More liquidity drives stocks higher

Market Outlook for February 5th

So much for the selling… the NASDAQ moved to a new high and most sectors return to their respective uptrends. This, of course, raises the question of how long this can continue? The volatility index is still elevated at 16.05. Technology is clearly the leader in the move higher gaining 2.6% on the day. The large-cap NASDAQ hit new highs as well with the leaders heading higher. China’s action with liquidity injection of nearly a quarter of a trillion dollars was part of the reason for the global markets moving higher. The Fed injected $95.4 billion in the repo markets as well. Economic data showed more improvement in January with factory orders growing 1.8%. It was a day you sat back and watched money flow into stocks.

The S&P 500 index closed up 48.6 points to 3297. The index held the bounce off the 50 DMA and cleared the 3283 resistance. Ten of the eleven sectors closed higher on the day with industrials and technology leading the way. The downside was led by utilities as money rotated out of the safe haven. Rotation back to stocks the last two days renews the uptrend. Watching, listening, and managing the current risk.

The NASDAQ index closed up 194.5 points at 9467. Technology-led the upside for the index and large caps posted a solid move higher for the second day. The NASDAQ 100 large caps rose 2.3% on the day closing at a new high. Tesla was bright a spot again up 13.7% and in a vertical move. Semiconductors helped lead the upside but still has plenty of work to do. We are managing our risk and looking at what unfolds near term.

Small-Cap Index (IWM) The sector has been lagging since the highs on January 16th… short signal offered at $164.74 and confirmed Friday at $163.65. Willing to add a short term trade on the weakness technically. Money has been steadily lower and the break of the 50 DMA is negative. TZA entry $36.95. Stop $37.20 (stop hit). Solid bounce Monday hit stop and watching how this sector unfolds. Tuesday followed through with a move above the $164.44 resistance.

Transports (IYT) The sector moved to $200.55 and hit resistance. Reversed and tested support at the $192.42 level and broke support on Friday. Closed at the 200 DMA and the bottom of the current trading range. Held the 200 DMA and gave up early gains Monday. Solid gains on Tuesday, but still challenged at the current levels of resistance.

The Dollar (UUP) The buck has returned to the downside accelerating on Friday. The negative sentiment about the virus and weaker economic data aren’t helping the cause. Bounced on hope. Fed is back adding liquidity in the repo market helping the buck.

The Volatility Index (VIX) Anxiety returned this week with the virus issues in China spreading. The fear of curtailed economic activity has pushed money towards safety and anxiety spiked to 18.8 on Friday. Watching how this unfolds in the coming week. 17.9 remains elevated. Tuesday at 16 and still elevated.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector followed small caps lower breaking support at $203 and offering a short side trade opportunity. We didn’t enter the trade as we took the small-cap trade. A negative close below the $200 mark. Joined the small caps with a solid bounce off the lows Monday. Added to the upside move on Tuesday. $205.93 level to clear.

Biotech (IBB) The sector hit highs at the $124 mark and since became indecisive. The double top pattern played out breaking lower $117.90 offering short side entry point. Accelerated lower to end the week. LABD entry $13.25. Stop $13.70 (stop hit). Solid bounce off the lows and watching. Cleared $117.92 resistance.

Semiconductors (SOXX) January 24th intraday reversal to close lower was a negative sign for the sector. The gap lower on the next trading day was a short side signal. It attempted to bounce but resumed the downside move closing below the 50 DMA. SOXS entry $20.70. Stop $21.25 (hit stop). Modest bounce… watching the sector overall. Solid gains on Tuesday to clear the $250 resistance.

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. Very volatile week for the sector as it shows some weakness near term. Watching with stops in place. Moved to new highs on Tuesday to continue the uptrend.

REITs (IYR) The sector has turned into one giant consolidation pattern. The upside resumed clearing the $93.50 resistance and hitting the $95.50 resistance… consolidated and moved lower to end the week… watching how it unfolds. Solid bounce to hold near highs.

Treasury Yield 10 Year Bond (TNX) The yield closed at 1.52% down 29 basis points last two weeks… TLT moved higher breaking through resistance as money rotates to safety near term. Taking the trade offered (TMF/TLT) and managing the risk. Rates move to 1.6% watching money flow in bonds.

Crude oil (USO) Crude moved to $64.22 on speculation. Crude fell to $51.56 on the speculation falling short and China virus. Watching how this plays out with the downtrend in play. SCO Entry $13.27. Stop 17.30 (adjusted). More downside for crude breaking $50.56 support. Watching for a bounce as the sector is oversold. UCO needs to clear $14.31.

