resistance level. We cleared the July highs and the renewed uptrend as we manage the risk accordingly. Entry $101.45. Stop $119.33 (adjusted). LABU $32.55. Stop $58.68 (adjusted). Concerning move on Friday and watching how the week unfolds. Breaking lower with more selling on Monday. Added to the test and bounced Tuesday. Thursday selling resumed… watching how this unfolds.

Semiconductors (SOXX) Broke higher from topping pattern on the chart following a great run off the October lows. The leadership resumed this week with a solid gain and providing positive leadership. Added to the upside move. Held the 10 DMA on Monday. Moved to new highs on Thursday leading the upside move.

Software (IGV) The sector tested the lows of the trading range and bounced at support in October. The steady grind higher has not been easy. The move above $220 was a big positive for the sector. The test of support held and the upside resumed this week closing at new highs. Adjusted our stops and letting it run. Moved to the first level of support. Bounced some on Tuesday. Added to the upside with new highs on Thursday.

REITs (IYR) The upside trend is coming into question as money flow declines and rotates to other sectors. The outlook for interest rates rising rattled short term investors creating some selling in the sector. Tested the 200 DMA support and bounced… watching how this unfolds. The only positive sector on Monday. Continued upside move. Selling returned on Thursday as money rotated.

Treasury Yield 10 Year Bond (TNX) The yield closed at 1.87% and lower for the week. Money is rotating again as investors remain focused on the deal or lack of a deal with China. The lower possibility of rate cuts in 2020 is pushing rates back near the 2% level. Yields ticked lower to 1.88% after move to 1.95%… rotation?

Crude oil (USO) Crude broke above the $58.25 levels on optimism of a trade deal with China. That is all well and good, but the reality of inventory levels would be my concern. This week saw a bigger drawdown than expected and speculation pushed crude higher. Taking what is offered, but managing the risk of the trade. UCO entry $16. Stop $19.79 (adjusted). Weaker dollar helping crude.

Gold (GLD) The upside in gold was driven by speculation of the rate cuts and global weakness overall. The tug-o-war of tariffs, interest rates, and speculation should play into the strength of gold, and you can see on the chart the steady higher since November lows. The consolidation pattern broke higher this week. UGL entry $46.90. Stop $48 (Stop Adjusted). Breaking higher from the trading range. Weak dollar producing rally in gold and gold miners. $144.20 level to clear.

Emerging Markets (EEM) Bounced from the bottoming range established in August cleared resistance at $42.25 and cleared the September highs. The positive trend higher came from the hope of a US/China trade deal. We cleared the $44.10 level and moving higher. EDC entry $76.40. Stop $88.22. Gapped higher on stimulus news from China.

China (FXI/YANG) hope springs eternal… deal or no deal? The question remains, but there are tweets a deal is done and moving on to ‘phase two’. The upside is in play and the risk remains highs. Moving higher. Gapped higher on government stimulus.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for January 2nd: Markets kick off the new year with some new highs and some money rotating towards stocks as money flow rises. China stated it was adding money to the system… i.e. Federal Reserve in the US… stocks gapped higher in China and emerging markets. The game is on for how the first month will unfold for stocks. The lagging growth sectors such as small-caps is not helping my confidence. The rise in large caps is positive on the day with NASDAQ 100 index leading the day. Watching and adjusting as necessary day by day.

  • Semiconductors (SOXX) led the day on the upside hitting new highs.
  • Software (IGV) added solid gains for technology closing at new highs.
  • Consumer Discretionary (XLY) closed at new highs.
  • China (FXI/YINN) gapped to new highs on stimulus offer.
  • NASDAQ 100 (QQQ/TQQQ) posted new highs on day.

WEDNESDAY’s Scans for January 1st: Happy New Year – Markets closed.

TUESDAY’s Scans for December 31st: Last trading day of the year finds support and holds the uptrend. No big changes as the buyers find there reason to add positions or add to existing ones. A solid day to end the year as some take gains and look for new opportunities to start the new year.

  • Treasury Bonds (TMV/TLT) rotation remains as interest rates are creeping back towards the 2% level. Holding our short position and watching how this unfolds.
  • Volatility Index (VIX/UVXY) declines on the day in anxiety but levels remain elevated. Watching.
  • REITs (IYR/URE) upside returned after tumbling to support. Watching.
  • Brazil (BRZU/EWZ) testing the July highs… solid upside move and we adjusted our stops.
  • Global stocks are enjoying a rise finally. GREK, EWU, EWS, EWC, IEV.

MONDAY’s Scans for December 30th: Sellers took control at the open… buyers stepped in, but some volatility showed up on the day. Watching how the last trading day of the year unfolds. The talking heads are focused on valuations and new year predictions. I am focused on managing money regardless of the day or prognostications. Whatever happens, will happen with or without my opinion. Stay focused and manage the risk along with the opportunities created.

  • Technology (XLK) sold lower on the day… it is the parts that we have to watch with SOXX, IGV, IGN and others dropping more than one percent on the day.
  • NASDAQ 100 Index (QQQ) tested the 10 DMA as the first level of support.
  • Healthcare (XLV) joined technology to lead the downside. Biotech (IBB) has declined to lead the sector lower. Watching how rotation and profit-taking are acting on the sector.
  • Volatility Index (UVXY) jumps for the second day as anxiety levels rise on year in speculations. Hit entry point on the day.
  • Gold Miners (GDX/NUGT) continue to move higher on the decline in the dollar.

