Sellers return move markets lower

Market Outlook for April 2nd

I kept thinking it was an April fool’s joke as I looked at my monitors to see the indexes down more than 4% on the day. It has been positive and the bottom established, right? As we have discussed the party isn’t over until there is clarity on the horizon. The data on the virus worsened and the President predicted pain for the next few weeks and the markets moved lower helping create some of the pain predicted. This remains a traders market driven by news and uncertainty. Thus, we have three choices: one, be long the markets, two, be short the markets, or three, be in cash. Whichever we choose we need to have a defined strategy. Follow the money it always knows. Watching to see if the selling was a test of the move off the lows or a retest is ahead for the indexes. Patience as it unfolds.

In the news: Coronavirus dominates the news and the emotions of everything currently… fear levels are rising as the number of cases rises. The unemployment rate is predicted to hit 35% over the next three months. That is a staggering number with the reality throwing the economy into a recession and some predicting a recession.

The Fed is becoming an interesting enigma in the markets with the recent QE efforts. They are allowed to buy securities that are federal government guarantees. They are now buying investment-grade corporate bonds and ETFs. By the way, those are not federal government guaranteed. March 31st they announced they are using the repo markets to offer US dollars in exchange for US Treasuries held abroad. It gets better as they now offer short-term loans to investors who want to liquidate their muni bond portfolios. Is the Fed nationalizing the markets? Is this appropriate for the Fed to do? Evidently it is, as they are taking the measure of stabilizing the markets into their own hands… how long will it last? What happens looking forward? Speculation at its best may be on the horizon.

It doesn’t make sense: I read some comments on the stimulus package and I agree with them… two that I find most interesting… 1) current stimulus is a goose egg. If you have a child 17 or older who is or was a dependent or in college on the prior tax return, they get nothing, the parents get nothing. All those college students whose parents are paying the cost of education. Nothing. If you were a dependent on the prior tax return but are now out of school or otherwise on your own with or without a job, you get nothing. 2) Moreover, small businesses seeking forgivable loans will not find the process as easy as Secretary Mnuchin outlined numerous occasions on TV. There will be red tape as certain criteria must be met, including good credit among others. Many small businesses do not have all the information readily available and will have to compile it. Even then they may not meet the credit requirements – the SBA is administering it and even though banks will be the arms for the SBA, the SBA is pretty much roundly hated by small businesses for its absurd requirements. The people there are bureaucrats and good luck working with them. Thus, the stimulus is not going to go where it was supposed to – surprise! Not really; it never does.

The S&P 500 index closed down 114.1 points to 2470. The index dropped 4.4% on the day as sellers return. I stated it was decision time for the buyers and Wednesday they folded their tents for now. Utilities, financials, and REITs led the downside as money rotates towards safety again. The news from the White House about the next thirty days settled in and investors move money… again. Economic data is awful at best… but that is expected.

The NASDAQ index closed down 339.5 points at 7360. The index posted a loss of 4.4% as we test the move off the lows. The NASDAQ 100 index (QQQ) has equally been a rollercoaster ride posted a 4.2% drop on the day. Semiconductors (SOXX) fell 1.9% with some consolidation at the current levels. Technology (XLK) was lower by 5.4%. The ups and downs have created a bottom with some testing in play currently.

Small-Cap Index (IWM) The sector has been lagging since the highs on January 16th… The negative turn off the January 18th high has struggled to find buyers. The bounce this week had some positives… watching how it unfolds. Still lagging the upside move. Need to clear $115. Tested lower on Wednesday.

Transports (IYT) The sector has the greatest exposure to a slowdown due to the virus. Airlines, container ships, trucking, etc. if the production slows transportation slows. Watching with the bottom in play. Stalled in the bounce as the economic data worsens. Moved below support at $132.42.

The Dollar (UUP) The dollar was up as the Fed and White House get involved in throwing everything at the markets… The dollar retreated this week as the realities settle in and the buck returns to a normal range. Held some support. Watching how the new Fed dollar for treasuries deal works relative to the dollar strength… longer-term it will make it weaker is my belief.

