Markets fall as worries rise

Markets take the virus surge to heart as the indexes tumble to start the week. The rise in cases, no stimulus package, economic outlook, shutdowns around the world, and a decline in US home sales all contributed to the worries. Those worries led to selling as the S&P 500 was down more than 2.5% intraday and closed down 1.9%. The move broke a key level of support and put the charts on notice of a possible retest of the September lows. The Volatility index spiked to 32.4 on the day showing the rise in anxiety from investors. We did hit some of our stops on the day and in turn, raised our cash levels. The same issues are in play and the lack of solutions is pushing money towards safe havens. Treasury bonds rose as the yields declined on the day with money flow rising. As said, not a great day for the markets as we watch how the downside unfolds the balance of the week.

Short news notes of interest…

  • New home sales decreased to 959,000 in September. The 3.5% decline from August added to the anxiety on Monday. Some speculated that higher prices deterred buyers. That is a normal response to supply/demand in the sector.
  • The Senate confirmed Amy Coney Barrett to the Supreme Court Monday and set off another round of politics on the horizon.
  • The Senate went home following the confirmation of Barrett to the Court and thus signaled no stimulus until after the election.
  • Walmart stated that sales of supplies are rising again as toilet paper, sanitary wipes, and other supplies in fear of another shutdown.
  • Lockdowns in Spain are starting to see a rebellion from citizens. The side effect of shutting people off from their normal life is rebellion. With more talk of restrictions, the question becomes compliance. How will the world enforce these going forward?

The S&P 500 index closed down 64.4 points to 3400. It was down 1.86% on the day. The index moved lower on the day as the sellers step up the pressure. The close below 3427 and the 50 DMA were both negatives technically. The action was negative throughout the day as energy and industrials led the markets lower. Eleven of the eleven sectors closed in negative territory as investors continue to evaluate risk and money flow shows rotation again. The upside didn’t show up to follow-through on the Friday advance. The VIX index closed at 32.4 showing a spoke in investor anxiety and breaks from the trading range. Negative indication short term.

The NASDAQ index closed down 189.3 points at 11,358. The index was down 1.64% on the day as the index struggled on technology sector worries. The index had rallied 11.8% from the lows on 9/23… and starting show signs of retesting that level… Technology stocks came under pressure again along with the small caps. The NASDAQ 100 index (QQQ) was down 1.5% for the day. Large caps moved below the $282 level after testing the last two weeks. Semiconductors (SOXX) closed down 2.17% for the day and breaking support. Technology (XLK) was down 2.17% and testing the next level of support. Watching how this unfolds as the market shifts gears again.

Small-Cap Index (IWM) The sector bounced at the $144.65 support and managed to hold the move higher… it followed through, but has struggled at the resistance of $162.50. Watching how this unfold going forward. Entry $151. Stop $159. Letting it unfold near term. Positive bounce back from the test earlier in the week. Moved back to the bottom of the range down 2.1% to start the week.

Transports (IYT) The sector topped at $205 and confirmed the upside but struggled of late with earnings data. We will see how it changes the momentum. Managing the risk. Entry $167. Stop $205.63 (adjusted). Fell 2.4% to start the week as worries about shutdowns hit the sector.

The Dollar (UUP) The dollar broke lower and shows a downside trajectory from the 9/25 high. We can blame plenty of data points, but the key thing to understand is we (the government) are supporting a weak dollar policy currently and that isn’t helping the cause.

The Volatility Index (VIX) Volatility remains a question mark as anxiety rises and falls during the week. The uncertainty remains a challenge for investors and the consistent rotation of concerns weekly is keeping the anxiety level elevated. Watching and letting this unfold around facts versus speculation. Big spike to start the week as the index surged to 32.4 and offering an entry for VXX. Entry $23.18. Stop $23.18.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector completed a bottom reversal and cleared the August highs. Taking on a leadership role near term as the sector follows small caps higher. Watching the topping pattern on the chart at the highs with an attempt to break higher on Friday. Sold back to the bottom of the range and support… watching.

