Money rotates with semiconductors leading

MARKET OUTLOOK FOR April 17th, 2019

Leadership is key to any trend in the markets and Tuesday the leadership of the semiconductors was important overall. There was some equal leadership on the downside from healthcare and REITs that was worthy of our attention. The rotation is worthy of our attention to better understand the current dynamics of the markets. Why is money leaving specific sectors? Why the break lower from the consolidation patterns on above-average volume? The answers to some of this is addressed below, but the whole storyline is still unfolding. Watching, listening, and managing our risk.

The S&P 500 index closed up 1.4 points to 2907 pushing closer to the October highs of 2930. Somewhat of boring day again on Tuesday as eight of the eleven sectors closed in positive territory. The financials and energy were the leading sectors resuming their respective trends. REITs and healthcare led the downside on the day. The long-term trendlines are approaching the key levels to resume the previous uptrend. We will watch how the current activity unfolds and if the buyers can maintain control. SPXL entry $33.50, stop $46.95 (adjusted).

The NASDAQ index closed up 24.2 points to close at 8000. The large-cap stocks (QQQ) have been the leader for the move higher continue to add to the move above the March 21st high (7838). The 7849 support is the level to watch should the sellers’ appear near term. Technology held up and remains in a leadership role. QQQ is our indicator near term and needs to hold $185.05. The bounce produced some opportunities to buy an upside position on clearing the $152.51 mark and holding. TQQQ entry $34.17. Stop $58.20 (adjusted). Solid leadership in this sector and watching how it unfolds with the move above $180.28.

Small Cap index (IWM) the sector has been in a consolidation pattern. The need to close above the $154.90 level was key to breaking higher to continue the previous uptrend. Need to hold above $156 and clear the Feb 25th highs to show positive progress in the current move. There is still hesitency in the index as it remains at the $158 mark. Start of the current trend was the break lower testing the $149.05 support and back to the resistance at $154.90. The trend from the February highs was heading lower… it did reverse back to positive last week and has tested the move this week. The chart is still not very convincing with the buyers not quite as robust and the volume on the low side. We are looking at what opportunities result near term.

Transports (IYT) hit some resistance at the $192.42 level and the index cleared the resistance with a solid move higher. A small test on Monday to start the week. The test of the $182.43 mark failed then bounced back above that level and $186.70 cleared. The big gains last week brought the $192.42 level back in play and it followed through with a move higher adding confidence to the sector. Added a position at $188.30. Stop $190.50 (adjusted). Taking what the sector offers.

The dollar (UUP) The reaction to the FOMC pushed the buck to support at the $25.50 level. A dovish Fed willing to offer stimulus is not favored by the dollar… But, a weaker economic picture globally is helping the dollar currently. The IMF revised GDP numbers lower for around the globe. It is a matter of which news story holds the greatest belief for the buck. The big question mark for the buck remains a possible resolution to the trade tariffs with China. The ETF closed at $26.01 and remains in a positive pattern holding support… Watching as this continues to unfold.

The Volatility Index (VIX) closed at 12.1 on Tuesday moving to a six month low on positive stock activity. The IMF warned of global growth slowing for the third time in six months adding some volatility. For now the tug-o-war between buyers and sellers is being won by the buyers. Watching how this all unfolds patiently.

Economic Data: April starts a new round of data for the month of March… looking for some improvement over February.

MONDAY: Empire State index rose better than expectations as a positive sign for the economy. Fed spoke and stated they were good with the current interest rates environment and growth.

TUESDAY: Earnings were solid to help upside. Industrial production fell 0.1% missing estimates. Homebuilders index rose beating expectations. This is being reflected in ITB’s gains of late. Capacity utilization declined and missed expectations. Still showing slowing overall in the economic trends.

It is all about the progress following interest rates were hiked by the Fed… we continue for the fourth straight month to see slowing in the data. Eventually, this will show up in stock prices through earnings. Those have started and we are seeing mixed data from companies. Interpreting the data versus the emotions… following the trends.

(The notes above are posted daily based on the activity of the previous days trading. The BOLD/ITALIC comments are current day changes worth noting.)

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

Biotech (IBB) The selling resumed and moved back below the $112 level of support. The break down is coming from the small-cap stocks. XBI is the large cap stocks and it is not fairing much better on the chart. We don’t hold any positions in the sector currently. Continued lower to start the week. $107 is next level to hold.

