Risk-off becomes the theme

Worries turn to high anxiety on Wednesday with markets selling off more than three percent on the day. The reason is what most investors are trying to evaluate… if we know the reason we can determine if there is more downside on the horizon… the challenge is to know exactly what is motivating investors. Remember, we all think individually and over time if we come to similar conclusions we will act collectively… which establishes a trend. A quick look at the charts shows there is a new trend attempting to be established and it is on the downside. Thus, far there have been multiple issues facing investors, but on Wednesday the virus took center stage relative to a reality check. Talks about a voluntary lockdown and restrictions became a part of the headlines… that translates into a slower economic picture and slower earnings. The jump in cases was the cause of the talk and thus, investors started to believe it could happen again. That leads to visions of March for the markets when they declined more than 30%. That leads to selling. Question is, how true is the belief? Only time will tell, but investors are acting on the belief and waiting for the reality of what is to come. You and I have to act on our beliefs and that is what we do every day, not just when there is panic in the headlines. Stay focused on what you are doing and manage the risk both short and long term.

Short news notes of interest…

  • Transports (IYT) fell 4.3%… UPS earnings were good as the beat estimates, but the focus is on the future as investors take on a panic mode. Watching the opportunity as things settle and emotions give way to logic. Need to hold the $193.50 level for the sector.
  • Thursday is a big day for earnings… AAPL, AMZN, FB, GOOG report after the close. Good news… rally… bad news… watch out below. The negative tone heading into the data doesn’t help… this will be interesting.
  • The Fed stated there was little left to be done by them… waiting on stimulus… but that has been delayed until who knows when with the current political climate. Watching how this storyline unfolds.
  • Mastercard (MA) missed earnings expectations and the stock fell 8.8%. This is an interesting miss as online shopping and other usages are still high… but, travel and leisure are off notably.
  • Crude oil prices 5.3% on Wednesday as the concerns about shutdowns hit the commodity and there may be more downside as anxiety levels rise among investors. Testing the October lows.

The S&P 500 index closed down 119.6 points to 3271. It was down 3.5% on the day. The index moved lower on the day as the sellers remain present. The close below 3427, 3330, and the 50 DMA remain negatives technically. The action was negative throughout the day as industrials and healthcare led the markets lower. Eleven of the eleven sectors closed in negative territory as investors turn to risk-off and money flow shows rotation to cash. The upside has given way to safety concerns for the near term and money is heading for the exits. The VIX index closed at 40.2 adding to the spike in investor anxiety and eclipses the 36 mark. Negative indication short term.

The NASDAQ index closed down 426.4 points at 11,004. The index was down 3.7% on the day as investor sentiment went south. The question remains will buyers return? If they do, they are going to need a reason… Maybe Apple earnings will provide some hope? Technology stocks were the downside leader for the index. The NASDAQ 100 index (QQQ) was down 3.9% for the day. Large caps moved below the $282 level again after hitting stops on Monday. Semiconductors (SOXX) closed down 3.2% for the day adding to the downside and breaking the next level of support at $304.80. Technology (XLK) was down 4.2% and looking at $109.30 support. Watching how this unfolds as the market shifts gears again.

Small-Cap Index (IWM) The sector bounced at the $144.65 support and managed to hold the move higher… it followed through, but has struggled at the resistance of $162.50. Watching how this unfold going forward. Entry $151. Stop $159 (HIT STOP). Letting it unfold near term. Positive bounce back from the test earlier in the week. Moved below the bottom of the range and down 6% for the week.

Transports (IYT) The sector topped at $205 and confirmed the upside but struggled of late with earnings data. We will see how it changes the momentum. Managing the risk. Entry $167. Stop $205.63 (adjusted). Fell 8% thus far for the week as worries about shutdowns hit the sector.

The Dollar (UUP) The dollar broke lower and shows a downside trajectory from the 9/25 high. We can blame plenty of data points, but the key thing to understand is we (the government) are supporting a weak dollar policy currently and that isn’t helping the cause. Dollar gains on the day holding above the $25 mark.