Retail (XRT) The retail data released for September was positive and the sector continues to show solid growth. The bounce at the support of $48.35 has eclipsed the August highs and the fundamentals confirmed the trend. Entry $51. Stop $52.68 (adjusted). Shows some near term weakness and topping. Down 2.5% as the volume rises and sellers emerge.

Biotech (IBB) The sector gapped lower, hit our stops, and watching how it responds. The news around the vaccines and antibody drugs has been a drag on the sector near term. Patience. Sold the bounce from Friday.

Semiconductors (SOXX) The sector remains in an uptrend but the chart is showing some topping again. Intel earnings were a drag on Friday and we are watching how this unfolds moving forward. Entry $304. Stop $320.20 (adjusted). Broke lower and tested support.

Software (IGV) The sector has been a key part of the leadership since the March lows. Some testing at the highs and watching how it unfolds. Entry $308. Stop $322.76 (adjusted). Cloud software has been weaker. Moved to support with twice the selling volume.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.84% up from 0.74% last week. Yields rose as stimulus talks failed. Watching as the uptrend from the August lows remains in play. Short side trade offered in bonds with TLT falling. TBT entry $16.34. Stop $15.75. Watching the trendline for some decision points. Yields fall, bonds rally, anxiety levels rise all equals fight to safety on the day.

Crude oil (USO) Crude moved to $39.88 down from $40.85 for the week. Plenty of speculation to drive prices and watching how this unfolds. No position currently in the commodity. Too much talk about the economic impact relative to the shutdowns and virus worries. Energy fell 3.6% in response.

Gold (GLD) The metal broke lower from the descending triangle pattern to continue the negative decline from the spike higher in July. Support at $174 held and is trying to establish a move higher. Watching how this unfolds near term. Breaks higher from the consolidation pattern, but fails to hold the move selling on Thursday and Friday.

Emerging Markets (EEM) The sector held support at the $42.50 mark and reversed to move back above the $45.50 resistance as the dollar dips lower on stimulus news. Entry $44.50. Stop $43.50. Holding near the highs with some testing the last week. Need to hold the $45.40 level of support. Tested on all the news Monday.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENTT

MONDAY’s Scans for October 26th: Spike in volatility shows the unrest from markets as the data points push the fear button. The continued shutdowns and response to the rise in cases is impacting the near term outlook for the economic data. The charts have reflected the uncertainty in the last few weeks, but the sellers on Monday accelerated the reaction. How does this unfold near term? Is there are correction on the horizon? What about the stimulus? What about opportunities? What about clarity? What about??? Too many questions are the result of uncertainty looking forward and therein lies the challenge for the markets near term. Some stops hit, more cash raised, more opportunities on the horizon.

  • Energy (XLE) crude dropped more than 3% on the day and the sector fell 3.6% in response… all speculation, but it didn’t help the reversal attempt. Short side setting up again.
  • S&P 500 Index (SPY) breaks a key support level at 3427. Closed below the 50 DMA. 3330 is the next level of support. Negative day and set up for more downside technically.
  • NASDAQ 100 Index (QQQ) broke $282 support. Closed below the 50 DMA. Volume rose on the selling pressure in the small and large-cap stocks. Negative technical look for the index and watching how it unfolds.
  • REITs (IYR/SRS) selling continued in the sector and set up a short side trade in SRS. Watching how this unfolds near term.
  • Treasury Bonds (TLT) reversal in rates on the day… money flowed into bonds as safety to selling. Watching how this unfolds near term.

FRIDAY’s Scans for October 23rd: Indecision remains for stocks. Earnings are mixed. The stimulus is nothing but talk. The election is 10 days away. And, and, and… Plenty of issues facing stocks moving forward and the lack of clarity in the issues isn’t helping matters. Thus, we take what the market gives, exit where risk is elevated, and patiently wait for the trends to develop.

