Stocks retreat on renewed fear

Do markets react in earnest to the coronavirus increase? The discussion has been around over the last few weeks as the number of cases has increased back to levels in April. Plenty of theories ablaze in the headlines, but the reality is the virus never left… and now it rising again. The challenge is what to do, and how to do it. The shutdown helped, but the reluctance for a redo is high. Americans are a stubborn group about freedom and socializing. The end result was a decline of more than two percent across the markets and questions about what is ahead for stocks. We made some adjustments and raised some cash as a result of trading on Wednesday… manage your money and follow your strategy, not the news.

In The News:

Short news notes of interest… 1) The coronavirus approaching 10 million infected. The surge is starting to impact the markets relative to the outlook. Apple closed seven more stores in Texas. 2) Crude oil fell 6.2% in response to the news of travel restrictions. It didn’t help that the storage hit another record… production still high relative to consumption. 3) Cruise lines continued to fall further on the news of travel restrictions. 4) Treasury yields are lower as money flow makes a shift to safety for the day. 5) Gold moved slightly lower as the dollar firmed and moved higher. The metal has gained 16.5% YTD and remains in an uptrend. 6) President Trump reaffirmed that the China-US trade deal is still intact.

The S&P 500 index closed down 80.9 points to 3050. It was down 2.6% on the day as the index sold lower. The worries about the coronavirus surge and stock valuations have kept a lid on the markets of late and now some downside. All of the eleven sectors closed in negative territory for the day led by energy and financials. The downside accelerated with energy losing 5.5%. The VIX index moved to 33.8 with anxiety back in play. The complacency in the markets got a nudge on Wednesday from reality. Managing our risk accordingly.

The NASDAQ index closed down 222.2 points at 9909. The index closed down 2.2% for the day. The index gave up the move above 10,000 and tested the 10 DMA. The downside leadership from the technology stocks helped the move lower. The NASDAQ 100 index (QQQ) was down 2.1% for the day and testing the first levels of support. The $233.41 level is the stop as we now watch how this unfolds. Semiconductors (SOXX) closed down 2.2% for the day and watching support at the $255 level near term. Technology (XLK) was down 2.2% for the day and held the 10 DMA. 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 give that up and test lower. It held support at the $132.55 level and moved into a consolidation pattern on the chart. Watching for clarity. Gave back the gains from earlier in the week and watching how it holds near support.

Transports (IYT) The sector jumped 16.6% on optimism and rotation. The sector fell 10% since… Fast money moving and watching how this unfolds relative to the trend. Transports remain weak on the revised outlook for the second half of 2020. Closed lower and testing support.

The Dollar (UUP) The dollar broke lower from the consolidation pattern and was in a downtrend short term. There was a modest bounce this week in the dollar. Watching the bounce and the outlook near term. Small bounce as the buck tries to find a bottom.

The Volatility Index (VIX) Anxiety returned to end the week after falling to support at the 32.3 level. We closed at 35.1 thanks to the weaker economic outlook from the Fed. Closed lower at 33.8 and watching how this unfolds as emotions rise.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector tested off the high and is moving sideways of late. The challenges facing growth is the rationale… watching how it unfolds with not holdings currently. Fell 3.4% and testing support.

Biotech (IBB) The sector has been in a consolidation pattern and Friday broke higher… now we need to see a follow through to the move as we adjust our stops on positions. Fell 1.6% Thursday testing the break higher.

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. Testing the move higher in a flag pattern.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $267.50 (adjusted). Entry $205.10. Some testing with the markets moving lower, but the trend remains positive. Erased the move higher and now testing 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. Back to the bottom of the consolidation pattern.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.69% flat from 0..69% last week. TLT was also flat for the week after some volatility in bond yields. Bonds are still in a downtrend from the April highs. Some rise in money flow to bonds on stock weakness.

Crude oil (USO) Crude moved to a high of $39.83 closing at the high for the week. The data is showing a reduction in production and consumption as this unfolds relative to the data. 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 $18.54 (adjusted). Closed down 6% as supply rises again as seen in storage. testing the move higher.

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… added at $158.90. Stop at $161.86 (adjusted). Closed the week at the top of the current range. Manage the risk. Closed above the trading range breaking higher with solid gains. Watching and adjusting stop with some modest moves lower on Thursday.

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. Moved higher and remains in a consolidation pattern.

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. Moved higher and remains in a consolidation pattern.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scan for June 25th: The sellers showed up as the news about the virus finally broke the upside string. The challenges the economy faces due to slower openings and keeping people inside is a reality. We will see how this impacts the current trends and take the necessary steps to protect the recent gains on the upside.

  • Energy (XLE) broke support and the 50 DMA. The renewed weakness in the sector is raising questions about the outlook near term. Short side opportunity if it confirms the break lower.
  • Small Caps (IWM/TZA) downside move worth watching. A break lower will offer short side trade opportunities.
  • Volatility Index (VXX) Moved higher after testing support this week. Watching how this unfolds and if the anxiety levels rise in stocks.
  • Biotech (IBB) tested the upside move and managing our stops.
  • Treasury Bonds (TLT) bounced and back to resistance… will money flow rise as investors seek safety… watching.

TUESDAY’s Scans for June 24th: Another positive day for the leadership and more challenges for the laggards. The number of headlines now focused on the valuation of the markets and what happens next is growing… sometimes corrections become a self-fulfilling prophecy. Taking what is offered, managing the risk, and watching the data.

