Research Notes for June 16th

MARKET OUTLOOK: 

The week with some selling as Greece sets the tone, but the FOMC meeting looms bigger from my view as this week unfolds and Wednesday the Fed sets it place its view of the economy and rate hikes. Plenty of concern about the impact of rate hikes at this point in time. Is there enough growth to absorb the move? How will the global markets react to the Fed? And on it goes like one big merry-go-round. We will watch and see how the week progresses, but the selling on Monday set a negative tone to start. Today is another day and we will see how it unfolds.

Leadership remains another challenge for the markets overall. We continue to see attempts, but they flame out quickly. Banks are the latest in that vein as the anticipation of higher rates is pushing the sector higher. But, if the Fed doesn’t follow through on their promise to hike rates this fall… that leadership will be challenged. Even¬†if and/or when the Fed acts¬†it will still take time to filter through the balance sheets of the stocks. Fundamentals will lag by several quarters in all likelihood. That could very well bring volatility back into the sector if the numbers don’t accelerate to meet expectations from investors. The same is true in healthcare, biotech and consumer discretionary currently. Without leadership the market will continue the current sideways movement with a drift to the upside.

The Fed meets today and Wednesday and that will put some questions in market again about interest rates. Look for rates to rise in anticipation of the blather that will come from the Fed in the announcement. The big question will come in the language used to push towards hiking rates. We will watch, listen and determine what actions if any to take on the release.

It¬†is imperative that we remember the overall theme of this market currently is a lack of clarity which leads to a lack of conviction. The offspring being volatility day to day driven by news as we saw Monday with Greece. Until the market gains clarity we will continue to experience this activity… nothing more or nothing less.

Have a great day.

NOTE: The following are things to watch and evaluate during¬†the trading day…

  1. Software (IGV) is one of the attempting leaders in the market. If gets a positive push and then struggles to follow through on the upside. Tested the 50 DMA on Monday. VMW (testing), CYBR (nice break through the $67.80 mark), VDSI (cleared the $30.25 level), SPLK (in position to break above the $70.25 mark) are some individual stocks to watch in the sector for upside opportunities.
  2. Semiconductors (SOXX) Tested $95.15 support, bounced, tested again on Monday? This is the challenge for the NASDAQ currently. Within the sector we are seeing some leaders emerge worth watching.  QRVO, SIMO (back to the previous highs), AMBA, AAOI (nice move from the flag pattern). Others worth watching for bounce following the recent selling are FSL, NXPI, SWKS (positive move on Monday).
  3. Retail (XRT)¬†remains in a trading range, but managed to move to the top end of the range on Friday.¬†We were looking for a move above the $100.25 resistance level for entry point to¬†trade higher. Retail sales report on Thursday wasn’t stellar, but wasn’t bad either… watching how that unfold moving forward. Some stocks from scanning the sector to watch DPLO, JCP, CONN, TGT, BKS, CVX, MW.
  4. Emerging markets (EEM) attempting to build a bottom near the $40 level after a 10% decline on worries about the dollar. Yes, the dollar has been declining, but the fear of the Fed hiking rates later this year is playing havoc on the outlook for the sector as the dollar would rally in response to the Fed move. Bottom reversal is what to watch for now on the oversold technical conditions in the sector. Target on bounce $42. If not there is always the trade in EDZ again if downside resumes. (EDZ was the winner on Monday with the worries in place. Still need to clear the 200 DMA for the entry on the short trade.)
  5. Healthcare (XLV) remains a sector in a trading range, but the parts may offer more interesting setups as this unfolds. XLV did hit new high on Thursday as bounce off support follows through. Testing again and looking for upside clearance.
    1. Pharma (XPH) starting to confirm the reversal off the May lows. Sector is of interest looking longer term as a hold and manage the risk. Entry $125.50. Some consolidation currently.
    2. Biotech (IBB) attempting to move higher again with $367.80 resistance level to take out. Added a small position at $366.50. Stop $355. Remains in range after brief move above resistance and willing to add on the move through resistance.
  6. Treasury bond (TLT) bounced off the low and watching today for trade opportunity on the follow through. The downside risk remains in the bond relative to the Fed, but oversold short term. $118.60 level of resistance is in play. IF moves above the rally may have some legs to go higher near term. FOMC meeting will set the tone for the bonds.
  7. Airlines are oversold according to analyst. The challenge is the addition of routes creating angst about the future profit. Rising oil cost is adding some concern, but the reality is a lack of clarity based on a combination of both. Worth watching for a bounce in the sector as well as some of the leaders like LUV, JBLU, DAL and ALK.
  8. Utilities (XLU) broke support at the $43.30 level last week and $42.15 is the next level of support to watch, but the question of interest rate impact on these assets seems to be overdone from my view and worth watching for bounce off the lows or reversal going forward.
  9. Midcap (IJH) like the small caps this sector has held up better than the other indexes. Why? biggest rationale would be the rally in the regional banks. They have helped the sector along with the biotech sector holding their own against the recent selling. Watching the upside opportunity if it can clear the $154.25 mark. Tested $151.15 support on Monday.
  10. Vietnam (VNM) attempting a bottom and trend reversal. The ETF cleared the $17.90 mark to end the week and held the move on Friday. This sets up a trade opportunity on the follow through above the $18 level… watching for follow through.

Below I outline the major indexes, sector¬†stories¬†and management of existing positions.¬†Stay focused, stay disciplined and don’t chase rabbits down a hole.

MAJOR INDEX STORIES:

S&P 500 Index (SPY) The worry returned and the bounce from Wednesday looks more like a relief bounce off support. The support near the $207.50 mark is still in play and the level to watch this week. Keep your stop on positions at the $204.50 level.