The Volatility Index (VIX) Anxiety spiked to 85. This week the index settled into trading near the 60ish mark. We closed the week at 65.5 with some selling on Friday. Still very elevated and showing the selling is not likely over. Moved below 54 and maybe some softening in anxiety? Closed at 57 without a spike higher on Wednesday… interesting.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector remains volatile and trying to establish a bottom. $145 resistance in play. Patience. Up 2.5% Monday and watching. Down 1% on Tuesday as stumbles at resistance. Fell 5.85 on Wednesday leading the downside.

Biotech (IBB) The sector established a bottom at the $95 mark and bounced. Hitting some resistance at $107. Stops at $104 (Stop Hit). Nice upside gain of 3.9% as it confirms the break above $107. Held on Tuesday… watching. Watching how it responds to the selling on Wednesday… acting like it wants to go higher.

Semiconductors (SOXX) The sector established a bottom at $175 and bounced. Stops at $195. Parts are worth digging into for short term trade opportunities. AMD, NVDA, MU. Consolidation at the current levels… need to break higher. Wednesday fell 5.4% to test the move from the lows.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $197.48. Scanning the parts shows some opportunities. Positive move on Monday and looking for upside leadership. Wednesday tested support at the $197.50 level.

REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. Watching to see how this unfolds near term. Established a low at $58ish. Bounce is in play. Watching as hits some resistance. Wednesday it moved lower to test the $65 support.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.74% down from .95% last week. TLT benefited on the upside. Watching as money is rotating back to bonds. Stop at $160. Yields down to 0.63% Wednesday… watching and adjusting stop on TLT.

Crude oil (USO) Crude moved to $21.51 this week as the battle with Russia and OPEC continues. Refineries are closing down production as a result. There are places where gasoline is selling below $1. Fell 6.6% on Monday with more speculation on Russia. Up 1.9% Tuesday… Flat on Wednesday… watch Thursday as Trump talked after-hours about a settlement between Russia and Saudi…

Gold (GLD) The metal bounced off the 200 DMA and established a bottom. The upside gap came from the weaker dollar this week. Down 3.1% on Tuesday as Fed makes move on the dollar/treasury swaps. Watching the bounce on Wednesday.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from August. Established a bottom at the $30.67 mark and bounced. Watching as this unfolds. Held bounce, but not much more. Testing lower on worries about global economies.

China (FXI/YANG) Downside accelerated on the coronavirus and has established a low near $34. Bounced and watching how it unfolds. Up 4% as the country attempts to reopen. Down 4% on worries… crazy place.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scans for April 1st: Sellers show up again to test the bounce off the recent lows. Are they here to stay? Not likely, but we have to move our money accordingly. SOXX, SRS, SDOW short trades hit entry and adjusted stops accordingly. Crude oil up after-hours on Trump comments. Treasury bonds up and adjusted stops. Traders market and making some trades based on our strategy near term. Watching how the markets open on Thursday and how they trade throughout the day. Sellers are stalking.

  • Banks (KRE/KBE) weakness returns as the data surrounding revenue and overnight reserves are hitting the stocks. FAS is one way to trade the downside in the financial sector.
  • Energy (XLE/ERY) downside returned Wednesday… watching how Trump comments on oil trade will play out.
  • Gold (GLD) bounced at support. Watching how it unfolds.
  • Bonds are struggling as debt default worries rise. HYG
  • REITs (IYR/SRS) downside in play as default risk rise from researchers. REM shows the downside risk currently.

TUESDAY’s Scans for March 31st: Some lates day selling puts the index on the downside for the day… what is coming with the new month, new data, new forecasts, and more speculation? Is the bounce over? What should we be doing now? Looking for the opportunities and tightening the stops on positions is my view. The markets are up more than 15% off the lows… this is not a long term market environment… it is a daily unfolding of what is next and we have to be focused on the near term (0-6 weeks), not even short term (3-6 months). There is no data to digest to look longer term! It is all news-driven and a traders market for now.

