Markets hold steady to start week

Market Outlook for May 12th

An interesting start to the week as money was on the move. Financials remain challenged and healthcare heads higher on virus solutions. Yields on treasury bonds moved up money rotated from bonds. Crude was down 4% on fear of another wave of the coronavirus. Tesla becomes the first company to defy the government shutdown and reopens California manufacturing facilities. Elon Musk asked that only he be arrested. Plenty of talk remains in the headlines about market prices relative to the economic picture. But, as more countries open businesses the hope for a recovery is in place. The challenge will come when reality meets hope… do they add up? Not mine to speculate, but we are managing the risk of the current environment as it relates to valuations and data.

In The News:

Marriott misses earnings as revenue per room plunge… Revenue fell 90% on the closely watched revenue per available room in April. The hope is that April defined the bottom for the sector, but many believe this will be a long recovery process for hotels and restaurants.

Biotechnology (IBB) stocks move to new highs… this is a sector we hold positions in and continue to trade based on the outlook for cures to the coronavirus as well as other research. The gain of 4.2% On Monday broke above the resistance at the $129 level closing at $133.90. A look at the monthly chart shows the break above the July 2015 highs. This is a positive breakout and one to watch going forward.

It doesn’t make sense: U.S. meat supplies dwindle as exports to China rise… President Trump has asked for the meat processing facilities to remain open despite issues with the spread of the virus. It was recently noted that exports to China have risen as a pig disease decimated their herd. The end result thus far has been beef prices rising by nearly 100% for ground beef in stores. Projections are for a decline of 30% in supply for grocery stores. Restaurants are opening to higher prices for food which in turn will be passed on to the consumer. This could be a challenge to the food supply chain for some time looking forward as packing facilities are operating at 25-30% of capacity. It is also important to note that Smithfield Foods is owned by China’s WH Group Ltd. Pork production has fallen 40% since mid-March while shipments of American pork to China have quadrupled over the same period according to the US Department of Agriculture data.

Economic News… Jobs report shows a loss of 20.5 million jobs in April. 14.7% unemployment. Mostly inline with expectations. ADP jobs survey shed 20.2 million jobs, worst in the survey’s history. ISM services data was better than expected at 41.8% but still well below 50% expansion. The ISM manufacturing data to the mix as it was 33.4% well below the expansion levels of 50%. Personal income fell 2% in March… expected with the job losses. Consumer spending fell 7.5% in March… expected with the job losses. Core inflation -0.1% and the Chicago PMI was 35.4 for April versus 47.8 in March. Bottom line, the economic data is falling as expected and this the first full month of real data… this will likely get worse before it gets better.

The S&P 500 index closed up 0.5points to 2930. The index moved back above the 2900 level again and spent the day moving off the opening lows. Resistance at the 2950 level is of interest near term. The chart is defining the near term trend and we are looking for who will take the leadership role… Healthcare and technology were the leading sectors on Monday. Watching how the consolidation pattern unfolds as it meets the previous highs.

The NASDAQ index closed up 71 points at 9192. The index is holding above the 10 DMA and breaks to a new high from the March lows gaining 0.7% for the day. The close puts the index in positive territory for 2020 and only 6% off the February highs. The NASDAQ 100 index (QQQ) was up 0.9% for the day and a new high since March lows. We cleared the $218 level and holding a solid uptrend currently with $228 resistance next level to clear. Semiconductors (SOXX) closed down 0.1% as it tests the $243 resistance. Technology (XLK) was up 0.6% keeping the uptrend in play. The bottom has been established and we are starting another leg higher… watching how this plays out near term.

Small-Cap Index (IWM) The sector tested the move higher and bounced at the 50 DMA and now moving back towards the previous highs and needs to find some momentum. A solid day to end the week and watching how this unfolds next week.

Transports (IYT) The sector has the greatest exposure to a slowdown due to the virus. Airlines, container ships, trucking, etc. if the production slows transportation slows. Mr. Buffet didn’t help with his announcement of selling all his airline stock. A retest of support at the $139 level and bounced. $153.17 is level to clear.

The Dollar (UUP) The dollar has been higher as the Fed and White House got involved in throwing everything at the markets… The dollar has now worked into a consolidation pattern and testing the lows. Watching how the tariff tweets impact the buck next week.

The Volatility Index (VIX) Anxiety spiked to 85 at the height of the unknown fallout from the virus. This week the index settled at the 27.5 level. The move below 31 is significant for the index and signifies some calm is being restored to the markets. Watching how this unfolds going forward.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector remains volatile with a solid week of gains to respond to last week’s selling. Next is to clear the recent highs to keep the upside trend in play. Stop at $157. Entry $145.50.