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 breaks from the consolidation pattern at $146.60. UGL entry $46.90. Stop $52.15 (Stop Adjusted). Letting it unfold. Liquidity moves by move by the US and China rallies dollar and gold falls.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from December. Watching and letting this unfold. Gapped higher by the liquidity injection from China.

China (FXI/YANG) Finally gets a trade deal to help the upside trend emerge… then the coronavirus erases all the gains. YANG entry $43. Stop $47.20 (adjusted). Gapped higher by the liquidity injection from China.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans for February 4th: the second day of the bounce and all is well with stocks again… right? NASDAQ moves to new highs, Tesla if up more than 30% in two days, Fed providing liquidity again, the economic news is positive, and all is well. Or so it seems. There is still plenty of uncertainty behind the markets but investors were drinking the liquidity cool-aid. As I say, take what the market gives, manage risk, and keep moving forward. You still have to manage the risk of the current environment.

  • China (FXI) Gaps higher on the nearly $250 billion in liquidity.
  • Emerging Markets (EEM) gaps higher along with China.
  • Technology (XLK) closed at new highs as money flow rises in tech stocks.
  • Semiconductors (SOXX) bounced, but still not convincing.
  • Europe (IEV/EURL) bounced on liquidity move.

MONDAY’s Scans for February 3rd: Overall not much changed from Friday, but many sectors managed to hold support on a modest bounce. The S&P 500 held the 50 DMA and there were buyers stepping in on the dip… how does it unfold moving forward? Flip a coin and watch. ISM manufacturing surprised with a move back above 50% help the economic outlook… plenty of more data on hand this week along with jobs on Friday. Taking what we know and letting the rest work itself out.

  • China (FXI) posted solid gains on Tuesday. Watching the news about the flu virus is not helping.
  • NASDAQ 100 (QQQ) posted a solid bounce on Monday and watching how it unfolds. TSLA posted a big day. BIDU, GILD, JD, NFLX added as well to the upside.
  • Basic Materials (XLB) nice bounce from the 50 DMA.
  • Crude Oil (USO/SCO) more downside as weakness remains in the commodity and raised stop on our short trade.
  • Biotech (IBB) showed some signs of life bouncing from the current lows… watching for an opportunity.

FRIDAY’s Scans for January 31st: Investors ended the month with a bang. The selling was methodical versus frantic. The volatility index spiked higher. Dollar dropped. Gold rose. Bonds rose. Money was looking for safety as stocks fell to end the week. For weeks there has been plenty of chatter about the markets being overbought… add some fear as a catalyst and you get Friday’s activity. There are plenty of data points with economic data, earnings, and global economics… throw in some geopolitics and you have plenty of headlines and chatter. The plan is the same… avoid the emotions and rumors, focus on the facts, and manage the risk.

  • China (FXI/YANG) short signals hit and confirmed on the downside move. Manage the risk of the news.
  • Small Caps (IWM/TZA) short signals hit and confirmed. Manage the risk within the sector.
  • Semiconductors (SOXX/SOXS) short signals hit and confirmed. Managing the risk of the sector.
  • Energy (XLE/ERY/SCO) reconfirmed the downtrend. Adjusted stops and watching how it unfolds
  • Treasury Bonds (TLT/TMF) upside trend confirmed. Adjusted stops and watching how it unfolds.

THURSDAY’s Scans for January 30th: WHO issued a medical emergency and working on solutions. It helped calm some nerves but the uncertainty of the outcome is still going to rattle markets daily until resolved. GDP for Q4 came in at 2.1% and the slowest growth since 2016. Thus, the economy continues to show modest growth but it is still in a downtrend. Bonds see the 3 month/10-year bond inversion again… flight to safety has rallied bonds with rates dipping to 1.55%. Earnings have been solid with Microsoft leading the upside move on Thursday. Amazon announced solid beat after-hours. Watching how it unfolds relative to stock prices.

  • Financials (XLF) bounced finally… watching how they unfold.
  • Energy (XLE) bounced after accelerated selling… watching.
  • Technology (XLK) leading the upside charge with solid moves. Software (IGV) leading, Semiconductors (SOXX) and Networking (IGN) lagging.
  • Gold (GLD) benefactor to the uncertainty globally.
  • Europe (IEV) back on my watch list with Brexit at hand. Watching how it all responds as it unfolds. The British pound has been holding steady at the $126 level.

