OUTLOOK: February 5th
Sellers accept the role and send the markets lower to end the week on a very negative tone for stocks. The Dow posted a 666 point loss for only the sixth time in history. NASDAQ dumped 145 points, and the S&P 500 index lost 58 points. It was not a pretty Friday… plenty of stops hit on the day as we refill the cash and lock in some more gains. The bigger question is what now? The new Fed Chair, Mr. Kaplan, making some waves with his stance on inflation and growth. The downside is now real. The reality of the move on Friday has plenty of emotion attached to the VIX index jumping to 17.3, a level not seen since last August. I am looking for confirmation to the move on Friday and what if and when the reversal or bounce attempt takes place. I don’t like speculation and I will state again be cautious in how you approach this going forward.
Friday the downside expanded with a vengeance with the major indexes dropping more than 2%. The blame goes to… you choose there were plenty given on Friday… I believe interest rates are the real challenge for stocks. The rise isn’t a matter of speculation it reality in what and how it affects the economic picture as well as consumer spending. The ten-year yield now stands at 2.85% and accelerated higher on Friday relative to Kaplan’s comments. Take this move for what it is, but make note of interest rates. All eleven sectors on the negative side with utilities (XLU) and REITs (RWR) again leading the day thanks to rates rising more than eight basis points. The upside didn’t exist unless you look at the short ETFs like SPXS. Scanning the charts we now see a break or gap lower that impacts the trend of the charts short-term and puts us on notice relative to the longer-term charts. This has been an unprecedented move to the upside at it could do the same on the downside. Remember markets sell faster than they rise. Manage your stops relative to the current risk as it rises. I hit plenty of stops on Friday, but I still have to manage the long-term holding based on the original strategy, not emotions. I equally am caution as it relates to adding new positions and being patient. We will always take what the market gives and exercise discipline in executing our trading strategies. The news is reactionary, beliefs are trend building… watching what belief rises out of the short-term activity last week.
The S&P 500 index closed down 59.8 points at 2762 and moved to the 30 DMA breaking the first and second levels of support on the move. The uptrend remains in control of the index for now. The index gave up 3.85% of the gains from January and retraced one-third of the gain. If this level doesn’t hold look for the potential retracement back to the end of the year levels at 2700. The index now extended only 230 points above the 200 DMA dropping 70 points this week. The biggest movers in the index for Friday were… MAT (gap higher in the trading range), MSI (gap higher in the current short-term uptrend), CHTR (gap higher in the current uptrend), XL (gapped upside bottom reversal pattern), and EW (moved higher in the current uptrend). Downside leads the day, but still some positive moves on charts for individual stocks. The downside came from FCX, FBHS, CLX, AMD, and CBS. The weakness in utilities and REITs are impacting the downside move for the index. Watching how the news merry-go-round unfolds with renewed efforts from the sellers to take on the leadership. The last ten days all the sectors are posting negative returns with energy, basic materials, and consumer staples leading the downside moves. The last month shows financials, consumer discretionary, and healthcare leading upside.
Gold (GLD) gapped lower to support at $126.03. There is some indecision in the metal near term, but holding above our stop for now. The dollar (UUP) worries abound, but it did manage to bounce off the current lows. Treasury Bond yields moved to 2.85% and rattle interest sensitive stocks and the market psyche on Friday. Crude oil (USO) near the highs with the dollar creating some near-term uncertainty about the upside. The emerging markets (EEM) dump lower on interest rates, the dollar, and just plain worry over the US markets. The Volatility Index (VIX) jumped to 17.3 on the obvious anxiety present in the markets on Friday. There is plenty on the table relative to dynamics and agendas from the government, traders and investors alike, but the emotions injected into the markets now raises questions about the downside and the level of correction that will transpire and/or the opportunities that exist to start the trading week. For me, Monday is validation day for the sellers. The buyers seem content currently to sit on the sidelines and wait. The jobs report was lost in the news Friday as 200k new jobs reported better than expectations. It wasn’t enough to offset the interest rates worries taking center stage. The key is to remain disciplined within your trading strategy and not let the anxiety of the situation change your mind. There is nothing wrong with banking gains. The goal is to manage money, not markets. Manage your risk and stay focused on the horizon, not the rear-view mirror.
