Small Caps continue to lead markets

OUTLOOK: June 6th

The markets continued higher on Tuesday with the small caps leading the upside move. Crude bounce along with gold off their current lows to help the upside. The S&P 500 index still lacks momentum and looking for some leadership from the index to help the upside cause. The doji candle on the close leaves some concern about the index following through on the upside. The drag is industrials and materials struggling with the tariffs. Throw in healthcare and financials lagging and you have the cause of the S&P lethargy… There is a bias towards growth stocks with the small caps, technology, semiconductors, etc. leading the move higher. If all the parts get in sync on the upside a move back to the February highs for the index would be easy. For now, we take what is given and manage the risk.

The S&P 500 index closed up 1.9 points at 2748 as the index the move above resistance from the trading range. Basic materials and telecom led the day with some modest move higher and still need to clear resistance. The downside came from utilities and consumer staples as both struggle to find buyers. Financials closed in the red as well with the sector barely holding above the 200 DMA. A look at the chart shows the break from the flag pattern on above-average volume. The move helps the cause to reestablish the upside trend with a move above the 2743 mark. The chart is holding the long-term trendlines off the January/February 2016 low. Patience is key.

The NASDAQ index cleared 7297 resistance level of resistance and has continued to push higher. The move above 7505 level (January highs) was positive and Tuesday established a new high. The close at 7637 erases all the downside from the last three months and puts the index in a positive uptrend. The index continues to show leadership in the sea of news driven stocks. The large caps (QQQ) were higher as well leading the upside and closing above the March highs as well and showing strength currently with the leadership of large caps. The SOXX showed some leadership breaking above the $187.03 resistance and continues to add to the upside move. The key remains to follow through on the move higher. Patience is required along with a strategic approach to managing money.

Small Cap index closed the day higher as the sector continues to show solid leadership overall. The index posted another new high. The leadership of this sector has been key to the bounce from the April lows with the move above the $160.50 double top as a clear sign of momentum from the sector. Entry $155. Stop $162.05 (adjusted). Managing positions as trades and letting the market determine if it becomes a long-term trend.

Gold (GLD) Modest bounce off the lows to keep the metal below the 200 DMA and holding the current levels of support. The downtrend is in play along with the short side trade. The gold miners (GDX) are equally volatile based on the metal and we are managing our position as the volatility plays out. Entry$21.92. Stop $21.92 (adjusted). Metals and Mining (XME) moved higher to clear the $37.40 level of resistance and holding for now. The sector is facing some resistance near term as the sector tests the move higher and the uptrend. Entry $37.50. Stop $36. Watching how this unfolds near term.

The dollar (UUP) bounced and cleared resistance at the $23.65 level and pushed back above the 200 DMA. Gapped higher on a move above $24.35, and cleared the November highs of $24.75 again on Friday. The overall move higher is a positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… history validates a strong dollar favors the US despite the short-term setbacks. Took the upside trade near term as the move above $23.75 was the entry point for UUP. Stop $24.25 (adjusted). EUO trade is working well also as the dollar climbs. $22.50 stop.

Crude oil (USO) Bounced off the current low but remains below the $66.28 level of support. Speculation drove the price higher, and speculation is a double edge sword as profit-taking plays into the move… throw in OPEC and Russia discussing increased production… i.e. supply becomes an issue to consider. The question is will they? The trade will be based on the believability and timeline for the implementation. This would help offset the estimated 1 million barrels a day that would disappear from Iran sanctions… that speculation has driven the price higher, and now we have opposite speculation to offset the losses… the jury is out for deliberation. Hit stops and took profit… added SCO at the $18.25 level, stop $17.80 (adjusted), as the opposite speculation takes over the driver’s seat.

Emerging Markets (EEM) dumped lower breaking the $45.50 support but managed to bounce and rallied back to $46.62 resistance… moved above it on Monday… tested the move on Tuesday and watching how this unfolds near term. Volume was lower on the move and watching how this unfolds with the sector still in a downtrend. With the dollar, tariffs, trade wars, and interest rates all playing into the volatility of the sector it isn’t promising. We will let the market speak and it continues to say lower in the current trend.

