Stocks rally on positive vaccine news

Market Outlook for May 19th

Moderna (MRNA) announced that a Phase 1 study yielded positive interim clinical results for its Covid-19 vaccine. Throw in that Mr. Powell (of the famed Fed chair) was on 60-minutes Sunday stating there is plenty more the Fed can do to assure the economy doesn’t crash. His comments included a one-year timeline for the recovery in the economy and that it would likely take a vaccine to help… imagine that, not even 24-hours later Moderna is making progress one. He even went so far as to explain how the Fed prints digital money daily. That part was not very reassuring relative to the US debt. It was, however, a reassuring way of saying the Fed is here to help. JC Pennys filed for bankruptcy adding to the woes in the retail sector which is a far way from any recovery. All eleven sectors of the S&P 500 index closed in positive territory with energy leading the upside as crude jumped 7.2% to join in on the optimism. As we always do… taking what the markets offer, managing the risk that is, and continue to look for the next opportunity.

In The News:

Mr. Trump threatens to permanently cut off WHO funding… last month he halted funding for the WHO as his administration conducted a review of the agency’s response to the Covid-19 pandemic. The challenges for this to happen are many, but the intent is accountability. While there are many attempts to hold Trump accountable to how the US has responded to the virus, he is now trying to hold others responsible for the information and data provided to the US and the world about the virus. Where there is money allocated without accountability there will be problems… and corruption. Watching how this story unfolds and what details are uncovered.

4.1 million people are skipping their mortgage payments… 8.16% of all mortgage payments are in forbearance. More than 11% of Ginnie Mae loans are in forbearance. In the UK the estimates are above 15% of those behind on mortgage payments. While the challenges of how this unfolds are just beginning we will see how this impacts the current residential markets around the US. The additional challenge is in the commercial real estate markets as companies don’t pay their rent and landlords abate their mortgage payments. Many unknowns loom around the virus’s impact on the overall economy… the parts will start to unravel along with the opportunities.

It doesn’t make sense: Mr. Trump stated he was taking hydroxychloroquine to protect against the coronavirus. There have been sharp responses from doctors, lawmakers, and even Fox news. They are all warning that the drug can lead to fatal consequences for some people. My surprise is that people still react to Mr. Trump. He has proven over and over again that he… well, is Mr. Trump. By the way, Dr. Conley… Mr. Trump’s physician didn’t recommend it but stated the benefits outweighed the risk as they both discussed the drug. Medical decisions are between a patient and their doctor… not what Fox News thinks.

Don’t look now but crude demand rose… Oil prices rose to their highest levels since March as signs of demand from China is picking up. Travel restrictions are being eased around the world and that is helping as well. Crude closed at $32.55… this has helped our purchase of USL and USO with a long term outlook.

Economic News…

  • Retail sales were down 16.4% in April and well below expectations of -12.3%. Autos fell 12%, Furnishings down 58%, clothing off 78%, Gasoline store sales down 28%, and non-store retailers -8.4%. Not pretty and it did impact the markets on Friday.
  • NAHB home builders index rose to 37 in May up from 30… seeing some activity in the sector that is positive. XHB, ITB, NAIL all rising.
  • Capacity utilization was 64.9 worst ever since started tracking in 1967. This is a telling number as it relates to productivity for US companies.
  • Weekly jobless claims were higher at 2.98 million applications submitted.
  • Producer Price Index fell 1.3% and well ahead of the 0.5% expected to fall. Oil prices can take credit for the biggest piece of the decline while food and liquor prices rose.
  • Consumer Price Index fell by 0.8% as expected. The core CPI fell 0.4% (lowest level ever). Food prices jumped as apparel and energy fell.
  • Jobs report shows a loss of 20.5 million jobs in April. 14.7% unemployment rate. Mostly inline with expectations. ADP jobs survey shed 20.2 million jobs, worst in the survey’s history.
  • ISM services data was better than expected at 41.8% but still well below 50% expansion.
  • The ISM manufacturing data to the mix as it was 33.4% well below the expansion levels of 50%.
  • The bottom line, the economic data is falling as expected and April is the first full month of real data… this will likely get worse before it gets better.

