Selling returns as money seeks to find ‘safer’ ground

The selling returned from the opening bell until the closing bell. No intraday volatility… just slow methodical selling. The VIX moved back to the 14.3 level… and puts investors on notice. SPY moved back below the $209 support, Russell small cap (IWM) moved back below $121.25 and remains below the trendline, Semiconductors (SOXX) moved back below the $95.15 support on the day with $92.50 in sight, and the yield on the thirty-year bond rose to 2.9% up 37 basis points in two weeks. The NASDAQ 100 index is leading the markets lower, as you can see below, there are some holes in the dike that need to be plugged if we are going to sustain the uptrend. Tomorrow is another day and we will take each one… one day at a time.

NASDAQ 100 index revisits the 50 day moving average on Tuesday… now what? The following events are of interest going forward:

  • Baidu Inc. (BIDU) drops 4.3% and support at the $202.70 level. The money flow index has declined the last four weeks along with the relative strength index.
  • Trip Advisor (TRIP) drops below support at $80 as weakness in the leisure sector remains a trend to watch. The consumer is showing weakness on many fronts and that is an indicator pointing in the wrong direction for stocks.
  • American Airlines (AAL) support at the $47 level is giving way to the selling. This is would result in a break from a head and shoulder pattern and potential target of $38 if the downside accelerates on fear.
  • Semiconductors (SOXX) Testing support at $92.60 again. We have been here before and a break through support and the 200 day moving average allows for a downside target of $88.30. Not the sector we want to see leading the downside for the broader index.
  • Biotech (IBB) moved lower again and testing the downside support at $334. A break lower would be another negative for the broader index. Another leader that showing weakness and that is not a positive for the markets overall. Don’t assume anything… let this unfold and then establish the positions accordingly.
  • Damage was done… patience is key… let the downside validate direction… act according to the risk you can tolerate… one day at a time.

ISM services data showed a bump higher to 57.8% well ahead of expectations. This is yet another improvement in the economic data this week. It has been positive thus far, but earnings continue rain on the parade. How do we measure the this in terms of looking forward? For now it is not going to have a baring except on the Fed and how they perceive the growth of the economy and jobs relative to hiking interest rates. As noted, the ten-year bond yield now stands at 2.17%, and the price (value of the bonds) has declined approximately 2.5% over the last two weeks. That shows investors leaning towards the Fed hiking interest rates soon versus later. Watch the downside risk if you still hold bond for interest sensitive assets.

One interest sensitive asset class to watch outside of bonds is REITs (IYR). The sector has declined 10.9% since hitting the high on January 28th. Breaking support and moving below the 200 day moving average shows more selling could be on the way. Why the price decline? Some is attributed to profit taking. Another issue is interest rates. The ten-year bond was at 1.7% and REITs averaged 3%… spread seems reasonable in many ways. With the ten-year bond at 2.17% and rising that puts pressure on the price to raise the yield proportionate to the move in bonds. It is simple math and this will correct with time. What’s next for the sector? Opportunity as the yields stabilize and the selling is over done it will be time to add positions to our portfolio. As yields start to rise to 5-6% on the REITs and treasury bonds are at 2.5% money flow will find it’s way back to the sector… therein is the opportunity to watch.

Earnings as we have stated before remain a worry for investors. That said, the first quarter has moved to year-over-year growth versus the decline forecast. FactSet shows the positive number at 0.15% using estimates for those yet to report for the quarter. The interesting part is people are cheering that number! Utilities showed 4.9% growth versus a 5.8% decline forecast. Healthcare have grown 22.5% versus the 11.5% forecasts. Energy declined 57.5% versus the 64.5% estimates. That would lead you to believe all is well with the markets based on that result. I am going to go out on a limb and say that is not the case… at least if Tuesday way indication.

Focus, discipline, stops, and patience.