Positive start to the week

Market outlook for October 22nd

Markets were quiet but positive to start the week as investors put money to work with some rotation in money flow. The positives are the Fed remains engaged in the repo markets and statements from the White House about trade talks progressing. That offset the negatives of South Korea and Japanese exports falling hard in October. An overall positive day for stocks and watching how the week plays out. Earnings remain positive thus far with some big-name reporting this week. Taking it one day at a time.

The S&P 500 index closed up 20.5 points to 3006 closing above the 3000 mark again. Nine of the eleven sectors closed higher on the day with energy and financials leading the upside. The downside was led by basic materials and healthcare. Plenty of questions remain relative to how this unfolds near term. The long-term trend remains sideways and steady.

The NASDAQ index closed up 73.4 points at 8162. The index posted a solid gain but needs to clear resistance at the 8200 mark. Technology is still providing the leadership for the broad index as it bounced back from Friday’s selling. The semiconductors showed strength moving to the September highs again after struggling last week. Questions remain relative to growth stocks and large caps despite the bounce at support. QQQ hit resistance at the September highs and watching how this unfolds near term.

Small-Cap Index (IWM) The sector led the move back to the July highs and then led the downside move to the August lows. Lack of belief in the outlook for economic growth remains a cloud over the sector. Solid upside move for the sector as it plays catch up to the broad markets. $152.28 level cleared with $155 resistance hit and checked on Monday.

Transports (IYT) The sector, like small caps, moved to the July highs and back to the August lows. The bounce off support is positive as watch to see how this unfolds. Plane deliveries and tariffs have been a headwind to the sector and we expect more challenges going forward. Solid upside moves this week, but still lagging the broad markets. The sector moved above the $186.70 mark and looking at $192.42 next. Added nicely to the upside move started last week… $192.42 in sight.

The dollar (UUP) The dollar reacted to the Brexit news as it moves below support on strong selling during the week. Watching how gold and oil respond to the move. The euro and pound have rallied on the news. Some support in the buck Monday… watching this near term.

The Volatility Index (VIX) closed at the week at 14.2 and remains near the current lows. Despite some selling, during the week the index remains low with little anxiety showing from traders. Watching how this plays out in the coming weeks. Solid gains in SVXY for the week. Closed at 14 to start the week. Low anxiety is good for stocks currently.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector moved to the July highs and back to the August lows. The bounce moved back to the $193.35 resistance and watching to see if the index can play catch-up to the balance of the market. Followed through on the move from last week clearing $193.35.

Biotech (IBB) Tested support at $96 bounced and moved back above the $101 resistance level. The downtrend remains in play. Looking for some upside follow through if the sector is to turn positive again. Entry $101.45. Stop $100. LABD $32.55. Nice move on Monday upside.

Semiconductors (SOXX) The sector bounced, cleared $210.92 resistance and moved back to the July highs. The sector looks solid compared to others on the charts and showing some leadership. The parts are where we have added positions versus the whole. NVDA, MU, QRVO, CCMP, SWKS, AMD, and LRCX. Back to the September highs and looking for a catalyst higher.

Software (IGV) The sector bounced back in the previous trading range only to lead the downside on the week. Watching how this unfolds near term. Held at support, but still struggling as the cloud sector is weaker.

REITs (IYR) The upside trend remains on the long-term chart with a solid break to new highs for the week. Patience with our long term positions and short term watching how interest rate market unfolds. Added to the break higher on Monday.

Treasury Yield 10 Year Bond (TNX) The yield closed at 1.74% and flat for the week. Money is rotating again this time to risk… Added a short position on bonds for now. TMV entry $10.40. Stop $10.65 (adjusted). Yield moves to 1.79% Monday as bonds continue to retreat on rotation.

Crude oil (USO) Held support at $52.50 and $58.25 is top of the current range. Watching as the data points show plenty of oil and lower demand. With the bounce off support we added a position in UCO entry $16. Stop $15.50. Remains in the bottoming range.

Gold (GLD) The upside in gold has been driven by speculation of the rate cuts and global weakness overall. The tug-o-war of tariffs, interest rates, and speculation are keeping gold in play. Watching how the trade talks and weaker dollar unfold near term. Some downside on Monday with a stronger dollar.

