Research Notes for August 7th

MARKET OUTLOOK:

Based on the headlines you would believe Apple is the only stock impacting the markets. More headlines on that one topic than any other item today except for the GOP debate. I will reserve my comments on that subject for another day. Today I am focused on the impact to the consumer sector. The sellers took retail lower as a result of the Disney earnings comments. The media companies were hit the hardest. This is a reversal in one of the leading sectors and puts me more on edge than if it was energy or one of the other sector already in a downtrend. This puts the patience word back in play as to the direction near term. KORS was a bright spot for the retail sector beating earnings and gaining nearly 11% on the day.

The jobs report is out this morning and the expectations have shifted following the ADP report on Wednesday. The anticipation is for the number to be lighter than expected and that view contributed to the selling on Thursday as well. This also keeps the teeter-totter effect in play for the Fed rate hike being speculated between September and December. We will see soon and then we will adjust to what we know.

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. Small Caps (TZA) short side of this trade is setting up to be traded again based on the activity the last two days. Entry at the $10.45 level is attractive for the short side trade.
  2. Healthcare (XLV) lost 2.2% on Thursday. Short side trade may well set up if this downside follows through. Biotech led the downside again for day.
  3. 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. Gap open settled lower and we continue to watch. 
  4. 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. Watch for a bounce following the selling in the sector on Thursday. Could bounce back. $37.55 entry possible on the ETF. 
  5. 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. Sold lower, held the $148.50 support. 
  6. 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.¬†
  7. 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 as came close on Thursday.¬†
  8. 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 with break below the $45 mark on Thursday. 
  9. 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. Bounced 1.6% on earning data Thursday.  
  10. 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. Yield lower on the selling stocks trade Thursday… watch.¬†

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. Moved lower as stocks sold with consumer leading the downside on Thursday. Held $208 as placating benefit. 

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 erased with selling on Thursday… tech weak andled the downside.¬†¬†

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.¬†Sold below the $121.75 level again on Thursday… showing plenty of weakness.¬†¬†¬†

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. Bounced on Thursday above the 14 level and showing some signs of worry? Watching how it unfolds today. VXX at $16 was the original trade…

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. Selling knocked the sector back near the $150 level still has work to do if the upside is going to resume. 

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 again on the day move down 1.25%. Breaks the $45 mark¬†on the close.¬†

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. Went straight to the stop level. Watching how it opens today. 

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. No chance on the selling on Thursday. 

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. Holding up okay for now. Longer term view is positive, but we have to manage the risk of this trade.  

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, but frustrated by the market overall.¬†

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 Thursday¬†impacted the overall view of the stocks and we have to watch how this unfolds relative to the markets in general.¬†

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