NASDAQ leads the downside move

Technology stocks were down more than two percent on the day as the NASDAQ large caps take the brunt of the selling. Semiconductors fell hard on the day with some profit-taking and money rotates to energy and financials. Crude oil was higher again on the supply data globally showing more use. Banks are up on higher interest rates. Leisure and travel showed nice gains on the day as another sector where the money is moving. Overall very mixed with the large sectors suffering the biggest losses. Investors are looking for new homes to make money. Some stops hit, some close, as we manage the risk that is and looking for the best opportunities.

Short news notes of interest…

  • Crude rallied above the $61 mark on Monday… this is still not a great sign for the balance of the economy, but it is good for our positions in the energy sector. Gasoline (UGA) was higher on the day as well… adjusting our stops on positions and letting it all unfold.
  • Facebook caved and agreed to a deal with Australia on news and publishers. It gives digital platforms time to negotiate deals for the feeds on their platforms in order to comply with the laws. Government wins again… seems to be a trend of late.
  • Treasury Allstar Janet Yellen was at work warning about the “extremely inefficient” use of Bitcoin for conducting transactions. She even raised issues with stability and legitimacy. This is going to get interesting as the comments lend themselves to government interference as a possibility. In India, one of the billionaire investors, Rakesh Jhunijhunwala called it speculation of the highest order and stated that the government should ban the use of cryptocurrencies and bitcoin. Bitcoin is trading below $50,000 currently taking another big tumble.
  • The stimulus bill is heading to Congress for a vote this week and some are calling it too expensive and poorly targeted. Some go as far as to say it is unrelated to Covid… big shock. The list of fat in the bill is amazing… it is over 500 pages long and offers some great reading if you get bored. The best comment is from the Committee for a Responsible Federal Budget… yes, the committee exists… they state it contains $300 billion of unrelated spending… they are generous.
  • The shortage issues continue to arise for manufacturing. The most commonly known is the lack of semiconductor chips for automobiles, but now US steel companies are struggling with short supplies. Inventories are at a 3 1/2 year low. The price has reached $1176 per ton the highest in 13 years. You guessed it, mills were idle due to the pandemic… production utilization was at 56% in June… it has moved up to 75% of late but still well behind the 82% last February… that equal shortages as demand have ramped up… still a ways to go. This is also called inflation and watch how the price increases will be passed through to cars, appliances, construction, etc. Not great news.

Sector Rotation and the S&P 500 Index:

The S&P 500 index closed down 30.2 points to 3876. It was down 0.77% on the day. The index closed lower with concern and rotation in play. Money flow was lower again as it rotates to where it will be treated best. Six of the eleven sectors closed on the upside with cyclicals leading the upside. The VIX index closed at 23.4 up slightly on the day. Watching how this unfolds moving forward.

Monday: more rotation as money heads out of technology and consumer-related stocks to energy and financials. This has been building momentum for a few weeks and Monday showed some acceleration in the process. For now, the good news is money is staying in the markets, but there are some key issues on the horizon that will impact the cost of goods through inflation. It is time, if you have not already done so, to evaluate the opportunities looking forward and the risk of the past leadership currently. Plenty of work to be done as the stimulus bill rolls to Congress to be voted on and the challenges will be plenty.

