Research Notes for August 4th

MARKET OUTLOOK: 

 

Economic disappointment… no conviction upside move as clarity is still like a fog bank. It is not a matter wanting to put money to work… it is a matter of the risk to put money to work. The risk/reward is still not at a level to jump in yet. Thus, we continue to let this unfold and take one day at a time. Monday started lower, pushed off the lows, but still failed to establish any momentum in either direction.

The most recent story line is the Fed holding off interest rates as a result of employment data on Friday. The ISM manufacturing and Markit PMI did nothing to change that view… in some ways it only added to the opinions relative to the Fed. This will only get fed further as the balance of the data reports this week will be watched and earnings move to the back burner.

Below I outline some thoughts relative to opportunities we are watching, recap of the broad asset classes and updates on what we are invested in currently. Still need to be patient.

NOTE: The following are things to watch and evaluate as we progress forward.

  1. Retail (XRT)¬†was on our watch list, but it failed to hold the move and managed to close at the key support levels at $97.25. The 200 DMA held support and then we reversed to move back above the $87.25 mark. Watching how this unfolds with entry at the $9820 level posted last week. Need confirmation on the move off support. For the leverage trade you can use RETL.¬†Gave back some of the upside move… still challenged.¬†
  2. Financials (XLF) Held the test of the 50 DMA and bounced. Took some selling on Friday from the employment cost speculation stating the Fed may put the rate hikes on hold. Holding XLF below and here we are looking at KRE again as opportunity $43.90 entry. Patience as the news unfolds. No Change. 
  3. Biotech (IBB) Tested the $368 support level and held. The entry now is $383.25. Volume has dropped on the buying and the positive open on Friday faded. Looking for conviction on the upside if we are going to add this sector back to our positions. No real change on Monday. 
  4. China (FXI) is a mixed bag of nuts. The government intervention versus the free markets for stocks? Not clear which is winning? For now the government with outlawed selling stocks. $41.50 entry point on FXI as possible relief bounce. I am still leaning towards the downside based on the economic data. Watch and see. Downside it is with continued gap lower on Monday. 
  5. Emerging Markets (EEM) attempting to hold support near the $36.30 mark. Attempted bounce, but no conviction. Watching to see if there is a upside trade above the $37.25 mark or a downside resumes with break of low at the $36.30 mark… patience is key.¬†Gapped lower on Monday and held support at the $36.30 mark… still open to downside trade on break lower.¬†
  6. Crude Oil (OIL) two day rally as the supply data shows bigger drop than expected. Then the sellers returned as earnings in the sector put a damper on the outlook along with warnings from the companies. Short trade back on? SCO at 88.90 if the selling returns. Nice short side follow through. 
  7. Energy Sector (XLE) modest bounce on the two day rally in crude. Ended with the earnings and drop in crude. Short side trade in play again. ERY at $26 or lower if we get a test early in the week. Nice short side trade. 
  8. Treasury Bonds (TLT) rally on as the rates decline on more speculation the Fed will not hike rates in September. The catalyst this time is the employment cost index which fell. Of course that is the tell all on what the Fed will do. Bonds jumped through resistance with $123.50 the next resistance to watch. TBT broke support and watching as well. Nice rally as yields continue to decline. 

MAJOR INDEX STORIES:

S&P 500 Index (SPY) 200 DMA and $206.10 are the support levels to watch this week. Moved back above the $208 entry point to add. Stop is $204.40. The¬†triple top is still an issue relative to a ceiling on the index currently.¬†Not sure who is in ¬†control near term and willing to let this play out on either side for now.¬†Sold early… showed some weakness on the day… but, we watch and see.¬†

NASDAQ 100 Index (QQQ) Managed to move back¬†above the $111.10 level for short term trade on the test lower. Held the¬†$109 support and¬†added position back on the reversal. Stop $109.80.¬†Volume drifted lower, but looking at how we start the week more than how it ended. Patience for now.¬†Early selling… recovers most of the downside, but technology continues to struggle.¬†

Russell 2000 Index (IWM) Managed to hold¬†the $121.25 support level along with the 200 DMA.¬†Added position at $122.40. Stop $120.50. Resistance at the $123.75 mark. Gave up the solid start on Friday, but still inching it’s way higher for now. Patience as it unfolds.¬†Early selling on Monday, but recovered to close off slightly.¬†

Volatility Index (VIX) made the move lower to 12.21¬†Friday. The volatility has evaporated as quickly as it came and SVXY was the trade on the move. We continue to watch the downside in volatility as it now reaches levels of complacency for the index. Watching how it starts the week as well.¬†Some volatility to start Monday, but it faded and not much change… watch today.¬†

Transportation (IYT) Moved back to the $148.50 level on UPS earnings and the broke through resistance. Entry at $149.50. Stop $147.50. Still need to see the upside resume short term, but this is a positive for the major indexes.

Dollar (UUP) The dollar technically is attempting to break from a double bottom pattern, but reversed to the end the week. We are watching how this responds to the employment cost speculation around the Fed. I still like the upside for the dollar near term.

Crude Oil (OIL) Crude continues to¬†be downside bias commodity. Despite the drop in supply data there is still plenty on the horizon. In fact, Congress is considering allowing US oil companies to export oil… that should say something. The price fell to $46.81 on Friday and remains in a downtrend. Short side trade may be returning.¬†More selling as the speculation continues to mount for the commodity. Supply/Demand.

SECTOR¬†STORIES:¬†Not much change from Monday trading…¬†

Utilities (XLU) Not an exciting sector, but one that is paying a 3.7% dividend and offers some upside as all the noise around the dividend stocks subsides. The bounce and test off the low is now in position to offer some upside opportunities. Entry of $43.50 is Hit the entry on Thursday and now we manage the risk of the move with Stop $$42.60 to start.

Real Estate (IYR) REITs are moved off the low in June. Hit resistance at the 50 DMA and looking for the downtrend to break as well. That means catalyst to break through the resistance. Watching and looking for entry near the $74.75 level. Hit that level on Friday and added the position. Stop $73.50 for now. Let this unfold and if the rate hike rumors return the downside may return.

Financials (XLF) remains challenged by the uncertainty issues. But, the Fed is committed to hiking interest rates and the longer term view is to own the sector. You have to be willing to stomach the volatility and add to the position on weakness. Moved back above the $24.50 mark¬†added¬†positions. $24.70 entry.¬†Still challenged… Stop $24.70 on the positions.¬†Bounce followed through on the move Tuesday and Wednesday. Holding for now and will manage the trade.¬†

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 helped for the trend to continue upside move. Trend fundamentally on the consumer is flat and that is keeping things in check for now. $77.50 exit point raised stop.¬†Now we look for the retail data for July as more insight into the consumer. The sentiment data has had little to no impact on the sector near term. Let it play out.

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