The S&P 500 index closed up 90.2 points to 2952. It was up 3.13% for the day. The index held support at the 2820 level and returned to the resistance at the 2950 mark. The chart is defining the near term trend along with a topping pattern. We are looking for who will take the leadership role… Monday all eleven sectors closed in positive territory with energy, industrials, and financials leading the upside. The VIX index moved to 29.3 on the day showing investor sentiment shifting to positive again. Watching how the consolidation pattern unfolds and if we can follow through on the upside move.

The NASDAQ index closed up 220.2 points at 92314. The index held above the 20 & 10 DMA gaining 2.4% for the day. The close moved back above the 8972 support level and back to positive territory for the year. The NASDAQ 100 index (QQQ) was up 1.8% for the day as the large-cap stocks lagged on the day. The $218 level is the stop for now and watching how it unfolds near term. Semiconductors (SOXX) closed up 4.5% as it tested the 200 DMA support and challenges with the China/US trade issues. Technology (XLK) was up 2.4% moving back to the previous highs. Holding the new leg higher… watching how this plays out near term.

Small-Cap Index (IWM) The sector tested the move higher and bounced at the 50 DMA as the volatility picked up again. Watching how this unfolds near term. $132.50 level to clear on the upside. 6% gain on Monday helped the cause.

Transports (IYT) The sector has the greatest exposure to a slowdown due to the virus. Airlines, container ships, trucking, etc. if the production slows transportation slows. A retest of support at the $137 level of support as the sector put in a challenging week. 7.2% gain on Monday to lead the index back toward the previous highs.

The Dollar (UUP) The dollar has been higher as the Fed and White House got involved in throwing everything at the markets… The dollar has now worked into a consolidation pattern and testing the lows. Watching how the tariff tweets impact the buck next week. Declined on the comments from Mr. Powell and the Fed’s willingness to do everything.

The Volatility Index (VIX) Anxiety spiked to 85 at the height of the unknown fallout from the virus. This week the index settled at the 31.8 level. There were moves to the upside during the week as anxiety shows up again for investors. Watching the progress going forward. Declined to 29.3 on Monday showing some optimism from investors.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector remains volatile as money flowed out of the store with a small bounce to end the week. Stop hit at $157.52. Entry $145.50. Watching how support holds or not. Climbed 6% on Monday and back to the previous highs.

Biotech (IBB) The sector tested the $121.70 support and moved back to the previous highs… tested $128.67 support this week… bounced on Friday. Some topping in the sector as this unfolds. Entry $102.75. Stop $121.73 for now and allowing for some volatility… longer-term view for this sector. Solid move back to the previous highs and watching how it responds.

Semiconductors (SOXX) The sector tested support at the 50 DMA again. Watching as the volatility rises on the US/China issues with Huawei Technology. We hit our stops on some positions and managing the risk on the balance. Gained 4.5% on Monday to recover from Friday’s move lower… back at the previous highs $243.50 resistance.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $237.50. Entry $205.10. Volatile week of trading as we adjusted our stop and letting it play out. Monday failed to clear the previous highs and watching how it responds to the balance of the week.

REITs (IYR) The sector collapsed as talk of defaults in the commercial debt market spooked investors. The Federal Reserve has stepped in to stem most of the negative sentiment for now. The sector moved into a descending triangle pattern that broke lower this week… watching as the short side develops… SRS. Gapped up 5.3% on Monday as money flowed back into the sector on hope… still challenges here.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.64% down from .68% last week. TLT is now in a trading range. Watching how this unfolds in the coming week. Monday yield jumped to 0.74% and pushed the bond lower. Watching how this unfolds.

Crude oil (USO) Crude moved to $29.52 this week and up from the $26.17 level last week. A solid upside move for the week and we have adjusted our stop accordingly. Plenty of news and speculation about the outlook from the analyst. If you take a long term view there will be upside in crude. 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. Crude runs higher on hope… back above $30 level. Watching and managing our stops on positions.

Gold (GLD) The metal moved to a high of $163.93 this week as money rotates into the metal. Watching how this unfolds going forward and the China-US trade talks. Entry $158.95. Stop $158.90. Reverses on stock optimism… watching.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from August. Established a bottom at the $30.67 mark and hitting resistance. Cleared $36.40 resistance and watching how this unfolds. Gapped higher my 4% as money looks for opportunity.