  • Semiconductors (SOXX/SOXS) sold on Tuesday and watching to see if the downside returns. $18.70 entry SOXS?
  • REITs (IYR/SRS) sold on Tuesday and watching to see if the downside resumes. $25.85 entry SRS?
  • Treasury Bonds (TLT/TMF) adjusted stop to $40.60 TMF. Move above $45.15 a positive for positions.
  • Dow Index (DIA/SDOW) if the selling resumes looking for short side trade in the Dow. SDOW entry $53.55.
  • Crude Oil (USO/UCO) question… if in 30-90 days we are past the virus worst-case scenario where is oil going? I agree… thus looking for the upside opportunities as they unfold moving forward… trading opportunities will come first.

MONDAY’s Scans for March 30th: Solid upside day for the markets to recover the Friday selloff. Software was up with MSFT rising 7%. Semiconductors are trying to break from the current consolidation with NVDA and LRCX leading. Transports trying to bounce JBHT and NSC showing some hope. Restaurants are sector to watch with WING, MCD, CMG leading. The later have issues relative to opening to customers versus just to-go menus. Watching how the day unfolds as we move forward.

  • Healthcare (XLV/CURE) solid upside leadership developing as the news reveals whos is leading with virus solutions.
  • Biotech (IBB) cleared resistance at $107 and raised the stop on the positions.
  • Volatility Index (VXX) declined on Monday. SVXY is still on my watch list as the anxiety levels decline.
  • Utilities (XLU) solid ‘V’ bottom move to resistance at $58. Watching how this unfolds. Adjusted stops.
  • NASDAQ 100 (QQQ/TQQQ) Held $45.16 level and moved higher. $44.20 stop in place and letting this unfold.

FRIDAY’s Scans for March 27th: Inside trading day for most indexes as they forfeit some of the gains from Thursday. The issues facing stocks relative to the accelerating number of virus cases in the United States is becoming a reality. The political wheels are in motion as the blame game begins. It’s always someone else’s fault for what is taking place… it can’t be an act of nature it has to come with rocks and sticks to be thrown at anyone nearby. Illness is a part of life and all we can do is respond in the best way we know-how. When there is an uncertain outcome the blame game begins. IF we knew what to do would we do it? I am not sure that is true either… at least that is what history teaches us.

  • Energy (XLE) the downside trade hit stops as the bottom was established… now watching how it unfolds with crude still showing weakness.
  • Semiconductors (SOXX) watching the parts as the bounce attempts to follow through. Volatility still very much in play.
  • Treasury Bonds (TLT) solid upside week for bonds. Watching how this rotation plays out near term.
  • High Yield Bonds (HYG) found some support near $68 bounced with stocks and watching how this unfolds.
  • Gold (GLD) jumped this week on the weaker dollar. Watching.

THURSDAY’s Scans for March 26th: The markets rallied nicely on the day, but there remains a sentiment that the downside isn’t over. The VIX remained at 60 showing anxiety levels remain elevated. Bond yields remain below 1% and some sectors are still lagging. That said, you take what the market offers and manage the risk associated with the environment.

  • REIT’s (IYR), Financials (XLF/KBE), Energy (XLE), Homebuilders (ITB) and others we have positions in moved up nicely on the day. Adjusted stops, took some gains to lessen risk exposure, and looking for the next leg… up or down.
  • VIX (VXX/SVXY) Closed at 61 and still elevated on the buying Thursday. VXX at $48.15 of interest.
  • S&P 500 Index (SPY) $255.50 level to hold. Added position in the index.
  • NASDAQ 100 Index (QQQ) $187.70 level to hold. Added position in the index.
  • Financials (XLF) $20.50 level to hold. Added position in the sector.

(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 looking for some signs of recovery.
  • XLU – Utilities looking for some signs of recovery.
  • IYZ – Telecom looking for some signs of recovery.
  • XLP – Consumer Staples looking for some signs of recovery.
  • XLI – Industrials looking for some signs of recovery.
  • XLE – Energy looking for some signs of recovery.
  • XLV – Healthcare looking for some signs of recovery.
  • XLK – Technology looking for some signs of recovery.
  • XLF – Financials looking for some signs of recovery.
  • XLY – Consumer Discretionary looking for some signs of recovery.
  • IYR – REITs looking for some signs of recovery.

