Markets remain downside bias

Market Outlook for February 27th

The questions continue to be raised about the direction of the markets and what lies ahead for stocks. The indices put in a steady climb all morning only to give it back and close in the red. It is easy to jump on the negative side of the market after the last four days of trading activity, but you also have to know that the markets move down faster than they move up. Meaning, they are set up to bounce at this point more than sell lower… statistically speaking. Wednesday showed more rotation less flight to safety and some willingness to buy stocks. Follow the money and manage the risk. The greater issue facing us is the coronavirus as it spreads and the uncertainty of the effect on lives and countries around the world. How much truth is there in the news being reported and how much is there not being said. Time will tell as we continue to watch it all unfold.

Wednesday I said to watch two things; first, Bond yields on the ten-year bond at 1.33%, lowest since 2017. It continued lower at 1.31% but showing some signs of bottoming. A move higher would offer stocks some relief near term. Second, Gold prices. If they continue the topping reversal seen on Tuesday, it could offer stocks some relief. They held steady on the day… both are still issues to watch.

The S&P 500 index closed down 11.8 points to 3116. The index closed lower again after a morning attempt to bounce. 2982 is the level to hold from a long-term perspective. One of the eleven sectors closed higher on the day with technology stocks closing higher. The downside was led by energy and REITs as money flow was negative. Watching, listening, and managing the near term risk as well as any opportunity being presented.

The NASDAQ index closed up 15.1 points at 8980. The index remained below the 50 DMA and 8993 support. The NASDAQ 100 large caps held in positive territory with moving back above the $215.69 (QQQ) support. Semiconductors moved lower after hitting resistance at the previous highs and back to support at $237.71 (SOXX). We are managing our risk and looking at what unfolds near term along with opportunities.

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. A positive week overall as the sector moves back to the previous resistance at $168.10. Down 3% and below the 50 DMA. Ugly move Monday. Down 3.5% Tuesday and below the 200 DMA. Wednesday down 1.1% and didn’t look good. More downside to come?

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. Below the 200 DMA. $189 support Monday. Tuesday fell 4.2% as the selling accelerated on virus speculation. Wednesday down 2.2%. Testing the October lows.

The Dollar (UUP) The buck has returned to the upside accelerating with a test on Friday. Fed is back adding liquidity in the repo market helping the buck, but also promised to lower commitment levels. Held steady on Monday. Tuesday gave way to some downside and relief to gold. Up on Wednesday… watching.

The Volatility Index (VIX) Anxiety reversed to 13.7 to start the week but Reversed on worries about the virus moving to 17.1 to close the week. Watching how the new week unfolds. UVXY hit entry at $11.14. Stop $17 (adjusted). Spiked to 25 Monday. Raised our stop. Tuesday spiked to a high of 30.2 and closed at 27.5. Took half of the trade off at $18.20. Adjusted the stop on the balance… watching how we open on Thursday.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector bounced off the $203 support and tested the previous highs at $210 only to move lower again on Friday. Looking for some clarity in the uncertainty. Down 3% Monday and $202 support. Tuesday down 3.4% and below the 200 DMA. Watching. Wednesday down 1.5%… watching for a bounce.

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 back to the previous highs. Finding some resistance at the previous highs again. Down 2.6% Monday. Down 3% Tuesday. Wednesday up 1.3%. Looking for the opportunity.

Semiconductors (SOXX) The sector remains indecisive based on current global events. Watching the downside risk as investors have not been willing to put money to work here. Money flow has negative… short side entry hit on Friday… SOXS entry $17.70. Stop $22 (adjusted). Down 4.8% adjusted stop on short trade. Down 2.9% Tuesday adjusted the stop again. Attempted bounce on Wednesday but couldn’t hold the move. $231.71 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 on two selling days. $256 exit point. Monday down 3.1% stops hit. Tuesday down 2.7% as selling accelerated. Wednesday held steady. Looking for the opportunities.