Emerging Markets (EEM) Bounced from the bottoming range established in August hit resistance at $42.25 and tested the support at the $40.25 level again… bounce this week on the trade news. Back near the September highs and watching how the news unfolds with China. Up day to start the week and need to clear the September highs.

China (FXI/YANG) weaker economic data hurting the stocks currently as the move higher stalls at the September highs. Watching and listening for now. Positive White House comments on trade helped move the stocks higher.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

MONDAY’s Scans for October 22nd: Positive day overall for stocks with some rotation into the laggards. Small caps post a positive day, the dollar bounced, bonds move lower, and financials taking on some leadership following earnings. Take the positives for what they are and keep looking forward.

  • Energy (XLE/ERX) positive bounce on the day despite the issues with crude prices. $58.20 is level to clear.
  • Retail (XRT) cleared resistance at $43 and looking positive near term. The parts are where you want to be versus the whole. PETS, AEO, LAD, JWN, ABG and others making breakout moves.
  • REITs (IYR) breaking to new highs and following through is a positive for the sector.
  • Financials (XLF/FAS) upside is positive in the sector. Follow the leadership as option to investing. STT, MS, C, JPM, BAC
  • Semiconductors (SOXX/SOXL) upside in play again and watching the parts as well as the whole. AMD, MCHP, KLAC, SWKS

FRIDAY’s Scans for October 18th: Weak day for stocks, but not so much that you take exits. Headlines were negative and worries about direction near term. You take the bad with the good and watch what happens from here. We have our stops in place and looking for the next opportunity. Patience as we take a break for the weekend.

  • Software (IGV) showing weakness as the sector returns to the bottom of the trading range and showing more downside opportunities than up. Scanning the stocks in the sector shows the weaker side of the story.
  • Semiconductors (SOXX) weaker to end the week after solid upside leadership… has my attention.
  • Financials (XLF) showing some upside leadership as earnings are positive for Q3.
  • Oil & Gas Exploration (DRIP) flag pattern with a downside bias on the chart. Watching for trade opportunity.
  • Homebuilders (NAIL/ITB) solid trade playing out on the upside breakout in September. Raised stop and managing the risk.

THURSDAY’s Scans for October 17th: Economic data disappoints and growth continues to slow. Brexit is a wildcard for global markets. China’s economy continues to slow. Earnings have been solid for Q3. The Fed had to fund more money in overnight lending to the tune of $102B… not a good sign. Trade office confirmed it would add $7.5 billion in tariffs on the EU Large-cap stocks took the day off and small caps played catch up to the rest of the market. Overall not a bad day, but this is breaking down to individual stocks leading versus sectors moving. Still at the September highs resistance and watching how it unfolds near term.

  • Breakouts? Yes, that is what we are looking for currently. Plenty of consolidation pattern on the charts as stocks and indexes stall at near term resistance. Good examples of this are HZNP, SGEN, WGO as they clear resistance on solid volume. Scanning the SOXX sector shows similar setups of stocks in position to break higher… all they need is a catalyst.
  • Small Caps (IWM) cleared the next level of resistance at $152.28. Long way to $158 level. Watching for follow through on break higher and opportunity to trade the move if it follows up.
  • Financials (XLF) earnings have been positive and individual stocks leading the upside worth a look.
  • Biotech (IBB/LABU) following through on the break higher from the bottom reversal.
  • Healthcare Providers (IHF) followed through on bottom reversal and now facing resistance at the $172 level.

WEDNESDAY’s Scans for October 16th: Up and down trading day, but little in terms of change. The economic data was weak with retail sales turning in a negative number. Earnings have been solid thus far for the third quarter. Overall the markets lack confidence and remain in a broad trading range. News is having some impact by sector, but overall investors are looking for the Fed, China/US trade, Brexit, and clarity… need to be patient and let it all unfold.

