Markets end the week on a negative note

Market Outlook for February 10th

The four-day rally comes to an end with stocks closing lower on Friday. All good things must come to an end as traders were willing to take some profits moving into the weekend. The jobs report was positive with 225,000 new jobs added. The jobless rate now stands at 3.6% and near a half-century low. The average hourly earnings climbed 3.1% year-over-year. It was a good week for the markets as the indexes climbed to new highs. As I have stated all week there things to be concerned about and things to be happy about. We will take what the market gives and manage the existing risk.

The S&P 500 index closed down 18.1 points to 3327. The index hit new highs for the week and posted a solid gain move back above January highs. One of the eleven sectors closed higher on the day with consumer staples leading the way. The downside was led by technology and materials as late-day selling turned the index negative. Money flows into stocks on the week renewed the near term uptrends. Ten of the eleven sectors closed the week in positive territory with only utilities negative. Watching, listening, and managing the current risk.

The NASDAQ index closed down 51.6 points at 9520. The index closed the week above January highs. The index was lower on Friday but managed to post a solid week in the green. The NASDAQ 100 large caps set the pace throughout the week closing near the high. Semiconductors didn’t look great for the week and closed off 2.3% on Friday. We are managing our risk and looking at what unfolds near term.

Small-Cap Index (IWM) The sector continues to lag since the highs on January 16th… The negative turn off the January 18th high found support at the $160.17 mark and is holding for now… watching.

Transports (IYT) The sector moved to $200.55 and hit resistance. Reversed and broke support at the $192.42 level. Found support at the 200 DMA and remains in the current trading range. Worries about the virus in China hanging over the index.

The Dollar (UUP) The buck has returned to the upside accelerating all week. Fed is back adding liquidity in the repo market helping the buck. China’s tariff relief on Wednesday pushes the buck higher along with crude.

The Volatility Index (VIX) Anxiety reversed near 15 on the week but remains elevated despite the buying all week. We closed at 15.4 and watching how the new week unfolds.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector followed small caps lower breaking support at $203. Bounced early in the week showing some signs of life, but that ended and back near the $204 support.

Biotech (IBB) The sector hit highs at the $124 mark and since became indecisive. The double top pattern played out breaking below $117.90. Then bounced off the lows. Cleared $117.92 and $120.89 resistance working towards the previous highs. Finding some resistance at the previous highs.

Semiconductors (SOXX) January 24th intraday reversal to close lower was a negative sign for the sector. Found support and bounced, but still not looking ready to resume the uptrend. Watching how this unfolds in the new week. $247.56 level to hold.

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 test of support held and the upside resumed with some small tests along the way. Closed the week near the highs and watching how this unfolds.

REITs (IYR) The sector has turned into one giant consolidation pattern. The upside resumed clearing the $93.50 resistance and hitting the $96 resistance… watching.

Treasury Yield 10 Year Bond (TNX) The yield closed moved to 1.65% and then reversed back to 1.57% to close the week… still seeing money flow to bonds despite the rally in stocks. Something to watch.

Crude oil (USO) Crude moved to $64.22 on speculation. Crude fell to $50 on the speculation falling short and the China virus. Watching how this plays out with the downtrend in play. SCO hit stop but still on watch list if the downside resumes

Gold (GLD) The upside in gold was driven by speculation of the rate cuts and global weakness overall. Geopolitics played a part in the China trade agreement. Now throw in the virus fears and it breaks from the consolidation pattern at $146.60. UGL entry $46.90. Stop $52.15 (Stop Adjusted). Letting it unfold.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from December. IT did bounce at the 200 DMA, but volatility remains on speculation. Watching and letting this unfold.

China (FXI/YANG) Finally gets a trade deal to help the upside trend emerge… then the coronavirus erases all the gains. Watching how it unfolds.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for February 7th: The markets find their way lower on the day after a solid start. Profit-taking? I would say there were some as the technical data on the charts are not support the move we see higher. It doesn’t mean the buyer won’t remain engaged… it just means the move is contrary to the data. Watching and letting this unfold one day at time with our stops in place. We did hit stops on several positions this week locking in some solid gains. We will see how this all plays out.

  • Semiconductors (SOXX/SOXS) The sector continues to show some weakness technically. Close below the $254 support levels again on Friday… letting it play out.
  • NASDAQ 100 (QQQ) showing a positive upside on the week and positive leadership from the large-cap stocks.
  • Crude Oil (USO/SCO) downside remains in play as the supply data remains elevated. Hopes of a quick recovery from the coronavirus are fading and the downside risk remains.
  • Small Caps (IWM) still not looking good overall. The weakness in the chart is confirmed by the declining money flow. Money has rotated out of the sector.
  • Treasury Bonds (TLT) the reversion of the yield curve was positive on the week, but the sharp move higher for the bond Friday was a concern worth our attention moving forward.

THURSDAY’s Scans for February 6th: Large-cap stocks lead the day and we see some not so great moves in semiconductors, small, and midcap stocks. I am not convinced by the move in the last four days, but it doesn’t matter what I think I follow the market. But, that said, I did raise stops and continue to manage the risk as I see it. Cautionary signs in the semis and other sectors are keeping me on my toes.