  • XLB – Basic Materials bounced off the lows with money flow bottoming on the reversal. $70.80 support held and the upside has returned. Solid gains Friday hit entry $74.50. Stop $72.60. More upside as cyclicals gains favor.
  • XLU – Utilities don’t like rising interest rates… thus some downside pressure on the sector near term. Watching as earnings have been good and may offset some selling. Big downside on expenses related to upgrading the power grid is discussed.
  • IYZ – Telecom bounced at the support of $30.95 and moved back to the previous highs and stalled. Watching and managing the risk. Downside to start the week.
  • XLP – Consumer Staples moving lower to establish a near-term downtrend. Watching.
  • XLI – Industrials broke from the trading range on Friday keeping the upside trend in place. More upside as cyclicals gains favor.
  • XLE – Energy tested $39.12 support and bounced offering entry. Crude has been the catalyst and watching how it continues. Entry $41. Stop $44 (adjusted). Big gains on crude moving higher.
  • XLV – Healthcare hit new highs and has struggled since. Watching the move below the 50DMA currently. Biotech equally has struggled as vaccine rollout is slower than expected. Lower as stimulus bill holds some interesting responsibilities for drugmakers.
  • XLK – Technology remains in an uptrend but tested the upside and has struggled along with other growth sectors of late. Letting this unfold for now. Led the downside on the day as technology money head to other sectors.
  • XLF – Financials bounced at the support of $28.95 and bounce back to the previous highs creating a ‘V’ bottom on the chart and a break higher. The upside in play near term. Entry $29.75. Stop $31.53. Benefactor of higher interest rates helping banks… watching.
  • XLY – Consumer Discretionary holds uptrend line and bounced at the 50 DMA. Resumed uptrend and tested the move at the new highs. Watching. Consumer under pressure on inflation concerns.
  • IYR – REITs have struggled with interest rates, vacancies, and virus talk about people moving out of cities. Held support at the $82 level and moved back to new highs… Watching. Entry $84.45. Stop $87.50. Positive day to start the week.

Using the six-month charts as an indicator for the short term view… Eight sectors are in confirmed uptrends with renewed upside. Three are in consolidation patterns showing indecision from investors, and none are in a downtrend. The result for S&P 500 index is an uptrend short term with a positive bias currently.

(The notes above are posted at the end of each week based on the activity of the previous week’s trading. The BOLD/ITALIC comments are the current day changes worthy of note.)

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

The NASDAQ index closed down 341.4 points to 13,533 The index was down 2.46% on the day with notable selling in large cap stocks. The NASDAQ 100 index (QQQ) was down 2.59% for the day as money flow into the sector was lower with selling. The large caps have been lagging of late and remain a concern as rotation affects the sector. Semiconductors (SOXX) closed down 3.62% forfeiting gains. Technology (XLK) moved down 2.21% watching the $128.57 level of support. Patience for now.

Semiconductors (SOXX) The sector remains in an uptrend breaking higher from the consolidation and resuming the uptrend. The sector closed the week on a positive note and watching for the leadership to resume. Entry $415. Stop $426.26 (Stop Hit). Tumbled 3.6% on selling in the sector. Hit our stop.

Software (IGV) The sector came back to life after six weeks of consolidation and volatility. Broke to new highs and showing some consolidation at the current highs. Entry $361.77. Stop $376 (Stop Hit). Fell 3% and hit our stop.

Biotech (IBB) The sector broke higher after testing support and maintained the uptrend. Managing the risk and letting the current testing playout. Entry $164.70. Stop $164.70 (Stop Hit). Fell 2.5% and hit our stop.

Small-Cap Index (IWM) The sector consolidates near the new highs. Entry at $213.76. Stop $219.38 (adjusted). The uptrend remains in play with some testing at the highs. Watching how it unfolds moving forward.

MidCap (IJH) The sector turned higher along with small caps. Solid move and holding near the highs.

Retail (XRT) The retail sector volatility dropped and some normal returned following the GME frenzy. This week XRT has traded sideways as money flow drops. $81 is the level we are watching to clear on the upside.

Emerging Markets (EEM) The sector recovered from and moved to new highs. China (FXI) is the leader in the sector. Big downside move… hit stop levels if you own the sector. China led the downside move.

Transports (IYT) The sector has struggled but seeing some upside recovery and interest in stocks. Hit new highs and letting the parts show the leadership. Airlines, shipping, trucking, and ports are all struggling with the logistics side of the equation of late. Higher on the day with a break from the trading range.

The Dollar (UUP) The dollar tested lower to end the week as stimulus and inflation become a real thing for investors. The new team at the Treasury are weak dollar proponents and it is not helping the cause. Devaluing currency has never been good for economic growth. Lower on higher rates and stimulus package.

The Volatility Index (VIX) Volatility closed 22 up from last week’s 19.9 level as anxiety levels rose on the inflation talk. Watching how this unfolds relative to the outcome. Higher on concerns about inflation.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 1.34% up from 1.2% last week. Rates are rising on inflation fears… negative for bonds. TBT hit entry at $17.84. Stop $19 (adjusted). 1.37% and climbing.

