Markets closed the week in negative territory

We are back to pin the reason on the selling… with the S&P 500 index down 2.8% for the week including the 2.4% drop on Friday, investors are looking for a reason or rationale to stay invested. As those reasons get clouded by speculation of the new fallout from the surge in coronavirus cases many are worried about future growth. Florida and Texas took steps to close down bars that are already struggling from the last closure. This started another round of speculation about shutting down the economy a second time. From this what-if scenario, the markets moved lower on Friday and many speculate it is only the beginning of a retest of the March lows. Drama is a part of investing and with it comes opportunities. We have to maintain our sanity and look where the opportunities lie moving forward. Patience and risk management are the focus as we move into the second half of the year.

In The News:

Short news notes of interest… 1) A day after banks got news from the Fed on passing the stress test, the fed decided to require banks to suspend their share purchases and cap dividend payments in the third quarter, that sent the sector down more than 6%. This is a sector already struggling and the move broke key support on Friday… something to watch as we start the new week of trading and quarterly earnings on the horizon. 2) Consumer spending showed a positive rebound in May, but that was overshadowed by the worries about the delay in states reopening on the rise in coronavirus cases. 3) Facebook remains in a feud over labeling content. The stock fell 8.3% on Friday as companies suspend marketing on the website… something to watch and find the opportunity in the reality. SOCL fell 2.9% response to the news. 4) We are at the end of the second quarter and the rebalancing of mutual funds and ETFs could have played a role in this week’s volatility… we will see how the new week unfolds. 5) Personal income declined 4.2% for May… that followed a 10.8% increase in April. Personal spending jumped 8.2% as people went out on the reopening. Personal savings remains high at 23.2% of income. All said, consumers are being conservative currently and that in turn will impact the economy short term. 6) All the worries pushed gold higher to end the week and we continue to monitor our positions in the metal.

The S&P 500 index closed down 74.7 points to 3009. It was down 2.4% on the day as the index struggled on speculation. The worries about the coronavirus surge and stock valuations have kept a lid on the markets of late creating some downside. All eleven sectors closed in negative territory for the day led by energy and financials. The downside in financials raises a red flag as we watch how it unfolds next week. The VIX index moved to 34.7 with intraday volatility continuing to rise. The view for second-half growth is starting to weigh on stocks. Managing our risk accordingly.

The NASDAQ index closed down 259.7 points at 9757. The index closed down 2.6% for the day. The index moved back below the 10,000 level and closed near 9737 support. Technology and large-cap stocks continue to shape the day-to-day activity for the index. The NASDAQ 100 index (QQQ) was down 2.3% for the day and tested $239.30 support. The $233.41 level is the stop as we now watch how this unfolds. Semiconductors (SOXX) closed down 1.8% for the day and watching support at the $255 level near term. Technology (XLK) was down 1.9% for the day and held the 20 DMA. Watching how this plays moving forward.

Small-Cap Index (IWM) The sector had posted solid gains and had taken on a leadership role only to give that up and test lower. It held support at the $132.55 level and moved into a consolidation pattern on the chart. Watching for clarity.

Transports (IYT) The sector jumped 16.6% on optimism and rotation. The sector fell 12.5% since… Fast money moving and watching how this unfolds relative to the trend. The sector is at key support in the current trend with a topping pattern on the chart.

The Dollar (UUP) The dollar broke lower from the consolidation pattern and was in a downtrend short term. There was a modest bounce this week in the dollar. Watching the bounce and the outlook near term.

The Volatility Index (VIX) Anxiety returned to markets this week as the last three days show a significant increase in the intraday volatility. We closed at 34.7 thanks to the weaker economic outlook from the analyst.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector tested off the high and is moving down to sideways of late. The challenges facing growth is the rationale… watching how it unfolds with no holdings currently.

Biotech (IBB) The sector has been in a consolidation pattern that broke higher… and is now testing the move. Watching how the new week unfolds.

Semiconductors (SOXX) The sector tested the $255 support and held. The uptrend is still in place and the anxiety level a little higher… The money flow is flat. Taking what is offered and raising our stop to $255. Testing the move higher in a flag pattern.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $270 (adjusted). Entry $205.10. Some testing with the markets moving lower, but the trend remains positive.

REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. The Federal Reserve has stepped in to stem the downside. The current pattern shows consolidation with a downside bias… watching how it unfolds. At key support on Friday.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.63% down slightly from 0..69% last week. TLT has been a benefactor of the fear trade emerging again. Bonds made a key move higher and watching how this unfolds in the coming week. Entry $161. Stop $161 (adjusted).

