Markets still show caution

OUTLOOK: August 1st

July comes to a close with some buyers back after the selling on Monday. Somewhat of a rebound attempt, but not overly impressive. Then again there was not a continuation of the selling to entice the buyer back. There was rumors of the US and China starting up trade talks again. Apple beat earnings after-hours. Tech stocks show modest bounce. Overall not a great day, but not a bad day for stocks. The Monday hangover from selling is still a big question mark and we continue take what the market offers with patience as it all unfolds.

The S&P 500 index closed up 13.6 points at 2816 as the index struggles to hold the move above the February highs as sellers exert some effort to push stocks lower. The trend remains on the upside, but there are some challenges on the chart technically. The volume remains on the weaker side even with the selling. Industrials and REITs led the upside as nine of the eleven sectors closed in positive territory. Financials and energy led on the downside as money flow shifts gears. The chart is holding the long-term trendlines off the January/February 2016 low. Patience is key.

The NASDAQ index closed up 41.7 points to close at 7761.7. The move to new highs have been erased as money rotates away from large cap technology on earnings. The index held the 50 DMA and is testing the trend line from the February lows. Semiconductors (SOXX) continue be positive as they struggle to move above the $187 resistance. The long-term uptrend remains in place and the tug-o-war with the sellers is not likely over. The key remains patience along with a strategic approach to managing money. Stops in place and watching how the day unfolds.

Small Cap index moved back towards support at $164.43 and holding for now. Still in a consolidation topping pattern as we see how this turns out. We are watching how this unfolds near term. The leadership of this sector has been key to the bounce from the April lows. A turn lower would be a negative for the broad markets overall.

Transports (IYT) the move above $192.40 and running into some resistance at the $200.53 mark. The sector remains in a positive upside move from the June lows. Some positive moves in the airlines is keeping the upside in play. Watching the bottoming formation on the chart for airlines currently. Held the move and offered an entry point. Entry $192.50. Stop $192.50 (adjusted).

Gold (GLD) testing the $115.86 (GLD) support and held… the metal is struggling to find buyers. Some consolidation in play at the lows currently. The close leaves the downtrend in play along with the short side trade. The gold miners (GDX) moved lower as well breaking support at $21.92. Metals and Mining (XME) moving back to the 200 DMA after hitting resistance at the $37.40 mark. Base metals (DBB) dumped lower on tariffs worries, but with the trade talks with the EU and China worth watching for follow through on a bottom reversal even with the testing the last three days.

The dollar (UUP) closed above the $25 mark as the up and downs continue. China has made moves to devalue the yuan with some quantitative easing adding to the ease in the dollar. There has been some selling showing on the chart with a topping pattern in the buck. Plenty of reasons to believe the dollar has peaked short term… Watching how this unfolds along with global politics. The overall move higher is positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… history validates a strong dollar favors the US despite the short-term setbacks.

Crude oil (USO) is consolidating after selling lower the last two weeks… the worries remain around the supply data causing the current angst. The commodity closed at $68.76 on Tuesday. This is a supply and demand issue simply put. When traders believe supply is short prices rise… when there is too much supply prices drop… supply data the last two weeks has not favored crude prices… simply put. Remember all of this is about the sanctions on Iraq… OPEC controlling the supply… Russia as a wildcard… and don’t forget the US can influence production as well. We banked our gains for the upside trade and watching how the current selling unfolds.

Emerging Markets (EEM) The bottoming consolidation in the sector broke higher with a follow through and the upside continues from the June lows. Some sign of hope with the move above resistance at $44.10 as tariff talks bring investors back to the dance. The bantering the last few weeks helped push the sector back to resistance and with some news of hope on the tariff front money flow increased. Watching how this unfolds and where the sector heads short term. Entry $44.50. Stop $43.50.

The Volatility Index (VIX) closed at 12.8 on Tuesday as the anxiety levels move on earnings from tech stocks. Geopolitics helped with talks about tariffs easing in Europe and China willing to start talks again. Short term the market is driven by emotions… trade accordingly by managing your risk. There is plenty on the stove that could boil over at any time… watching how this unfolds.