Crude oil (USO) Crude moved to $59.15 from $59.47 for the week or down 0.005% for the week. Plenty of speculation to influence prices as OPEC cuts to supply are showing an impact. As we stated nearly seven months ago… the greatest opportunity was in crude. Taking what is offered and managing the risk. USO Entry $29. Stop $38.75 (adjusted). UCO trade position entry $25.78. Stop $49.40 (adjusted). Over $61 a barrel and up 4% on the day.

Gold (GLD) The commodity is struggling against the background of uncertainty relative to the dollar and inflation. Watching as we hold above $166.50 support levels. Still challenged near term. Bottom reversal continues with a 1.5% gain and hits the entry point.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENTT

MONDAY’s Scan for February 22nd: Markets tale of two cities as technology and large caps head lower… but, the cyclicals head higher. The challenge on the horizon is inflation as shortages continue to show up in the manufacturing sector. Opportunities are to be had and they will be needed to be able to afford the goods we will need to consume. The bigger challenge will be price increases that will not be rescinded even if the cost of production falls in the future. Time to put on your work pants and manage your money.

  • Semiconductors (SOXX) declined enough to hit the stops and watching how this unfolds… the downside is setup currently if it follows through.
  • Software (IGV) equally declined on the day hitting stops. Watching how this opportunity unfolds.
  • NASDAQ 100 Index (QQQ) fell on the day and watching the downside. Adjusted our stops on positions and looking for signs of more selling.
  • Gold (GLD) finally moved higher on the day as the dollar falls and inflation raises its head. Hit the entry-level.
  • Treasury Bonds (TLT/TBT) heading lower as rates continue to rise. Adjusting our stops and letting it play our near term.

FRIDAY’s Scans for February 19th: Markets remain mixed with the separation and rotation becoming more pronounced. Cyclicals rise on inflation concerns and growth stocks decline as money moves. The risk is rising overall, but the stimulus is advancing, and therein lies the solution to the game being played on Wall Street. Semiconductors remain strong growing demand in the manufacturing sectors. Automobiles have a big delay in chips due to rising demand. Overall we see areas of opportunity and areas of concern. Patience as it all unfolds.

  • Bitcoin (GBTC) hits the one trillion dollar mark… enough said.
  • Treasury Bonds (TLT) with yields rising the bond has been under selling pressure helping our TBT/TMV holding. With the inflation talk, this isn’t going to change tomorrow… watching and managing the risk.
  • Crude Oil (USO/UCO) and Gasoline (UGA) hit resistance this week and stalled… watching how it unfolds as supply data shows a steady drawdown in storage across the board. Natural Gas (UNG) has been higher on cold weather… watching as well.
  • Semiconductors (SOXX) solid uptrend in play and the renewal on Friday was positive to the trend.
  • Copper (COPX) prices have topped $4 a pound for the first time in over nine years.

THURSDAY’s Scans for February 18th: More selling overall, but no real damage done to the charts. This amounts to profit-taking and a test of the move higher. Charts are still in a good position to continue higher and we will remain patient to see how it unfolds. Our stops are in place and the focus remains on the economic data near term. Facts are always better than rumors for the long-term outlook. Patience as we end the week.

  • Testing… Energy (XLE), Crude Oil (USO), China (FXI), Biotech (IBB), Small Caps (IWM), Natural Gas (UNG), and Semiconductors (SOXX) all tested the last two days. Stops in place and watching how they unfold.
  • Facebook (FB) Watching the fight unfold between government and independent business. This is going to impact the course of history for free trade and independent businesses. The question is will Facebook go it alone will other large companies take a stand? Not to mention, what happens to the stock prices going forward.
  • Commodities (DBA, DBC, DBP) all tested on the day… watching.
  • Utilities (XLU) got a boost from earnings… parts may be worthy of time to find the leaders versus the whole.
  • Homebuilders (ITB) and the housing market overall are raising questions of supply and demand… interest rates rising? What does the future look like? Plenty to watch unfold and important to protect the gains in the sector near term.

