North Korea takes center stage

OUTLOOK: August 11th

In the face of uncertainty, all you need to do is give investors a reason to sell… North Korea did exactly that. ICBM nuclear capable missiles gave everyone reason for concern, but more importantly, it added to the uncertainty in the global outlook. The sellers once again took control and after several attempts to bounce sold off more than 1.4% on Thursday. Small caps fell even more and moved to the 200 DMA. Technically a break of this moving average is a sell signal for long term positions. The sector has been one of the weaker and worth our attention near term. Emotions are picking up as the VIX index spikes to 16 from the close at 11 on Wednesday. Overreaction? Maybe, but the reality is it happened and we all have to make decisions relative to our positions and our outlook for stocks. Today is important to see how investors respond to emotions going forward. Futures are pointing lower for the open and our stops are in place and our outlook remains one of caution.

One sector ended Thursday on the upside as utilities (XLU) closed higher. VXX jumped 13.5% on the day as nerves showed clearly in the index. The downside was led by technology (XLK) and financials (XLF) as money rotates to cash and some defensive sectors. Short interest grew as speculation grows about the downside taking control of the trend. There is plenty more selling that would need to occur before that is a reality… emotions are in play and that is the most dangerous for markets currently. The S&P 500 index closed down 35.8 points on the day at 2438 and below the 50 DMA. The move also broke the consolidation pattern for a short term short trade signal on the day. The long term uptrend is still in play but now comes into question. The biggest movers in the index on Thursday were PRGO (bottom reversal and gap higher), DRI (first sign of bottom reversal), FE (flag pattern move to the top), CBS (cup and handle pattern), and AES (double bottoming attempt to move higher). The downside leadership came from XRT, M, SIG, INCY, KSS and AMD. Each confirmed downside break in patterns for short opportunities. Gold (GLD) moved through the $120.45 resistance tested lower only to move higher again. Positive day for gold as it takes on a safety role. The dollar (UDN) continues to struggle with the dovish outlook from the Fed and their shift to liquidate their balance sheet. The emerging markets (EEM) gapped lower on the political unrest with N. Korea. Broke $43.50 support and hit exit signal for short term positions. The Volatility Index (VIX) closed at 16 spiking higher on the worries present Thursday over N. Korea. The VXX position spiked higher as well on the news and now you adjust your stop and see how it unfolds. Manage your risk and stay focused on the horizon, not the rear-view mirror.

The scans for Thursday took on a negative sentiment with the selling in response to N. Korea or at least that was the storyline of the day. The Volatility Index (VXX) again raising plenty of questions as it spikes higher showing investor sentiment shift for the day. The shift in attitude is worth watching in the trading today as Trump and North Korea create worries. The Utilities and defensive stocks were the leadership. Short ETFs led the scans as the downside accelerates. Country ETFs continue to show positive trends. Watching how the downside unfolds today. Biotech (IBB), China (GDX), semiconductors (SOXX), technology (XLK), financials (XLF), small caps (IWM), mid cap (MDY) and NASDAQ (QQQ) were the downside leaders and ones to watch today as this unfolds. Natural gas (UNG) made an upside move Wednesday and followed through Thursday with a spike higher. Gold miners (GDX) made a positive move along with gold (GLD) with money rotating to where it believes it will be treated the best in light of the speculation. Crude oil (USO) made a move lower as anxiety believes less consumption on a weaker economic picture with North Korea disrupting the balance. Again that is all speculation driving the move. Treasury bonds (TLT) pushed higher as money accelerated the rotation towards safety. Watching how this unfolds near term as it impacts the current trends with reversals, breaks of support levels and moving averages on higher volume… all impacting the technical read for the market. Patience in how you approach this market both short and long term. Let the news settle and the reality develop for the current trends. There are opportunities in all of this activity both long and short various sectors.

The was jobs report put a positive end to an otherwise negative week. The shift on the charts is to a sideways movement of consolidation with value or safety driving the direction. What does all of that mean? Simply put nerves are rising about the seven-year uptrend for the markets. Data isn’t supporting the moves as the economy shows modest to no growth overall. The unemployment data on the surface looks great, but income and amounts of people leaving the job force raise plenty of questions. Two charts that validate the rotation last week are IWM -1.3% and DIA +1.2%. This movement is worth our attention as the new week unfolds. Crude oil remains the leader, but energy (XLE) has not followed the lead. The move in IEO and XOP on Friday got my attention, but they will need to follow through to gain any traction. The undercurrent of worry remains along with some speculation on where the markets go near term. The VIX index moved off the lowest point reacting to the chatter about Fed activity impacting stocks looking forward. The move lower on Friday reflects the lack of anxiety present in the markets currently. There is plenty to ponder both positive and negative going forward. Earnings are helping with individual stocks, but not the sectors. As seen in tracking the S&P 500 leadership the biggest moves have come from positive earnings. Volume was weak for the week as investor enthusiasm for risk fades. Data is still not driving… news and speculation are. The key word remains to be PATIENCE. Not something many traders like. We all want to believe we can see forward, but the reality is we can only see today. Thus, we must do what our strategy tells us to do today and tomorrow will take care of itself. Hard lessons to learn as our analytical brain wants us to believe we have the solution and can predict the future. Keep your stops in place and your eyes focused on the horizon taking what the market gives.