REITs (IYR) The sector broke from the consolidation pattern and put in five solid days of upside and moved into consolidation for the week. Money flow shows rotation into the sector as some investors look for safety. Held near the highs Monday. Tuesday downside accelerated dropping 2.6%.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 1.47% down eleven basis points and testing the September lows. It has been mixed with money flow moving up and down in bonds. Friday was a large input into bonds as virus fears rise. Watching TLT and adjusting our stops. 1.37% on the ten-year bond Monday… rotation to safety and adjusted our stop on TMF and TLT. Tuesday yields moved to the lowest levels at 1.33%. Wednesday sold further down 1%. $95 level to hold. Watching and adjusting the stop on TMF.

Crude oil (USO) Crude moved to $64.22 on speculation. Crude fell to $50 on the speculation falling short and the China virus. The upside move came on positive news about the virus… Friday reversed that… UCO entry $14.66. Stop $14.66 (Stop HIT). Monday Fell 3.6%. Tuesday fell 2.9%. Wednesday fell 2.3% as renewed fears hit oil. Broke previous lows and watching. SCO – Entry $17.41. Stop $17.70.

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 broke higher from the consolidation pattern. Virus news driving the metal higher. UGL entry $46.90. Stop $57- Stop HIT. (Stop Adjusted and sold 25% at $58.50, Sold 75% at $57). Monday spiked higher on the fear factor and closed well off the highs… watching. Tuesday traded lower as the dollar eased and some money rotated out. Wednesday some upside returned on the fear factor.

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. Monday tanked 3.7% as fear rises. Tuesday down only 0.7% as some buyers stepped in. Wednesday was positive close, but no major changes.

China (FXI/YANG) Finally gets a trade deal to help the upside trend emerge… then the coronavirus erases all the gains. Solid bounce off the lows and $42.72 is the level to clear currently. Watching how it unfolds. Monday Fell 3.5%. Tuesday fell 0.9% and watching. Wednesday was positive close but not major changes.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scans for February 26th: The buyers attempted to put some money to work, but the sellers remain in control for now. Energy led the downside as crude prices fall on speculation of a global virus. Transports hit hard on airlines and others cutting flights. Money is rotating and looking for the best opportunities, but the speculation levels remain highs. The downside bias is firmly in control and for now, there are no signs of easing. Taking what is offered and making safety a priority.

  • Crude Oil (USO/SCO) downside accelerated with the speculation of supplies building on lower demand. Entry $17.41. Stop $17.70.
  • Technology (XLK) showed some life with a modest close higher. However, it gave up a solid gain from earlier in the day.
  • Energy (XLE/ERY) downside accelerated as expected with crude falling. Adjusting stop on downside trade.
  • Small Caps (IWM/TZA) this sector has been lagging prior to the selling so no surprise to see it leading the downside move. Adjusting stops on the downside positions.
  • Treasury Bonds (TLT/TMF) upside in play, but watching how interest rates shift near term. 1.31%… due to move higher, but being patient. Adjusted stops on TMF.

TUESDAY’s Scans for February 25th: More selling as the upside at the open gave way to more selling… this is the second day of shedding stocks. Will Wednesday be the third? Watching for signs of a bounce, but statistically, if you have a third day push lower and a bounce… there is an opportunity in the bounce. There are plenty of sectors that would be attractive on a bounce. Until it sets up we will let it all play out. Looking for some selling and a bounce on Wednesday… if it doesn’t happen we will continue to watch.

  • Treasury Bonds (TLT/TMF) adjusted our stops and watching how the yield react on Wednesday.
  • Gold (GLL) hit stops on the positions as the top reversed on Tuesday. A positive sign for stocks to bounce. Still watching for how gold unfolds.
  • Volatility Index (UVXY) Took some profit on part of the trade and watching how it unfolds on Wednesday. Adjusted the stop.
  • Semiconductors (SOXS) adjusted the stop and watching how Wednesday unfolds on the downside move.
  • NASDAQ 100 (QQQ) looking for support to hold and upside opportunity for short term trade.