The Volatility Index (VIX) Volatility remains a question mark as anxiety rises and falls during the week. The uncertainty remains a challenge for investors and the consistent rotation of concerns weekly is keeping the anxiety level elevated. Watching and letting this unfold around facts versus speculation. Big spike to start the week as the index surged to 32.4 and offering an entry for VXX. Entry $23.18. Stop $27.05 (Adjusted). Added more anxiety on Tuesday at 33.3. Wednesday justs to 40.2 and we raise our stop. Looking to sell part of our position on Thursday.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector completed a bottom reversal and cleared the August highs. Taking on a leadership role near term as the sector follows small caps higher. Watching the topping pattern on the chart at the highs with an attempt to break higher on Friday. Sold back to the bottom of the range and support… Sold below $190.11 support… next support 183.

Retail (XRT) The retail data released for September was positive and the sector continues to show solid growth. The bounce at the support of $48.35 has eclipsed the August highs and the fundamentals confirmed the trend. Entry $51. Stop $52.68 (adjusted). Shows some near term weakness and topping. Down 2.5% as the volume rises and sellers emerge. Moved to $51.50 support.

Biotech (IBB) The sector gapped lower, hit our stops, and watching how it responds. The news around the vaccines and antibody drugs has been a drag on the sector near term. Patience. Sold and broke the $134 support looking for the opportunity.

Semiconductors (SOXX) The sector remains in an uptrend but the chart is showing some topping again. Intel earnings were a drag on Friday and we are watching how this unfolds moving forward. Entry $304. Stop $320.20 (stop hit). Broke lower and broke support. Hit the stop and watching.

Software (IGV) The sector has been a key part of the leadership since the March lows. Some testing at the highs and watching how it unfolds. Entry $308. Stop $322.76 (adjusted). Cloud software has been weaker. Moved to support twice the selling volume. Small bounce on Tuesday… watching. Fell below the $315.67 support and watching.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.84% up from 0.74% last week. Yields rose as stimulus talks failed. Watching as the uptrend from the August lows remains in play. Short side trade offered in bonds with TLT falling. TBT entry $16.34. Stop $15.75. Watching the trendline for some decision points. Yields fall, bonds rally, anxiety levels rise all equals fight to safety in play.

Crude oil (USO) Crude moved to $39.88 down from $40.85 for the week. Plenty of speculation to drive prices and watching how this unfolds. No position currently in the commodity. Too much talk about the economic impact relative to the shutdowns and virus worries. Crude fell 5% on Wednesday and energy stocks followed lower.

Gold (GLD) The metal broke lower from the descending triangle pattern to continue the negative decline from the spike higher in July. Support at $174 held and is trying to establish a move higher. Watching how this unfolds near term. Breaks higher from the consolidation pattern, but fails to hold the move selling on Thursday and Friday. Broke lower from the trading range as a negative sign for the metal. $174 next level of support.

Emerging Markets (EEM) The sector held support at the $42.50 mark and reversed to move back above the $45.50 resistance as the dollar dips lower on stimulus news. Entry $44.50. Stop $43.50. Holding near the highs with some testing the last week. Need to hold the $45.40 level of support. Broke support and accelerated lower. Watching how this unfolds.

(The notes above are posted every weekend and updated daily in Bold Print)

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENTT

WEDNESDAY’s Scans for October 28th: Selling accelerated as fear levels rose from investors. The virus rises in the number of cases, lockdowns in France, lockdown fears spread to the US cases rise, and investors take a risk-off approach to their money for now. Don’t be surprises if the markets bounce on Thursday… but, will it be enough to shift the tide? We have hit stops raised cash level and watching for what is next. Don’t be in a hurry and don’t chase the downside. Focus on what you know, what you believe, invest accordingly, and manage the risk.