  • NASDAQ 100 Index (QQQ) stalled and testing key support. $282 is the level to hold if the upside is to continue near term. Volume was lower on the week and worthy of attention.
  • S&P 500 Index (SPY) needs to hold support at $341.76. The testing is in play and the buyers remain at bay. Looking for the leadership that will take the index higher.
  • Financials (XLF) showing some leadership for the week as the regional banks (KRE) bounce off support. Need some leadership from this sector going forward and need to clear the $25.55 level.
  • Treasury Bonds (TLT/TBT) moving lower again as yields rise. Watching where this is going as higher rates will have a negative impact on housing and other areas of long-term debt.
  • Clean Energy (PBW) topping pattern on the chart as the uptrend starts to test the move higher. Watching for opportunities and raised our stops.

THURSDAY’s Scans for October 22nd: The markets remain undecided on many fronts, but the talk of stimulus rallied stocks late on the day. There is plenty of issues facing stocks near term, but the hope of a money infusion sends stocks higher. Energy was up 4% on the day as the hope of a stimulus package would spur the demand. Regional banks were higher again as the sector continues to show signs of breaking to the upside. Utilities and healthcare both posted solid gains on the day as well. Technology continues to be the laggard of late.

  • Energy (XLE) found support and buyers again as the sector move higher on the day.
  • Regional Banks (KRE) Solid rise on Thursday as the sector climbs 4.7% on stimulus talks, higher interest rates, and hope of the impact on the sector… broke above resistance.
  • Technology (XLK) lagging again as the money flows out of the sector and move to other areas of interest for investors. Worries remain on the rise for the sector overall.
  • Small Caps (IWM) posted a solid gain on the day to bounce at support. Keeps the upside option in play and watching how it unfolds.
  • Brazil (BRZU/EWZ) bottoming pattern show a solid move to the upside and looking for upside follow through.

WEDNESDAY’s Scans for October 21st: The sideways movement continues as uncertainty rises about the outlook. The charts are showing topping patterns and the conviction is lagging along with leadership. The good news is the downside test is well within reason, but we have to measure our risk accordingly. Patience is the key for now and we are willing to wait this out.

  • Emerging Markets (EEM) they are a benefactor of the dollar dropping. Watching for the upside trend to continue near term.
  • Biotech (IBB) downside accelerated and hit the 62% retracement from the last trend higher. This is a signal to bounce or sell back to the previous lows. Watching the sector.
  • Gold (GLD) attempting to break from the consolidation pattern and turn higher again. The dollar has moved lower… but gold has yet to respond.
  • Social Media (SOCL) gets a boost from the SNAP earnings report. Breaks higher from the trading range. Need to follow through on the upside.
  • China (FXI/YINN) moving higher and attempting to reverse the current trend. Chile (ECH) broke higher from the consolidation pattern as well.

TUESDAY’s Scans for October 20th: News day as money follows the speculation and noise. No real changes to speak of overall. Energy bounced again after some testing of the previous lows. Tech is dealing with the antitrust suit on Google and the overall sentiment is edginess relative to the uncertainty that is. Watching, tracking money, and letting this unfold near term as we test the move higher.

  • Regional Banks (KRE) making a move back to resistance and looking for a break higher. We added on the test lower in September and now comes the moment of truth… breaking through on the upside.
  • Solar (TAN) breaking higher from the flag pattern to continue the upside trend.
  • Latin America (ILF/BRZU) cup and handle pattern-breaking higher and showing a continuation of the effort to reverse the drift lower from the June highs. Brazil looks similar on the chart.
  • Treasury Bonds (TLT/TBT) downside showing up for bonds as interest rates creep higher. No stimulus is helping keep interest rates on the upside. Watching the trade to short bonds near term.
  • Precious Metals (GLD/SLV) both metals remain in a consolidation pattern and the upside opportunities are being discussed… Watching and letting it unfold currently.