MONDAY’s Scans for February 24th: Panic Monday as virus spreads and fear rises of a pandemic. The media had a field day with all the stats and what-ifs and what-fors… It was a day to remember, but we still had to stick with our discipline. We hit stops on positions and benefitted from other positions. Take the bad with the good and focus on what to do when reality sets in. There will be plenty of opportunities as the storyline unfolds and we see where the next opportunity lies.

  • Gold (GLD/GDX) spikes higher and settles off the highs. Took some profits and let the balance play out for now.
  • VIX Index (VXX/UVXY) spiked higher and adjusted our stops. We will lock in some gains if the fear levels subside Tuesday.
  • Treasury Bonds (TLT/TMF) nice rally as yields fall and money rotates to safety… adjusted stops.
  • NASDAQ 100 (QQQ/SQQQ) downside is in play… watching how this unfolds near term with the index losing 3.8% on Monday.
  • Crude Oil (USO) falls back to $51.43 giving up gains and retesting the recent lows. Watching.

FRIDAY’s Scans for February 21st: More selling to end the week as the concerns of the coronavirus spread. The move lower triggered stops in plenty of sectors for short term positions. The long term positions now become a concern as we adjust stops and manage the risk that is. The underlying sentiment on Wall Street is the market is overbought. That triggers sellers at the first sign of concern… this may well offer some downside short term. Stay focused and take your emotions out of the equation… use your stop and let this all play out… there are always opportunities created when emotions drive the market higher or lower without logic.

  • NASDAQ 100 (QQQ/SQQQ) Move lower triggered stops. The selling in the sector on Friday was enough to also hit entry signals on short side trades. SQQQ entry $17. Watch how it opens on Monday… take exit if the buyers show up early. If not, manage the downside move.
  • Semiconductors (SOXX/SOXS) The sector has shown weakness over the last two weeks. $257 is entry-level for short side trade… watching how it unfolds on Monday. Technology (XLK) looking for short side trade as well.
  • Volatility Index (VXX/UVXY) We added a position as the anxiety levels rise. This is a trade to manage as well on Monday. If the buyers are back exit. If the sellers remain let it run.
  • Treasury Bonds (TLT/TMF) we added to our existing position on Thursday. The acceleration on Friday confirmed the trade and stop moved to break even. This may run further based on the sentiment on Monday.
  • Gold (GLD/UGL) upside move accelerated and adjusted our stop on the position. Miners (GDX/NUGT) accelerated as well.

THURSDAY’s Scans for February 20th: Some selling. Some rotation to safety. The dollar still moving higher. Gold moving higher. Large-caps struggle on the day. Small and Mid-caps move higher. It was a day of jockeying money in anticipation or speculation of what is going to happen near term. We will take what happens, manage the risk, adjust our stops, and let others speculate.

  • Crude Oil (USO) continued to rally on US supply falling more than expected. Any news is good news for oil as it tries to establish a bottom and move higher.
  • Small Caps (IWM) show some positive signs amid the selling Thursday… needs to follow through.
  • Volatility Index (VXX/UVXY) Looking for entry on the anxiety move in stocks.
  • Treasury Bonds (TLT) bonds moved higher on rotation Thursday… worth our attention near term.
  • Homebuilders (ITB) moving to new highs again. Housing data remains positive with lower rates in place again.