  • Energy (XLE) downside resumed and watching how low this will go. The bounce failed to produce any follow through and the outlook is still not pretty for any changes in consumption.
  • Volatility Index (VIX/VXX/UVXY) opportunity on the upside followed through. Raised stop and looking to take 1/2 off on Thursday. The rise in anxiety is expected, now the question is what will calm investors worries?
  • NASDAQ 100 (QQQ/SQQQ) Short side entry hit. Watching what and how this unfolds. There is fear in the market… the question being, how much?
  • REITs (IYR/SRS) downside trade is doing well. We need to manage our risk here as the target is approached at $16.20. Adjusted the stop and watching how this unfolds near term.
  • China Internet (KWEB) moved to resistance and testing. Looking for the break higher and follow through.

TUESDAY’s Scans for October 27th: Markets are still in a mode of uncertainty as to the challenges relative to the economy rise. No stimulus is the assigned cause for the rise in concern, but the reality is the virus shutdowns and reluctance to reopen or push the economic recovery are hindering progress. On the other side, public safety is the primary concern. Like all things… there has to be a balance. Where that balance is currently is drawn along political lines. Unfortunately, that isn’t helping matters nor is it providing reasonable solutions to advance all things good. With that in mind, we continue to take this one day at a time with a focus on the horizon.

  • Charts – since the top on 10/12 have been lagging and declining. The markets have retraced 38% of the gains from the 9/23 lows. This is a solid test of the gains and watching for some sign of the buyers resurfacing. Watching for leadership to return along with direction from investors.
  • REITs (IYR/SRS) short side trade continues to show momentum short term.
  • Social Media (SOCL) solid upside in play from the 9/23 lows… adjusted our stops as the upside looks extended.
  • Agriculture (DBA) commodities are still leading on the upside. Adjusted our stops again as the trend remains in place.
  • Financials (XLF/SKF) showing some downside this week… watching how the sector unfolds near term.

MONDAY’s Scans for October 26th: Spike in volatility shows the unrest from markets as the data points push the fear button. The continued shutdowns and response to the rise in cases is impacting the near term outlook for the economic data. The charts have reflected the uncertainty in the last few weeks, but the sellers on Monday accelerated the reaction. How does this unfold near term? Is there are correction on the horizon? What about the stimulus? What about opportunities? What about clarity? What about??? Too many questions are the result of uncertainty looking forward and therein lies the challenge for the markets near term. Some stops hit, more cash raised, more opportunities on the horizon.

  • Energy (XLE) crude dropped more than 3% on the day and the sector fell 3.6% in response… all speculation, but it didn’t help the reversal attempt. Short side setting up again.
  • S&P 500 Index (SPY) breaks a key support level at 3427. Closed below the 50 DMA. 3330 is the next level of support. Negative day and set up for more downside technically.
  • NASDAQ 100 Index (QQQ) broke $282 support. Closed below the 50 DMA. Volume rose on the selling pressure in the small and large-cap stocks. Negative technical look for the index and watching how it unfolds.
  • REITs (IYR/SRS) selling continued in the sector and set up a short side trade in SRS. Watching how this unfolds near term.
  • Treasury Bonds (TLT) reversal in rates on the day… money flowed into bonds as safety to selling. Watching how this unfolds near term.

FRIDAY’s Scans for October 23rd: Indecision remains for stocks. Earnings are mixed. The stimulus is nothing but talk. The election is 10 days away. And, and, and… Plenty of issues facing stocks moving forward and the lack of clarity in the issues isn’t helping matters. Thus, we take what the market gives, exit where risk is elevated, and patiently wait for the trends to develop.

  • NASDAQ 100 Index (QQQ) stalled and testing key support. $282 is the level to hold if the upside is to continue near term. Volume was lower on the week and worthy of attention.
  • S&P 500 Index (SPY) needs to hold support at $341.76. The testing is in play and the buyers remain at bay. Looking for the leadership that will take the index higher.
  • Financials (XLF) showing some leadership for the week as the regional banks (KRE) bounce off support. Need some leadership from this sector going forward and need to clear the $25.55 level.
  • Treasury Bonds (TLT/TBT) moving lower again as yields rise. Watching where this is going as higher rates will have a negative impact on housing and other areas of long-term debt.
  • Clean Energy (PBW) topping pattern on the chart as the uptrend starts to test the move higher. Watching for opportunities and raised our stops.

