Stimulus challenges and virus increase keeps markets in check

The markets give back the gains from Monday as the uncertainty remains in the broad indexes. The NASDAQ gained 1.6% on Monday and fell 1.3% on Tuesday… We can assign many reasons for the decline, but the bottom line is the markets are facing plenty of issues… not the least of which is the current negotiations of more stimulus from Congress. Then there are the ongoing issues of Covid as cases rise again. Thursday is lottery day with AAPL, FB, AMZN, and GOOG announcing their Q2 results. Wednesday they all head to Washington to tell Congress why they shouldn’t be monopolies. Definitely will make for an interesting end to the week. FOMC meeting today as well to add to the excitement for all. Take what is there, manage your risk, and keep looking forward.

In The News:

Short news notes of interest… 1) Congress rejected the Senate version of the relief bill and now the fun begins over negotiating what is wanted… Money is the answer. 2) Consumer confidence declined to 92.6 from the 98.3 reading in June. The pause in reopening, the coronavirus surge, and unemployment remain in the way of the consumer. 3) Analysts are expecting refiners to post the worst earnings results in a decade for quarter two. 4) AMD surged after-hours on positive earnings result jumping more than 10% on the news. 5) Homeownership has jumped t the highest level since 2008. Lower interest rates are helping, but the true reasons behind the moves could be the work from home movement accelerated by the coronavirus.

The S&P 500 index closed down 20.9 points to 3218. It was down 0.65% on the day as the index gave back Monday’s gains. The index continues to try and hold the first level of support at 3214. The stimulus package remains the top headline as many look for more assistance. Three of the eleven sectors closed in positive territory… showing some weakness on the day. REITs were the leader of the day. Basic materials and energy were the weakest sectors on the downside. The VIX index moved to 25.4 as anxiety stepped up in the index. Watching how the data points all add up looking forward.

The NASDAQ index closed down 134.1 points at 10,402. The index closed down 1.27% for the day. The overall movement on the day was lackluster as the technology sector came under pressure again from sellers. Technology and large-cap stocks were lower on the day after attempting to bounce on Monday. The NASDAQ 100 index (QQQ) was down 1.27% for the day and as the mega caps moved lower leading the downside. The topping pattern broke higher on the chart but failed to hold the move testing the 30 DMA. The $255 level is the stop as we adjust and watch how this unfolds. Semiconductors (SOXX) closed down 1.95% for the day testing the 20 DMA. Technology (XLK) was down 1.2% for the day and testing the 30 DMA. Watching how this unfolds moving forward as some believe the top is in…

Small-Cap Index (IWM) The sector broke from the consolidation pattern with $144.65 resistance the level to clear. The sector attempted to climb higher this week but failed to hold the move. Looking for upside follow through.

Transports (IYT) The sector moved above the $167.50 resistance as airlines and trucking helped the move. June high is the next level to watch. Entry $167. Stop $171.62. Tested all week as news continues to disrupt the current trend.

The Dollar (UUP) The dollar broke lower from a consolidation pattern and has moved into a trek lower. The EU stimulus package news didn’t help. There is a concern about the dollar moving into a free-fall. Watching. Bounced from the gap lower on Monday.

The Volatility Index (VIX) Showed up to end the week and the index settled at the 25.8 mark and essentially unchanged on the week. Watching for clarity here as investor emotions are not rattled… yet.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector remains challenged as growth stocks still not in favor, but it did manage to break from the consolidation pattern. Needs to follow through to the June highs.

Biotech (IBB) The sector broke higher from the consolidation pattern and hit a new highs only to reverse and test the 50 DMA. We hit our stop on the position and watching how it unfolds from here. Entry $128.50. Stop $139.90 (Hit Stop). Bounce attempt on Monday… gave it back on Tuesday.

Semiconductors (SOXX) The sector remains in an uptrend but challenged by some volatility of late as money rotates. Money flow remains in a downtrend. Taking what is offered and managing the risk. $272 stop. Bounced Monday… gave it up on Tuesday.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $280 (adjusted). Entry $205.10. Some testing with the markets moving higher and challenging support.

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 current pattern shows consolidation with a downside bias… watching how it unfolds. Bounced higher from the consolidation pattern…

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.58% down slightly from 0.62% last week. TLT has been a benefactor of the fear trade emerging again. Bonds made a key move higher and watching as they consolidate. Entry $161. Stop $163.55 (adjusted).