North Korea pushes the buttons of the market… literally. The news and banter over nuclear missiles remain a topic of debate and worry for markets and politics. Too much speculation and not enough facts lead to sell first and ask questions later. The short interest spiked on Thursday in the US markets as well as the emerging markets. Watching how it plays out short term and what opportunities result from the anxiety and selling. 


Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare is back with traders exiting the sector and looking for more interesting ground. The Senate failed to pass healthcare reform and can see the impact. No positions as our stops were hit and we watch to see how the current test lower sets up… short trades are starting to look attractive. Breaks support at $309 mark and $300 is next. Reaction or rational? The sector was already under distress from the inability to pass a reform bill… this only gives reason to sell. Short side is of interest on the move below support. LABD hit entry at the $7 level. 

REITs (IYR) had been lagging in response to interest rate worries related to the Fed promise to hike rates multiple times this year. The sector tested the $76 level of support and bounced back to resistance and tested, and bounced… The shift in outlook for the Fed holding rates steady for now has shifted money back to the REITs. We continue to focus on managing our risk and collecting our dividend as this all unfolds. This is a growth and dividend holding with a 4.2% dividend currently. Entry at $75.75. Stop $76.25 (adjusted). Fell in response to all on the day… watching. 

Treasury yields (TNX) moved back to the 2.4% level as the Fed talked of raising interest rates. The move to 2.2% came on the comments from Ms. Yellen and the Fed taking on a more dovish role towards rates. Just when you thought it was safe to go back into the water… the Fed changes its mind. TLT rallied on the comments and watching for the opportunity to unfold on a follow through. $124.10 entry, stop $122. TLT moved back to the July highs and tested to end the week… positive for now. Yields continue to deline helping the upside for bonds this week. 

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last five months. The volatility within the trend is speculation and news driving money. The selling was more of the speculation, just as the current buying is on speculation the dollar and the Fed will remain neutral. Bounced off support at the $114 level, cleared resistance at the $117.38 mark (entry) and heading towards the $120 target (hit last week). Stop $117. Negative move on the positive jobs reports Friday… watching this week. Break higher continues the uptrend on uncertainty in North Korea. 

Crude Oil has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but the weaker dollar is having some influence near term. The move above $48 this week brought plenty of speculation and the bottom reversal on the double bottom pattern is in full bloom. Entry hit at $47.50, stop $44.35. Taking what the commodity gives and not asking any questions… purely managed as a technical trade. Positive news on the supply data helping the short term outlook. North Korea banter hurting the bounce… still in small range near the highs. 

Energy stocks (XLE) have fallen since the December highs as the OPEC deal to cut production has not resulted in any real measurable cut that would impact prices. The move lower and test of the $63.70 level kept the downside in question… but, the bounce on the rise in crude only adds to the confusion. $66.25 level to watch for opportunity. Close above it and looking for follow through and entry at $67. Need some volume and conviction from investors. More selling to move back towards support at the $63.72 mark. 

Volatility Index (VIX) This week was more interesting for the index closing at 10 showing some activity, but not enough to rock stocks. The Fed comments following the FOMC meeting brings some anxiety and with it, we will watch what transpires short term. Movement in the index reflects investors nerves over North Korea. 16 spike has our attention along with most investors. VXX position plays out well and adjusting stop to $12.75. 

The sectors were rotating again last week as money moves towards value stocks and bonds. We have to take it one day at a time and see how it all unfolds. The S&P 500 and Dow indexes are testing the moves to new highs and the NASDAQ is a cause for concern following its positive move higher. Our job is to let the opportunities develop… have a strategy for trading or investing in them… and then managing the process based on our belief and disciplined approach. Sounds simple? It is except for the six inches between our ears that process what we hear as it impacts our beliefs. Have a strategy for every position and trade/invest according to the strategy… don’t let the news or others sway you from the task at hand.

Rotation is reaction to N. Korea and now we look to see how it impacts our positions and what new opportunities it presents going forward. 

Daily Scan Results:

THURSDAY’s Scans 8/11: Selling present again and holds this time as the worries over events move the anxiety level higher. Reality vs speculation is the challenge we now face as the selling started in earnest and now we see how it plays out near term.

