Some consolidation for the markets

There wasn’t much to cheer about, but there was plenty to watch. The major indices closed near where they started the day. Energy gained 1.2% after giving up 3% on Wednesday… REITs lost 1.2% adding to the downside from Wednesday. The Volatility Index fell to support again as investors spent the day contemplating the future. Economic data was mixed as jobless claims climbed 1.5 million versus the 1.35 million expected. The bounce in economic activity continued as seen in the Philly Fed Index turning positive after being negative the last two months. Investors are looking for signs of hope on the horizon, but the data remains mixed and thus a consolidation day is just what the doctor ordered. Options expiration on Friday and watching what juggling is done looking forward.

In The News:

Short news notes of interest… 1) Jobless claims jumped 1.5 million for the week and the continuing claims decreased by a mear 62,000 to 20.54 million. The fact that claims are still running well above the million mark is concerning for the economic outlook. 2) LEI (Leading Economic Indicator) increased to 2.8% in May from a -6.1% in April. That was the first increase since January. Initial rebound is positive… it is about sustainability going forward. 3) Philly Fed Index for June unexpectedly jumped to 27.5 from -43.1 in May. More positives from the initial reopening of the economy. 4) Coronavirus worldwide topped 8.6 million cases. The numbers are still out there to raise concerns from investors. 5) Software (IGV) continues to be one of the leading sectors in the recovery from the March lows.

ABM Industries stock jumped 19.9% on Thursday… their earnings report was impressive as the stock got lost in the pandemic bounce. They are a major provider of janitorial services… thus, a pandemic benefactor. They provide whatever maintenance a business might need and thus… they are doing well in the current environment.

Carnival posts larger-than-expected earnings… the ups and downs for the sector have been obvious, but the worse than expected losses don’t help investors feel good about the dive in revenue. They were down 85%… that is similar to many of the restaurant and airline stocks. Not sure why there was a surprise in the revenue number… they are not even returning to sailing ships until September. Another case of stocks being ahead of themselves on the rebound. Another reason why you have to have a strategy for every holding in your portfolio. Risk management versus greed.

Roth IRA conversions… most people fail to understand the value of a Roth IRA or use one in their portfolio. The key advantage for individuals is the tax-free withdrawal from the account in retirement… Yes, tax-free… that means the income from the account doesn’t count against your social security income being taxable. It also means more spendable income without a tax bite. With the correction earlier in the year capital loss harvesting allowed you to offset withdrawals from your traditional IRA that could be converted to a Roth IRA. There are opportunities if you will take the time to do some homework.

The S&P 500 index closed up 1.8 points to 3115. It was up 0.06% on the day as the index struggles to move higher. The worries about the coronavirus surge and stock valuations kept a lid on the markets again on Thursday. Six of the eleven sectors closed in positive territory on the day with the energy sector leading the upside gaining 1.2%. REITs led the downside losing 1.2% to balance out the index. The VIX index moved to 32.9 holding above key support and showing anxiety still in markets. The rise in investors’ anxiety is on our watch list. Plenty to ponder as we end the week on expiration Friday.

The NASDAQ index closed up 32.5 points at 9943. The index closed up 0.3% for the day. The index gave up the new all-time new highs in grand fashion last week but has bounced back the last five days. The leadership from the technology stocks helped the move higher. The NASDAQ 100 index (QQQ) was up 0.3% and watching the reversal top on the chart. The $233.41 level is the stop as we now watch how this unfolds. Semiconductors (SOXX) closed down 0.2% holding support at the $255 level and bouncing. Technology (XLK) was down 0.4% holding key support on the bounce. Watching how this plays moving forward.

Small-Cap Index (IWM) The sector had posted solid gains and had taken on a leadership role only to fall 9.6% for the week. Watching support at the $132.55 level. The uptrend remains in play despite the selling… watching how the new week unfolds. TNA or TZA? Solid 2% gain on Monday… held support at the $132.55 mark. Added 2.4% on Tuesday to recover some of the losses from last week. Wednesday fell 1.8% as the uncertainty remains in the sector.

Transports (IYT) The sector jumped 16.6% on optimism and rotation. The sector fell 9.6% the last four days… Fast money moving and watching how this unfolds relative to the trend. Held support and bounced from last week… watching.

The Dollar (UUP) The dollar broke lower from the consolidation pattern and was in a downtrend short term. Some challenges in the markets pushed the money back towards the dollar on fear. Watching the bounce and the outlook near term. Down on Fed action. Small recovery on the week.

