Research Notes for August 6th

MARKET OUTLOOK:

The news was positive to start the day, ISM services was up to 60.3% well ahead of expectations. It was positive, but the sellers still took their shot on the day. Opposite of the last few days, but the results were essentially the same… no conviction in direction. Trading ranges remain in place. Some stocks like Google helped the upside for the NASDAQ lead the day. S&P 500, 400 & 600 indexes all continue drift sideways looking for a catalyst on the upside or even the downside at this point. Interest rates ticked up six basis point again today pushing the bonds lower and reversing some of the recent rally. Volatility index tested below 12 early in the day showing the lack of anxiety or fear in the markets currently. Overall not much changed again today making the start of August dull. It must be the heat or vacation? Whatever the case we are more than willing to sit this out and let the trends develop.

The recent story line of the Fed holding off interest rates as a result of employment data and speculation global economies slowing is still in play. Today will slow on the economic data, but the jobs report will be out on Friday.

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. Apple (AAPL) tested the low at $112 level and bounced on Wednesday. That is worth watching for a follow through bounce and trade back to the $122.50 level. Entry $116.
  2. Restaurants are moving on the upside and PEJ is one ETF we can play the sector. DRI, JACK, CMG are some of the leaders. Watching for the upside opportunity to follow through.
  3. Transports (IYT) a move above the $153.25 is of interest on double bottom reversal and trendline break on the upside. Patience is the key for the sector.
  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.¬†Testing the low… break opens the downside for another leg lower. Modest bounce on Wednesday.
  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. Small decline after the supply data released. Sellers remain in control of the commodity. 
  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 and follow through as stock fade again. Supply data still playing havoc with the sector.  
  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. Bounce in yields put the short trade back on the table near term. $46 entry on TBT.

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.¬†Rallied¬†early… showed some weakness later in¬†the day… but, we continue to 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. Nice gain on Wednesday with the boost from Google and NetFlix helping. 

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.¬†Still holing the $121.25 support.¬†¬†

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. Dropped lower on Wednesday and SVXY rallied again. Overbought is the argument near term.

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. Slow move higher and $153.25 resistance just overhead. 

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. Moving back to the $25.66 resistance. 

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. Rally?¬†NOPE, selling prevailed on the day move down 1.5%. Breaks the $45 mark intraday.¬†

SECTOR STORIES: 

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. Hit entry, stop $43. Still need some upside momentum near term.

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. Stop $370. Positive move higher on Wednesday, but still show lackluster results.

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 $98.20 level posted. Need confirmation on the move off support. For the leverage trade you can use RETL. Hit the entry point with stop at $96.75. Nice follow through on Wednesday. 

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 $43.15.¬†Sold on the rally in yields on the ten-year bond. 1.6% downside move Tuesday… held Wednesday and onward we go with stop in place.¬†

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. Small reaction to the yields and watching with our stop in place. 

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.¬†Holding for now and will manage the trade.¬†Attempted move higher on Wednesday… but fizzled.¬†

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.¬†Selling on Wednesday despite the gains in retail space. Media stocks hammered with Disney forecast taking it’s toll.¬†

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