FRIDAY’s Scans for December 27th: Some rotation taking place with commodities coming alive. Small caps struggle to end the week and crude jumps on the supply data. Watching how this all unfolds with only two trading days left in the year. Looking forward to the beginning of the new year leaves many questions about stocks and the economy. Taking one day at a time with stops in place.

  • Volatility Index (UVXY) small move in anxiety level for investors something to watch into the new year.
  • Biotech (IBB) showed some profit-taking in the chart. Watching and managing the risk currently.
  • Commodities (DBC) solid upside and watching gold, crude, metals, and agriculture currently.
  • Europe (IEV) hitting new highs again for the week as the hope of trade pushes the indexes higher.
  • NASDAQ 100 (QQQ) broke the string of new highs, but the leadership remains positive for stocks overall.

(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 bounced at support $55.95 level and moved back above the $60 resistance. A nice break to new highs near term. Some selling on Friday.
  • XLU – Utilities moved lower in response to interest rates. Broke support at $63.17. Bounced at support… and resumed the upside. Watching how this unfolds near term. Sold Thursday as money rotated.
  • IYZ – Telecom picked up volatility with the markets and testing the $29.50 level of support and bounced.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs. Moved to new highs. Rolling top.
  • XLI – Industrials moved back and cleared the $79 resistance. Moved above the July highs and hit new highs. Tested lower and bounced on hopes of another trade deal. Broke to new highs from the trading range.
  • XLE – Energy remains in at a point of indecision. It did hold $58.19 support and bounced back above the $50.52 mark and stalled at the October highs. Watching for positive momentum. Bounced from recent selling.
  • XLV – Healthcare held support at the $86.75 level. Bounced and cleared resistance at the September highs. Taking on a leadership role as the sector moves to new highs. A solid break higher and good leadership.  Fell to key level of support on Monday led by biotech on the downside.
  • XLK – Technology broke to new highs along with semiconductors. Both tested the moves and resumed their respective leadership roles. Watching the parts with SOXX, IGV, IGN, and others moving lower. Solid bounce from all to start the new year and hit new highs.
  • XLF – Financials got a boost from solid earnings pushing the sector higher. Cleared $28.24 resistance. Broke to new highs, tested, and resumed the upside providing leadership for the broad index. Bounced on Thursday.
  • XLY – Consumer Discretionary tested but remains within the current trading range. Positive sales data has helped the sector. Looking for the break to new highs. Got the break higher on positive sales data for the holidays. Gapped to new highs on Thursday.
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… only to retest the lows again and bounce… watching. Selling returned as money rotated.

There are currently two sectors in a sideways or consolidation trend. Seven sectors are in confirmed uptrends. Two sectors in a confirmed downtrend. The result is SPY in a confirmed upside trend short term. We have to remain patient and let this all unfold. Remember the parts make up the whole.

(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: Solid start to the new year as money found its way into stocks. The large caps were the primary beneficiary along with technology stocks. The Russell managed a gain of only 0.1% showing the laggard small-cap stocks. Chinese stimulus helped the emerging markets gap higher. Interest rates dipped pushing bonds higher. An overall interesting start to the new year and we will be cautious in how we approach the move overall. Letting our profits run and managing the risk accordingly.

Wednesday: Happy New Year… Markets are closed.

Tuesday: The final day of the trading year is positive as is the total year for the indexes. The final quarter was impressive with the indexes posting double-digit gains as the find support and move to new highs. All eyes turn to the new year and watch how it unfolds. Small caps as always will be watched in the month of January as an indicator for stocks the balance of the year. Growth stocks have lagged of late and looking for some clear signs for a positive year in 2020.

Monday: Not the hope many had for the year-end party as stocks move lower on the day. Some signs of profit-taking and rotation as the talking heads continue to bang the drum of valuations. Where have they been all year as the fundamental data showed a continued downward trend? It is always easiest to prognosticate when things are obvious. The key to remember is the Fed is behind the market with liquidity. The question is how long they remain. There still is not a signed trade deal. Fourth-quarter economic data will start next week. Plenty in the hopper to watch and avoid the chatter of the financial gurus who get paid to chatter.

Holiday week with low volume trading and holding the new highs. The trade deal is still being rumored as progressing and stocks managed to post a positive week. The S&P 500 and NASDAQ indices pushed to new highs again as stocks look to close out the year with solid gains. Is there enough hope to continue the move on the upside? That will depend on the trade deal, economic data, and retail earnings. Geopolitics, politics, and tariffs remain high on the worry list for the markets. Third-quarter earnings were better than expected offering a positive catalyst for the last two months. The economic data last week was mixed but steady. Retail is showing positive as the consumer continues to drive the economy. The backstop of the Fed for liquidity has been key in the move higher and they continue to be engaged in the liquidity game. The dollar fell on the week as the trade deals weigh on the buck. Interest rates closed at 1.87% and down for the week. The money flow was lower on the week with the holiday. The VIX index moved higher to end the week as investors some angst about the markets. Trade with China and the US remains at the top of the list. The key is to watch the trend, know which side the Fed is on, 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.