Rotation in play as investors remain cautious

Market outlook for September 11th

Another mixed day for stocks as the small and midcaps continue to see money flow. The move towards the growth stocks is positive, but the lagging large caps are keeping the index in check. They gained near .75% the last 20 minutes of trading and still closed down 0.29% on the day. Energy, materials, and industrials are seeing money flow as well with REITs, consumer staples, and utilities seeing outflow. We continue to watch how this unfolds and following the money for the best opportunities.

The S&P 500 index closed down 0.9 points to 2979 as the index held the break from the trading range on a mixed day of movement again. There were limited news events on the day and money rotated somewhat overall. Seven of the eleven sectors closed higher on the day led by financials and energy. The downside was led by REITs and consumer staples closing slightly lower. Plenty of questions remain relative to how this unfolds with the up and down movement, but for now, the buyers showed some moxie keeping the upside in play. The long-term trend remains in question with the move lower breaking the trendline from the December lows.

The NASDAQ index closed down 3.2 points at 8084. The index is testing the move higher and some weakness in the large caps stock again on Tuesday. QQQ added to the soft trading with the large-cap stocks weaker on the day and testing the move higher and a big push the last twenty minutes to get close to even to end the day. The gap above resistance at the $190.50 mark was positive as well. Watching how this unfolds moving forward and looking for the best opportunities. Solid moves from WBA, NTAP, PCAR, KHC, and WYNN to show follow through upside moves. Dig in an find the movers.

Small-Cap Index (IWM) The sector is leading the upside effort for the last two days as money rotates above the $152.28 resistance. The gap higher had my attention as it cleared the $149.33 resistance. Monday the sector showed some leadership with a solid 1.3% gain and Tuesday added 1.2% as well. Hit the entry point at $152.28.

Transports (IYT) The sector sold back to the lows and bounced off support. The $182.43 resistance was cleared and $186.70 level cleared giving entry point on Monday. Entry $186.70. Stop $$188.53 (adjusted). Added to the move Tuesday with a 1.5% gain.

The dollar (UUP) The dollar moved lower on the trade talk news. Moved back below the $26.77 breakout point. Closed at $26.76 on Tuesday and watching how it unfolds going forward.

The Volatility Index (VIX) closed at 15.2 falling as the tariff banter with China and the US remains in the headlines with talks coming in October. The positive news on the economic data helped buyers step in and the volatility decline. This is the lowest level in six weeks… watching how it impacts trading.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector tested the $182.55 support again. Bounced and cleared resistance at the $190.44 mark. Challenge is to hold and move higher. Solid upside to start the week and showing some positive upside moves. Added to the move on Tuesday.

Biotech (IBB) The sector tested support near the $101 level again. The sector has been content to trade int he $101-107 range for several weeks. Watching how it unfolds. Overall the sector remains in a downtrend. Weakness prevails in the sector testing the lows again. Short side setting up. Bounce at support again on Tuesday keeps the hope alive. Still in a downtrend.

Semiconductors (SOXX) The sector shed 4.4% in reaction to the tariffs. Bounced again and gaining 4.3% for the week and clearing $210.90 resistance. Left a doji candle on Friday to watch how it trades on Monday… looking for entry point following the gap higher. Modest gains on the day and holding upside move.

Software (IGV) The sector tested the $213.40 support, bounced, cleared the $219.08 resistance and tested the move on Friday… Watching for an entry point if the upside move follows through. Weakness on the day dropping 1.5% as the sector struggles to find any momentum. Tuesday still sluggish as sector sees money move.

REITs (IYR) The upside trend remains on the long-term chart. Patience with our long term positions and short term watching how interest rate market unfolds. Holding near the highs. Testing resumes. Tuesday drops more than 1% as money rotates and rates rise.

Treasury Yield 10 Year Bond (TNX) remains at the 1.55% level on all the worries. Money rotated to safety and our TLT trade remains in play on the fear. Stop $142.70. Still watching the Fed talk and once again the trade war. Yields are rising… buying into the Fed talk on higher rates. 1.7% on Tuesday highest mark in four weeks. Stop hit on TLT and entry signal on TMV $10.50.

Crude oil (USO) Tried to bounce on rumors of supply drawdowns and remains in the current range. Bounced on the tariff talk schedule… positive for oil? Watching support at $52.50 and resistance at $58.25. Crude jumped 2.3% as anticipation of trade talks pushes oil prices. Tuesday tested the move higher after hitting resistance at $58.25.

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. Jumped higher on worries about trade and breaking from the consolidation. The stop is now at $141.10. Economic data sent the metal lower breaking $143.76 support… watching with stops in place. Third day of sliding lower… watching and stop in play. Broke support and hit our stop on Tuesday… downside in play as money rotates.

Emerging Markets (EEM) Broke lower in the trading range as tariff threats add to the worries about an economic slowdown. China helped by announcing trade talks would resume in October… hope springs eternal and the sector rallied to $41.23 resistance. Trade talk hopes are keeping the sector alive and well.

