Small-cap stocks take the lead

Another vaccine ready and the markets post a positive day in response. The small-cap stocks continue to show leadership in the recent move along with the cyclical sectors. Technology remains challenged by the current environment and remain sluggish. The disappointing news is the continued lockdowns across the US as businesses struggle to overcome the advancing issues of government to control the spread of the virus. The race for a vaccine remains the hope for a solution to most businesses. Pennsylvania has decided to ban alcohol sales in restaurants on Wednesday to avoid people being out before Thanksgiving. The hits keep coming… We will watch how it all unfolds as we remain with the theme of patience for now.

Short news notes of interest…

  • Yellen to return to Washington as Treasury Secretary for Biden… Wall Street liked the news. Why? Simply put, someone with policy experience in a time when the treasury will need some as the economy recovers from the virus.
  • Tesla stock is being added to the S&P 500 index and in the process has made Elon Musk the second richest man in the world. His net worth has exceeded $100 billion over the last year.
  • Crude oil moved to the highest levels since the downtrun closing at $43.15. Watching how the upside plays out near term. Upside trend in play currently.
  • The Trump administration begins transition to Biden. This will settle some nerves in Washington and hopefully financial markets.
  • Talk of the vaccines creating herd immunity are surfacing now that we have three potential vaccines to be released by the end of the year. The mindset is society will develop immunity and the mobility will return to normal along with economic growth. Estimates are for second quarter 2022 that all will stabilize and be normal again… long time away.

The S&P 500 index closed up 20 points to 3577. It was up 0.56% on the day. The index held 3550 support on the day as the index closed higher to start the week. Plenty of back and forth along with worries facing investors near term. The energy sector led the day with a 7% gain as crude moved higher on the vaccine news. Eight of the eleven sectors closed in positive territory as investors continue to weigh risk at current levels. The technology sector was the downside leader on the day. The VIX index closed at 22.67 as anxiety ticked lower on the day. Watching the momentum changes and how it proceeds.

The NASDAQ index closed up 25.6 points at 11,880. The index was up 0.22% on the day as the index held above the 10 DMA. Semiconductors have been the leader for the index term and held up well despite the move lower. Tech overall continues to show signs of fatigue near term. The NASDAQ 100 index (QQQ) was flat with no change for the day. The index remains in a well-defined trading range. Semiconductors (SOXX) closed up 1.42% for the day and closed at new highs. Technology (XLK) moved down 0.02% and holding above the $118 support. Watching how this unfolds as the market shifts gears again.

Small-Cap Index (IWM) The sector moved up 2.1% and held the gains for the week as it takes on a leadership role and continues the uptrend. Volatility in the sector remains a challenge as we added a position on the bounce from the $151 support. Continued leadership adding 1.8% on the day.

Transports (IYT) The sector tested support again at the $193.50 level. The continuation of the move from the support is in play along with the uptrend. Moved up 1.5% to start the week.

The Dollar (UUP) The dollar turned lower this week talk of stimulus sends the buck lower. Watching how it unfolds at support. Bounced on transition news for the White House.

The Volatility Index (VIX) Volatility is dropping against the backdrop of the vaccine announcement. A move below 21.6 would be of interest from my perspective and end the surge started in March. Closed at 23.7 on Friday. Closed at 22.6 on downtick related to buying.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector posted a solid 4.4% gain last week and moved sideways this week. Watching the current trend and managing the stops. Started the week on a positive note up 1.5%.

Retail (XRT) The retail bounced back from the test of support and is now at new highs. Posted solid gains on the week and held them into the close on Friday. Adjusted stops and letting it run. Positive on vaccine news gaining 3.7%.

Biotech (IBB) The sector remained in a trading range. XBI has broken to new highs as the large-cap biotech leads the way. Taking the opportunities that are offered in the large-cap stocks. Positive bounce on vaccine news.

Semiconductors (SOXX) The sector remains in an uptrend and broke higher on the week. The $303 level of support held and the bounce offered an opportunity to add positions. Managing the risk and letting this unfold. Leading the tech sector with a 1.4% gain.

Software (IGV) The sector sold after an attempt to break higher. It settled into the defined trading range and watching to see how it unfolds near term.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.82% down from 0.89% last week. Rates flirted with the 1% level as inflation slows again and stimulus talk started up again. Watching how it unfolds.

Crude oil (USO) Crude moved to $42.17 from $40.12 for the week or up 5.1%. Plenty of speculation to drive prices and watching how this unfolds. Looking for a break above resistance currently. Moved higher on the day and breaks from the trading range. Watching upside and letting it run.