  • Volatility Index (VXX/UVXY) rally in the anxiety as the news rattles investor confidence. The spike to 16 set the tone for the trade signaled on Tuesday. Raise your stop to $12.75 and let this unfold.
  • Biotech (IBB/LABD) short side signal hit on the move lower with the sector under pressure already. $6.92 entry and stop at $6.60 (adjust to $6.92 if positive tones return to broad markets). If negative sentiment continues this will move lower.
  • Natural Gas (UNG/UGAZ) upside continues with the commodity moving above $6.46 resistance. $6.92 is level to clear for now.
  • Small Cap (IWM/TZA) hit the $16.90 entry level for short trade and that would be the stop currently as this unfolds as a trade opportunity.
  • Financials (XLF/FAZ) selling in the sector jumps and now setting up downside trade if this follows through. $16.45 level is key to move above. Patience.

Everyone has been taking valuation of the markets and the political issues with N. Korea are only providing a reason to sell… not the reason. Let the air come out of this balloon before running down the street screaming sell everything. First is the reaction to the news, then comes the rationale to the selling, and then comes reality. It is reality where the opportunity lies. Patience is key to letting this unfold and the opportunities to arise.

WEDNESDAY’s Scans 8/10: Attempt to establish downside activity but the buyers stepped in to keep the indexes at par on the day.

  • Natural Gas (UNG) positive on the supply data. An attempt on the bottom reversal in place. Watching for follow through and entry at the $6.60 mark.
  • Gold Miners (GDX/NUGT) bounced with the price of gold following through on a break above the $120 level.
  • Small Caps (IWM/TZA) downside made move and looking for it to hold support near at $139 and broke on the close Wednesday. Short trade setup.
  • S&P 500 index (SPY) topping pattern in play. NASDAQ (QQQ) topping pattern in play. Dow (DIA) Testing the new highs. The parts make up the whole, but the whole determines the direction. Watching how all three unfold near term.
  • Watching how the leadership unfolds… rotation? hot money? trends? All offer opportunities and we have to be patient in letting them develop.

TUESDAY’s Scans 8/9: downside day, but not dominate relative to the selling.

  • Utilities (XLU/UPW) leading the upside move with a solid trend back towards the June highs.
  • Volatility Index (VXX/UVXY) anxiety begins! The jump in nerves showed in the index and stocks. Move above $11 worth our attention and trading opportunity at $11.70 entry.
  • Biotech (IBB/LABD) watching how the downside unfolds… or bounce off support? Plenty of attention still in the sector short term.
  • China (GXC/YINN) the upside gap is a continuation of the uptrend. Positive run for the country ETF and the individual stocks… see Monday notes.
  • Base Metals (DBB) vertical move upside as the metals move with copper, aluminum and other gaining on the day.

Some other moves to watch TZA, SLV, TMV, UGAZ, SCO, and SRS.

MONDAY’s Scans (8/8): a positive day for the indexes and the leadership, but no real shifts in the overall trend. Looking for some leadership in the data, but that continues to be lackluster as the economy drags forward. Despite all the whining and complaining the market continues to inch higher and we progress with it albeit with our stops in place.

  • Semiconductors (SOXX/SOXL) bounce from the recent test and remain challenged on the upside… individual opportunities look better, but the risk is also higher in the current environment. ON, LRCX, NVDA, TSM, and MCHP offer positive looks.
  • Brazil (EWZ/BRZU) showing positive upside again in the current uptrend.
  • Energy (XLE/ERY) downside weakness showing again as the oil services (OIH) stocks show more weakness.
  • China (GXC) holding the uptrend with KWEB, SINA, BABA, HTHT, BZUN and other pushing higher in the current uptrend.
  • Technology (XLK/TECL) upside in play with a move to the top of the consolidation pattern. Worth digging into the sector for the leaders versus the whole. AAPL, NVDA and MCHP are few on the move.

Still proceeding with caution as this current environment unfolds. LBJ, DBB, EDC, TAN and KOL all in positive uptrends as well.

FRIDAY’s Scans (8/4): A positive day with the jobs report helping push stocks to the upside. We will take it in stride and see how the upside unfolds to start the new week. Taking it one day at a time as the future unfolds.

  • Biotech (IBB/LABU) bounced off support and watching for a follow through to the move and possible bottom reversal short term.
  • Gold Miners (GDX/DUST) negative response to the economic data and sold lower… watching how this unfolds relative to a short trade.
  • Homebuilders (ITB/NAIL0 showing positive signs again with a new high in the current uptrend. BLDR, IBP and BLD show positive breaks upside in the scan of the sector.
  • Crude Oil (USO/UCO) positive move testing with a wedge pattern at the top of the current uptrend. Watching how this unfolds in the coming week. FCG, IEO, XOP all showed possible bottom reversals?
  • Financials (XLF/FAS) upside break and continuation of the uptrend in play. Large banks (KBE) and insurance leading the sector higher (KIE).