(The notes above are posted daily based on the activity of the previous days trading)
KEY, INDICATORS/SECTORS TO WATCH:
Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare. The sector has taken on an emotional ride of ups and downs based on the current belief and market trends. Thus making it more of a trading sector than investing. The current move off the November/December bottom is testing with a move back to the $112 mark… which hit our stops on Friday. Entry $107, Stop $112.02 (adjusted). We watch and see what develops on Monday… in response to why not having tighter stops on this position… simply put volatility is higher in the sector and we need to give room…
REITs (IYR) The sector broke the $79 level of support and continued lower. The rise in interest rates continue to worry investors and in turn, the selling has expanded. Entry at $75.75. Stop $76.25 (adjusted). SRS hedge entry $30.25. Stop $30 (adjusted) we added to protect our principle short term. The Break of $77 level was negative. We hit our stops intraday on Friday and we remain short with the hedge. We did collect the 4% dividend achieving part of the goal and if the downside expands we will gain or equity gain with this trade. Money management is key with all positions.
Treasury yields (TNX) moved to 2.85% last week gaining 20 basis points. That is enough to solidify the move higher in yields and the short side trades in the bond. The lack of commitment from the Fed and Washington’s wanting a weaker currency isn’t helping, and neither is the comments from the new Fed Chair, Mr. Kaplan. Watching how this unfolds, but for now, rates have moved higher and the short side of the bond remains the trade with worries of yields rising further. TMV holding entry $18.50, stop $19.25 (adjusted).
Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last six months. The volatility of the trend is speculation and news driving money. The selling speculation on the Fed hiking interest rates broke the $120.45 support, but the weaker dollar led to the rise currently of the December lows. Entry $120.70, Stop $125.30 (adjusted). Long term view is positive and the short-term boost from the weak dollar is helping the commodity. There is plenty to account for relative to gold and the gold miners (GDX).
Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but speculation about the dollar is impacting the price near term. The last three months the commodity has managed to fight its way back above the $50, $52.50, $57.50, and now $61.60 levels of resistance and confirm an uptrend off the June low. Entry $50.20, Stop $60 (adjusted). The price accelerated on a weaker dollar and remains in the uptrend… let it unfold and manage your risk. Some rattling about the price being overextended… let it unfold as the upside is still in control.
Energy stocks (XLE) was stair stepping upside off the August lows and the double bottom pattern clearing $63.22 for entry and a stop at $72 (adjusted). We hit our stop on Friday as the price of stocks follows the market versus oil. Why? The simple fact that oil prices have stalled and investors are willing to lock in gains relative to the markets versus and underwhelming support for higher oil prices. It is simply a matter of choosing which speculation theme to follow.
Volatility Index (VIX) The negative week for stocks pushed the index above 17.3 on Friday to close at the high of the week. The worries are building and they are speculation driven… the key concern is the volume of buyers backing away and the sellers taking control near term. Watching how this unfolds moving into the new week of trading.
The S&P 500 index closed the week down more than 70 points or 3.8% erasing nearly half of the gains for the year. The drivers last week were interest rates moving higher and supporting speculation the Fed would raise rates as well. That puts speculation in overdrive as the impact of higher rates will slow the economy initially as consumers have less spendable income. The belief is tax cuts will offset the loss and longer-term create a stronger economic growth versus the stimulus given by the government over the last eight years. All the moving averages were negative on the week and volume was above-average on the selling. There is plenty to ponder as we start the new week… not the least of which is the move in interest rates, the dollar, and comments from the Fed. The questions to ask, how low will the dollar fall? How will earnings impact the current leg higher? Will interest rates move to 3%? Will inflation raise its head to disrupt? We remain on guard about how the buck will impact the inflation picture as well as commodity prices. Remember rising commodities impact inflation relative to spending and discretionary dollars from consumers. Overall we are still cautious about the direction looking forward. Patience is required with this market overall as news leads the parade. Economic data remains mellow to start the year. Plenty of talk on the table concerning inflation as interest rates move higher. One day at a time is all we can do…
(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)
Daily Scan Results:
FRIDAY’s Scans 2/2: Sellers take control of the direction for the week and leave us with plenty of questions to ponder. Monday will key for the follow through if the downside is to accelerate. Evaluation of the bounce, if it happens, will be key relative to breadth and volume. Now is a good time to watch, listen, and be patient.