Gold (GLD) The commodity remains in the trading range and on the bottom side of the range. Looking for a catalyst and a weaker dollar may provide the needed move. Breaks lower and reestablished the downtrend. Down 2% on Monday.

Emerging Markets (EEM) The sector turned lower, bounced, and broke to near term highs. Entry $44.50. Stop $46 (adjusted). China (FXI) was the leader on a break higher as well. and we adjusted our stop on those positions as well. Added to the uptrend.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENTT

MONDAY’s Scans for November 23rd: More rotation to small caps and what are being deemed recovery stocks. The cyclical rotation is in place as many are now looking longer term to the recovery of mobility globally. The herd immunity will take time to unfold, but the outlook is positive for the next 12-18 months. How we get there is what remains unclear and the markets are attempting to balance the outlook to near-term realities. Yellen being named Treasury Secretary gave hope of a stimulus package in January since she is familiar with the players. All were happy on Monday with the exception of Trump as he agreed to transition power to the new administration.

  • Energy (XLE) jumped 7% on the day as optimism surrounds the recovery of crude consumption. $38.50 next hurdle to jump. OIH jumped 9% on the news as well.
  • Financials (XLF) solid upside to add to the trend higher. Adjusting stops and letting this unfold. Banks are leading the upside move.
  • Goldminers (GDX/DUST) short side playing out well and raised our stop.
  • Retail (XRT) solid upside moves as the trend higher continue on the vaccine news.
  • Small Caps (IWM/TNA) upside leadership for the sector a positive as rotation continues to benefit the sector.

FRIDAY’s Scans for November 20th: Markets finished the week on the downside as investor worries rise about a stimulus, the virus, and the economy. There will always be something to worry about relative to stocks and with that in mind we keep our eye on the trend and our stops measured. Rumbling from analysts at markets being overvalued again. This is of interest as we head into a historically positive period for stocks. Taking it one day at a time with an eye on the risk factor. Below are the leaders and some interesting moves of late worthy of trades if they unfold.

  • Leaders on Friday: XBI, TLT, TAN, FXI, KWEB… worth watching into the new week of trading.
  • Leaders for the week: KOLD, DUST, PBW, IEZ, UCO… these have played out well for trading opportunities the last week. Stops in place.
  • Treasury Bonds (TLT) Yields fell on the week and the price of bonds rose in response. $38.60 level to clear on TMF.
  • Solar (TAN) Moved above the resistance on Friday and watching for a follow through to start the week. Clean energy (PBW) made move higher this week.
  • Energy (XLE) another flag pattern on the chart relative to the move from the lows in Ocotober. Letting this unfold as the parts are of interest as well.

THURSDAY’s Scans for November 19th: Markets respond to the rumors of a possible stimulus from Congress prior to year-end sparks some buying. Watching the ‘rumor’ as it unfolds as it has not been a topic to make it very far of late. The markets are still digesting the upside move on Monday without any real follow through the last three days. This put us in a cautious mood for now. Manage the risk and let the opportunities unfold.

  • Energy (XLE) continues an attempt to move higher as crude remains stuck at resistance. XOP, IEZ, OIH
  • Semiconductors (SOXX) remain in a solid uptrend and adjusted our stop on the day.
  • Clean Energy (PBW) solid run higher going vertical and adjusted our stop on the positions.
  • Retail (XRT) continues higher despite the slowdown in sales data for October. Managing the position.
  • China Consumer (CHIQ) consolidation near the highs. Adjusted our stop but watching how this moves near term.

WEDNESDAY’s Scans for November 18th: More testing for the broad markets and the uncertainty between the virus and the vaccine. It is a race to see which one will have the greater influence on markets. FANG stocks remain in a trading range (FNGU). Commodities continue upside move with DBA moving higher. Natural Gas (KOLD) continues to struggle. Our scans continue to find opportunities in global country ETFs and other sectors of note. Taking what is offered and managing the risk.

  • Long Term Corporate Bonds (IGLB) breaking higher from a four-month trading range.
  • Crude Oil (USO/UCO) top of the trading range? Ready for a move higher or retest of the move?
  • Natural Gas (KOLD) downside remains in play and watching for a break from the current trading range. Solid follow-through upside on the short trade Thursday!
  • Semiconductors (SOXX) at the top of the trendline and holding up despite some selling.
  • Alerian MLP (AMLP) uptrend in play as the ETF confirms the move above resistance at $23. Next challenge the 200 DMA.

TUESDAY’s Scans for November 17th: Markets take a pause in the move higher and watching how this unfolds in response to the vaccine and the war on the virus. The new administration elect is chomping at the bit to be in control of this situation and close the necessary practices to keep the virus from spreading. Closure didn’t work globally last time how is going to change this time? Caution, precautions, and common sense will have to prevail not government mandates. Some honest education would be nice as well versus telling and nine different opinions. This is going to be a big cloud to deal with going forward. Watching how it unfolds and protection the downside risk if the terms are too harsh.