Biotech (IBB) The sector tested the $121.70 support and moved back to the previous highs… watching for a breakout from the consolidation range. Lower volume has been a concern but raising the stops on holdings. Solid break higher gaining 4.2% and clearing the July 2015 highs.

Semiconductors (SOXX) The sector tested support at the $223 mark and moved up five straight days. The next hurdle is the $243.50 level. Watching how the new week unfolds follow the test and bounce.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $237.50. Entry $205.10. Solid five days on the upside for the week to recover from last weeks selling. Adjusted our stop and letting it play out. Added 1.4% to the uptrend on Monday.

REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. The Federal Reserve has stepped in to stem most of the negative sentiment for now. The sector has moved into a descending triangle pattern. Looking for some conviction… either direction.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.68% up from .64% last week. TLT hit resistance at $170.35 and hit our stop at $167.50. Watching how this unfolds near term. No real upside in yields seen currently. Yield climbs to 0.72% on Monday.

Crude oil (USO) Crude moved to $26.17 this week and up from the $19.68 level last week. A solid upside move for the week and we have adjusted our stop accordingly. Plenty of news and speculation about the outlook from the analyst. If you take a long term view there will be upside in crude. 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. Crude falls 4% on worries about the return of coronavirus.

Gold (GLD) The metal moved to a high of $163 and then reversed to test support at the $158 level. Holding near the highs and in a trading range. Watching how this unfolds going forward and the China-US trade talks.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from August. Established a bottom at the $30.67 mark and hitting resistance. Cleared $36.40 resistance and watching how this unfolds.

China (FXI/YANG) Downside accelerated on the coronavirus and has established a low near $34. Bounced and dealing with news and speculation. Closed above the$38.67 level of resistance and watching the previous highs.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

MONDAY’s Scans for May 11th: Mixed day for stocks without much on the docket relative to change. Crude moved lower as fear of a second wave of coronavirus hits the news. Biotech breaks higher gaining more than 4%. Financials continue to struggle and it was a day of juggling overall. No real breaks in major indices as we look for a follow-through upside.

  • Biotech (IBB) new highs and new hope in the sector. Adjusted our stops. Healthcare (XLV) and pharma (XPH) moved higher as well.
  • Financials (XLF) testing support in the lower end of the trading range.
  • Volatility Index (VXX) remains in a correction phase.
  • Cloud Computing (SKYY) adding to the upside leadership in the technology sector. Software (IGV) adding upside as well.

FRIDAY’s Scans for May 8th: Solid upside for stocks at the debate rages on about valuations and the economic outlook for stocks. My view is to take what the market offers and keep moving forward with your stops adjusted to account for the risk.

  • Technology (XLK) remains the bright spot for the markets as it remains the leader.
  • Healthcare (XLV) a benefactor of the money from the CARES act to help find a cure for the virus remains a positive for the markets overall.
  • Energy (XLE) crude has bounced off the lows and remains somewhat steady at the $25 mark. Watching how this sector unfolds moving forward.
  • Treasury Bonds (TLT/TBT) coming under pressure as the yield start to creep higher. Watching the downside play for bonds.
  • NASDAQ 100 (QQQ) leadership remains in place for the sector and watching how it unfolds near term.

THURSDAY’s Scans for May 7th: Another day of moving higher and then fading part of the gains into the close. The indexes are inching higher with the NASDAQ leading the way. The close on Thursday put the composite index into positive territory for 2020. There is plenty of speculation on the China-US trade front as negotiators talked for the first time since the coronavirus started. Jobs report is out Friday and many expect bad news which may make it good news for stocks. Not really sure how this will unfold but we will continue to take what the market offers and tighten our stops along the way.

  • Technology (XLK) remains the leader for the markets as they break to new highs from the March lows. IGV, HACK, SOCL, WEBL are all leading the way higher.
  • Volatility Index (VXX/VIX) is sitting on support as the index inches lower. A break lower would show less anxiety and some positives to the market’s psyche.
  • Gold Miners (NUGT) pushed to the key resistance point at $73 and looking for upside break higher.
  • Treasury Bonds (TLT) Tested the 50 DMA and bounced. Watching the move higher as it reversed some of the selling in bonds with money in rotation to stocks.
  • Medical Devices (IHI) trying to break higher from the flag pattern on the chart.

WEDNESDAY’s Scans for May 6th: Mixed day as some sectors show upside and others show testing… the key is none are breaking to new highs. Volume is lower and not conviction showing in the charts this week. Taking what is there and managing the risk accordingly. Not willing to say we are heading lower and not convinced we are heading much higher. Dull market and letting it play out.