- S&P 500 Index (SPY/SPXS) downside move of 70 points opens the door for sellers. Watching how this unfolds and what is leading the downside. REITs (SRS) and utilities (XLU) were the leaders for now. However, all eleven sectors lost on the week and it will evolve if the downside becomes the trend.
- NASDAQ 100 (QQQ/SQQQ) cleared the $17.25 entry level for a speculation short trade on the index. This was on my watch list and I did add a position based on the technical move and sentiment. The bigger perspective is the large caps sold the most as they were the upside leadership. Watching how they progress in the coming week. $157.50 (QQQ) is the key support level to watch.
- Small Caps (IWM/TZA) This was a laggard on the upside despite the modest gains in January. The drop this week erases the move above the key level of $155. The key level is $152.50 and a break lower would be a bigger negative for the sector. TZA hit entry at $11.42 on Friday as the bottom reversal created technical trade. We are watching how this unfolds near term.
- Semiconductors (SOXX/SOXS) Broke the 20 DMA and $181.60 support levels. Still not in bad shape and watching how the leadership of this sector impact technology (XLT) near term. Not enough here to interest me in a short last week, but looking forward and watching the 50 DMA as a key level of support.
- Treasury Bonds (TLT/TMV) interest rates move to 2.85% and cause havoc in the markets. This is a key example of how investors can override the reality short term. The economy is improving… interest rates should tick higher… except when the Fed intervenes more than it should. Thus, the delay in rates rising is now coming to roost (as my mother used to say.) I don’t expect them to fall unless the economic picture shifts to negative again. The last two quarters have seen 3% plus growth… that is a good reason for rates to rise. Watching and staying short bonds at this point.
Closes like Friday tend to cause havoc in the early week trading. Will there be a sympathy bounce? Will there be more selling? Either way, the likelihood of more downside is the greater probability moving forward. This is a time for caution and not speculation. The trend will validate and the opportunities will be clear. Patience, however, is the key.
THURSDAY’s Scans 2/1: Not a great start for the month as money starts to rotate. Interest rates rise which in turn pushes bonds lower, crude oil higher along with other commodities, and the dollar remains on the weak side. Number one question I am getting is… do we sell our positions? Second, do we short the market? Both legitimate questions, but both answers ask for speculation and I am not a fortune teller or speculator… let the trends unfold and take the opportunities presented.
- REITs (RWR/SRS) moved lower on the day in response to rates and the short side setup is in place. We added SRS as a hedge to our positions at $30.50. If it moves above $32.50 we will adjust by adding to our short position and selling our long position to be net short in the sector.
- Natural Gas (UNG/DGAZ) selling continues and the short side trade is setting up at $24.50. The negative sentiment over the outlook for the economy impacting, but the inventory data is moving the commodity short term.
- Treasury Bonds (TLT/TMV) short side trade confirms the move above $19.25 and clears the October highs. Adjust your stops to $18.70 and let this play out for now.
- China (FXI/YANG) uptrend showing fatigue. Watching what transpires near term. Casino news impacting the stocks, but the emerging markets are getting nervous about rates and economic growth. EDZ was higher on the action Thursday.
- Some short ETFs to watch in the coming days… SQQQ, SMN, SRS, EDZ, YANG, DGAZ, SOXS, and TMV.
- Other sector charts to watch… UCO, LBJ, OIH, IAI, EWW, ULE, KRE, KBE, SOCL, and DBC.
Watch and act based on a defined strategy… don’t react based on emotions.
WEDNESDAY’s Scans 1/31: January comes to a close and there was plenty to celebrate despite the closing three days of the month. I am still watching the reaction to the State of the Union, FOMC, and interest rates. Earnings are still in play as well with reports coming from the large-cap stocks that have been leading the charge higher. Charts are holding up and the upside is still the trend. Patience is the key along with a clearly defined strategy of how to approach the current market environment.
- REITs (IYR/URE) building a bottoming pattern as interest rates rise. Did the FOMC make the Fed more positive on rates? The sector responded in that manner on Wednesday and it has my attention. Looking for a follow through the bounce off support.
- Utilities (XLU/UPW) bottoming pattern has moved to the breakout level $51.12. Good volume on the move higher and watching how interest rate story unfolds. Willing to add a position if this makes a follow-through move.