China (FXI/YANG) Downside accelerated on the coronavirus and has established a low near $34. Bounced and dealing with news and speculation. Closed above the$38.67 level of resistance and watching the previous highs. Gapped higher my 4% as money looks for opportunity.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

MONDAY’s Scans for May 18th: Vaccine and Fed lead stocks higher to start the week as investors were willing to add risk to their portfolios. I have on my desk a simple note… “Markets can remain irrational longer than you can remain solvent going against the trend.” Nothing makes sense, but then over the short term when does it ever really make sense. FOMO is fully in play and we will ride the wave and manage the risk. One concern to voice from Monday’s activity… the leaders gapped higher but failed to hold it as they faded from the open. The weaker sectors showed hope…

  • Energy (XLE) solid upside on the day and back to the previous highs. The move higher in crude is helping as oil moves to $31. Managing our stops and letting this run.
  • Gaps higher from laggards… XLI, IYR, XLF, KRE, ITB all produced solid moves… now they need to follow through on the upside.
  • Utilities (XLU) reversed the downtrend and needs to follow through.
  • China (FXI) and Emerging Markets (EEM) moved back to previous highs and need to follow through.
  • Homebuilders (ITB/NAIL) solid move higher in the gradual uptrend off the lows.

FRIDAY’s Scans for May 15th: positive day overall with money moving as it deemed best. SOXX fell on US/China Huawei issues. Crude moved higher with demand rising in China. Worries remain about the coronavirus and states make political decisions more than logical ones. The economic picture is ugly as many analysts now looking to the fourth quarter for growth to resume. Taking one day at a time and exercising patience as this all unfolds.

  • Crude Oil (USL/USO) solid upside for the day as well as the week. Adjusting our stop and remained focus on the longer-term view. Gasoline (UGA) looking positive as well on the upside.
  • Financials (XLF/FAZ) remained below the support of $21.32 and offering some short side trade opportunities.
  • Biotech (IBB) solid bounce at support and letting this unfold as well with a long term view.
  • Silver (SIL) solid break higher for the miners and the metal (SLV). Gold (GLD) same upside move and looking positive near term. Gold Miners (GDX) solid upside as well.
  • Natural Gas (DGAZ) leader on the week as the downside trade unfolds yielding nice gains.

THURSDAY’s Scans for May 14th: upside day on lower volume. Watching how options expiration impacts the leadership on Friday. The short side trade setups got a reprieve on Thursday and watching how they unfold as well. Financial bounced nicely off the lows. The new chatter about how long it will take to deal with Covid-19 is growing as many try to jump on the fear factor of the virus. You want to ask why, but you already know the answer… power and money. We can call it many other things to make it palatable, but the reality lies with both. Practicing patience on all fronts as we end the trading week.

  • Financials (XLF) solid bounce but needs to follow through on the upside or this will give us a better entry for the downside trade.
  • REITs (IYR/SRS) bounced off the lows and now watching how this unfolds with the downside still in play… my view.
  • Crude Oil (USO/USL) upside on the day and look for a move above $28.40 level. This is a long term proposition. UGA made a solid upside move as well on the day.
  • Small (IWM) & Midcap (IJH) both tested lower and bounced… watching the downside trade still as weakness remains.
  • Gold (GLD) in position to break higher… watching the metal as it has been gaining strength of late.

WEDNESDAY’s Scans for May 13th: More downside movement as the talking heads hit the media with negative speculation on the economy and the virus. In America is it is easier to believe bad news than good news thus, the downside the last two days. We hit some stops on positions and watching how the near term unfolds. There are still positive patterns on the charts, but some are breaking near term support. How much of a test will we get at this level is still uncertain. Manage your risk accordingly.

  • Midcaps (IJH) hit our stop on the position and locked in a solid gain, but the downside acceleration the last two days is worthy of note. Small caps (IWM) were even more pronounced on the downside.
  • REITs (SRS) downside accelerated and added to the position.
  • Financials (FAZ) added to the downside move and adjusted the stop.
  • Natural Gas (DGAZ) accelerated the downside as well and adjusted our stop.
  • S&P 500 Low Volatility (SPLV) broke support and showing some weakness in the broader index… watching how this unfolds near term.

TUESDAY Scans for May 12th: Reversal day? Sectors are hitting against resistance at previous highs and testing the upside momentum. The NASDAQ reversed from the positive trend on Tuesday and the S&P failed at the April highs again. Watching how this all unfolds looking forward and what course of action we need to take relative to the patterns on the charts. We have adjusted our stops and watching how the days unfold.