The Volatility Index (VIX) closed at 12.4 to match the lows in May as optimism plays into the current environment. We saw some anxiety over Italy, tariffs, and uncertainty… and then some hope about economic data. It remains a buyers market for now with little anxiety in the chart… Remember there is plenty on the stove that could boil over at any time… watching how this unfolds.

Money Rotation in full bloom currently and following the leadership is key. The week was news drive but managed to end the week on economic data offering some upside hope. The thoughts of Italy leaving the EU will hang over the markets… that storyline is not over. Tariffs remain a challenge and with the G7 summit, it will hit the headlines next week. But, the employment data shows what is still king for investors… economic data that supports the growth story. Semiconductors showed a slowing in money flow for the week but moved higher. Worth our attention in the coming week. Energy dumped lower on the decline in crude but managed to bounce despite the commodity closing below support to end the week. Yet another storyline to track. Treasury bonds rallied along with the interest sensitive stocks as rates fell back below 2.8%. Watching the bounce on Friday to 2.89% to close the week… positive economic data trumped bad geopolitics. The NASDAQ broke higher from consolidation patterns and S&P 500 index struggled to accomplish the same… next week we will look for a follow through to the upside trend reversal and how news influences the direction overall. 

Monday and Tuesday post a positive start to the week as indexes clear key resistance levels. The focus is follow through on good volume… patience and stops in place as the week unfolds. 

(The notes above are posted daily based on the activity of the previous days trading)

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

Biotech (IBB) remains a sector of speculation… The sector has taken on an emotional ride of ups and downs based on the current belief and market volatility. The worries over the President following through on campaign promises has been dogging the stocks. He announced the changes proposed to drug pricing, etc. and they were better than expected and pushed the sector off the current lows. We added a position on the move back above the $107 mark to complete the bottom reversal attempt. $107 entry. $104.50 stop. Nice follow through for the week to close at $109.84. Intraday struggles that bounced back from the lows of the day… watching how today unfolds. 

Semiconductors (SOXX) The sector tested the 200 DMA and bounced back above the $181.60 resistance and traded in a narrow range for two weeks… $181.60 vs $187.03. The solid close above the range on Friday was a positive and now we look for the follow through and leadership on the upside. We own a position… entry $173.50. Stop $184.50 (adjusted). Managing the risk of the current environment. Follow through on the break above resistance. 

Software (IGV) bounced off the near term low and test at $171.11 support. A nice move higher clearing the $179 resistance and tested at the highs of late. A move above the $185 level eclipses the March and May highs. Entry $176. Stop $181.89 (adjusted). Letting it run and managing the stop. Break to new highs. 

REITs (IYR) The sector made a break from the trading range clearing $76.22 only to reverse and test the move back to $75.21 support and bounce on interest rates declining back below the 3% mark. This week they rallied again as rates fell to 2.78% before closing at 2.89%. The volatility in yields in offering help to the sector. Watching how this up and down effect unfolds. Entry $75. Stop $75 (adjusted). 3.8% dividend. Clears the $78.30 level to continue the uptrend. 

Treasury Yield 10 Year Bond (TNX) moved back to 2.76% Tuesday and closed the week at 2.89%. The up and down in the yield is pushing bonds up and down (TLT). The rally in bonds offered some upside to bonds, REITs, utilities, and telecom for the week. Yields dumped lower on the rotation to the dollar. The EU news prompted a big rise in US treasuries. In turn, this pushed the dollar higher and financials lower. TLT offered a buy signal, but we did not add any positions… interesting time for bonds. Watching how this plays out at the 2.925% mark. Back above the 2.92% level as interest rates find their support and bounce back. The short side of bond in play? TMV $20.25 on the close entry. 