THURSDAY’s Scans for October 22nd: The markets remain undecided on many fronts, but the talk of stimulus rallied stocks late on the day. There is plenty of issues facing stocks near term, but the hope of a money infusion sends stocks higher. Energy was up 4% on the day as the hope of a stimulus package would spur the demand. Regional banks were higher again as the sector continues to show signs of breaking to the upside. Utilities and healthcare both posted solid gains on the day as well. Technology continues to be the laggard of late.

  • Energy (XLE) found support and buyers again as the sector move higher on the day.
  • Regional Banks (KRE) Solid rise on Thursday as the sector climbs 4.7% on stimulus talks, higher interest rates, and hope of the impact on the sector… broke above resistance.
  • Technology (XLK) lagging again as the money flows out of the sector and move to other areas of interest for investors. Worries remain on the rise for the sector overall.
  • Small Caps (IWM) posted a solid gain on the day to bounce at support. Keeps the upside option in play and watching how it unfolds.
  • Brazil (BRZU/EWZ) bottoming pattern show a solid move to the upside and looking for upside follow through.

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

Sector Rotation of S&P 500 Index:

  • XLB – Basic Materials tested the trends. Added a bottom reversal and moved back to the previous highs. Letting this play out near term. Testing at the current highs. Broke lower from the topping pattern. Negative for the day and support is at the $61 mark.
  • XLU – Utilities bounced from the selling and back above the $61.75 resistance and heading higher. Entry $58.50. Stop $61. Testing near the highs. Attempting to break higher from the flag pattern. Joins the downside party on Wednesday down 2.9%.
  • IYZ – Telecom broke the $27.60 support created a bottom reversal and cleared the $27.60 level again on the upside. Entry $27.60. Stop $27.20. Testing and breaking $27.60 support. Gapped lower testing the previous lows.
  • XLP – Consumer Staples tested lower, reversed, and heading back to the previous highs. Positive for the overall market with the recovery stocks improving. Testing the trend. Tested lower breaking support and moving towards September lows.
  • XLI – Industrials moved sideways and testing the move higher. Friday broke above the previous highs and resumed the uptrend. Hit new highs and testing the upside. Gapped lower breaking support and heading towards September lows.
  • XLE – Energy gapped lower as a continuation of the trend set from the June highs. Added to the downside and adjusted stops. Managing the risk. The bottom reversal is of interest and watching to see if it follows through. Tested the previous lows… now breaks support and added to the downside. Adjusting our downside stop.
  • XLV – Healthcare tested the $101 support level and held… bottom reversal breaks higher $106.88 break. Entry $106.88. Stop $101. Solid move towards the previous highs. Testing at the $106.90 support is key near term. Broke support and recovered… indecision. Broke lower and watching.
  • XLK – Technology found support at the $110 level and bounced… Watching the bottom reversal attempt currently in play as it clears the $118 level. Testing $118 level this week. Tested lower breaking support and heading towards September lows.
  • XLF – Financials are challenged by the outlook for defaults and commercial real estate. $23.50 support held. Looking for regional banks to take a leadership role if the upside is to recover. Entry $24.50. Stop $23.50. Moved lower breaking support at $24.50 and testing $23.50.
  • XLY – Consumer Discretionary tested the trend, tested below the 50 DMA, and support at the $140 level and bounced. Solid move back to the previous highs.Testing. Breaks the 50 DMA and watching.
  • IYR – REITs have struggled with interest rates, vacancies, and virus talk about people moving out of cities. Tested support at $76.22 and bounced only to test lower again… patience. Tested lower breaking support and now testing September lows.