The Volatility Index (VIX) Anxiety spiked to 40.7 after testing the 24 level earlier in the week. Investors were willing to take some profit as they weighted the impact of another wave of coronavirus. Watching how the new week unfolds. Held 32.34 support closed at 32.9 and watching how the mixed anxiety unfolds for investors.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector has posted solid gains and has taken on a leadership role in the last three weeks. That change some as the selling on Thursday tested the move higher. Watching how we start the week. Gained 1.1% on Monday. Added 2.1% on Tuesday as the sector tries to recover. Fell 1.4% on uncertainty in the sector.

Biotech (IBB) The sector has been in a consolidation pattern that broke lower on Thursday but held the 200 DMA as support. Watching for some answers overall as the momentum has stalled. Gained 1.9% on Monday. Added 1.4% on Tuesday moving higher in the range. Small advance on Thursday as it remains in the trading range.

Semiconductors (SOXX) The sector tested the $255 support and held. The uptrend is still in place and the anxiety level a little higher… The money flow is flat. Taking what is offered and raising our stop to $255. Key sector if the indexes are to move higher… up 1.1% on Monday. Added 1.9% on Tuesday and moving back near the previous highs. Holding near the highs.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $257.50 (adjusted). Entry $205.10. Some testing with the markets moving lower, but the trend remains positive. Positive move on Monday. Moved back to the previous highs on Tuesday with a 1.7% gain. New highs with 1.4% gain on Thursday.

REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. The Federal Reserve has stepped in to stem the downside. The run to the 200 DMA was positive, but the reversal to support at $78.83 has us watching the recent trend. Stops in place. Holding support and positive close Monday. Added 1.9% on Tuesday with a positive move. Wednesday moved down 1.4% on the inside day. Down 1% on Thursday and remains in a consolidation pattern.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.69% down from 0.90% last week. TLT broke higher hitting our stop on the short side trade… we did lock in a reasonable gain, but now we refocus on the current activity. Bonds are still in a downtrend from the April highs. Yields moved lower back to 0.69% and watching.

Crude oil (USO) Crude moved to a high of $39.55 with some selling for the week it closed at $36.26. The data is showing a reduction in production and consumption is rising again… right? Not exactly the US showed a build in supply again as the data is lagging the cuts. That along with coronavirus talks send crude lower on the week. I like the long-term holding with entry at $13.81 and a two-year target of $45. Trading opportunities as well in the commodity. Added a position in UGA as well at $17.40. Stop $17.40 (adjusted). Up 2% on Monday… positive day. Added 3.3% on Tuesday with positive economic data helping the upside. Up 2.2% on Thursday at top of the current range.

Gold (GLD) The metal tested lower to $158.94 support and broke lower for a day… we were looking for a bounce and trade opportunity in the trading range and it unfolded early in the week. Bounced at support… added at $158.90. Stop at $158.90. Struggling on the Fed intervention.

Emerging Markets (EEM) Broke from the trading range and above the April highs. Positive money flow as the optimism rises for the global economies as everything attempts to reopen. Tested on the week, but watching how it unfolds. Struggling but holding support.

China (FXI/YANG) Moving higher on the recovery phase starting for the global economies. Despite all the banter with the US/China trade, the country ETF is making moves higher with some testing on the week. Erased the break higher and holding in the previous range.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for June 18th: There were plenty of challenges for the trading day, but the markets managed to close flat overall. There were sectors bouncing back like energy and those testing the range like REITs. We will take it as digestion day as investors were content to watch and learn more data. Friday is options expiration and could cause some jockeying for positions, but looking for an uneventful conclusion to the week.

  • Software (IGV) closed at new highs as the sector remains one of the leaders overall.
  • Gasoline (UGA) closed up 3.4% and breaks from the consolidation at the highs the last two weeks.
  • Biotech (IBB) moved back to the previous highs within the current trading range.
  • Social Media (SOCL) climbed to new highs helping the leading technology sector.
  • Base Metals (DBB) are attempting to break from the consolidation pattern near the highs.

WEDNESDAY’s Scans for June 17th: It was a lackluster day for stocks as they spent most of the day pondering events, data, and hope for stronger economics. The positive news on Tuesday left investors with little to do on Wednesday but think about all they know… and more of what they don’t know. Letting this run it’s course and following the money. There will always be opportunities on the horizon.