Energy stocks (XLE) The move above $74.50 on the upside to break from the flag pattern to eclipse the January highs was short lived as the downside pushed the sector back to support. The stops were hit and profit banked as OPEC and Russia discuss the increase in production to replace the Iran losses from the sanctions. You have to love speculation to trade crude or energy stocks as the news, hype, and speculation are a key part of the trends. In question now is the move higher even with the bounce off support. Watching with a downside focus if crude confirms the break of support. Crude moved lower… watching the reaction in the stocks. Without upside or a support level in crude the stocks will react sooner or later… 

Natural Gas (UNG) broke from the bottoming pattern after falling more than 19% off the January highs…the next opportunity in the commodity was presented and thus far has paid off. Entry $23.15. stop $23.30 (adjusted). Some upside optimism showing on the chart… I say it is more of follow the leader… watching how this unfolds in light of the decline in crude… adjusted our stops accordingly.  Back below the $23.76 mark and testing $23.33. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Daily Scan Results:

TUESDAY’s Scans 6/5: Mixed move on the day as the markets digest the upside break higher. No changes… leaders are leading and laggards are lagging. We up our stops on the upside moves and manage the short trades relative to the environment. It was more of day to manage positions, run scans, and look for the opportunities within the opportunity.

  • Biotech (IBB/LABU) upside holding the $98.60 level breakout. In position to run higher if the buyers remain engaged in the optimism towards the drug stocks.
  • Small Caps (IWM/TNA) solid move higher for the current leader. Adjust your stop to $81 level and let it run.
  • Retail (XRT) solid upside gain the last two days to confirm the break from the pennant pattern. Raise stop to $46.75.
  • Base Metals (DBB) running again as the tariff talks heat up with Mexico and others. Trading only in the sector as the speculation and news motives are extreme.
  • Coal (KOL) clears the $17.12 resistance and continues to the uptrend. Raise stop to $16.70.

Other moves to watch from Tuesday… SOCL, TQQQ, SKYY, HACK, FDN, KWEB, XLY all added to the cause on the upside… XLB in position to break above resistance… IHF in flag pattern… XPH in position to break through resistance.

MONDAY’s Scans 6/4: The solid move higher helps the broad indexes clear resistance. They need to hold the move and follow through. We continue to focus on the short term as the cloudy outlook of geopolitics and other issues remain. Take what the market gives with a defined strategy and risk management. I like the leadership of small caps, large-cap NASDAQ, and technology. We need the rest of the sector to play catch up or else the move will stall. One day at a time is all we can do for now.

  • Leaders break higher QQQ, IWM, XLK, SOXX all showing positive moves on the chart as our positions in each benefit and we adjust the stops accordingly.
  • Energy (XLE) remains a concern as crude (USO) continues to struggle. The short side trade (SCO) is playing out well. Looking at the downside in the stocks as the bounce shows signs of weakness… ERY at the $36 level will be of interest. The short side of gasoline (UGA) is playing out as well. $34.20 entry on short. Stop $35.10.
  • Emerging Markets (EEM/EDC) bounced off the lows and cleared $46.62 on the close. Worth watching for a trend reversal… there are many issues facing the sector, but worth our attention near term to see how it unfolds.
  • Treasury Bonds (TLT/TMV) interest rates back above the 2.9% mark and looking at the short side of the trade to unfold if yields continue the move higher. $20.25 entry on confirmation of the move.
  • Laggards continue to keep the move from accelerating higher. XLV, XLF, XLP, DIA, SPY. They cannot find that acceleration point as they continue to struggle with the upside momentum. They will move then stall… news is the challenge. Watching how they unfold going forward.

Other moves of note Monday: YINN, TQQQ, SOXL, XRT, URE, KWEB, SOCL, XLY, KOL, DBB. Scanning the markets are key to finding the leadership day-by-day as it develops.

Moves worthy of attention on Monday: IYT, TLT, USL, XBI, XLU, XLE, IEZ, EWC, DBA, TAN.

FRIDAY’s Scans 6/1: Rally on positive employment data helps the market rise. Like most investors, I like sound economic data as a catalyst for an upside move. Don’t get me wrong, this remains a news driven market with so many issues on the stove… Taking it for what it is as we add and subtract positions based on a defined strategy… right or wrong we stick to the discipline and let it all settle accordingly.