The week the NASDAQ set the tone to end the week with earnings misses from Facebook and Twitter leading the index down one percent for the week. The S&P 500 ended the week slightly higher as money is looking for a home with financials and industrials helping steady the direction. Economic data was positive with the GDP showing more than four percent growth in the second quarter. Interest rates moved higher as talks of Europe and the US coming to terms on tariffs. Earnings have been on the positive side with the biggest disappointment being NFLX, FB, and TWTR. We now head into next week with caution about the direction in the NASDAQ and Technology stocks. The selling on Friday shows investors can shift quickly in belief and act equally as quick. Small caps showed weakness but remain near their current highs. All we can do is manage our risk according to the charts and not speculate on what if… the greatest challenge for us all is not letting our emotions get involved in a process that requires a disciplined strategy and action. The leaders struggled to end the week as money rotates towards industrials, basic materials, and financials to end the week. Technology is leading the weakness on the downside. Energy and crude oil tumbled on worries and supply data. Utilities and REITs are watching interest rates as both tested during the week. There is plenty of dynamics working in the markets overall and we will take it one day at a time as the trend remains positive. There is some short-term repositioning in play and we will look at the opportunities, exit positions that warrant it, and take what the market gives.  Manage your risk and look on the horizon for answers to the trends.

(The notes above are posted daily based on the activity of the previous days trading)

KEY INDICATORS/SECTORS &LEADERS TO WATCH: 

Biotech (IBB) The break lower from the flag pattern on Friday was negative and hit our stop. Entry $111. Stop $116.50 (Stop Hit). Now we watch how it unfolds and take what it gives. Always willing to buy back if the momentum returns. Tested support at $114 and bounce back… watching how this unfolds near term.

Semiconductors (SOXX) The sector moved lower breaking the support at the $182.38 mark and testing the 50 DMA. The bounce off support was positive as we moved back above $182.38 level… testing resistance at the $187 mark now. I like the positive sentiment shift this week back toward the sector. Holding the move off the June low and hitting resistance at the $187 level. 

Software (IGV) The sector tested to the $178.87 mark of support. Bounce to new highs, but joined the selling on Friday. Watching how this unfolds to start the week. Sold to next level of support near $183 and watching. 

REITs (IYR) The sector made a break from the trading range clearing $76.22. Rates moving below the 3% mark got the credit for the rally. With interest rates suddenly moving back to the 3% mark leaves questions about the move. Manage your stops with your eye on rates. Entry $75. Stop $79.30 (adjusted). 3.8% dividend. Big jump on Tuesday after holding support at the $79.76 mark. 

Treasury Yield 10 Year Bond (TNX) moved to 2.96% on the week as the Bank of Japan made statements they are considering to stop buying US Treasury bonds. That sent rates higher and worries through the bond sector. TMV hit entry and watching how the downside unfolds for bonds. Entry $19.40. Stop $19.40. No big changes in the rates after moving higher last week. 

Energy stocks (XLE) The stocks tested the move higher and moved into a consolidation pattern. You have to love speculation to trade crude or energy stocks as the news, hype, and speculation are a key part of the trends. Supply worries are back and this is keeping the stocks in check for now. Letting the next opportunity unfold. Hitting resistance on move to top of the current trading range. Need to clear $77.50. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Daily Scan Results:

TUESDAY’s Scan 7/31: Modest bounce following the selling on Monday. Still not definitive action from either side. No follow through on the sell-off in large cap tech stocks. After-hours earnings from Apple will help, but not sure how much. The key for now is to let this unfold and take the opportunities presented.Rumors of China starting the trade talks again offered some relief, but not enough to change the overall worries present on earnings news. Positive moves in industrials, REITs, healthcare, and basic materials on the day.

  • Industrials (XLI) running higher on the trade talk news and the sector is in position to break above the resistance at the $76.70 level and the May/June highs.
  • Healthcare (XLV) resumed the uptrend with solid move higher. Biotech (IBB) resumed the move upside as well. This has been one of the leaders in the current trend higher for the broad markets.
  • Small Caps (IWM/TNA) solid bounce off support and watching how this sector unfolds as one of the previous leaders. Short side setup on the chart if the momentum shifts.
  • Aerospace and Defense (ITA) moved to the top end of the range and and resistance. Looking for a move above the $207 level.
  • China (FXI/YINN) $27.50 is level to clear. The bottoming pattern remains in play and the rumors of renewed trade talks could be a catalyst for the move higher. Watching.