  • Crude Oil (USO/UCO) oil prices rose one percent on the hope that OPEC will extend supply cuts. The weaker dollar is helping as well.
  • Retail (XRT) weaker sales data show negative sales for the first time in seven months. The sector rose despite the data… But, we have to remember that numbers don’t matter until they matter. Blame it all on trade or the weather.
  • Dollar (UUP) moving lower on economic data stoking the rumors the Fed will cut rates again. Watching how this impacts gold and oil prices.
  • Pharmaceuticals (XPH) moving upside with a double bottom pattern in place on the charts.
  • Homebuilders (ITB/NAIL) break higher from the range at the previous highs. Solid move as the expectations for strong building number on lower interest rates.

TUESDAY’s Scans for October 15th: Solid gain for the broad indexes as bank earnings give hope, Brexit rumors give a boost to Europe, and China trade talks all add to the headlines. Crude was weaker on supply data in the US. Bonds fall as yields rise on optimism. Plenty for investors to digest and act on as the overall move was positive lifting stocks back towards the September highs.

  • Semiconductors (SOXX/SOXL) showing solid leadership moving to the resistance of the September highs.
  • Treasury Bonds (TLT/TMV) yields moved up and bonds down helping the short positions we established last week.
  • Financials (XLF/FAS) bank earnings give the sector a boost along with the Brexit news.
  • Biotech (IBB/LABU) breaks above resistance offering upside trade opportunity. IHF also made a solid upside move.
  • Natural Gas (UNG/UGAZ) attempting to follow through on the bottom reversal.

(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 broke support at the $55.95 level and holding. Watching how it unfolds. Bounced at support.
  • XLU – Utilities moved higher and now forming a consolidation pattern near the highs. Support is at the $62.50 mark. Collecting the dividend and letting it play out. Topping pattern in play.
  • IYZ – Telecom held support at $27.62 bounced and watching how this unfolds. A solid move higher for the week. Clears $29.50 resistance.
  • XLP – Consumer Staples remains in the uptrend line. Watching how this unfolds near term. The trading range at the current highs.
  • XLI – Industrials moved back to support in the trading range and bounced to clear $76.80 resistance.
  • XLE – Energy broke lower on weaker oil prices and testing the lows. Watching and managing the risk of the short side trades. Positive bounce on Monday.
  • XLV – Healthcare held support at the $86.75 level. Bounced at support with solid gain on the week.
  • XLK – Technology tested lower bounced and holding steady near the highs. A small test to end the week.
  • XLF – Financials have been under pressure with lower interest rates and global weakness. Solid earnings helping the sector bounce back. Cleared $28.24 resistance.
  • XLY – Consumer Discretionary tested lower but remains within the current trading range.
  • IYR – REITs held the $88 support and cleared the $90.80 resistance and breaking to new highs to end the week. Follow through on the breakout higher.

There are currently seven sectors are in sideways or consolidation trends. Three sectors are in confirmed uptrends. One sector is in a confirmed downtrend. The result is SPY in a confirmed sideways/consolidation trend. 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:

MONDAY: solid start to the week as money rotates and laggards gain. Fed still engaged in supporting repo markets. White House engaged in trade rumors. Earnings are positive. Economic data remains weak. Export data from South Korea and Japan negative. Overall stocks are melting higher and looking for some type of catalyst to lead the indexes to new highs. Take what is offered, manage your risk, and keep moving forward.

Markets held the move higher but showed some weakness to end the week. The bounce off the lows was positive as the buyers showed some interest in stocks. The trade talks were the catalyst… but, there is no deal and more rumbling from China are creeping back into the headlines and causing some doubts about the “deal”. If the talks unravel yet again… watch for stocks to react negatively to the news. Brexit was the main headline of the week as the UK strikes a deal with the EU… reading through the details it is not a done deal either with a vote in Parliament needed to close the loop. The impact on the dollar has been noticeable pushing the buck down on the week. The US enacted $7.5 billion in new tariffs on Europe mostly aimed at Airbus. Earnings are lost in the background and they have better for Q3. I continue to manage the risk of the current environment. The upside move this week offered some trade opportunities and we have adjusted our stops to manage the risk. The treasury bonds shifted lower with rates moving higher to 1.74%… The risk remains high for upside opportunities as the underlying data remains weak. The market remains controlled by headlines as each day holds movement related to the speculation of what might happen. Trade with China and the US remains at the top of the list. Throw in Brexit, earnings, and other global issues and you get the picture. There are still too many questions unanswered and that invites speculation and volatility. 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.