  • Semiconductors (SOXX/SOXL) solid upside to confirm the break above $162.70 resistance. Added a position last week at that level and managing our stop on the move higher. Raised to $160.20.
  • Technology (XLK/TECL) benefactor to semiconductors, but other sectors looking positive as well with IGV, SOCL, and FDN breaking higher. Taking the positions and managing the risk on the risk above resistance.
  • NASDAQ 100 (QQQ/TQQQ) benefactor to all the above as the large caps continue to drive the index higher. Cleared resistance at $55.55… added to our position and raised the stop to $53.55. MCHP, IDXX, AVGO, ALGN, and TSLA leading the index higher the last week.
  • Crude Oil (USO/SCO) added the short side trade on Friday with the move below support. The news about the increased production is weighing on the commodity near term. Entry $18.22, stop $17.50.
  • Biotech (XBI/LABU) nice follow through on the upside move after clearing resistance at $82.20. Raised stop to $94 and let this run for now. Target $110.

Other moves of interest from Friday: YINN, EDC, GREK, KWEB, SOCL, KOL, and FDN.

Taking it for what it is currently… news driving and economic data confirming. Discipline and patience are the keys to the current environment.

THURSDAY’s Scans 5/31: End of the month volatility? Tariffs? Geopolitics? Yes, I vote for them all. The lack of conviction allows the markets to be tossed around by the news and speculation. At the end of the day we remain in a consolidation phase after the bounce from the April lows and looking for some reason to continue the move… currently, there isn’t enough conviction on the upside to produce the move higher and the sellers are looking for a reason to take the market lower. Flip-a-coin and we will take what the market gives as the trend unfolds.

  • Natural Gas (UNG/UGAZ) upside leader on the day as the commodity breaks back above resistance at $63.64 offering another entry point to add to any positions. $60.25 was our original entry point, the stop is the same.
  •  Biotech (XBI/LABU) upside still in play with a solid move to resistance at $98.60. Stop remains at $90 and watching how this sector unfolds.
  • Crude Oil (USO/SCO) downside back in play? Watching the $18.25 entry level if the sellers take control of the near-term direction.
  • Financials (XLF/FAZ) the downside pressure is building with interest rates, geopolitics, and the dollar. Money flow is declining. Watching the downside trade opportunity. $11.35 entry.
  • Social Media (SOCL) nice break from the bottoming consolidation range. $35 entry if the upside can follow through on the initial move.

Other moves of interest Thursday: KWEB, VXX, XBI, KOL, FDN, XLU, MUB, and TIP.

WEDNESDAY’s Scans 5/30: The buyers return to create solid bounce back from the selling on Tuesday. The leaders showed positive moves in continuing to lead. The laggards regained roughly half of their losses on Tuesday… not a good thing, but they did bounce. Overall the markets pushed higher in the current trend with small caps hitting a new high. Back to the upside? Watching this yo-yo effect as everyone attempts to find a focus on what is working overall. Patience required along with a defined strategy for every position and sound risk management.

  • Small Caps (IWM/TNA) solid bounce off the test that ends in another new high. Cleared $81.42 on the day and keeps the trend higher from the February lows fully in place.
  • Energy (XLE/ERX) solid bounce after a five-day gap lower to test support. Now comes the challenge of following through on the move and settling into the news about supply increases. What impact will it really have on earnings and more importantly… will it really happen. One day at a time for the sector. IEO bounced back above the $73.37 mark.
  • Biotech (IBB/LABU) solid bounce on the day to confirm the move above $85.18 and continuation of the move from the May lows. Looking for some leadership to resume from the sector near term.
  • Financials (XLF/FAS) not a pretty picture on the chart as the sector struggles to find any sound footing. The challenges in weaker interest rates and the stronger dollar are weighing the sector. Plenty of work to do if the uptrend is going to resume anytime soon. Digging into the sector some stocks worth watching are CME, TROW, SIVB, PGR, and ETFC.
  • Mid-caps (MDY/MVV) joined the leadership of the small caps with a solid move above the Mach highs. Looking for more upside and confirmation of the move near term.