China (FXI/YANG) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Watching the bounce play out as Mr. Trump makes his intentions clear… as does China. Gapped higher on the comments about talks in October. Holding near the current highs.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans for September 10th: More rotation as money seeks where it will be treated favorably near term. Small caps add to the upside move with biotech joining the move. Energy, telecom, materials, and industrials all benefit from the rotation. The laggards remain large-cap stock along with software, consumer stocks, utilities, gold, and treasury bonds. Follow the money flow and the volume where it is going and take the best opportunities. Establish define entries, exits, and targets before putting money at risk.

  • Small Caps (IWM/TNA) hit entry $55.50. Stop $54.59.
  • Energy (XLE/ERX) hit entry Monday and followed through nicely on Tuesday. Entry $15.27. Stop 16 (adjusted).
  • Treasury Bonds (TLT/TMV) hit stops on positions and triggered short side entry at $10.50.
  • Gold (GLD/DUST) reversed hit stop and watching the downside opportunity if the downside follows through.
  • Transports (IYT) added to the upside move and showing some positive moves upside.
  • The last two days have given opportunities to dig into the sectors and trade the leaders. Entry, Exit, and Target defined help lessen the risk of the trades should things reverse.

MONDAY’s Scans for September 9th: Lack of news allowed the markets to trade on their own with some rotation in effect. Energy moving higher as crude breaks through resistance. Small Caps took on a leadership role for the day… finally. Large Cap NASDAQ struggled, but some parts showed solid upside moves to continue the breakout. Overall it was a consolidation day and looking for the leadership and opportunities in the current environment.

  • Small Caps (IWM) break above resistance and offering some opportunities if it follows through.
  • Large Caps (QQQ/SPY) looking at the parts versus the whole as some solid breaks higher in key stocks has my attention. Scan for leaders.
  • Energy (XLE) hit the entry point on the breakthrough resistance. $59.63. UCO $18.,45 entry. UGA $28.82 entry.
  • Treasury Bonds (TLT/TMV) short side setting up… $10.50 is the entry point if rates continue to push the upside trek.
  • Natural Gas (UNG/UGAZ) solid upside follow through as the winter predictions continue to higher consumption of natural gas. Take what the market offers and keep your stops in place… raised to $19.

FRIDAY’s Scans for September 6th: Jobs report left plenty of questions about the state of the economy, but left enough hope it would spur the Fed to cut rates at the next FOMC meeting. It was a mixed day for stocks, but not disappointing… there was a small test of the upside move and now we watch to see if the trade opportunities unfold.

  • Small Caps (IWM) moved higher Thursday, tested on Friday… looking for the entry point if the upside follows through. If not, short side trade entry will be offered.
  • Semiconductors (SOXX) nice upside gap. Held Friday and watching for the trading opportunity on a test and run.
  • Gold (GLD) if the positive bias remains about the economic picture… look for more downside. Adjusted our stop and managing the potential risk to the position.
  • NASDAQ 100 index (QQQ) Positive gap higher on Thursday… looking for a test and run in the chart pattern.
  • Natural Gas (UNG/UGAZ) continues to run higher… adjusted stop and let this run.

THURSDAY’s Scans for September 5th: The trade talk continues to help stocks, but the real catalyst on Thursday was the economic data… ADP report showed a marked improvement in jobs. If the jobs report on Friday is equally positive it could add the needed boost for stocks to reverse the current trend. Productivity data improved along with labor cost… wages are improving finally. Throw in a Fed rate cut at the FOMC meeting this month and investors will buy into the rally. Hope is present and maybe, just maybe, we get some follow through on the upside move. Taking what the market gives and managing the risk.

  • NASDAQ 100 index (QQQ) Followed upside move with a gap higher and break from the trading range. $191 entry. Watching with a stop at $188.90.
  • Semiconductors (SOXX) upside follows through with a gap higher $211 entry and stops $206.
  • Financials (XLF) gapped higher and watching for a test of the move for an entry point. Banks (KBE) and brokers (IAI) leading.
  • Emerging Markets (EEM) gapped higher for the second day led by China (FXI) and Brazil (EWZ).
  • Gold (GLD) and Silver (SLV) gap lower on the reversal of sentiment towards stocks.
  • Watching how this newfound optimism follows through on Friday and into next week.

WEDNESDAY’s Scans for September 4th: The news of talks being scheduled in October pushed the indexes back to the high end of the trading range. The news daily on the topic making people immune to listening. Wall Street takes each piece of data on the topic to trade the swings. The news pushed technology, energy, and industrials higher. The question remains relative to follow through. All the sectors remain in their respective trading ranges as we watch how this unfolds. Hong Kong ISM data fell to 40.8… That followed the US falling below 50… It’s about the economy… eventually this will show up in stock prices.