  • Crude Oil (USO/USL/UCO) holding on to the gains and watching the stocks (XLE) and other parts such as gasoline (UGA). We are also looking at the oil-producing countries relative to the impact.
  • Utilities (XLU) break below key support at $55.24… short-side setup for trading?
  • Financials (XLF) testing key level of support at $21.30.
  • Telecom (IYZ) testing key level of support at $25.25.
  • REITs (XLRE) testing key level of support at $32.46.

TUESDAY’s Scans for May 5th: Solid gains until 3 pm and then the sellers showed up the last hour of trading. Profit-taking into the rally? Smells like… is institutional money rotating? Most likely. Are small investors getting suckered into stocks? Probably. Herein lies the challenge for most investors they follow without knowing why. FOMO (fear of missing out) is in play. Remember you can always make up for missed opportunities you cannot make up for lost principle. Be focused on a strategy and discipline it takes to carry it out. Taking the day in stride and adjusting our stops accordingly.

  • Crude Oil (USO/USL/UCO) jumped again on Tuesday as hope springs eternal. Adjusted our stops and managing the risk. Added a position in gasoline (UGA) as well.
  • Healthcare (XLV) upside resumes as biotech (IBB) takes the lead again.
  • Software (IGV) taking the leadership role for technology as it moves back to the previous highs.
  • Natural Gas (UNG/UGAZ) trying to break higher from the bottoming pattern.
  • Homebuilders (ITB/NAIL) uptrend remains in place.

(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 level offering upside trade opportunity. A solid move higher for the week and looking at the previous highs.
  • XLU – Utilities continue to struggle moving off the $61 highs and testing the $55.24 support. Watching how this unfolds near term.
  • IYZ – Telecom moved to $28 and tested support at $26.25 and remains in a trading range. Watching how this unfolds… parts are better than the whole currently.
  • XLP – Consumer Staples cleared resistance at the $54.92 mark and offered short term trading opportunity. Stalled at the 200 DMA and tested support at $57.20 level.
  • XLI – Industrials remain in a consolidation pattern. with $65 level to clear on the upside. Watching.
  • XLE – Energy moved above the $31.20 entry-level as the bottom was established. The uptrend remains in play with plenty of testing along the way. $38.90 level to clear to break through resistance.
  • XLV – Healthcare moved above $88.50 level and offered upside opportunity. Letting it play out and adjusted our stops. Leadership role. Resistance at the $101 level showing consolidation. Solid upside added with biotech rising to new highs.
  • XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently and watching how it unfolds adjusting the stop. Leadership remains strong.
  • XLF – Financials remain in a consolidation pattern as the outlook for stocks remains questionable. $23.50 level to clear on the upside. Testing support again.
  • XLY – Consumer Discretionary tested the 20 DMA and bounced back to the previous highs. In good shape to continue the current leg higher.
  • IYR – REITs have worked into a consolidation pattern with the support at $71.31 holding for now. Watching how this unfolds with plenty of concerns around the commercial real estate sector.

The trends have worked into consolidation patterns and uptrends as we experience less volatility and more trading. We took the entries based on our defined strategies and managing the risk accordingly. Using the six-month charts as an indicator for the short term view… Four sectors are in confirmed uptrends and seven are in consolidation patterns. The result for SPY is consolidation pattern short term. The strong leadership is helping overall, but plenty of questions developing on the charts.

(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: consolidation day from my view as some indexes struggle at resistance points. Watching how they unfold as the week progresses and the data continues to unfold. Biotech breaks to new highs and technology continue to provide leadership. Patience and risk management remain the name of the game.

Weekend Wrap & Outlook… The coronavirus remains center stage as the number of cases continues to flatten and more states have started to reopen businesses. This presents opportunities and expectations from stocks and the economic picture. There is no lack of question marks for the markets moving forward, but for now, investors are willing to put money to work. The jobs report on Friday was dismal as expected with 20.5 million jobs lost in the month of April. Unemployment jumped to 14.7% and average hourly earnings rose 4.7%. Despite the ugly news stocks rose higher on Friday and for the week. The major sectors ended the week all in positive territory. The optimism about reopening the country for business is helping, but it is being weighed against future damage. The VIX index fell to support at 27.5 and shows some lower anxiety from investors. We were presented with short term opportunities and put some money to work over the last few months. Our job remains to manage the risk accordingly. We hit stops on several sectors and have added to others. There is some testing in play, but the bounce back this week started a new leg higher. Healthcare, energy, and technology are the leaders currently. Gold has moved to near term highs and stalled. Crude oil has bounced off the lows showing some signs of life. Earnings have been somewhat positive for the markets, but the focus is starting to turn to the future outlook for growth and how long it will take to see a reversal. All said the goal is 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.