Crude oil (USO) Crude moved to $41.34 on the week holding steady near the highs. The data is showing a reduction in production based on the cuts from OPEC+. The EIA raised the forecast for the consumption of the balance of 2020 helping the commodity. I continue to like the long-term outlook with entry at $13.81 and a two-year target of $45. In addition, there are trading opportunities in and around the commodity. UGA.

Gold (GLD) The metal tested lower to $158.94 support and bounced giving a trade opportunity in the trading… added at $158.90. Stop at $172.29 (adjusted). Broke from a consolidation pattern and has started a vertical move. Adjusting stops on the move and letting it run.

Emerging Markets (EEM) Broke from the consolidation pattern as money flowed into the Asian markets lifting the index. Now testing the move higher on tension with US-China rising. The BRIC index fund also showed a break higher. Taking what is offered short term as it unfolds. Bounced Monday… Fell on Tuesday.

China (FXI/YANG) Gapped lower again this week. The news from China about the economy didn’t help. Add rising tension with the US and it sees money moving out of the sector. Watching and letting this unfold. Heads lower to start the week.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans for July 28th: The profits from Monday reversed course on Tuesday as the virus cases and Congress weigh on investors. Taking what is there, but I don’t expect the issues to be resolved easily. There are opportunities in the rotation as well as the fear creeping into stocks. Patience is the key as this all unfolds.

  • REITs (IYR) solid bounce, but needs to follow through as there is plenty of uncertainty in the sector.
  • Utilities (XLU) money rotating to safety. The sector has been a benefactor near term.
  • Natural Gas (UNG) bounced at the lows again… letting this unfold.
  • Treasury Bonds (TLT) moving higher again… adjusted stop and letting this unfold near term as money looks towards safety.
  • Consumer Staples (XLP) showing leadership from the defensive sectors.

FRIDAY’s Scans for July 24th: The selling took a broader path to end the week. This raises concerns about the mega-cap stocks and technology. Watching how this unfolds a the charts are still in good patterns and the overall market shows healthy trading. Some selling is always expected when valuations rise to levels of undue risk. Watching the rotation of money… where does it go? Cash? Bonds? Commodities? Watching and managing our risk accordingly.

  • Consumer Discretionary (XLY) will this be the sector of choice moving forward? Watching at it has done well but the parts are where to dig.
  • Gold (GLD/UGL) definitely has been a benefactor of rotation and concerns about the global economies. Gold miners (GDX) also benefitting from the price move in gold.
  • Silver (SLV) equally a benefactor to the move higher in metals. Gapped on the week and raised our stops to account for the move.
  • Semiconductors (SOXX) Intel laid an egg and pulled the sector lower… questions is how the sector as a whole responds. Watching for the next opportunity here.
  • NASDAQ 100 Index (QQQ) topping pattern is back… watching the large-cap rotation and how the index responds. This will offer an opportunity near term.

THURSDAY’s Scans for July 23rd: Technology large caps take a toll on the markets pushing the indexes lower. What leads higher can be what leads lower… watching the storyline relative to the large-cap technology stocks. It was kind of like a warning shot from investors as money has been moving all week, but not heavily. There is a modest migration from technology. The question is where is the money going? TLT? IYR? XLU? All are defensive solutions. Watching how this unfold and taking what is offered.

  • Treasury Bonds (TLT/TMF) broke higher as money flow continues to rise. Adjusted our stop… and considering adding some money near term.
  • Volatility Index (VXX) interesting move on Thursday at support. The bounce came from the selling in mega-cap stocks. Important to look at the NASDAQ volatility (VOLQ) as well with the current news surrounding that index.
  • Regional Banks (KRE) posted a solid upside day to help the financial sector… worthy of our attention in a bottoming pattern.
  • Natural Gas (UNG/BOIL) bounced off the near term lows… is it rally time for natural gas? Watching how this unfolds.
  • Oil Services (OIH) moved higher on the day and shows a positive five-day trend. Watching how this sector unfolds.

WEDNESDAY’s Scans for July 22nd: The rotation in sectors continues as money looks for alternatives to technology stocks. The recovery stocks made moves but nothing to write home about. It was a positive day overall and some movement due to earnings and existing home sales. Taking what is offered and managing the risk looking forward.