Bounce defines the day. Follow through defines the outlook. Uptrend near term remains in place. Volatility subsides on Italy. Crude bounces after five-day selling spree. Small caps and technology leading again. Financials and healthcare still lagging. Taking it one day at a time, and taking only what the market offers as we avoid speculation and anxiety driven decisions.

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Sector Rotation of S&P 500 Index:

One big change of note concerning sectors… The Global Industry Classification Standard is making a change to the Telecommunications Services Sector. It will become the Communications Services Sector which sounds minimal but could have a significant impact going forward. They are adding NFLX, DIS, CSMSA, FB, and GOOGL. The new structure will be enforced the end of September. This will make it more of a growth sector overall but could dampen some of the volatility the sector has experienced over the last two years.

  • XLB – Materials moved above the $58.44 resistance level again and back to the $60 resistance again… and again, they declined to build the current consolidation pattern for the sector. Watching $58.44 support and $60 resistance. Upside follows through needs to clear the $60 mark. 
  • XLU – Utilities have been under pressure from higher interest rates. They got relief as rates moved back below the 2.8% mark. The bounce in yields Friday hurt the move higher in utilities as they reversed within the current range. Letting this unfold for now. still reacting to interest rates and back to support at $49.50.
  • 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? Can’t make the move above the $27.65 resistance level. Indecision. 
  • XLP – Consumer Staples broke the February lows, March lows and is in the process of establishing the May lows. The downtrend remains in place, but the sector is attempting to find some upside momentum… watching. Indecision. 
  • XLI – Industrials made a move back above the 200 DMA and headed towards the $75.72 level of resistance. Watching for the next opportunity to unfold from here. Defense contractors are rebounding to help the sector.  
  • XLE – Energy broke lower as selling in the sector built from the announcement from OPEC and Russia to increase production levels in light of the Iran sanctions. Hit stops on positions and now watching how this unfolds near term. Small bounce on the week, but crude is still on the downside… no positions currently. Flirting with reversal on the crude news. Watching $75 level. 
  • XLV – Bounced off $79.50 support. Some follow through as the sector moved back to the $83.24 resistance holding… Needs to make the move through resistance. IHI and IHF leading the upside charge for the sector. Testing the $83.24 resistance on the chart. cleared the 83.24 on the close… watching. Needs catalyst to break upside. 
  • XLK – Technology broke higher from the flag pattern of consolidation to push to new highs on the week. Leadership in IGV, SOCL, HACK, and others. Entry $67. Stop $67 (adjusted).  Cleared to new highs on the close. 
  • XLF – the sector has become a hot potato with the interest rates, dollar, and geopolitics. KIE is still the weak link for the sector. Fell off the cliff with the news in the EU and the decline in rates impacting the sector. Bounced off support… still not great. More testing on the downside. 
  • XLY – Consumer Discretionary moved above the $105 resistance and followed through this week on positive earnings from the sector. Entry $102.50. Stop $103.50 (adjusted). Still in a positive uptrend from the April lows. Dig into the sector for trades as they underlying strength is better than the sector overall. Nice acceleration in the upside move. Taking on leadership role. 
  • RWR – REITs have been hampered by the uncertainty around the higher interest rates. Tested lower on interest rate moves above the 3% mark… testing higher on the move below the 2.8% mark. Watching and managing our risk in positions. Continues the move higher with test on Tuesday. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

The question remains about direction and volume despite the positive move higher in the NASDAQ to end the week. The lethargy continued this week as the indexes tested lower and then rallied on the jobs report. I will take the positive gains, but worries remain on many fronts and therein lies the challenge. There is a lack of conviction from either side as the volume remains below average and neither side seems to want control. The data shows five sectors moving higher and six moving lower for the week. The end result is lack of leadership outside of technology. The volatility introduced in technology, financials and healthcare is not a good sign as they account for more than 50% of the S&P 500 weighting. The index closed above the April highs barely holding on to the trend reversal. We need to follow through this week if the trend is to take root. The key is to focus on the strategy you want to take during the current market environment. News and speculation will drive the short-term while fundamentals drive the long term. Short term we are in a process of a bounce off support and a break above resistance. We need to follow through on higher volume if anything is to materialize on the upside. The goal remains money management, not market speculation…

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.