  • Energy (XLE) added to the upside following through on the optimism.
  • Brazil (EWZ/BRZU) showing strong upside reversal. Cleared $86.40 resistance and positive move upside.
  • Clean Energy (PBW) back to the uptrend and climbing on the election results… stops are a must.
  • Mortgage REIT (MORT) running following the break from consolidation.
  • Large Cap Biotech (XBI) solid trend higher from the September lows.

(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 break to a new high as clears the highs of the trading range. Gap and fade for the sector and watching the outcome.
  • XLU – Utilities struggled all week falling 4.8% and hitting our stop. Watching support and looking for any opportunities.
  • IYZ – Telecom moved to resistance at the $29.67 level and tested. Watching how this unfolds with our stop at $29.
  • XLP – Consumer Staples double bottom and break higher. Offered upside trade opportunities and watching as the sector test the breakout.
  • XLI – Industrials gapped higher on breakout and continuation of the uptrend. Watching.
  • XLE – Energy gapped higher on speculation of growth relative to the vaccine. Move to 200 DMA and found resistance. Jumped higher on move in crude and recovery hopes on the horizon. Stop $36.
  • XLV – Healthcare broke higher from the trading range offering an entry point for the sector. Tested the move and watching how it unfolds.
  • XLK – Technology is in a trading range and looking for upside momentum. Semiconductors broke higher and leading the sector. Semiconductors leading up 1.5% and new highs.
  • XLF – Financials gapped higher and getting support news from interest rates, dollar, and economic outlook. Watching the near term outcome. Solid move upside as recovery hopes on vaccines fuel stocks.
  • XLY – Consumer Discretionary bounced back to the previous highs as the consumer continues to show strength. Holding in the trading range for now.
  • IYR – REITs have struggled with interest rates, vacancies, and virus talk about people moving out of cities. Tested support at $76.22 and bounced to the top of the with a break above $84.45… testing currently.

The trends are shifting again based on investor activity. We saw sectors bounce off key support levels and followed through to resume some uptrends and stall others. Proceed with caution. Using the six-month charts as an indicator for the short term view… Six sectors are in confirmed uptrends as two breaks higher. Five are in consolidation patterns showing indecision from investors, and none are in a downtrend. The result for SPY is in a move to a sideways trend short term with an upside 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:

Monday: Hope springs eternal as the new administration gets approval from Trump to start the transition. Yellen appointment offers hope for a new stimulus package. Vaccines offering renewed hope of an end to the virus and a return to ‘normal’. Shutdowns still in action as states attempt to exert control over movement. The reality is becoming clearer and the time horizon is starting to become clearer over the next 12-18 months. There are so many variables in play and some many moving parts, but hope springs eternal.

Weekend Wrap & Outlook… The markets gapped higher to start the week but found a way to give up the gains with the S&P 500 closing in negative territory. The virus is taking center stage with the rise in cases and fear rising of more shutdowns. Thus far the shifts have been towards trying to control gatherings more than shutting down businesses. We will want to see how that unfolds moving forward. The economic data remains on the positive side as we continue to see improvement in the numbers. The talk on Friday centered on stimulus and the Treasury returning the $455 billion of unused aid for the Federal Reserve. That started the negative talk, but the move was not really negative as much as prudent to put the money where it can help most… small businesses. There is plenty to like, but there is also plenty of uncertainty surrounding the outlook for the markets as well. The virus spike in cases is an issue that is raising concerns. This fear factor is one thing that can disrupt the short term if it becomes believable enough. The long-term trends remain and the near-term bounce is positive as some sectors resume uptrends and indexes are pushing back to the previous highs and some setting new highs. How all of this plays out will be of keen interest to investors and traders alike. There were discussions again about the stimulus package, but it resulted in the same issue… not enough money according to Pelosi. Technology stocks led the volatility as the sector closed lower on the week. Semiconductors bounced and closed at new highs for the week. The retail sector bounced back despite the disappointing sales data for October. The VIX index moved to 23.7 after a week of ups and downs for the index. The dollar moved back to support and down as stimulus talk was in the headlines. The S&P 500 was down 0.7% for the week and six of the eleven sectors posting losses for the week as early gains from Monday fell off. The market is looking for leadership currently and small caps rose to the top again this week. Energy showed positive signs as crude continues to move higher. It is at the top of the range currently and looking for a catalyst to break higher. Watching the current movement in the broad markets as money continues to rotate 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.