Positive end to a lazy week for stocks… need the follow through on Monday if we are to see improvements above and across the sectors.


Sector Rotation:

  • XLB – Materials moved higher pushing above the $50 level and moving toward 2015 high. Hit the entry at $48, Stop $54.50 (STOP HIT). Moved to a new high clearing the $54 mark. Still testing support at $54 and watching how it unfolds. Fell to support at the $53.53 mark. 
  • XLU – Utilities bounce off support at the $50.88 level and have followed through nicely the last month. Entry $52.25, Stop $51. upside continues. 
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Watching for now how this unfolds as sector moved back above the $31.35 mark. Entry $31.60, Stop $30.90. Some buying? Watching the $32.65 mark for the upside continuation.
  • XLP – Consumer Staples moved lower on economic worries and higher interest rates. The Fed talks last week to stand still on rates put a positive reversal in play. Watching for a move above $55 to get my interest near term. Some help in the upside bounce off the low as earnings help the sector.  
  • XLI – Industrials – remains in a positive uptrend since the break higher in November. Entry $67, Stop $66. The positive trend was questioned with the downside move. An uptrend in place as the money flow remains positive but watching how it starts the week. Moved below $67.93 support and watching.
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. There is still the issue of uncertainty towards the stocks. Held $63.70 support and bounced as the dollar weakness helps the price of crude. To many question marks for now to take any positions. Scanning the sector is the only way to trade currently up or down. NFX, DVN, MRO, HES, and APA post positive moves to end the week. Moved lower towards previous support. 
  • XLV – Healthcare hit the low and established a pivot reversal relative to rumors around the election… then the election… attempted upside move and trend reversal… but, failed to hold the move. The second attempt with double bottom worked itself into a break above the $71.78 resistance level. Entry at $70 as cleared resistance. Stop at $78.50 (adjusted). Patience is key as this unfolds. Stops in place with the run higher and test. Trading in a range for now. Negative response to the news is the rationale for the previous undoing of the Senate bill. 
  • XLK – Technology made the move back near the highs as the semiconductors bounce off support. Uptrend breaks short term and test of support at the $54.75 mark in play. Entry $48.50. Stop $56 (adjusted). Semiconductor weakness is the key to how this unfolds near term… they bounced and so did the sector. Give room for this trade to work upside. Led the downside move… watching. 
  • XLF – Financials pushed lower on earnings and Fed talk on interest rates. Earnings were good… not great, but worrisome in light of the Fed. That failed to impact the stocks and thus, the downside was in play. Entry $23.85, Stop $24.50 (adjusted). The break above that range was positive as the upside showed some strength, but still cautious as seen in the stalled move. Patient for now. Money rotation as investors look for value trades versus growth. Big reaction to the news… watching. 
  • XLY – Discretionary Consumer broke above resistance with a positive trek higher. Entry $83.50. Stop $88.50 (adjusted). Had a positive break to new highs and some leadership from the sector to boot… testing that move at support as the topping pattern unfolds. Cleared $90 resistance and watching. break from consolidation on the downside… watching as retail is weak. 
  • RWR – REITs reacting to the current uncertainty around the Fed and positive attitude towards risk as money made some rotation. The longer term view clearly shows the trading range and the opportunity to collect the dividend while investors continue to make up their collective minds on direction. We added the position in December on the move off the lows and continue to babysit the dividend of 4%. Tested the bottom end of the range and bounced on the Fed comments and now has room to breathe again… patience is key. Traded sideways for the week. Reaction to the news. 

Rotation is back as the Fed talk on interest rates, a weaker dollar, weaker economic picture, and earnings are all pushing money around. I am cautious and optimistic on some sectors and avoiding other. Interesting rumblings about the FOMC meeting as money rotates in response to the action taken. The weaker dollar favors the multinationals and commodities… watching how this will unfold near term. The negative movement in technology, biotech, and semiconductors got the attention of traders… watching how the week unfolds with the rise in volatility in play.

Rotation in motion… reality will validate the move near term. Let this all unfold and look for both the opportunity in the reaction and following the reality. 


Investors are nervous plain and simple. Volume is lagging. Data is positive overall for earnings and the winners are being rewarded. Money is rotating to value versus growth. This remains a market in transition and with that comes opportunities. Those are outlined above in the scans and sector notes. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long term.

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

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese Proverb.