Research Notes for June 18th

MARKET OUTLOOK: 

FOMC meeting comes to a close and nothing changes except the willingness, desire and hope by the Fed to hike interest rates prior to year end. There was muted reaction to the comments by Ms. Yellen and I expect today will have more reaction in the charts. Higher interest rates are a fear point for many analyst as they believe it will be a drag on the economy initially. The interesting observation is no big reaction either way to the Fed’s news on rate hikes. It continues the current activity in the market of mild reactions in either direction to most events. That defines a lack of clarity.

Is the current move on the upside nothing more than a relief bounce or is this really building momentum to the upside. When you scan the headlines from analyst on Wall Street you would think the markets are about to be swallowed by a giant whale and taken to the bottom of the ocean. This is still and uncertain environment with little clarity and even less leadership currently. Patience remains key in putting money at risk.

Small caps are sitting near the April high and attempting to provide some leadership, but like the last few attempts to move higher the index has stalled again. A move above the $126.55 level is the watch for today.

Greece remains on life support and the stubborn confrontation on both sides isn’t going well. Either way this is not likely to end well. Like any disagreement there are valid points on both sides… it really isn’t about who is right and who is wrong… it is about who will compromise. If neither do, we deal with the new horizon of the EU without Greece and move forward on both sides. Decisions have ramifications and both sides will deal with those and new opportunities will arise for everyone. GREK is back to the previous low and could offer some opportunity as the decision is made and the future unfolds.

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 and Tuesday. Until the market gains clarity we will continue to experience this activity… nothing more or nothing less. As seen below not much changing, but there are some good move in fringe type trades and specific sectors like security software. Be patient and take the trades that set up well and keep your powder dry.

Have a great day.

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

  1. Software (IGV) is one of the sectors attempting leadership in the market. If gets a positive push and then struggles to follow through on the upside. Tested the 50 DMA and bounced back near the highs. $102.65 is the level to clear near term. VMW (testing and moved higher), CYBR (nice break through the $67.80 mark), VDSI (cleared the $30.25 level and followed through on upside), SPLK (broke above the $70.25 mark) are some individual stocks to watch in the sector for upside opportunities. Added CYBR and VDSI on the moves in the sector.
  2. Semiconductors (SOXX) Tested $95.15 support, bounced, tested again and holding? This is the challenge for the NASDAQ currently. Within the sector we do see¬†some leaders emerge worth watching.¬†¬†QRVO (follow through upside), SIMO (back to the previous highs), AMBA (nice follow through on the upside), AAOI (nice move from the flag pattern). Others worth watching for bounce following the recent selling are FSL, NXPI, SWKS (positive move). Mixed bag… measure the risk and manage your stops.
  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 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 (nice break higher and follow through), BKS (hitting new high near term), CVX, MW.
  4. Emerging markets (EEM) attempting to build a bottom near the $39.60 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.
  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 last week, but 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 as it stalls at the $118.60 resistance. The FOMC meeting shed some light on the Fed’s intentions. but we have to watch how the bond responds. The reaction on Wednesday was more of it being priced in… we will see today.
  7. 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. Started on Wednesday following the FOMC meeting. Need follow through to set up the entryat $43.30.
  8. 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.¬†Banks sold on Wednesday after FOMC meeting… watching for the leadership to resume.
  9. 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) Still testing and holding the support of $207.50 mark and the level to watch currently. Keep your stop on positions at the $204.50 level. Leadership is lacking with technology and healthcare stalling of late. Financials saw the banks struggle on Wednesday in light of the FOMC meeting and we still need leadership if the upside is going to resume.

NASDAQ 100 Index (QQQ) Another bounce off support and not much has changed. 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. Moved back to the $109.10 level to clear on the upside? Watching to see how it all unfolds.

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

Volatility Index (VIX) Closed at 14.5 with some anxiety and relief. No help from the FOMC meeting as it left most well within expectations of the rate hikes and the improving economic picture blather. The index is truly a great picture of what is going on the broader markets. Watching to see how this unfolds today and if traders react differently today than yesterday to the announcement.

Transportation (IYT) Bounced off the $148.50 support again and looking for another attempt to bounce. If you keep jumping up and down on a weak branch eventually it will break and that is the support in transports.¬†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 sold lower on the FOMC announcement? Yes, this is another indication that traders don’t believe the Fed will act before year end. ¬†The $24.88 level of support¬†broke on Wednesday with $24.48 next level to watch. News is driving and not willing to trade emotions for now. Dollar index (DXY) fell below the 94.70 level of support¬†with 93.25 the key level to watch going forward.

Crude Oil (OIL) Tested support again and bounced. We remain in the range as the supply data invites some speculation about supply ramping up again. The inventory data has shown seven weeks of decline, but the supply build up in Oklahoma has speculation growing about supply growing again. 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 $16.20 hit to take a profit. Watching for this to test the $15.20 mark and bounce again as the Fed comments get sorted and digested.

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 $19.20. Small test Tuesday. 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.

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.¬†Speculation selling on Wednesday with the Fed announcement rattling investors. Watch for opportunity and manage positions.

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.¬†If the sector gets a positive pushes to new highs willing to add to the position. $102.65 is the level to clear near term.

  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 $32 adjusted higher.
  2. CYBR – added a position in the stock on the break higher $70.70 entry. Stop $67.75 to start the position.
  3. VDSI – added a position as well in the stock $31.45 entry. Stop $30.50 to start.

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. Nice upside move on Wednesday.

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. Rattled by the FOMC meeting Wednesday, but still in play.

  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. Bounced off support on Wednesday.

  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.