Stock higher again

Market Outlook for February 7th

Stocks moved higher again on Thursday as the NASDAQ large caps lead to new highs and the S&P 500 index hits new levels. Liquidity is a beautiful thing as the Fed remains in the repo markets and it is impacting stocks. That liquidity has to find a home and more times than not it is stocks that are the benefactor. Thus, the large-cap rally as the big money users put their collective hands out to the Fed. I remain cautious as we have seen this movie before liquidity in an uncertain market can end poorly. The job report is out Friday morning and we will see if they follow the ADP private job data from earlier in the week.

The S&P 500 index closed up 11.1 points to 3345. The index closed at a new high completing the reversal from last week’s low. Seven of the eleven sectors closed higher on the day with technology and telecom leading the way. The downside was led by energy as it could not follow through on Wednesday’s bounce. Money flows into stocks as the last four days renewed the uptrend. Watching, listening, and managing the current risk.

The NASDAQ index closed up 63.4 points at 9572. The index gapped higher to close at new highs. The index closed higher, but we did see some weakness in small and midcap stocks throughout the day. The NASDAQ 100 large caps set the pace throughout the day closing at a new high. Semiconductors didn’t look great on Thursday as the closed flat on the day. We are managing our risk and looking at what unfolds near term.

Small-Cap Index (IWM) The sector has been lagging since the highs on January 16th… short signal offered at $164.74 and confirmed Friday at $163.65. Willing to add a short term trade on the weakness technically. Money has been steadily lower and the break of the 50 DMA is negative. TZA entry $36.95. Stop $37.20 (stop hit). Solid bounce Monday hit stop and Tuesday followed through with a move above the $164.44 resistance. Wednesday the move above $166.48 was equally positive for the sector. Tested the move higher on Thursday.

Transports (IYT) The sector moved to $200.55 and hit resistance. Reversed and tested support at the $192.42 level and broke support on Friday. Closed at the 200 DMA and the bottom of the current trading range. Held the 200 DMA and gave up early gains Monday. Solid gains on Tuesday and Wednesday cleared resistance at the $195.29 level. Thursday tested the move.

The Dollar (UUP) The buck has returned to the downside accelerating on Friday. The negative sentiment about the virus and weaker economic data aren’t helping the cause. Bounced on hope. Fed is back adding liquidity in the repo market helping the buck. China tariff relief on Wednesday pushes the buck higher along with crude.

The Volatility Index (VIX) Anxiety returned this week with the virus issues in China spreading. The fear of curtailed economic activity has pushed money towards safety and anxiety spiked to 18.8 on Friday. Watching how this unfolds in the coming week. 17.9 remains elevated. Tuesday at 16 and still elevated. Wednesday 15.1 and still elevated for the buying that is happening… watching. Thursday 14.9 and holding.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector followed small caps lower breaking support at $203 and offering a short side trade opportunity. We didn’t enter the trade as we took the small-cap trade. A negative close below the $200 mark. Joined the small caps with a solid bounce off the lows Monday. Added to the upside move on Tuesday and Wednesday. Clearing $205.93 level and $207.51 resistance.

Biotech (IBB) The sector hit highs at the $124 mark and since became indecisive. The double top pattern played out breaking lower $117.90 offering short side entry point. Accelerated lower to end the week. LABD entry $13.25. Stop $13.70 (stop hit). Solid bounce off the lows and watching. Cleared $117.92 and $120.89 resistance working towards the previous highs. Finding some resistance at the previous highs.

Semiconductors (SOXX) January 24th intraday reversal to close lower was a negative sign for the sector. The gap lower on the next trading day was a short side signal. It attempted to bounce but resumed the downside move closing below the 50 DMA. SOXS entry $20.70. Stop $21.25 (hit stop). Solid gains on Tuesday to clear the $250 resistance and Wednesday cleared $257.28 as moves back towards the previous highs. Struggled again on Thursday… not looking healthy on the chart.

Software (IGV) The sector tested the lows of the trading range and bounced at support in October. The steady grind higher has not been easy. The test of support held and the upside resumed with some small tests along the way. Very volatile week for the sector as it shows some weakness near term. Watching with stops in place. The sector moved to new highs on Tuesday and gapped higher Wednesday only to close lower as some money rotates and takes profits. Held near the highs on Thursday.

REITs (IYR) The sector has turned into one giant consolidation pattern. The upside resumed clearing the $93.50 resistance and hitting the $95.50 resistance… consolidated and moved lower to end the week… watching how it unfolds. Solid bounce to hold near highs.

Treasury Yield 10 Year Bond (TNX) The yield closed at 1.52% down 29 basis points last two weeks… TLT moved higher breaking through resistance as money rotates to safety near term. Taking the trade offered (TMF/TLT) and managing the risk. Rates move to 1.64% watching money flow out of bonds and TLT. Hit stop and watching how the storyline unfolds.

Crude oil (USO) Crude moved to $64.22 on speculation. Crude fell to $51.56 on the speculation falling short and China virus. Watching how this plays out with the downtrend in play. SCO Entry $13.27. Stop 17.30 (hit stop locked in solid gain). More downside for crude breaking $50.56 support. Watching for a bounce as the sector is oversold. UCO needs to clear $14.31. Rally in crude as tariff relief and comments about the virus help ease investor concerns.