(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 tested the trends. Added a bottom reversal and moved back to the previous highs. Letting this play out near term. Testing at the current highs. Broke lower from the topping pattern. Negative for the day.
  • XLU – Utilities bounced from the selling and back above the $61.75 resistance and heading higher. Entry $58.50. Stop $61. Testing near the highs. Attempting to break higher from the flag pattern.
  • IYZ – Telecom broke the $27.60 support created a bottom reversal and cleared the $27.60 level again on the upside. Entry $27.60. Stop $27.20. Testing and breaking $27.60 support. Gapped lower testing the previous lows.
  • XLP – Consumer Staples tested lower, reversed, and heading back to the previous highs. Positive for the overall market with the recovery stocks improving. Testing the trend. Tested lower breaking support.
  • XLI – Industrials moved sideways and testing the move higher. Friday broke above the previous highs and resumed the uptrend. Hit new highs and testing the upside. Tested lower breaking support.
  • XLE – Energy gapped lower as a continuation of the trend set from the June highs. Added to the downside and adjusted stops. Managing the risk. The bottom reversal is of interest and watching to see if it follows through. Tested the previous lows…
  • XLV – Healthcare tested the $101 support level and held… bottom reversal breaks higher $106.88 break. Entry $106.88. Stop $101. Solid move towards the previous highs. Testing at the $106.90 support is key near term. Broke support and recovered… indecision.
  • XLK – Technology found support at the $110 level and bounced… Watching the bottom reversal attempt currently in play as it clears the $118 level. Testing $118 level this week. Tested lower breaking support.
  • XLF – Financials are challenged by the outlook for defaults and commercial real estate. $23.50 support held. Looking for regional banks to take a leadership role if the upside is to recover. Entry $24.50. Stop $23.50. Moved lower testing support.
  • XLY – Consumer Discretionary tested the trend, tested below the 50 DMA, and support at the $140 level and bounced. Solid move back to the previous highs.Testing. Tested the 50 DMA.
  • IYR – REITs have struggled with interest rates, vacancies, and virus talk about people moving out of cities. Tested support at $76.22 and bounced only to test lower again… patience. Tested lower breaking support.

The trends are shifting again based on investor activity. We have added positions, added new stops, and watching the developing trends and patterns currently. Using the six-month charts as an indicator for the short term view… Eight sectors are in confirmed uptrends as the testing phase continues. Two are in consolidation patterns showing indecision from investors, and one is in a downtrend. The result for SPY is in a move to up and sideways trend short term with a downside bias currently. The leadership is rotating 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:

Monday: Not the day many were hoping for, but the reality of all the parts are starting to weigh on the markets. No agreement on stimulus after hope offered over the weekend. No solution for the virus as it continues rise in cases again. More shutdowns instill fear about the economic picture. The list goes on and the anxiety levels spiked to start the week. We have to keep our heads and manage our risk relative to the positions we have and let this all unfold. Speculation is a part of human nature and the problems are always bigger during periods of uncertainty. We hit some stops on positions, we raised our cash positions, and we are managing what we have. Now we start to look at what if… Stay calm and let this unfold one day at a time.

Weekend Wrap & Outlook… The markets continued to test the move to the September highs. The challenges have been reality versus speculation. The speculation is stimulus… the reality is politics and posturing versus helping the country find a unified direction. Small caps continued to show leadership for the week. Technology stocks were challenged as money flow slowed and some rotation took place. Semiconductors and software showed some weakness on the week not helping the broad markets. The economic data is showing some slowing in the recovery but still overall positive. The retail sector showed positive growth from the consumer and a positive outlook currently. Only ten days until the election and it is going to be an interesting day for America. The uncertainty going forward is showing up in the volatility index. The VIX index moved to 27.5 as the anxiety levels remain elevated for the week. The dollar bounced Friday, but our outlook is for it to continue the downside trek as the weak dollar policies remain. In turn that helped the metals, commodities, and emerging markets rise. Four of the eleven sectors posted gains for the week as worries about the economic picture and stimulus grow. Financials and utilities led the upside for the week showing some move to safety and recovery stocks gaining. REITs and technology were the weakest sectors for the week as the sellers showed up. Crude oil moved lower and closed at $39.85 a barrel down slightly on the week. Watching the current movement in the broad markets as money continues to search for the best opportunities and cash levels remain elevated. 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. Watch the trend, know which side the Fed is on 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.

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.