Semiconductors (SOXX) Tested below the $187.41 support and managed to hold and added to the upside this week as the sector moves higher. Watching how this unfolds going forward and managing the risk. Entry $187.50. Stop $194.50 (adjusted). A small test on Monday. Gained 3.2% on Tuesday to lead to new highs.

Software (IGV) Broke $167.88 and bounced back above the same level to create the December lows and start the new trend. $167 level added a trading position. Entry $167.90. Stop $207.60 (adjusted). Resumed the uptrend with a move back above the $210 level and followed through with a move back to the $215 highs.

REITs (IYR) Tanked on uncertainty from the Fed and the economic outlook. Broke $75.21 and bounced… trading opportunity on reversal above $75.21. Entry $75.25. Stop $85 (adjusted). Managed to break above the trading range and adjusted the stop and letting it unfold. Tumbled lower on higher interest rate talk.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.56% as yields bounce higher to clear resistance. The bounce from the low in March is in play and watching the bond near term as it declines. TLT hit exit point at $123.40 on Friday. Yields move to 2.59% causing a stir.

Crude oil (USO) showing resolve to work higher. Plenty of issues remain around the supply data. The US data showed a build this week and crude tested briefly before heading higher. The sanctions in Venezuela and Iran are being factored in… then OPEC stated they would start increasing production to fill the gap… then conflict in Lybia adds to worries about supply shortages… and the saga goes on. In the end, the data will prevail relative to pricing. For now, the speculation is driving prices. The move above the $48.03 level offered some hope and opportunity to add a trading position. UCO entry $15.10. Stop $21.80 (adjusted). Managing our risk and letting this play out with resistance at $64.20 (crude price). Solid gain on Tuesday with crude moving back to $64.

Emerging Markets (EEM) Watching as the bounce from the bottoming pattern moves above the $43.80 resistance and holds. Rumors of trade resolutions and talks with China helped the index but needs some reality to follow through. Watching for the clarity to unfold. Cleared $40.88 and broke higher from a double bottom pattern. Entry $41. Stop $42 (adjusted). News from China helping on the week, but the details are what will matter moving forward. Testing the move above $43.80. Nice upside added on Tuesday to help.

Gold (GLD) spiked lower again retesting support. Watching how the metal responds to the ups and downs of the dollar and global economic picture. Downtrend developed on the chart. $121 support level to hold. Moved lower on Monday. Confirmed the move lower breaking support at $121. Short side trade offered (GLL).

MidCap (IJH) The uptrend from the December lows are tested with a move below the $190.44 support. They have now managed to move higher and Friday cleared the February highs completing the reversal. Entry $190.45. Stop $188.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Bounced off support at $43.50 level. Talk of tariff agreement back on the table… but, we have heard this too long. The break from the eight-month bottoming pattern finally getting some follow through. Entry $39.80. Stop $42. News of improving PMI from a private rating service in China… perhaps, but doubtful… we will see how it unfolds… tested, but held above $45.20 to end the week. Moved below $45.20 on Monday… Back above $45.20 on Tuesday… watching how it unfolds.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans, April 16th: Some unique discrepancies in the market on Tuesday and worthy or our attention. Money rotated out of XLV and RWR. Money moved into XLF and SOXX. The broad indexes barely closed in positive territory as a result. The good is leadership. The positive is money stayed in the market. The bad is two sectors change their trends for now. Taking what the market gives, but keeping our eye on the overall sentiment of the markets.

  • Healthcare (XLV) breaks lower on higher volume from the consolidation pattern. Big negative and confirms the short entry $89.70. Providers (IHF) and medical devices (IHI) led the downside move. RXD entry $22.75. Stop $22.50.
  • Financials (XLF) solid upside on the day, but earnings from BAC missed top line growth. Warnings about net interest income were negative for the stock… but, it also shows the impact of lower interest rates on the ten-year bond. Just think inverted yield curve.
  • REITs (RWR) declined 2.5% negating the break above $97.92. Why the change in direction? Interest rates. Several banks have pointed to a slowing in net interest income. Lower rates aren’t helping the sector. REITs traded in sympathy with the chatter on interest rates. Watching how this sector unfolds.
  • Semiconductors (SOXX) solid upside move to add to the new highs. The leadership from this sector is key overall. Riding the wave and adjusting our stops.
  • Interest rates (TNX) ten-year bond yield moved to 2.59%. Not a huge deal, but it is a follow through to the move higher last Friday. The impact to bonds (TLT) is negative obviously, but it also impacts the interest-sensitive sectors like REITs (RWR) and utilities (XLU). This has my attention as it unfolds. Short Treasury Bonds (TBT) entry $33.55. Stop $33.55.