There are plenty of issues facing stocks. The selling in large cap tech on earnings is keeping the balance of the market in check. Watching how the trade talks with the EU and China unfolds and what that does for the materials and industrial sectors.

FRIDAY’s Scans 7/27: Earnings from Twitter add to the anxiety in technology stocks. The moves lower triggered stops in positions. The challenge remains a market that is technically overvalued and overbought. Neither of which can predict the reversal or correction in value. Thus, markets can remain irrational longer than we think or believe… therein lies the challenge for many. We take what the charts show and we manage our risk according to our strategy and nothing more. Getting to valuation prognostication is a dangerous game. There are still plenty of positive and to go with the negatives… we will follow the money short-term and the trends long term.

  • Biotech (LABD) sold lower on Friday and opened the door to the short side as the chart clears resistance at the $23.41 mark. Worth watching… not willing to step in just yet.
  • Brazil (BRZU/EWZ) upside moves on the week and looking positive with the bowl bottoming pattern attempting to break above resistance at the $25.72 mark. This would offer an opportunity to add to positions.
  • China (FXI/YINN) the tariffs are still in play… talks continue… speculation continues… the bottoming patterns is on my watch list.
  • Energy (XLE/ERX) made an upside move from the bottom of the current trading range… positive… however, the sector remains in the range and watching how it unfolds along with the price of crude oil.
  • Small Caps (IWM/TZA) downside move on Friday has the sellers showing their hand near term. We have discussed the topping pattern in the sector and we continue to watch with the move lower on Friday. TZA cleared resistance at $8.90… watching for follow through and opportunity if it unfolds.

Other moves to watch from last week… DUST, KOL, EDC, CURE, UGA, SCJ, EWW, IAK, and FAS.

Moves on Friday worthy of note… GASX, LABD, SQQQ, VXX, UGAZ, SRS, and EWJ.

THURSDAY’s Scans 7/26: Facebook takes center stage with earnings pushing the NASDAQ lower. Money is rotating and looking for a better home. The interesting move of the day came from the SOXX. Nice gain puts the upside back in play and helped the day not be worse. Some rotation in play as money looks for where it will be treated the best.

  • Energy (XLE/ERX) nice upside follow through for the sector with modest volume. The trading range remains in place with the move to the top side of the range. Watching how this unfolds. Gasoline (UGA) driving the upside momentum.
  • Semiconductors (SOXX/SOXL) nice move to resistance and putting the sector in a position to move higher with follow through. XLNX and QCOM lead the upside move.
  • Small Caps (IWM) make positive upside move and looks positive on the day. Watching the sector as the rotation has been a part of the chart near term.
  • Insurance (IAK/KIE) upside momentum breaks higher leading the financials currently.
  • Utilities (XLU) nice move above the $52.72 resistance and looking for the follow through. Interest rates have moved higher… but, not affecting the sector yet.

Plenty of issues on the horizon as we face more earnings, more tariff talks, more economic data, and more speculation. Takeing it one day at a time.

WEDNESDAY’s Scans 7/25: Stocks rally on news related to tariff negotiations. Facebook lays an egg on the earnings forecast. Which will have more impact on the broad markets moving forward? Good question and one that will get answered in the coming days… Thursday is likely to move lower based on the reaction to FB overnight. The scans show rotation from small caps and semiconductors is still in play. Industrials, healthcare, and financials have benefitted from the moves. Following the money flow for momentum.

  • Emerging Markets (EEM/EDC) continues to get a boost from the money rotation on news surrounding the tariff negotiations. China (YINN), Brazil (BRZU), Latin America (LBJ), and Europe (IEV) all moved higher on the news.
  • NASDAQ 100 (QQQ/TQQQ) nice move to new highs on the day. Watching FB impact today.
  • Healthcare (XLV/CURE) leading the upside move and looks positive on the break higher from consolidation. Biotech (IBB) and drugs (IHE) helping lead the upside.
  • China Internet (KWEB) bottoming pattern in place. Looking for a move above the $60.50 level.
  • Europe (IEV/EURL) nice bottoming pattern breaking higher on the tariff news. $36.24 next resistance. Worth watching relative to the current momentum.

The talks with the EU over tariffs going to zero were a positive overall for the markets… the key will be the reality of the tariffs going away… that will take time.