  • S&P 500 Index (SPY/SPXS) reversal at the previous high is negative. Watching how this unfolds and what opportunity if any it offers.
  • REITs (IYR/SRS) broke support at the $71.31 level and downside trade needs to confirm.
  • Financials (XLF/FAZ) breaking from the trading range on the downside? Watching as the short side trade sets up.
  • Treasury Bonds (TLT) Holding near the 50 DMA and watching for upside move if money starts to rotate again.
  • Natural Gas (UNG/DGAZ) downside entry hit as commodity price is heading lower again.

(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 level offering upside trade opportunity. In a trading range after testing support. Cleared $52.50 resistance and watching.
  • XLU – Utilities continue to struggle as the fell off the $61 highs and breaking the $55.24 support. Watching how this unfolds near term. with a downtrend established. Reversal of the downtrend? Watching.
  • IYZ – Telecom moved to $28 and tested and broke support at $26.25. Watching how this unfolds… parts are better than the whole currently. Back above the $26.25 level…
  • XLP – Consumer Staples cleared resistance at the $54.92 mark and offered short term trading opportunity. Stalled at the 200 DMA and tested support at $57.20 level. Reversal of the downtrend? Watching.
  • XLI – Industrials remain in a consolidation pattern. Watching. Gapped higher still in trading range.
  • XLE – Energy moved above the $31.20 entry-level as the bottom was established. The uptrend remains in play with a consolidation pattern emerging on the chart. Watching as diverging from oil prices. Back to the previous highs and in range.
  • XLV – Healthcare moved above $88.50 level and offered upside opportunity. Letting it play out and adjusted our stops. Leadership role. Resistance at the $101 level showing consolidation. Failed to hold the break above the previous highs?
  • XLK – Technology cleared $82.37 resistance and offered upside trade. Remains the leadership for the broader index currently and watching how it unfolds adjusting the stop. Moved back to the previous highs.
  • XLF – Financials broke below $21.30 support and setting up a short side trade based on the technical data. Watching as this unfolds next week. Solid bounce off the lows? Watching for reversal or follow through?
  • XLY – Consumer Discretionary in a trading range and watching. Broke to new high showing some leadership.
  • IYR – REITs broke lower below $71.30 support. Short side trade setup and watching how next week unfolds. Reversed the downtrend? Watching.

The trends have worked into consolidation patterns and uptrends as we experience less volatility and more trading. We took the entries based on our defined strategies and managing the risk accordingly. Using the six-month charts as an indicator for the short term view… Two sectors are in confirmed uptrends. Four are consolidation patterns, and four are in downtrends. The result for SPY is consolidation pattern short term with a negative bias. The leadership is lacking as plenty of questions developing 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:

Monday: Fed and vaccine… make for a positive day on Wall Street. You take what the market gives and watch how it responds. We saw the laggards gap off the lows. We saw some renewed hope for sectors. We saw leaders gap higher and fail to hold the move. Signs of profit-taking from leadership worthy of attention. For now, you take what is given and manage the risk. Avoid the talking heads and the nonsense that is pontificated in the media. Focus on what is true, what is perceived to be true, the trend, and the Fed. Good day overall and watching how the balance of the week unfolds.

Weekend Wrap & Outlook… The coronavirus remains center stage as the number of cases continues to flatten and more states have started to reopen businesses. The lastest how this has turned into a political issue more than a medical one. The medical side is the pawn in the chess game Washington, states, and municipalities are playing. This presents opportunities and expectations from stocks and the economic picture. There is no lack of question marks for the markets moving forward as money is rotating again and some moving to the sidelines. The jobless claims added another 2.9 million people to unemployment. Retail sales fell 16.8% in April and the data is showing how deep the impact is from the shutdown due to the coronavirus. We are not likely through the worst of it as the reopening process is slowly progressing. The VIX index climbed to 31.6 as some anxiety creeps back into the markets. We were presented with short term opportunities and put some money to work over the last few months. Our job remains to manage the risk accordingly. We hit stops on several sectors and have added to others as money rotates. The rotation is showing up on the charts as more sectors shift into downtrends over the last three weeks. Healthcare, energy, and technology are the leaders currently. Gold has moved to new highs for the week. Crude oil has bounced off the lows showing some signs of life as demand rises in China. Earnings have been somewhat positive for the markets, but the focus is starting to turn to the future outlook for growth and how long it will take to see a reversal. Many analysts are now saying the fourth quarter. All said the goal is 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.