(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. Monday Down 2.8%. Tuesday down 4.3%. Wednesday steady. Bounce?
  • XLU – Utilities are the current benefactor of lower rates and money looking for safer havens. Broke higher to continue the uptrend. Raised stop. Monday tested lower. Tuesday sold 2.1%. Wednesday down 1.1% Watching.
  • IYZ – Telecom picked up volatility with the markets and tested the $29.50 level of support. Held and moved back to the previous highs finding some resistance. Lower and at the bottom of the trading range.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs. Monday down 2.3%. Tuesday down 1.8%. Wednesday is slightly lower. Watching.
  • XLI – Industrials held support at $81.10. Managing the risk that is. Tested lower all week. Watching. Monday down 2.8%. Tuesday down 4.1%. Wednesday added to the downside. Looking for relief.
  • XLE – Energy remains in downside move as anxiety rises about China and consumption. A bottoming pattern in play. ERY entry $53.65. Stop $67. Monday broke lower down 4.6%. Tuesday moved down 4.4%. Wednesday down 4%. Any relief?
  • XLV – Healthcare breaks lower from the topping pattern. Closed at the 50 DMA and support is at 101. Watching. Monday down 3.1% and Tuesday down 3.1%. Wednesday held near lows. where is support?
  • XLK – Technology in an uptrend and providing leadership. The test lower on Friday is a challenge as we closed below the 20 DMA. Watching the downside risk. Exit on short term positions hit. Monday down 4.1%. Tuesday down 3.1%. Wednesday small move up. Looking for a bounce.
  • XLF – Financials have been in a trading range as moves back to the previous highs. We need some interest in the sector with money flow and volume lagging. Monday down 3.2%. Tuesday down 3.3%. Wednesday added to the downside. Looking for some relief.
  • XLY – Consumer Discretionary tying to be the bright spot for the markets. Holding solid uptrend with some testing to end the week. Monday down 3.4%. Tuesday down 2.6%. Wednesday added to the downside. Watching.
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… Solid upside. Entry $93.50. Stop $96 (adjusted). Holding near the highs. Held up in midst of the selling Monday. Tuesday sold off down 2.6%. Wednesday down 1% and watching.

There are currently three sectors in a sideways or consolidation trend. Seven 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:

Wednesday: Attempted bounce abandoned as sellers keep control of direction. Anticipation for Thursday based on Wednesday’s intraday activity is down. More selling is being projected by analyst. Take what is offered – downside trades in weaker sectors, weakness in energy, rally in bonds and gold, and focus on the risk. Cash is a sector and offers some buffer to the current selling in the markets.

Tuesday: Second day of selling. This was the house cleaning that needed to take place based on the levels stocks had reached without underlying fundamentals to support them. The virus was just the catalyst to what everyone was talking about… valuations. Watching for Wednesday to have a final push lower and then we see if the buyers emerge. If they do we will look for the opportunities in the move. Otherwise, we manage our current positions and keep moving forward. The key is to face each day with a strategy and see what unfolds. No need to panic, just manage your money based on what the markets offer.

Monday: Not a pretty day for investors as markets tumble lower on fear of a pandemic virus. The leaders fared the worst as they declined more than three percent. Bonds moved higher as money flow rose. Gold was a benefactor as well as moving higher. Emerging markets were slammed lower. Italy (EWI), South Korea (EWY), China (FXI) and Europe (IEV) all moved lower. We now step back look through the wreckage and determine how this unfolds as the reality sets in. The greatest challenges remain the uncertainty around the virus and how far it will spread.

The coronavirus remains center stage as the number of cases continues to rise. The spread to Europe and other countries is unsettling to the markets and citizens. The markets showed reactions on Thursday and Friday to the news. The speculation took hold on Friday with markets tumbling on worries. Those worries are reflected in the VIX index rising above 17. We hit stops on short term positions that were in harms way. We locked in positive gains. But our attention turns to downside trade opportunities as well as protecting our long term positions should the selling accelerate. Money flow showed rotation as it rose in gold, bonds, and safe havens sectors. The dip in technology money flow showed investors shifting toward safer sectors or cash. 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 continues to be positive with 77.4% of the stocks reporting in the S&P 500 index have beat expectations. The data points will be important to how this unfolds moving forward. Economic data remains okay as January shows improvements all-around with a few exceptions. Yields on the ten-year treasury bond fell to 1.47% with money flow strong into bonds. The dollar remains solid. Gold broke out to new highs with worries still backing the metal. Money is rotating to where it will be treated the best as seen this week. Energy struggles as crude prices continue to decline with the news around China. Watching how the price of crude reacts moving forward as the commodity did find a bottom. Watching with interest how the new week unfolds… 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.