The trends are shifting again based on investor activity. We have added positions, added new stops, and watching the developing trends and patterns currently. Using the six-month charts as an indicator for the short term view… Eight sectors are in confirmed uptrends as the testing phase continues. Two are in consolidation patterns showing indecision from investors, and one is in a downtrend. The result for SPY is in a move to up and sideways trend short term with a downside bias currently. The leadership is rotating as money flow shifts directions.

(The notes above are posted Weekly based on the activity of the previous weeks trading. The BOLD/ITALIC comments are current day changes worth noting.)

FINAL NOTES:

Wednesday: Too many things on the stove to keep track of and investors head towards the exits. The question is how bad does it get on the downside. The only way to know is to watch… Know what is driving the downside risk… virus cases rising and lockdowns in Europe. If the lockdowns happen in the US it leads to further concerns and selling is the proposition… It has to validate first on the charts… when that happens decisions become easier. Don’t speculate, focus. Focus on what we know, what we believe to be true, and then act as it validates the belief. If the downside is to be the next trend, we hit entry points short term on Wednesday. If there is a bounce on Thursday it will offer better entry points. Watching how this unfolds and what opportunities it presents… patience is the key. Watching how Thursday unfolds throughout the day… not just the open.

Tuesday: Economic data shows slowing in economic recovery. Investors showing nerves as anxiety levels move higher. Banter about how to deal with the virus remains high. Solutions are limited and the outcome is putting one big cloud over the equity markets. The bottom line is we need to keep to our strategies, focus on risk management, and not let the emotions of the moment sway the outcome. Stay focused on what you know, what you believe, and let the outcome happen. You nor I can control the future only how we respond and adapt to the realities that are.

Monday: Not the day many were hoping for, but the reality of all the parts are starting to weigh on the markets. No agreement on stimulus after hope offered over the weekend. No solution for the virus as it continues rise in cases again. More shutdowns instill fear about the economic picture. The list goes on and the anxiety levels spiked to start the week. We have to keep our heads and manage our risk relative to the positions we have and let this all unfold. Speculation is a part of human nature and the problems are always bigger during periods of uncertainty. We hit some stops on positions, we raised our cash positions, and we are managing what we have. Now we start to look at what if… Stay calm and let this unfold one day at a time.

Weekend Wrap & Outlook… The markets continued to test the move to the September highs. The challenges have been reality versus speculation. The speculation is stimulus… the reality is politics and posturing versus helping the country find a unified direction. Small caps continued to show leadership for the week. Technology stocks were challenged as money flow slowed and some rotation took place. Semiconductors and software showed some weakness on the week not helping the broad markets. The economic data is showing some slowing in the recovery but still overall positive. The retail sector showed positive growth from the consumer and a positive outlook currently. Only ten days until the election and it is going to be an interesting day for America. The uncertainty going forward is showing up in the volatility index. The VIX index moved to 27.5 as the anxiety levels remain elevated for the week. The dollar bounced Friday, but our outlook is for it to continue the downside trek as the weak dollar policies remain. In turn that helped the metals, commodities, and emerging markets rise. Four of the eleven sectors posted gains for the week as worries about the economic picture and stimulus grow. Financials and utilities led the upside for the week showing some move to safety and recovery stocks gaining. REITs and technology were the weakest sectors for the week as the sellers showed up. Crude oil moved lower and closed at $39.85 a barrel down slightly on the week. Watching the current movement in the broad markets as money continues to search for the best opportunities and cash levels remain elevated. The goal remains to manage money not the markets or the pundits in the media. Let the future unfold and manage the risk that is. Track the data. Know where the markets stand relative to the facts. Money rotates to where it will be treated the best. Watch the trend, know which side the Fed is on daily, and ultimately the data will establish the longer-term trend. We remain focused on what is working and what is failing. Therein lies the opportunities.

Disciplined entry and exit points allow you to manage your risk in up or downtrends. Investing and trading is a matter of a defined strategy implemented with discipline. It is not magic. It is not being a prophet. It is about following your strategy one day at a time.

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

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in our trading strategies with a disciplined approach to investing and managing the risk of our money.