  • Gold (GLD/UGL) turned vertical as the dollar remains weak. Adjusted the stop on the move. Silver (SLV) was up 9% on the day.
  • Homebuilders (ITB/NAIL) solid boost from the existing home sales on the upside. People are buying homes as the thought of coronavirus being here to stay pushes people to ownership.
  • Healthcare (XLV) moved higher on vaccine news and earnings.
  • Treasury Bonds (TLT) Moving back towards the April highs. Holding for now.
  • Europe (IEV) moved back to the June highs… stimulus is a great drug for stocks to move higher. Dig into the parts and leaders for opportunities.

(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. Tested the $54.15 support levels and bounced. Solid bounce above the June highs and holding. Testing upside move.
  • XLU – Utilities found support again at the $55.24 mark and bounced. Trading higher in the current range and moving back towards the previous highs. Finding buyers motivated by safety.
  • IYZ – Telecom found support again at the $27 level and bounced. Moved off support and heading back towards the previous highs.
  • XLP – Consumer Staples moved lower again testing support at the $57.17 mark and bounced back to the previous highs. Then broke higher and showing near term leadership. Defensive money moving into the sector. Taking on a leadership role.
  • XLI – Industrials moved sideways and managed to break above resistance at the $71.43 level. Watching how this unfolds near term.
  • XLE – Energy broke the trendline moving lower and found support as the downtrend remains in play. Testing the bounce and letting this play out with short side bias.
  • XLV – Healthcare broke above the $104 resistance. Watching as it posted a solid follow-through. Upside back in play for now. Pushing higher on the hope of vaccine and earnings.
  • XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently with a solid uptrend on the chart. The testing this week has us on watch… testing support and stops in place.
  • XLF – Financials broke below the $23.50 support moved sideways and back above $23.50 on banks (KBE) rising on earnings. The challenges remain for the sector overall and watching how this unfolds.
  • XLY – Consumer Discretionary broke from the trading range and established a solid uptrend. Stalled and is trading in a consolidation pattern. Watching the outcome of the renewed leadership.
  • IYR – REITs struggle to find money flow. The move below $77.90 was negative but bounced at support and holding for now. Descending triangle pattern in play. Bounced in the bottoming pattern.

The trends are being challenged by news and investor activity. Plenty of consolidation patterns building the last few weeks and watching how they unfold going forward. We have positions based on our defined strategies and managing the risk accordingly. Using the six-month charts as an indicator for the short term view… Seven sectors are in confirmed uptrends as the consolidation phase continues. Four are consolidation patterns showing indecision from investors, and none are in a downtrend. The result for SPY is in a move to sideways trend short term with upside the bias for the week. The leadership is seeing some rotation 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:

Tuesday: Another day of worries back from Monday optimism. Taking what is offered, but the worries are rising along with some day-to-day volatility. Patience is the name of the game as the near term direction works through the worries and news. Watching money flow and rotation as some money moving towards safety and some taking the short term opportunities. Plenty to weigh as this all unfolds near term.

Weekend Wrap & Outlook… The coronavirus remains a headline impacting markets with the record rise in new cases in eight states. That puts caution in the markets and money begins to rotate looking for opportunity. The broad indexes posted a negative week as the investor psyche turns to some worries about large-cap stocks. The NASDAQ’s was the weak link for the week closing down 1.3% at 10,363 on the week. The Fed and the Treasury continue to mouth support for further stimulus and helping get the economy back on its feet. The EU chipped in to help the European countries offering a stimulus of more than 2 trillion euros. The hope of a strong recovery in the second half is dwindling on comments from the Fed as they warn of slower recovery. The jobs data was steady as more jobs are being found, but first time climbs actually climbed for the first time in seven weeks. The reopening process is being challenged by the spike higher in coronavirus cases. California closed again causing some grief to businesses as each state and city makes decisions independently. They also took the lead for the most cases in the country. The VIX index moved down to 25.8 showing settling at support but didn’t raise on the selling this week. We continue to find opportunities near term to put money to work even in some sectors that have been lagging. Our job remains to manage the risk accordingly. Eight sectors posted gains for the week and three closed in the red. Technology saw money flow shift to negative as money was on the move again. Gold went verticle posting new highs as money flow rises. Crude oil remains near the highs and closed above the $41 a barrel level. The focus is starting to turn to the spread of the virus versus vaccine development. Something to watch as the markets remain in an overall uptrend since the March lows. 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.