  • Technology (XLK) still leading the markets overall. Watching how semiconductors unfold. Some topping in software as well.
  • Consumer (XLY) solid leadership as earnings validate the consumer is still engaged.
  • Crude Oil (USO) remains near the current lows and watching.
  • Gold (GLD) attempting to bounce again.
  • Transports (IYT) still weak. Small caps (IWM) still lagging. Energy (XLE) still in a downtrend.

WEDNESDAY’s Scans for February 5th: Solid day for stocks again. We did see some rotation of money and we did see some softness after the gap higher at the open. Stocks ended the day higher as we continue to follow the upside move and adjust our stops accordingly. The economic data was positive as well on the day as January data continues to show solid improvement. Important to watch the rotation as money looks for new sectors and growth.

  • Crude Oil (USO/SCO) upside bounce hit our stop on the short trade. Now watching to see if the reversal has any strength or just a one-day event.
  • Biotech (IBB) solid addition to the reversal. Watching how far it runs.
  • Healthcare (XLV) cleared $103.19 resistance and showing some leadership again.
  • Transports (IYT) solid upside move as some fears of the virus eases.
  • Small Caps (IWM) solid upside as money flow rises in the sector.
  • Software (IGV) saw some rotation out as money flow fell. Watching how this leader plays out near term.

TUESDAY’s Scans for February 4th: the second day of the bounce and all is well with stocks again… right? NASDAQ moves to new highs, Tesla if up more than 30% in two days, Fed providing liquidity again, the economic news is positive, and all is well. Or so it seems. There is still plenty of uncertainty behind the markets but investors were drinking the liquidity cool-aid. As I say, take what the market gives, manage risk, and keep moving forward. You still have to manage the risk of the current environment.

  • China (FXI) Gaps higher on the nearly $250 billion in liquidity.
  • Emerging Markets (EEM) gaps higher along with China.
  • Technology (XLK) closed at new highs as money flow rises in tech stocks.
  • Semiconductors (SOXX) bounced, but still not convincing.
  • Europe (IEV/EURL) bounced on liquidity move.

MONDAY’s Scans for February 3rd: Overall not much changed from Friday, but many sectors managed to hold support on a modest bounce. The S&P 500 held the 50 DMA and there were buyers stepping in on the dip… how does it unfold moving forward? Flip a coin and watch. ISM manufacturing surprised with a move back above 50% help the economic outlook… plenty of more data on hand this week along with jobs on Friday. Taking what we know and letting the rest work itself out.

  • China (FXI) posted solid gains on Tuesday. Watching the news about the flu virus is not helping.
  • NASDAQ 100 (QQQ) posted a solid bounce on Monday and watching how it unfolds. TSLA posted a big day. BIDU, GILD, JD, NFLX added as well to the upside.
  • Basic Materials (XLB) nice bounce from the 50 DMA.
  • Crude Oil (USO/SCO) more downside as weakness remains in the commodity and raised stop on our short trade.
  • Biotech (IBB) showed some signs of life bouncing from the current lows… watching for an opportunity.

(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 $58.10 level and back near the previous highs. Remains in long term uptrend and watching.
  • XLU – Utilities are the current benefactor of lower rates and money looking for safer havens. Rolling top on the chart. Adjust stop on the vertical move.
  • IYZ – Telecom picked up volatility with the markets and tested the $29.50 level of support. Holding for now with modest bounce on the week.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs.
  • XLI – Industrials held support at $81.10. Managing the risk that is.
  • XLE – Energy remains in downside move as anxiety rises about China and consumption. Hit stop on ERY locked in solid gain. Watching.
  • XLV – Healthcare breaks lower from the topping pattern. Closed below the 50 DMA and support at 101. Bounced and watching.
  • XLK – Technology in an uptrend and showing a flag pattern at the current levels. Watching how leadership unfolds.
  • XLF – Financials have been in a trading range with IAI being the key leader within the sector. Watching as it hits resistance again at the previous highs.
  • XLY – Consumer Discretionary tying to be the bright spot for the markets. Holding solid uptrend.
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… Solid upside follows through. Entry $93.50. Stop $93.50. Closed the week near the highs.

There are currently no sectors in a sideways or consolidation trend. Ten sectors are in confirmed uptrends. One sector in a confirmed downtrend. The result is SPY in an uptrend 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:

The coronavirus remains center stage but ignored all week. Why? Simply put liquidity from the Fed and China. Both are putting money into the economic system for different reasons, but that money is making its way into the markets. All the speculation that was causing grief two weeks ago was nonexistent this week. Money flow was highs, volume was higher, and thus stocks were higher. We need to focus on what is happening and not on what could happen. Let the future unfold and manage the risk that is. The earnings season has been positive with some solid results posted again this week. The data points will be important to how this unfolds moving forward. Economic data remains okay as January shows improvements all around. That provided some hope as well to investors. Yields on the ten-year treasury bond rose to 1.57% unable to hold the move earlier to 1.65% The dollar remains strong. Gold is holding near the current highs with worries still backing the metal. Money is rotating to where it will be treated the best. Energy has taken the worst hit as crude prices continue to decline. Watching with interest how the new week unfolds… the profit-taking on Friday got my attention with the afternoon selling. Proceed with caution and discipline. 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.