WEDNESDAY’s Scans for January 29th: Fed takes center stage with comments following no change vote on interest rates. The consumer was downgraded adding some angst to the situation. The repo money is back adding liquidity to the system. End result is more confusion which goes hand-in-hand with the uncertainty already in play. Some interesting moves on the day as telecom drops lower, energy continues the drop, bond rally, gold rallies, the dollar gets stronger, and semiconductors sell-off. Watching how it unfolds and looking for reality in the emotions.

  • Treasury Bonds (TLT/TMF) nice move for bonds as the yields continue to move lower.
  • Semiconductors (SOXX) showed some downside risk on the day and watch how it deals with support and momentum.
  • Energy (XLE) remains weak and managing our short positions. DRIP, GASX, ERY, DGAZ, SCO all doing well. UGA has bounced off the low and attempting a bottom reversal…
  • Gold (GLD/UGL) keeping the upside in play with cup and handle pattern on the chart.
  • Telecom (IYZ) fell more than 2% on the day. Chipmakers lead the sector lower.

(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 $55.95 level and moved new highs. Then fell as the worries rise… watching how it responds to close below the 200 DMA. Bounced at support. Followed through on the bounce.
  • XLU – Utilities are the current benefactor of lower rates and money looking for safer havens. Adjust stop on the vertical move. Some downside on Tuesday and watching.
  • IYZ – Telecom picked up volatility with the markets and testing the $29.50 level of support.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs.
  • XLI – Industrials shifted lower the last two weeks and watching the support at $81.10. Nice move upside.
  • XLE – Energy remains in downside move as anxiety rises about China and consumption. Short entry $53.40. (ERY) entry $40.20. Stop $53.60 (adjusted). Adjusted the stop. Did it find the bottom on Tuesday?
  • XLV – Healthcare breaks lower from the topping pattern. Closed below the 50 DMA and support at 101. Short signal issued. Bounced and watching.
  • XLK – Technology in an uptrend and showing a flag pattern at the current levels. Watching how leadership unfolds. Closed at new highs.
  • XLF – Financials have been in a trading range with IAI being the key leader within the sector. Bank issues in the headlines not helping matters and Friday broke support… looking at the downside trade options. Bounced on liquidity.
  • XLY – Consumer Discretionary tying to be the bright spot with Amazon earnings leading upside to end the week. Watching. Moved to new highs.
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… Solid upside follows through. Entry $93.50. Stop $93.50. Flag pattern broke down on Friday and watching how it unfolds.

There are currently four sectors in a sideways or consolidation trend. Five sectors are in confirmed uptrends. Two sectors in a confirmed downtrend. The result is SPY in a transition pattern 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:

Tuesday: Liquidity for everyone and markets rally. The NASDAQ is at new highs led by the technology stocks. NASDAQ 100 back to the uptrend. Positives all the way around. The challenge is the uncertainty about the coronavirus, global economies, and growth. We will take the gains, adjust our stops and look to today. Uncertainty can work both ways… the aggressive selling prompted by fear of not knowing and, aggressive buying on the hope of knowing. Either way, it is an irrational activity and we have to manage the risk in both directions.

Monday: Some upside to stem the selling from Friday. No big changes in the charts. Some sectors are looking to establish lows in their respective downside trends. Others bounced at support. Watching how this unfolds and where money rotates. The big challenge on the day was the inability to hold the opening highs or even a lion share of it. The volatility in the afternoon shows the presence of sellers still there. Taking it for what it is and looking forward. Earning, economic data and the virus are key drivers we are watching.

The coronavirus remains center stage and money flow heads towards safety for the second week. The challenge is the unknows… those create speculation… which creates volatility short term… resulting in the rotation of money. The uptrends are being challenged with some reversing short term. The rising speculation is also playing havoc on money flow. If we add this to the rising concerns from the talking heads about market valuations you see why volatility rose and money rotated for the second week. 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 has been positive with some solid results posted again this week. The data points will be important to how this unfolds moving forward. Economic data remains okay in that it is not getting worse. With the close of January on Friday, we will start the week with fresh data on the economy. Yields on the ten-year treasury bond fell to 1.52% raising plenty of red flags as it shows more rotation towards safety and a revisit to the inverted yield curve. The dollar reversed to the downside of the virus’s fears. Money is rotating to safety as bonds rise, utilities rise, gold rises, and cash levels rise. Energy has taken the worst hit along with the emerging markets. The downside trade opportunities arose this week along with several other sectors offering entry points. 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.