Facebook impact will be the immediate issue facing investors today and if the losses after-hours holds the NASDAQ will be down nearly 1% at the open. Patience is required and look for the opportunities in the aftermath.

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Sector Rotation of S&P 500 Index:

One big change of note concerning sectors… The Global Industry Classification Standard is making a change to the Telecommunications Services Sector. It will become the Communications Services Sector which sounds minimal but could have a significant impact going forward. They are adding NFLX, DIS, CSMSA, FB, and GOOGL. The new structure will be enforced by the end of September. This will make it more of a growth sector overall but could dampen some of the volatility the sector has experienced over the last two years.

  • XLB – Materials moved back below the $58.44 level and continues to consolidate on worries about tariffs, etc. Watching how it unfolds. Positive move on Tuesday
  • XLU – Utilities got relief as rates moved back below the 2.9% mark. A flat week as the sector tries to clear the resistance at the $52.72 mark and the uptrend remains in play… entry $49.55. stop $51.80 (adjusted). Moved above resistance… can it follow through? 
  • IYZ – Telecom moved back above the $27.63 resistance and is testing the move again. Entry $27.80. Stop $27.50. 
  • XLP – Consumer Staples finally found support and has been in a gradual uptrend from the May lows. The ability to gain some momentum is shown in the nice move above the 50 DMA and now dealing with the 200 DMA. Entry $50.50. Stop $50.75. Going with the trend and being patient. 
  • XLI – Industrials made a move back to $71.43 holding support and a bottom reversal pattern in play and cleared the $74.20 resistance and $75.72 mark on Friday. Entry $72.50. Stop $71.40. Solid move higher to clear resistance at the $75.72 level and continue the trend from the June lows. 
  • XLE – Energy stocks have been volatile as they deal with the question of production impacting the price of crude. Too much speculation as stocks remain in the current pattern. Moved to the top side resistance in the trading range. 
  • XLV – Bounced off $83.24 support. Upside follows through as the sector moved back above the $86.74 resistance and gaining momentum from drug stocks. Test on Friday has my attention. Entry $83.25. Stop $86 (adjusted).  Resumed the upside move on positive day Tuesday. 
  • XLK – Earnings missed… stocks drop. Watching how this unfolds in the coming week. Hit our stops on the position. Struggling to find buyers. 
  • XLF – Tested support at $26.90… rallied on earnings and bounce in interest rates this week. Watching resistance at the $28.24 mark. Entry $27.50. Stop $27.50. Hit resistance at $28.24 and turned lower on Tuesday. 
  • XLY – Consumer remains a leader after testing support and bouncing back near the June highs. Letting this unfold as the sector shows strength overall. Consolidation pattern in play at the highs. 
  • RWR – REITs have been in a clear uptrend since the February lows. Granted it has come with some volatility and speculation, but the upside is in place. Entry $87. Stop $93.50 (HIT STOP). 3.8% dividend. Testing on moves in interest rates near term. Solid bounce off support. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

Earnings adjust the uptrend to a watch it if reverses direction question. Plenty of bantering and speculation on the news from Facebook… Netflix… Twitter… and others. The earnings season has been positive thus far and we will watch how investors react next week. We will end the month of July which will inject economic data back into the equation. GDP for the second quarter gained 4.1%, but that was lost in the earnings dilemma on Friday. We have to focus on our own strategy and ignore the news. We have booked positive gains on positions and added others as we continue to trade what the market gives. All of the economic data remains on track for growth. There is always something to worry about, but at the end of the day it is about the trend and we continue to see a positive uptrend for stocks despite the selling on Friday. Earnings have been positive overall. The S&P 500 index showed seven of the eleven sectors moving higher for the week. The volume remains on the low side. The results for the week were positive for the index and not so great for the NASDAQ. Financials, industrials, and consumer staples offered leadership efforts on the week. Bonds, utilities, REITs and other defensive sectors held their own and watching interest rates following the bounce. Energy is consolidating along with crude oil as speculation about supply and demand keep the commodity and the stocks in check. We need stocks to hold their own in the face worries in order to keep the second leg of the bounce in place along with the uptrend. We will keep our focus on our strategy in the current market environment. We continue to manage all positions as trades until we gain some clarity on the longer term views. The long-term uptrends remain in place and we will manage our longer-term holdings in light of that trendline. The goal remains money management, not market speculation…

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly.

“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.