Wednesday: downside move and test of the current bounce. Small caps, financials, semiconductors, and technology lead the downside move. Utilities and industrials were laggards as well. Plenty of worries in the markets to keep the volatility alive and well. We added some downside trades and looking at how Thursday unfolds.

Tuesday: selling in the afternoon on virus updates gives me a reason to adjust stops on positions and watch how the week unfolds. Energy posted a positive day as crude bounced off the lows. Healthcare holding up as more companies put out data on drugs and screening for the virus. Utilities and REITs lead the downside as money rotated towards bonds. Plenty of movement as money rotates yet again… validating a traders market.

Monday: solid upside from technology and healthcare to lead. We need financials to chip if this bounce is going to gain any real traction. REITs are recovering, but there is still plenty to worry about in the debt side of commercial markets. Watching as the week unfolds for defined leadership.

The trends are all askew with the last five week’s activity on the downside being so aggressive. We did establish some bottoms this week in the sectors and watching how that unfolds near term. Putting the six-month charts as an indicator for the short term view… Eleven sectors are in a downtrend with an established bottom currently. The result is SPY in a downtrend short term. We have to remain patient and let this all unfold. Remember the parts make up the whole look for the leadership.

(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: sellers emerge again to push the indexes lower. Watching how this unfolds… test or do the sellers return. Bonds are moving lower again, but the Fed is acting as a backstop for them. Mortgage REITs heading lower again. There are plenty of issues facing the markets and it remains a trader’s environment. President Trump stated Russian and Saudi can resolve their differences. Crude up after-hours and watching how that unfolds. The news is dominated by counting how many people have the virus… it is creating more uncertainty for individuals and markets… fear levels continue to rise.

TUESDAY: some selling on the day but it was orderly. Money flow is shifting again, but there is no clarity on why or where. Some bond buying on the day. Some Energy stocks were bought. Selling in utilities and REITs as money move towards safety. Gold stumbled on the new dollars for treasuries campaign from the Fed. White House announces the next two weeks will be painful… as if the last three have not been. Uncertainty is the word that keeps coming to mind. It breeds anxiety and speculation at its best. All conversations I have had the last three weeks have been focused on what is going to happen, what is happening, and how do we react? There are no clear answers because we have never been here before… uncharted territory and thus speculation.

MONDAY: Solid gains for the day. Buyers engaged in a logical format for the first time in a while. Logical leadership with healthcare and technology. The question is follow-through. This party is long from over and there are plenty turns ahead as this all unfolds. This remains a traders market and we are lucky to look out 7-10 days currently. The data being reported is effectively useless as it shows a dramatic drop in the economic picture. The question now is the end and recovery phase… when, where, who, what, etc. Trade bassed on strategy, not emotions.

Weekend Wrap & Outlook… The coronavirus remains center stage as the number of cases continues to rise and stocks end the week on a selling note to accent the uncertainty. The accelerated number of new cases in New York and other states is unsettling to investors. The worries are reflected in the VIX index remaining elevated and closing at 65 for the week. We continue to look for short term opportunities and remain willing to hold cash. Money flow saw money on move this week. All of the sectors had some buying. There is a bottoming pattern in place on the charts and that offers some hope. Congress passed a 2.3 trillion dollar aide bill that should provide some hope moving forward. All said the goal is to manage money not the markets or the pundits in the media. We need to focus on what is happening and not on what could happen. Let the future unfold and manage the risk that is. The data doesn’t matter currently, but it will when things stabilize relative to the anxiety levels. Track the data. Know where the markets stand relative to the facts. As emotions ease, you will find the new leaders. Gold gapped higher on the week as the dollar declined. Money is rotating to where it will be treated the best and many are believing that to be cash. Energy struggles as crude prices continue to decline on the production dispute with Russia and Saudi Arabia. High yield bonds and corporate bonds bounced finally this week as well. The Federal Reserve is buying them to stabilize the financial markets. Remember fear and speculation create opportunities. Proceed with caution and discipline. The key is to watch the trend, know which side the Fed is on (they told you a lot the last week), 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. 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.