MONDAY’s Scans, April 15th: Some selling, some weaker earnings in banks, some talk by the Fed, some economic data and the markets closed basically unchanged. No break downs, no breakouts. It was a boring day for stocks and we move to Tuesday.

  • Financials (XLF) earnings from GS and C missed top line numbers. Sector test the move higher from Friday. KRE, KBE, IAI all in the mix.
  • Natural Gas (UNG) moves to February lows. Short side DGAZ trade working well… watching if it holds this level of support.
  • Homebuilders (NAIL/ITB) solid upside remains in play with lower interest rates helping the sector.
  • EWO, GREK, EWL, EURL all moving higher.
  • Consumer Staples (XLP) moved to the October highs.

FRIDAY’s Scans, April 12th: There is plenty in the headlines and it is impacting stocks in both directions, but overall, the upside is winning. Financials and Transports make positive breakouts. Technology, consumer discretionary, industrials, and basic materials remain in a leadership role. The VIX dropped to a six month low. Everything is positive to end the week. That said, we remain cautious and have adjusted our stops accordingly.

  • Financials (XLF) JP Morgan posted solid numbers for earnings and boosted the sector breaking above resistance and resuming the uptrend.
  • Transports (IYT) broke above resistance and posted a positive week to resume the uptrend.
  • Technology (XLK) moved to new highs. SOXX, SOCL, IGN, IGV all move to new highs a well.
  • Consumer Discretionary (XLY) moved to new highs. Consumer is alive and well based on the charts.
  • Crude Oil (USO/UCO) moved to resistance at the $64.20 level and watching as the data is conflicting with the belief.

THURSDAY’s Scans, April 11th: earnings, economic data, international trade questions, China tariffs, etc. etc. etc. The news is keeping the market in limbo this week as investors attempt to make a decision based on the future impact and outcome. Looking forward is always a tricking thing as we can see illusions that don’t exist. We saw some struggles in healthcare/biotech stocks, emerging markets, and oil. We saw some positives in banks, industrials, and transports. Taking what the market offers and managing our risk.

  • Financials (XLF) bounced in front of banks earnings on Friday… watching how the sector performs in light of earnings.
  • Biotech (IBB) tumbled back to support again and in a tight range for now. The move impacted the small cap (IWM) sector as well. XLV fell 1.2% and tested the 200 DMA.
  • Crude Oil (USO/UCO) tested lower as OPEC ponders increasing production. This a day after the increase in US supply data. Watching how this unfolds relative to crude and energy prices.
  • China (FXI) moved lower on speculation.
  • Gold (GLD) gave up all the gain of late… retest support.
  • Homebuilders (NAIL) nice bounce back and move higher the last two weeks.

WEDNESDAY’s Scans, April 10th: News settles and stocks rise slightly on the day. Nothing stirring on the day as some money continues to rotate. The good news thus far is money looks to be staying in the markets versus heading to cash. Bank earnings start on Friday and Thursday and will offer some insight into the economic picture. Taking what the markets offer one day at a time.

  • Telecom (IYZ) breaks higher from consolidation and following through. Positive leadership from ZAYO, IRDM, ACIA, and VSAT.
  • Small Cap (IWM), Midcap (IJH), and biotech (IBB) all moved upside on Wednesday rebounding from the selling on Tuesday… watching how the growth stocks are responding.
  • Gasoline (UGA) big jump on supply data. Adjusting the stop and letting it run.
  • Networking (IGN) solid break from flag pattern. Looking for follow through and scanning the leadership. PLT, VSAT, and COMM.
  • Emerging Markets (EDC) moving higher after breaking from the trading range.