  • Energy (XLE) continues to struggle to move higher but keeping the uptrend alive for now. USO and UGA holding well.
  • Financials (XLF) still not showing signs of an upside run… credit markets remain a big worry for the sector.
  • China Internet (KWEB) positive trend higher despite the struggles in the China ETF FXI.
  • Technology (XLK) remains a leader as the parts continue to move higher. SOCL closed at new highs. HACK, WEBL, IGV all look good.
  • Online Retail (IBUY) showing solid move to previous highs.

TUESDAY’s Scan for June 16th: Positive economic helps lift stocks from the selling last week. The initial jump from the lows in April and May is giving hope to investors. The challenge as put by Mr. Powell in his testimony to the Senate Banking Committee yesterday, it is a long road to recovery. The initial data is positive, but there is a lot that will have to be overcome during the next six months or longer. Taking the good for now and managing the risk that is based on our strategy.

  • Retail (XRT) solid bounce off the support levels and looking positive for the near term.
  • Small Caps (IWM) recovered about half of the losses from last week… watching how the risk-on trade unfolds.
  • Banks (KRE/KBE) held support and bounced on the talk from Mr. Powell to the Senate… but not enough confidence to surge. Watching how the sector unfolds.
  • Transports (IYT) key sector to watch on the upside… goods and services impact the sector… if the economy is recovering the sector will need to show solid signs of improvement.
  • Healthcare (XLV) bounced on the news relative to UK positives on drugs impacting the severely ill patients. Watching the drug sector (IHE) as well.

MONDAY’s Scans for June 15th: Negative start to the day reversed as the Fed offered more liquidity. Plenty of stimulus to keep the markets happy and for now, you don’t want to bet against a market backed by the Fed. China, Florida, and Texas see spikes in Covid-19 cases… that stimulated fear about further shutdowns around the world. The news is keeping the markets interesting and we will remain diligent in managing our risk.

  • Financials (XLF) get a boost from the Fed comments… moved higher on the day and holding above the $23.50 support levels.
  • REITs (IYR) bounce back… thanks to the Fed.
  • Energy (XLE) flat on the day, but crude oil (USO) and gasoline (UGA) headed higher.
  • Homebuilders (ITB/NAIL) solid bounce at support. Positive data in the sector as housing remains positive.
  • Natural Gas (UNG/DGAZ) downside accelerates… adjusted stop on the downside trade.

FRIDAY’s Scans for June 12th: there was some fighting about direction on Friday as some buyers showed early and then some sellers also showed up selling into the rallies. This shows profit-taking and a tug-o-war about direction near term. This is something to watching as we move forward to see if the buy on the dip money is stronger than the sell into strength money? Overall trends are still positive and sentiment bent on the week but it still shows overall positive. One day at a time.

  • Treasury Bonds (TLT) watching the money flow… does fear creep back into the markets near term to push stocks lower? Yields fell 21 basis points this week showing rotation to safety.
  • Cyclicals (XLF, XLI, XLE) does money continue to rotate away from these stocks?
  • NASDAQ 100 (QQQ) vs NASDAQ composite… do the large caps resume leadership role? They have been the key to the rally off the March lows. Watching the money and rotation.
  • Natura Gas (UNG/DGAZ) the sellers continue to control the direction and the break higher in the short ETF doesn’t bode well for the direction changing near term. Adjusted stop on the position.
  • Trendlines are intact… watching how this plays out near term. The uptrend accelerated moving 10-30% above the trend… that generally spells trouble technically. Most of that corrected on Thursday… the trends held on Friday and now we look how this unfolds. Patience is the key for now.