Gold (GLD) The upside in gold was driven by speculation of the rate cuts and global weakness overall. Geopolitics played a part in the China trade agreement. Now throw in the virus fears and it breaks from the consolidation pattern at $146.60. UGL entry $46.90. Stop $52.15 (Stop Adjusted). Letting it unfold. Liquidity moves by the US and China rally dollar and gold fell. Nice bounce on Thursday as some uncertainty creeps into the markets.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from December. Watching and letting this unfold. Gapped higher by the liquidity injection from China. Gapped higher on Wednesday but failed to hold the gains. Thursday was inside day on chart watching for follow-through.

China (FXI/YANG) Finally gets a trade deal to help the upside trend emerge… then the coronavirus erases all the gains. YANG entry $43. Stop $47.20 (adjusted). Gapped higher by the liquidity injection from China.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for February 6th: Large-cap stocks lead the day and we see some not so great moves in semiconductors, small, and midcap stocks. I am not convinced by the move in the last four days, but it doesn’t matter what I think I follow the market. But, that said, I did raise stops and continue to manage the risk as I see it. Cautionary signs in the semis and other sectors are keeping me on my toes.

  • Technology (XLK) still leading the markets overall. Watching how semiconductors unfold. Some topping in software as well.
  • Consumer (XLY) solid leadership as earnings validate the consumer is still engaged.
  • Crude Oil (USO) remains near the current lows and watching.
  • Gold (GLD) attempting to bounce again.
  • Transports (IYT) still weak. Small caps (IWM) still lagging. Energy (XLE) still in a downtrend.

WEDNESDAY’s Scans for February 5th: Solid day for stocks again. We did see some rotation of money and we did see some softness after the gap higher at the open. Stocks ended the day higher as we continue to follow the upside move and adjust our stops accordingly. The economic data was positive as well on the day as January data continues to show solid improvement. Important to watch the rotation as money looks for new sectors and growth.

  • Crude Oil (USO/SCO) upside bounce hit our stop on the short trade. Now watching to see if the reversal has any strength or just a one-day event.
  • Biotech (IBB) solid addition to the reversal. Watching how far it runs.
  • Healthcare (XLV) cleared $103.19 resistance and showing some leadership again.
  • Transports (IYT) solid upside move as some fears of the virus eases.
  • Small Caps (IWM) solid upside as money flow rises in the sector.
  • Software (IGV) saw some rotation out as money flow fell. Watching how this leader plays out near term.

TUESDAY’s Scans for February 4th: the second day of the bounce and all is well with stocks again… right? NASDAQ moves to new highs, Tesla if up more than 30% in two days, Fed providing liquidity again, the economic news is positive, and all is well. Or so it seems. There is still plenty of uncertainty behind the markets but investors were drinking the liquidity cool-aid. As I say, take what the market gives, manage risk, and keep moving forward. You still have to manage the risk of the current environment.

  • China (FXI) Gaps higher on the nearly $250 billion in liquidity.
  • Emerging Markets (EEM) gaps higher along with China.
  • Technology (XLK) closed at new highs as money flow rises in tech stocks.
  • Semiconductors (SOXX) bounced, but still not convincing.
  • Europe (IEV/EURL) bounced on liquidity move.

MONDAY’s Scans for February 3rd: Overall not much changed from Friday, but many sectors managed to hold support on a modest bounce. The S&P 500 held the 50 DMA and there were buyers stepping in on the dip… how does it unfold moving forward? Flip a coin and watch. ISM manufacturing surprised with a move back above 50% help the economic outlook… plenty of more data on hand this week along with jobs on Friday. Taking what we know and letting the rest work itself out.

  • China (FXI) posted solid gains on Tuesday. Watching the news about the flu virus is not helping.
  • NASDAQ 100 (QQQ) posted a solid bounce on Monday and watching how it unfolds. TSLA posted a big day. BIDU, GILD, JD, NFLX added as well to the upside.
  • Basic Materials (XLB) nice bounce from the 50 DMA.
  • Crude Oil (USO/SCO) more downside as weakness remains in the commodity and raised stop on our short trade.
  • Biotech (IBB) showed some signs of life bouncing from the current lows… watching for an opportunity.

FRIDAY’s Scans for January 31st: Investors ended the month with a bang. The selling was methodical versus frantic. The volatility index spiked higher. Dollar dropped. Gold rose. Bonds rose. Money was looking for safety as stocks fell to end the week. For weeks there has been plenty of chatter about the markets being overbought… add some fear as a catalyst and you get Friday’s activity. There are plenty of data points with economic data, earnings, and global economics… throw in some geopolitics and you have plenty of headlines and chatter. The plan is the same… avoid the emotions and rumors, focus on the facts, and manage the risk.