Sector Rotation of S&P 500 Index:

  • XLB – New lows and found support… got the move above the $50.35 mark. Entry $50.50. Stop $54.10. Upside tested at the $55.95 mark again. Held support at the $54.15 mark and has moved into a leadership role with the climb above $55.95.
  • XLU – The utility sector found support at $51.11… moved above $52.72 for entry. Cleared $57.10 resistance and showing some near term topping. Watching and managing the risk. Entry $53. Stop $56.75. Topping pattern showing on the chart and letting this unfold with stops in place. Back to support at the $57.12 level. Sold off 1.2% Tuesday. Interest rates rose.
  • IYZ – Telecom found new lows and bounced…  $26.25 level cleared for upside trade. Entry $26.35. Stop $28.25 (adjusted). Cleared the February highs and continued the uptrend. Hitting new highs and solid move on the upside. Adding to new highs.
  • XLP – Consumer Staples found new lows and bounced. Cleared $50.50 and continued upside trend. Managing our risk. Entry $51.90. Stop $54.25 (adjusted). Cleared resistance at the $54.92 level. Testing the break higher. Remains in an uptrend. Solid move to the October highs.
  • XLI – Industrials moved to near-term low and bounced. $65 level cleared for trade opportunity. Entry $65. Stop $74.05 (adjusted). Back to resistance at the $76.80 mark and watching. Facing resistance at February highs.
  • XLE – Energy stocks bounced back with crude prices moving higher. Breaking from the trading range and plenty of uncertainty in the sector overall. Watching for follow through on the move above $67. Attempting to confirm the break higher.
  • XLV –  Healthcare fell below the 200 DMA and testing at support. Still not showing a lot of strength overall. Watch the parts for clues as
    XPH stalls, IHF dumped lower, XBI struggling, and XPH not looking good. Consolidation pattern in place… Failed to hold the bounce on Monday and headed lower with weakness in IHF, IHI, XPH… Watching. Short side trade signal hit.
  • XLK – Technology moved to near-term lows and bounced. $61.70 cleared for trade opportunity. Entry $61.70. Stop $75.03 (adjusted). Trading at new highs. SOXX, IGN, HACK, SOCL, and IGV all part of the puzzle for the upside to continue. Moved higher with the help of SOXX. Adjusting our stop.
  • XLF – Financials moved to recent lows and bounced. $23.76 level cleared for trade. Entry $25.76. Stop $25.50. Cleared $26.33 level of resistance and watching. Positive earnings push the sector above resistance and renewing the uptrend. Moved upside on earnings and looking solid for now.
  • XLY – Consumer fell to near-term lows and bounced. $98.96 level cleared for trade. Entry $99. Stop $113.50 (adjusted). Cleared resistance at $113.50 level. Taking on a solid leadership role and hitting new highs. Adding to new highs.
  • RWR – REITs broke lower… bounced from lows clearing $93.21 resistance… positive upside move. Entry $88. Stop $96.50. Watching and managing the risk. Made move to new high last week. Reacting to interest rates with sharp move lower… watching.

(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:

Markets tested and held key support levels and have bounced back near the October highs as resistance. The S&P 500 closed with solid upside for the week. The leadership remains in place and the transports joined the upside effort to end the week. Looking at the charts you can see the key levels of support holding, the key resistance levels remain in play as well. April is unfolding with earnings season kicking off and investors deciding if they like the economic data thus far from March. There are plenty of earnings on the horizon along with not so rosy of a picture. Plenty of question marks and only time will tell the outcome. There are some issues facing investors as the trade agreement has not materialized with China. Fundamental data remains on the weaker side both domestically and internationally. We will take the positive week for what it was as we continue to emphasize sound money management. We will look at positions to take profits, adjust stops, and manage the risk of the current environment. The goal is to avoid speculation and follow our disciplined strategy for each position. Taking it one day at a time.

Nine of the eleven sectors managed to close the week in positive territory as money continues to move with some rotation. Financials and telecom led the upside for the week. Transports posted a positive break higher along with financials. Healthcare was the laggard as money looks for a new home. Money is rotating out of the sector as we watch the break below the 200 DMA. Seven sectors remain in a positive uptrend with four moving sideways in consolidation patterns. Interest rates ended at 2.56% as they got a small bounce higher breaking through resistance. The ten-year bond moves lower as money finds stocks of ineterest near term. The dollar bounced back as the global picture remains uncertain. We continue to take this one day at a time. There is plenty of influencers in the markets currently and headlines are the drivers.

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.