(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 solid break above the $45.87 resistance offering upside trade opportunity. Cleared $54.15 resistance and moved higher. Hit the stop, locked in gain, held support at $54.15… watching. Positive reversal and watching.
  • XLU – Utilities reversed the downtrend and heading higher. Tested back to the 200 DMA and watching how the sideways trend unfolds.
  • IYZ – Telecom moved to the April highs and follows through to $29.50 resistance. Back to $27.63 support.
  • XLP – Consumer Staples offered short term trading opportunities as it trades in a range. Support at $57.20 level. Stop $56. $60.45 level to clear to continue the upside. Back to the 200 DMA. Positive reversal and watching.
  • XLI – Industrials broke higher from the consolidation pattern. Tested support at the $67.50 mark. Helped by infrastructure bill proposed.
  • XLE – Energy moved above the $31.20 entry-level as the bottom was established. The uptrend remains in play with a gap higher was given back on the week and test the $38.80 support. Playing catch up to crude prices. Natural gas spiked lower and adjusted stop on DGAZ trade.
  • XLV – Healthcare moved above $88.50 level and offered upside opportunity. Letting it play out and adjusted our stops. Stuck in the trading range as money flow declines and attempted to break lower. Positive upside on UK positives on drug use for Covid-19.
  • XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently and broke higher from the topping pattern and adjusting the stop. Getting needed leadership from the sector… watching.
  • XLF – Financials broke higher showing some solid upside momentum the last two weeks. That ended on Thursday selling back to support at the $23.50 level… watching. Bounced with the Fed news. Banks higher on Fed talks to Senate… Watching.
  • XLY – Consumer Discretionary broke from the trading range and established a solid uptrend. Approaching the February highs and stalled. Watching the outcome. Retail sales data is helping the sector.
  • IYR – REITs broke lower below $71.30 support and bounced… Solid upside the last two weeks as the laggard gains momentum. Moved back o support at the $78.83 mark. Nice bounce… consolidation… watching.

The trends are resumed on the upside breaking from consolidation patterns only to reverse this week. Watching how this unfolds moving forward as there was a rotation chasing returns currently. We took entries based on our defined strategies and managing the risk accordingly. Using the six-month charts as an indicator for the short term view… Eight sectors are in confirmed uptrends. Three are consolidation patterns, and none are in downtrends. The result for SPY is in an uptrend short term with a selling bias to end the week. The leadership is seeing some rotation as questions get answers on the charts.

(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:

Thursday: It was a day for positions to jockey heading into expiration Friday. Some buying some selling as the sectors were pretty much split on the up and downside for the day. The news was quite. Economic data showing the initial bounce off the April lows. Overall not a bad day. Watching how this unfolds and managing our risk accordingly.

Wednesday: Mixed day for stocks as they jockey for position. No big changes as the economic data show a positive rebound and the Fed remains engaged in liquidity measures. Washington continues to be one big political football, and the real challenges remain stock prices… too much too soon? Watching and managing the risk that exists.

Tuesday: Positive data points on the day with retail and other economic data showing a solid bounce off the April and May lows. The initial bounce is always the most positive… there is plenty of challenges ahead for the economy as projections of job recovery remain slow. The bounce back from the selling last week is a plus… but, I remain cautious currently. Stops are adjusted and taking what the market offers.

Monday: Positive intraday reversal as the indexes started lower, but the Fed comments offered hope and buyers stepped in to turn the indexes back to the upside. The NY Empire Manufacturing report was much better along with credit card spending… the consumer is alive and coming out of their house or at least spending from their house. There are some positives overall… the challenge comes from the fact they are all government back with unemployment and Fed stimulus… If it stops it will be like a game of musical chairs as everyone scrambles to find a seat.

Weekend Wrap & Outlook… The coronavirus to the headlines with the second wave theory being expressed by the CDC. That caused an adjustment in momentum on Thursday. China-US trade tensions and Hong Kong are still in headlines, but the outlook for the economy became a concern if the virus returns in the fall. The NASDAQ’s push to a new high failed after one day and tested to support. How will this all unfold going forward? There are so many questions left unanswered for the simple reason it will take time to know… thus, investors are focused on putting money to work on the fear of missing out (FOMO) versus the risk that is present in the markets currently. The move higher only validates my first rule of investing… never fight the Fed. They have been fully engaged in the recovery process from the beginning putting liquidity into the financial system, buying debt, and providing stimulus. The Covid-19 battles remain 100% political issues more than the virus itself. The drama being played out in Washington is nothing short of amazing. There is no lack of question marks for the markets moving forward as money rotated again this week. We are not through the worst of it as the reopening process is slowly progressing and the rise in the number of reported cases is weighing on the markets. The VIX index jumped to 40.7 on the selling Thursday… this is something to watch going forward. We continue to see short term opportunities and put some money to work over the last few weeks as money rotates. Our job remains to manage the risk accordingly. The rotation is showing up on the charts the last two weeks with fast money looking for opportunities. All the sector posted a loss for the week with technology holding its own and energy and financials leading the downside move. Gold bounce offering a trade opportunity as it remains in a trading range. Crude oil posted some selling as the US data showed some build in supply. The focus is starting to turn to the future outlook for growth and how long it will take to see a recovery. Many analysts are now saying the fourth quarter… I say that is a bit optimistic. 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. Remember fear and speculation create opportunities. Watch the trend, know which side the Fed is on (they keep telling you almost 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. 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.