- Healthcare (XLV/IBB) the sector is subject to speculation, rumors, and fear. Not a good place to if you are an emotional trader. The downside remained in play on Wednesday and watching how this unfolds and what opportunities it brings. LABD bottoming pattern is on my watchlist… $3.40 level of interest.
- Natural Gas (UNG/DGAZ) drops on data and watching how that unfolds following the strong upside move. Hit stops at $25.50.
- Semiconductors (SOXX/SOXL) holding in a consolidation pattern currently and is one of the keys looking forward. Scanning the stocks shows some positives with QRVO up after-hours on earnings, AMD rallied on earnings, MU, BRKS, and ON in good setups, QUIK still in positive trend, and MCHP in holding pattern… all still in position to rise.
There is plenty happening in and around the markets. We have to be patient and let them unfolds. Take what it gives and keep our focus on what beliefs are driving the trends both short and long-term.
TUESDAY’s Scans 1/30: Another negative day of trading as money rotates based on speculation and news. Some money coming out of the market as profits are booked. Large-cap stocks were the hardest hit, but they also had the biggest gains. Managing our stops, looking for the truth in the moves, and looking for the resulting opportunities.
- Short side ETFs – they were the biggest movers the last two days. Plenty of emails about buying them currently. You can always trade speculation in markets as they create changes in charts, but they also come with the higher risk probability and that is not my strategy for managing money. My view… let this unfolds further and then take the positions when there is clarity and measurable risk. DRIP, ERY, SOXS, YANG, SCO, TECS, and DUST are the ones on my radar following Tuesday’s move.
- Energy (XLE/ERY) downside move is worthy of attention. Cleared $7.62 entry level for bottom reversal trade. Speculative at best based on the news. If this holds the move above $7.62 worth trading with a stop at $7.38… measurable risk, and target of $8.86… measurable reward… strategy defined.
- Healthcare (XLV) downside move of two percent. Closed on the 10 DMA. $88.06 level to break on the downside to interest me in the short side trade. Watching biotech (IBB) as well as this unfolds. The news impacts the providers (IHF) and watching how that unfolds as well.
- Financials (XLF) some downside and below the 1o DMA. The uptrend is in place and the sector has been a benefactor of the move in rates and optimism towards the economic picture. $28.50 level to watch on the downside. KIE is where the risk resides in the sector based on the current news.
- Treasury Bonds (TLT/TMV) short side continues to gain momentum and confirms the move above $19.25. Added to our position at $19.60 with a stop at $18.90.
Plenty to watch, avoid the speculation, focus on the horizon, and measure the outcome on the charts. Takeing it as always… one day at a time.
MONDAY’s Scans 1/29: Negative day to start the week and we will watch as one day does not a trend make.
- VIX index (VXX/UVXY) gap higher, but it corresponded to the selling. This is normal… watching for the VIX to remain elevated when stocks rise as a negative sign for stocks. SVXY could test $115 and bounce? Watching what opportunities arise from the current movement. UVXY cleared resistance at $10 and watching.
- Energy (XLE/ERX) the downside was worthy of attention on Monday. Topping pattern in play and if the sentiment shifts in the sector the downside could accelerate. Crude would need to turn negative and it doesn’t currently show any signs of that.
- S&P 500 Index (SPY/SPXL) the index is extended. The 200 DMA is at 2523. The index closed at 2853… big gap on the current surge higher since November. All I am saying is technically the market is extended. Earnings for some of the key players MSFT, AMZN, GOOG, and others are coming soon… they will likely set the tone for what is ahead short term.
- Treasury Bonds (TLT/TMV) yields moved to 2.75% and the move above $19.25 on short ETF keeps the short trade in play and hits next entry for the ETF.
- Wheat (WEAT) upside building some momentum on the bottom reversal pattern. Hit entry at $6.12 last week and nice follow through on Monday. JJG is breaking higher as well. SOYB has been positive off the January lows. Commodities are benefitting from the buck and watching.
Interesting day for the markets and it brings with it plenty of speculation. We will watch to see how this unfolds and what the opportunities are that come along with the activity. Downside on the day was present, but it will take more than that to shift the momentum tide. Caution and patience as we watch for the leadership to unfold on earnings.
(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)
- XLB – Materials topping pattern breaks lower hitting our stop and threatens the trendline for the sector. $60 is the next level to watch on the downside and the trend needs to hold that level to remain in place short term.
- XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed and a weaker dollar. Now that rates are pushing above 2.85% look for more pressure on the sector. Looking for support and the next opportunity as the fear evaporates and reality settles in. Erased the bounce off $50 and tested it again on Friday…
- IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Some buying? Some selling? Some consolidation. The bounce was positive and we added a position on the upside move… $28.55 entry. Stop break even $28.55. Stalled at the $29.50 level of resistance in a trading range the last nine weeks.
- XLP – Consumer Staples remain in an uptrend despite the dump lower on the week. Not pretty and it closed at support as one of the downside leaders for the week. Entry $54.80, Stop $57.25 (Stop Hit). Let it unfold and then we decide any action to take moving forward.
- XLI – Industrials moved higher and they accelerated to a flag pattern… which broke lower on Friday… watching how the week starts with our stops in place. The long-term uptrend remains in play. Stop at $77.50 (adjusted).
- XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. The cards have been dealt a straight with the climb higher as a result of the rise in crude oil. Entry $65.20 with a stop at $72 (Hit stop). Divergence in oil prices and stock prices again as the speculation in stocks overall is pushing them lower. Watch and see how it unfolds.
- XLV – Healthcare has been a big roller coaster ride with a promise to reform healthcare and then the failure to follow through. The test of support at $81 bounced and followed through on the break higher. Entry $83.85, Stop $87.75 (Stop Hit). The last week it moved lower as the sellers took control. Watching how it unfolds and the next opportunity in the sector.
- XLK – Technology breaks the flag pattern lower on Friday. The uptrend is still in play as we watch to see how this unfolds. Entry $48.50. Stop $65 (adjusted). Semiconductors (SOXX) created some angst last week with the selling below $181.60 support. Watching how the parts unfold near term.
- XLF – Financials remain in an uptrend as money flow remains positive in the sector. Moved above the $28.25 level adding upside and current trend. Entry $26.40, Stop $28.75. Interest rates benefit the sector on a move higher… but, too much and it will act as a negative for the stocks. Watch how this unfolds.
- XLY – Consumer Discretionary has been a key leader since the November move higher. Entry $83.50. Stop $104 (adjusted). For all the positives the sector has offered over the last three months it is now decision time for traders. Speculation on interest rates, dollar, and spending impact the sector.
- RWR – REITs reacting to the current uncertainty around the hike in interest rates. The longer-term view clearly shows the trading range and the move near the December 2016 lows as support. We added the position last December (entry $91) on the move off the lows and continue to babysit the dividend of 4%. This is a sector to watch relative to higher rates.
Finished the week with the S&P 500 and NASDAQ indexes forfeiting nearly 1/2 of the gains for the year. The market environment is volatile with speculation on many fronts impacting the near-term direction. Last week interest rates move to 2.85% was enough to ruffle some beliefs and the sellers took over. As a result, stops were hit, stops adjusted and views questioned. We have been taking some money off the table as it relates to specific positions and activity. We keep some invested and let it run, but hit stops on Friday for many of the remaining positions. Our mindset is one of risk management as we look for the next opportunity. Some rotation into safety and cash last week. The outlook is patience to let the next opportunity unfold along with the short-term trend. The sellers had the upper hand last week and now comes the decision point with a follow-through move. Eight sectors are trending higher, two trending lower, and one moving sideways… The moves last week put all of that in question and we will watch patiently for confirmation of bounce. We have to remain disciplined in our approach to investing our money. The goal is risk management as the story-lines continue to unfold.
(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)
Downside week for the market raises questions. Traders are driving the short term swings and opportunities with news as the catalyst along with a pinch of speculation. The week was filled with questions, speculation, and selling overall. Volume was above-average with the selling accelerating on Friday. The focus remains on the impact of the tax cuts, earnings, and interest rates. The speculation relative to the highs being to0 high to continue became a self-fulfilling prophecy. Our goal is to take the opportunities that meet our strategies and allow us to manage our money with the least amount of risk. Positive employment data Friday was lost in the speculation relative to interest rates. The market trades looking forward and evaluates based on past data. They ignored one piece of data in exchange for another that led to the selling. There are plenty of short-term trading speculation I have little interest in, but the long-term remains in an uptrend overall. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long-term.
ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly.
“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.