  • Technology (XLK) bounced back from the selling… something has to give… up or down. SOXX bounced back to the top as well… looking for the follow-through.
  • Energy (XLE) solid bounce after testing lower. Crude oil (USO) bounced nicely on the news. Watching for follow through here as well.
  • Natural Gas (UNG/UGAZ) continues to rally upside and we adjusted our stops accordingly. $15.80
  • Homebuilders (ITB/NAIL) upside remains in play with a solid move higher on Wednesday.
  • Emerging Markets (EEM) bounced as China (FXI) and Hong Kong (EWH) lead upside move. Brazil (EWZ/BRZU) nice bounce as well.
  • Distribution is a concern… higher volume on selling into the bounces. Eventually, this leads to a break lower. Or, it finds enough buyers to start the new trend higher… Watching how this tennis match ends.

(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 broke support at the $55.95 level and reversed to end the week. Attempt to break from the range… needs to follow through. Tested the move.
  • XLU – Utilities broke from the trading range and continued higher. Tested on the rise in interest rates and testing near term support at the $62.50 mark. Collecting the dividend and letting it play out. Testing the first level of support.
  • IYZ – Telecom held support at $27.62. Hit entry at $28.70 and followed through on upside move to close the week. Stop $28.55. Couldn’t hold the move higher on Monday, but managed to hold it on Tuesday.
  • XLP – Consumer Staples held support and the uptrend line. Watching how this unfolds near term. Holding near the current highs. Made the move lower on Tuesday with money rotating.
  • XLI – Industrials moved back to support in the trading range and bounced back and gapped higher clearing $76.80 resistance. Added to the upside as money rotates into the sector.
  • XLE – Energy broke support at $58.19 tested support and then bounced clearing resistance and looking for the entry opportunity on a follow-through. Broke higher on crude adding position ERX $15.60. Stop $15. Nice upside added to the gains.
  • XLV – Healthcare held support… small bounce followed by modest gain… plenty of work to do. $91.75 entry-level to watch. Moved lower on the day… setting up short side trade. RXD. Tested lower and reversed on Tuesday.
  • XLK – Technology tested lower, bounced, cleared resistance with a gap higher and held. Looking for test and go for entry. Tested with weakness in software.
  • XLF – Financials have been under pressure with lower rates and global weakness. The positive data gave some life to the sector and looking for the opportunity in the gap higher. Test and go? Solid upside addition on Monday. Entry $27.60.
  • XLY – Consumer Discretionary moving higher on earnings from the retail sector earnings… gapped higher from the trading range on positive data… looking for test and go. Adding to the upside move.
  • IYR – REITs held $88 support and cleared the $90.80 resistance. Remains in a positive uptrend… collecting the dividend and letting this run with a stop in place. Inching lower towards support. Broke the first level of support and moving lower on interest rates moving higher.

There are currently four sectors in confirmed short term uptrend. Four sectors in consolidation or sideways trends. Two in a confirmed downtrend. The result is SPY in a confirmed sideways trend. The positive gap higher last week could offer some upside trading opportunities going forward. We have to remain patient and let this all unfold. Remember the parts make up the whole.

(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:

Tuesday: Another day of rotation as money moves where it anticipates being treated the best. Watching and taking some trade opportunities on the move. The key is defining the entry, exit, and target prior to putting your money to work. Rotation in the face of weaker economic data is a positive near term, but the proof will be in the data going forward. The Fed will likely cut rates. The Fed is adding some QE with bond purchases again. Interest rates have moved back to 1.7% on this activity lessening the inverted yield curve. The dollar has held. China is hinting at a resolution to trade. What more could we hope for… take what the market gives and manage your risk accordingly.

Monday: It was a day of no news and left stocks to themselves… always gives insight into the beliefs overall. Some rotation with energy leading on the upside with crude driving higher. Some trade entry points setup… some weakness in healthcare, software, and treasury bonds. Taking what the market offers and enjoying the opportunities and managing the risk.

Markets found enough buyers to break from the five-week trading range. While positive on the surface the challenge comes with the validation of the move. I am looking for a test of the gap which in turn will validate the move. If there isn’t a test the risk of the trade is higher. Thus, we will see how the beginning of the week unfolds and what opportunities it offers. The risk remains high for upside opportunities as the underlying data remains weak. The market remains controlled by headlines as each day holds movement related to the speculation of what might happen. Trade with China and the US remains at the top of the list with China once again wanting to resume talks in October. Interest rates and Fed banter remains high as well with all eyes fixed on the next FOMC meeting. Throw in Brexit and other global issues and you get the picture. The economic data showed mixed news with the jobs report showing a weaker headline number but a better participation rate along with higher wages. There are still too many questions unanswered and that invites speculation and volatility. Speaking of volatility the index fell to a six week low as the buyers stepped forward. We remain focused on what is working and what is failing. Therein lies the opportunities. The break from the five-week trading range is on my watch list moving into the new trading week. Manage your risk accordingly and let this unfold… one day at a time.

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.