WEDNESDAY’s Scans for February 17th: More mixed results for the markets as money is still rotating to where it will be treated the best… energy, telecom, financials, commodities, and China. Taking what is offered and managing the risk. Plenty of data being reported about the economy and plenty to digest as we look forward. Don’t overthink this follow the trends and focus on the reality in the charts.

  • Energy (XLE) remains the leader… crude (USO), natural gas (UNG), gasoline (UGA) all leading the upside. Oil services (OIH), exploration (IEO), and other components showing positive trends. NOTE: USO received notice from RBC Capital Markets they cannot buy oil futures contracts. This will hamper its ability to meet the fund’s objective. By prospectus they can hold treasuries and cash. Not good for the fund. We are evaluating what options we have relative to the notice.
  • Semiconductors (SOXX) some selling, but the trend remains higher for the sector. Watching how the automobile shortage for chips unfolds as well as the sector overall.
  • Apple (AAPL) Berkshire Hathaway sold all their Apple stock as one of the previous largest holders many take that as a bad sign for the stock. Worth watching going forward as the chart shows an uptrend in play, but a major test is showing… watching support and ticker.
  • GameStop (GME) just when you thought the story was over… Congress has to get involved… after all, they know show much about this subject. Maybe they are trying to get some insider information from Reddit and others who will testify.
  • Phizer (PFE) has not delivered 10 million vaccine supplies to the EU. This is a concern relative to meeting the demand for the vaccine globally. Watching the biotech stocks near term on the news.

TUESDAY’s Scans for February 16th: Interesting start to the week. Moves of interest were in the volatility index, interest rates, crude oil, and the dollar. This shows concerns about inflation. It also signals some rotation in money by investors. Watching how it unfolds and we continue to take what is offered in positions we have while managing the risk.

  • Crude Oil (USO) clears the $60 mark per barrel. Raised our stops and watching how it unfolds. Energy (XLE) gapped higher on the day as well.
  • Natural Gas (UNG) jumped 4% as the winter storm moves through the country. Taking the upside move and adjusting the stops.
  • Financials (XLF) ‘V’ bottom recovery and gapped to new highs. Taking the offering as interest rates helping the upside move.
  • Europe (IEV/EURL) Solid upside move and gap higher to start the week. Adjusting our stops and letting this run as vaccine news helping the outlook for Europe.
  • Commodities (DBA, DBC, DBP) all moving higher on the inflation concerns. Watching and managing the risk.

(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.)

FINAL NOTES:

Monday: Taking note of the rotation in sectors… the value of the dollar… the decline in treasury bonds… manufacturing shortages… and inflation! Plenty on the horizon to be concerned about as the storyline of Jimmy Carter (I mean Joe Biden) unfolds. Too much spending and too few goods are not a good combination. The was on Covid is creating shortages that will impact the economic recovery they are fighting for in Washington… As mom said, sometimes the best action is no action and to let things unfold. We are now in a position of too much money chasing too few goods… This will be more interesting as we move forward… Time to pay attention and do some risk management.

Weekend Wrap & Outlook… The market’s sentiment remains positive with a twist of concerns overall. The upside hope is alive and well with stimulus driving the hope currently. The same stimulus is driving concerns relative to inflation as investors finally believe to some extent rising rates are a challenge for stocks and the economy moving forward. With that in mind, the markets closed the week essentially flat across the major sectors. The cyclicals enjoyed a positive boost on Friday from the discussions. Growth stocks stepped back and watched as money rotated to other areas. Commodities remain a hot topic as well with the rising prices adding to the inflation talks. The long-term trends remain on the upside following the test of momentum. For the week four sectors closed in positive territory as some profit-taking appeared in the markets. The VIX index closed at 22 and higher on the anxiety around inflation. The dollar headed lower thanks to the new Treasury head pushing $1.9 trillion in stimulus. Crude moved sideways at $59.15 after moving near $65 earlier in the week. This is the highest level since February 2020. UGA moved higher with prices at the pump elevated… hopefully you own the ETF to afford the increase. Watching the current movement in the broad markets as money continues to rotate and money flow shifts. The goal remains 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. Watch the trend, know which side the Fed is on 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.

“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 your trading strategies with a disciplined approach to investing and managing the risk of our money.