NASDAQ 100 Index (QQQ) Selling resumes to break the trendline and test the next level of support. Our stop remains at $104.40 on short term positions (3-9 month horizon). Large cap tech remains the reason for the uncertainty in the index. The SOX index is the biggest struggle for tech currently. $106.74 is the next level of support to watch.

Russell 2000 Index (IWM) The index moved back above¬†the¬†$123.75 level. The¬†stop at $122.50 on trades (0-13 week)¬†holding. Tested lower on Monday, but move back to the $125.50 level on the close. Don’t assume anything as this unfolds… expect volatility short term. Holding¬†the short term¬†support and looking for the upside to continue. $126.53 level to clear for the sector.

Volatility Index (VIX) Closed at 15.3 with some anxiety showing up in the index to start the week and begging for questions? The index is truly a great picture of what is going on the broader markets. Sellers fighting it out with buyers on direction, but the VIX shows no anxiety in the process. Watching to see how this unfolds as we approach the FOMC announcement on Wednesday.

Transportation (IYT) Bounced off the $148.50 support again and looking for another attempt at a bottom reversal, but that failed on Monday. 50 DMA crossed below the 200 DMA as technical sell and it is still in play.¬†The index is in a downtrend¬†short term and looking at the sub-sectors we still don’t see any leadership.¬†Short trade setup in place on move below the $147.50 level. This remains a negative indicator for the Dow Industrial Average.

Dollar (UUP) Oops… the dollar¬†remains under pressure as things attempt to resume a¬†normal outlook. The $24.88 level of support¬†is still in play. News is driving and not willing to trade emotions for now. Dollar index (DXY) is attempting to hold the 94.70 level of support¬†with 93.25 the key level to watch going forward.

Crude Oil (OIL) Tested support again at $56.75 and bounced. Yes the bounce played out with a push back to the upper end of the trading range… failed to¬†break higher at resistance and closed the day¬†at $59.52. The inventory data last week¬†helped the upside, but still lacks in conviction.¬†News driven on OPEC, supply, demand, rig counts, etc. etc. It is a moving target and high risk trade. Patience.

SECTOR STORIES: 

Gold miners (GDX) they broke lower on the price of gold drifting lower. DUST cleared the $15.20 entry, stop at $14.60 and watching to see how it unfolds with follow through. Nice gains to end the week and raised stop to $15.

Energy (XLE) the short side has set up and now is a good time to add to the positions on break from consolidation at the $19.20 level (ERY). Hit the entry point and watching how it unfolds. Stop $18.80. Nice move higher on Friday and a continuation of the move hits the target of $20.75 short term.

Telelcom (IYZ)¬†telecom moved to support at the $29.70 mark. Bounce or break lower? The break lower takes out the trendline from the October low and offers a downside trade opportunity. In a four week trading range near support… watching for the opportunity if it develops. $30.40 is the level to clear on the upside to break higher. Monday tested lower?

Internet (FDN) tech moving and internet is part of the move higher. Breakout at 67.70. Hit entry and the stop is at $66.75 and 50 DMA. HIT STOP on Monday.

Regional Banks (KRE) – broke higher from the trading range short term and this time nice follow through.¬†After a small test back towards the $41.85 entry hit¬†and the upside was in favor of rates moving higher… questions answered for now on upside direction.¬†$42.85 is the stop. Manage the move accordingly. Small pennant pattern at high… look for continuation move.

Software (IGV) leading sector for tech is testing support at the $100.50 level currently. Keeping the uptrend in play needs some help… manage positions. Selling is to be watched and stops in place at $100. Watching the near term opportunity and a move back above the previous highs at $102.88.

  1. HACK – the software security stocks are running on the breach in government systems. Watching and letting it run for now. Don’t get greedy and ladder your stops on the upside move. Stop $31.55 adjusted higher.

Consumer Discretionary (XLY) ¬†Held support at the $74.50 level and keeping¬†the trend moving higher… break above $77 would be of help for the trend to continue upside move. Hasn’t played out according to plan… watching the stop and looking for upside to breakout.¬†Trend fundamentally on the consumer is flat and that is keeping things in check for now. $74.50 exit point on the downside.

Financials (XLF) This sector is all about Fed speculation. Will they raise interest rates¬†or not. Jobs report puts more pressure on the Fed to hike rates soon. This is one sector in favor of higher rates.¬†If that is true, we would want to hold long term positions… wide stops and ignore the volatility based on speculation¬†from analyst. Focus on what you believe. Stop $23.80. Tested $24.50 support again, but bounced with banks leading he way. Back near the December highs.

  1. BAC – Bank of America trade on the upside entry at $17 on confirmation of the reversal. This is one of the large cap banks and the upside opportunity is to $18.20. Stop raised to break even or $17.

Healthcare (XLV) РHeld support at the $71.25 mark and reversed and headed towards a new high, but has stalled near the $75.50 level. Short term $74 level to watch for support. Stop $73.50. Still one of the better sector long term as we move forward.

Industrials (XLI) – The sector hit the stops and failed to materialize on the upside opportunity. Still watching, but would have to validate the upside turn should it materialize. $56.40 is level to watch on the move higher. Trading range and downtrend off the February high are the key issues for entry.

  1. Kansas City Southern (KSU) shows why the transports continue to struggle. Put in a low and¬†a reversal… looking for follow through and possible upside trade technically. bought the follow¬†through and $93.75 entry on the bounce. Stop $90.40. Nice bounce higher, but not follow through on the move Friday.

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