  • Small Caps (IWM) remains a laggard for the overall markets and looking at how the consolidation pattern unfolds.
  • Financials (XLF) another laggard for the markets. Watching support at $23.50 as an indicator.
  • Leisure & Entertainment (PEJ) corrected from the June highs… watching how this pattern unfolds.
  • Natural Gas (UNG/DGAZ) short side trade rises again. Adjusted our stops to account for the move.
  • Biotech (IBB/LABU) solid rise higher… adjusting the stop.

MONDAY’s Scans for June 23rd: Interesting start to the week of trading as the technology sector continues to lead the NASDAQ higher. The other indices are struggling to hold near the current levels without much change. Plenty of talk about valuations in the news, but it only matters when the money flow shifts… currently it is still positive. Taking what is given and managing the risk as it is presented.

  • Crude Oil (USO/USL) still on the rise as crude clears the $40 level. Adjusted our stops on the move. Gasoline (UGA) advanced as well.
  • Financials (XLF) moved lower and back to key support at the $23.50 level. Watching how this unfolds near term.
  • Gold (GLD/GDX) more upside as it breaks from the trading range as the dollar shows weakness. Adjusted stops.
  • Apple (AAPL) leaves Intel to use its own chips in Mac. Pushed to new highs on the news and raised stop.
  • Netflix (NFLX) broke from flat base and rose to new highs. Providing leadership for the NASDAQ. Adjusted stops.

FRIDAY’s Scans for June 19th: Volatility described the trading day and there was not much at the end of the day that changed. We continue to be diligent in managing the risk of the current environment and watching how the data impacts the movement on the charts. Money flow is slowing and the outcome is getting cloudier. Watching how institutional money moves from here.

  • Biotech (IBB) breaks from the trading range and moves to the upside.
  • Dollar (UUP) nice drift higher for the week.
  • Volatility Index (VXX) bounced higher on Friday. Watching how investor anxiety moves going forward.
  • Gasoline (UGA) broke higher for the week to new highs.
  • China Internet (KWEB) solid break higher and follow through.

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.

(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. Tested lower and watching.
  • XLU – Utilities reversed the downtrend and heading higher. Tested back to the 200 DMA and watching how the sideways trend unfolds. Negative move on Friday. Tested lower and watching.
  • IYZ – Telecom moved to the April highs and follows through to $29.50 resistance. Back to $27.63 support. Tested lower and watching.
  • 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. Tested lower and watching.
  • XLI – Industrials broke higher from the consolidation pattern. Tested support at the $67.50 mark. Tested lower and watching.
  • 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. Sold off 5.5% as questions rise in oil consumption.
  • 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. Tested lower and watching.
  • 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. Key leadership coming from IGV and SOCL currently.
  • XLF – Financials broke higher showing some solid upside momentum the last two weeks. That ended as sold back to support at the $23.50 level… watching. Fell to key support.
  • XLY – Consumer Discretionary broke from the trading range and established a solid uptrend. Approaching the February highs and stalled. Watching the outcome.
  • IYR – REITs broke lower below $71.30 support and bounced… Solid upside the last two weeks as the laggard gains momentum. Moved back to support at the $78.83 mark. Tested lower and watching.

The trends are resumed on the upside with some consolidation patterns building this week. Watching how this unfolds moving forward as investor confidence seems to be shaken on news. 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… 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 consolidation bias for 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:

Wednesday: Not a pretty picture for stocks. The test lower comes as the NASDAQ again fails to hold new highs. There is plenty of speculation on the outcome of the economic picture… that is not new… it is just a shift from positive to negative and the sentiment shift could impact stocks going forward. Letting this unfold, managing the risk, and looking for the opportunities in the moves.

Tuesday: Nine of the eleven sectors are in confirmed consolidation patterns. That means the markets are moving higher on two sectors and the mega-cap stocks. That is not a good sign relative to the current risk levels. We will watch and take what the markets offer, but we also have to be diligent to manage our stops and the relative risk.

Monday: The NASDAQ hits new highs and other indices move sideways. There are key leaders and they continue to lead while other sectors and stocks struggle to hold their ground. Watching and managing the risk in areas where it is warranted and letting the leaders run. The dollar is weaker, gold moved higher, and crude moved above $40. All part of the evolution of the markets currently.

Weekend Wrap & Outlook… The coronavirus leads the headlines with the record rise in new cases in six states. That put some caution in the markets overall as speculation of what the outcome will be for the economic picture. Add to that the Fed taking the lead to say it will weaken the second-half results for 2020 and prolong the recovery. All said it threw a wet blanket on the market along with some increased volatility on Friday. China-US trade tensions all but disappeared from the headlines this week, but that issue is far from dead. The NASDAQ’s pushed back towards the record highs giving up the gains on Friday… but, still showed positive movement. 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 Fed remains fully engaged in the recovery process as it continues to put liquidity into the financial system, buying debt, and providing stimulus. 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 moved back to 35.1 after testing the support levels earlier in the week. 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 with fast money looking for opportunities. Five sectors posted a loss for the week and six were higher. Gold continued to bounce moving back to the top of the trading range. Crude oil posted solid gains as it approached the $40 level per barrel. 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.