Crude oil (USO) Crude moved to a high of $40.77 on the week and then closing at $38.49 for the week. The data is showing a reduction in production and consumption as this unfolds relative to the data. 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.

Gold (GLD) The metal tested lower to $158.94 support and broke lower for a day… we were looking for a bounce and trade opportunity in the trading range and it unfolded… added at $158.90. Stop at $161.86 (adjusted). Closed the week at the highs. Manage the risk.

Emerging Markets (EEM) Broke from the trading range and above the April highs. Tested, bounced, and now in trading range at the near term highs. Watching and letting this unfold.

China (FXI/YANG) Moving higher on the recovery phase starting for the global economies. Despite all the banter with the US/China trade, the country ETF is making moves higher with some testing on the week. Erased the break higher and holding in the previous range.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for June 27th: The Fed returned to the headlines taking away share purchases and capping dividend payments for banks… that sent the sector lower and the balance of the market joined in with the spike in coronavirus cases. There is plenty to ponder relative to the outlook, but the key factor now is clarity. Without the belief of a second-half recovery the second quarter recovery may be in for a bumpy ride the balance of the year. Taking it one day at a time as the data unfolds along with the money flow.

  • Financials (XLF) easy come easy go. The Fed changes rocks the sector to a 6% decline, breaks support, and puts the sector in jeopardy of more downside. Watching FAZ opportunity.
  • Gold (GLD) upside remains in place with some stall in the move… the dollar gets credit for that… but, the fear factor looming offers upside opportunity… managing our stops and letting this unfold.
  • REITs (IYR) at key support… breaks downside becomes an opportunity… SRS = double bottom pattern.
  • S&P 500 Index (SPY) double top pattern on the chart… breaks key support the downside could unfold.
  • Treasury Bonds (TLT/TMF) upside back in play as stocks losing ground. Broke above resistance to close the week and watching how the fear trade and money flow shifts.

THURSDAY’s Scans for June 26th: The news from the Fed and banking regulators helped ease some stress as financials lead the markets on the upside Thursday. No questions were answered relative to the outlook for the economy only more added. The issues around unemployment are getting cloudier as large companies delay openings and full employment due to the spread of the coronavirus. Taking it one day at a time for now and letting the trend unfold near term. More consolidation currently.

  • Financials (XLF) got a boost from the Federal Reserve stress test results. The also got confirmation the Fed would provide any needed liquidity helping the sector rise 2.6% on the day… watching.
  • Energy (XLE) bounced back some from the selling on Wednesday as the fuel demand rose in the US. Watching how this unfolds in the face of the increased cases and slower opening of the economy.
  • Natural Gas (UNG/DGAZ) short side spikes higher again and we adjusted the stop… This is a new low for the commodity.
  • Volatility Index (VXX) the intraday moves are picking up. Watching if the anxiety overall starts to rise again.
  • The S&P 500 sectors now total ten of eleven sectors in consolidation patterns. This is a sign of uncertainty from investors. There has been a rotation among sectors, but the key will be how this consolidation unfolds. Watching for direction simply put.

WEDNESDAY’s Scan for June 25th: The sellers showed up as the news about the virus finally broke the upside string. The challenges the economy faces due to slower openings and keeping people inside is a reality. We will see how this impacts the current trends and take the necessary steps to protect the recent gains on the upside.

  • Energy (XLE) broke support and the 50 DMA. The renewed weakness in the sector is raising questions about the outlook near term. Short side opportunity if it confirms the break lower.
  • Small Caps (IWM/TZA) downside move worth watching. A break lower will offer short side trade opportunities.
  • Volatility Index (VXX) Moved higher after testing support this week. Watching how this unfolds and if the anxiety levels rise in stocks.
  • Biotech (IBB) tested the upside move and managing our stops.
  • Treasury Bonds (TLT) bounced and back to resistance… will money flow rise as investors seek safety… watching.

TUESDAY’s Scans for June 24th: Another positive day for the leadership and more challenges for the laggards. The number of headlines now focused on the valuation of the markets and what happens next is growing… sometimes corrections become a self-fulfilling prophecy. Taking what is offered, managing the risk, and watching the data.

  • Small Caps (IWM) remains a laggard for the overall markets and looking at how the consolidation pattern unfolds.
  • Financials (XLF) another laggard for the markets. Watching support at $23.50 as an indicator.
  • Leisure & Entertainment (PEJ) corrected from the June highs… watching how this pattern unfolds.
  • Natural Gas (UNG/DGAZ) short side trade rises again. Adjusted our stops to account for the move.
  • Biotech (IBB/LABU) solid rise higher… adjusting the stop.