  • China (FXI/YANG) short signals hit and confirmed on the downside move. Manage the risk of the news.
  • Small Caps (IWM/TZA) short signals hit and confirmed. Manage the risk within the sector.
  • Semiconductors (SOXX/SOXS) short signals hit and confirmed. Managing the risk of the sector.
  • Energy (XLE/ERY/SCO) reconfirmed the downtrend. Adjusted stops and watching how it unfolds
  • Treasury Bonds (TLT/TMF) upside trend confirmed. Adjusted stops and watching how it unfolds.

(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 bounced at support $55.95 level and moved new highs. Then fell as the worries rise… watching how it responds to close below the 200 DMA. Bounced at support. Followed through as sector moves back toward the previous highs.
  • XLU – Utilities are the current benefactor of lower rates and money looking for safer havens. Adjust stop on the vertical move. Some downside on Tuesday and watching. Holding steady.
  • IYZ – Telecom picked up volatility with the markets and testing the $29.50 level of support. Gapped higher on Wednesday. Nice follow through on Thursday.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs.
  • XLI – Industrials shifted lower the last two weeks and watching the support at $81.10. Nice move upside.
  • XLE – Energy remains in downside move as anxiety rises about China and consumption. Short entry $53.40. (ERY) entry $40.20. Stop $53.60 (adjusted). Adjusted the stop. Did it find the bottom on Tuesday? Looks good on Wednesday with follow-through. Thursday reversed lower again… watching.
  • XLV – Healthcare breaks lower from the topping pattern. Closed below the 50 DMA and support at 101. Short signal issued. Bounced and watching. Solid upside added on Wednesday.
  • XLK – Technology in an uptrend and showing a flag pattern at the current levels. Watching how leadership unfolds. Closed at new highs. Solid with the exception of software on Wednesday.
  • XLF – Financials have been in a trading range with IAI being the key leader within the sector. Bank issues in the headlines not helping matters and Friday broke support… looking at the downside trade options. Bounced on liquidity.
  • XLY – Consumer Discretionary tying to be the bright spot with Amazon earnings leading upside to end the week. Watching. Moved to new highs.
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… Solid upside follows through. Entry $93.50. Stop $93.50. Flag pattern broke down on Friday and watching how it unfolds.

There are currently four sectors in a sideways or consolidation trend. Five sectors are in confirmed uptrends. Two sectors in a confirmed downtrend. The result is SPY in a transition pattern short term. We have to remain patient and let this all unfold. Remember the parts make up the whole.

(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: Upside remains as liquidity rises from the Fed. Positive economic data continued from January and buyers remain present as money flow is solid, the volume is average, and buyers remain present. We continue to take what the market gives but remain cautious about the bounce. The virus is still growing in China without much in terms of a solution or stopping the advance. Our focus is on the risk levels and what is being done to abate them. Focus and manage your money.

Wednesday: Money flow rose and some money rotated on the day. The upside gains were solid despite the give back from the opening highs. Watching to see how this optimism unfolds going forward. The solid economic data was a bonus as the services numbers were better than expected along with solid gains in the ADP private jobs numbers. The shift in sentiment over the last three days is quite the reversal. I am not sold on the move and remain cautious as there are plenty of issues still on the horizon to be dealt with economically and politically.

Tuesday: Liquidity for everyone and markets rally. The NASDAQ is at new highs led by the technology stocks. NASDAQ 100 back to the uptrend. Positives all the way around. The challenge is the uncertainty about the coronavirus, global economies, and growth. We will take the gains, adjust our stops and look to today. Uncertainty can work both ways… the aggressive selling prompted by fear of not knowing and, aggressive buying on the hope of knowing. Either way, it is an irrational activity and we have to manage the risk in both directions.

Monday: Some upside to stem the selling from Friday. No big changes in the charts. Some sectors are looking to establish lows in their respective downside trends. Others bounced at support. Watching how this unfolds and where money rotates. The big challenge on the day was the inability to hold the opening highs or even a lion share of it. The volatility in the afternoon shows the presence of sellers still there. Taking it for what it is and looking forward. Earning, economic data and the virus are key drivers we are watching.

The coronavirus remains center stage and money flow heads towards safety for the second week. The challenge is the unknows… those create speculation… which creates volatility short term… resulting in the rotation of money. The uptrends are being challenged with some reversing short term. The rising speculation is also playing havoc on money flow. If we add this to the rising concerns from the talking heads about market valuations you see why volatility rose and money rotated for the second week. We need to focus on what is happening and not on what could happen. Let the future unfold and manage the risk that is. The earnings season has been positive with some solid results posted again this week. The data points will be important to how this unfolds moving forward. Economic data remains okay in that it is not getting worse. With the close of January on Friday, we will start the week with fresh data on the economy. Yields on the ten-year treasury bond fell to 1.52% raising plenty of red flags as it shows more rotation towards safety and a revisit to the inverted yield curve. The dollar reversed to the downside of the virus’s fears. Money is rotating to safety as bonds rise, utilities rise, gold rises, and cash levels rise. Energy has taken the worst hit along with the emerging markets. The downside trade opportunities arose this week along with several other sectors offering entry points. Proceed with caution and discipline. The key is to watch the trend, know which side the Fed is on, 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.