MONDAY’s Scans for June 23rd: Interesting start to the week of trading as the technology sector continues to lead the NASDAQ higher. The other indices are struggling to hold near the current levels without much change. Plenty of talk about valuations in the news, but it only matters when the money flow shifts… currently it is still positive. Taking what is given and managing the risk as it is presented.

  • Crude Oil (USO/USL) still on the rise as crude clears the $40 level. Adjusted our stops on the move. Gasoline (UGA) advanced as well.
  • Financials (XLF) moved lower and back to key support at the $23.50 level. Watching how this unfolds near term.
  • Gold (GLD/GDX) more upside as it breaks from the trading range as the dollar shows weakness. Adjusted stops.
  • Apple (AAPL) leaves Intel to use its own chips in Mac. Pushed to new highs on the news and raised stop.
  • Netflix (NFLX) broke from flat base and rose to new highs. Providing leadership for the NASDAQ. Adjusted stops.

(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 offering upside trade opportunity. Now testing the $54.15 support levels and exit point if we move lower.
  • XLU – Utilities reversed the move higher and moving lower testing the $55.24 support levels. Watching for the opportunity.
  • IYZ – Telecom moved to the April highs and then breaks the $27.63 support. Threatens the uptrend line from the March lows… no positions.
  • XLP – Consumer Staples moved lower again testing support at the $57.17 mark and remains in a sideways trend. Break of support offers downside opportunity.
  • XLI – Industrials broke higher from the consolidation pattern. Tested support and broke support at the $67.50 mark. What happens from here? Downside?
  • XLE – Energy established an uptrend from the March lows… accelerated on crude prices, but has now broken the trendline and struggling to hold key support levels. The downside is in play for now.
  • XLV – Healthcare moved above $88.50 level and offered upside opportunity. The sideways trend remains in play with the sector closing at the bottom of the range. A break lower offers downside opportunity.
  • XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently and broke higher from the topping pattern and adjusting the stop. SOCL under pressure on the week. SOXX and IGN weighing down the sector.
  • XLF – Financials broke lower this week as the Fed intervenes in ways seen as costly… no share purchases and capped dividend payments for the third quarter. Watching the downside risk in the sector.
  • XLY – Consumer Discretionary broke from the trading range and established a solid uptrend. Approaching the February highs and stalled and is trading in a consolidation pattern. Watching the outcome.
  • IYR – REITs struggle to find money flow. The move below $77.90 was negative this week. The uptrend line is in play… a break lower offers downside trade. Watching how this unfolds.

The trends are being challenged by news and investor activity. Some consolidation patterns building this week and watching how they unfolds going forward. We have positions based on our defined strategies and managing the risk accordingly as we take some exits this week. Using the six-month charts as an indicator for the short term view… Five sectors are in confirmed uptrends (down from eight last week). Six are consolidation patterns (up three from last week), and none are in downtrends (several on the cusp of breaking lower). The result for SPY is in a move to sideways trend short term with a consolidation bias for the week. The leadership is seeing some rotation as money flow shifts directions.

(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:

Weekend Wrap & Outlook… The coronavirus leads the headlines for the second week with the record rise in new cases in six states. That puts caution in the markets and money begins to rotate. The broad indexes posted a negative week which is now two of the last three weeks. Add to speculation the Fed restricting banks on Friday to cap dividend payments and stop share purchases. It is keeping a cloud over the market along with some increased volatility in the last three days. China-US trade tensions are back on the table as China threatens the US if they intervene in Hong Kong or Taiwan. The NASDAQ’s pushed back towards the record highs giving up the gains to end the week. There are so many questions left unanswered for the simple reason it will take time to know… thus, all the questions start to cut into money flow as it shifts towards safety. The treasury bonds rose on the week and break above resistance points. With the reopening process being challenged by the spike higher in coronavirus cases markets begin to test and in some sectors reverse trends. The VIX index moved back to 34.7 after testing the support levels earlier in the week and intraday volatility spiking. Some downside opportunities are setting up based on the current charts and money flow. We will monitor these throughout the week. We took some money off the table and raised cash as money rotates out of stocks. Our job remains to manage the risk accordingly. All eleven sectors posted losses for the week as they show strain from the current environment. Gold continued to bounce moving back to the top of the trading range. Crude oil moving sideways as it struggles with the $40 a barrel level. The focus is starting to turn to the future outlook for growth and how long it will take to see a recovery. Many analysts are now saying the fourth quarter… I say that is a bit optimistic. 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. 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.