Virus news puts lid on market

Market Outlook for February 14th

The number of deaths rose in China as experts attempt to stop the spread doesn’t work. This issue is far from over and the impact is growing. The concerns surfaced again in the global markets as money flow slows. The uncertainty around this issue remains. As we discussed yesterday there is plenty of doubt about how the data is being reported from China. We continue to look at the outlook and potential impact globally, but there is no hard data or facts on how to address this in the markets. End result is to monitor your investments and make adjustments as necessary.

The S&P 500 index closed down 5.5 points to 3373. The index closed lower on virus worries. Three of the eleven sectors closed higher on the day with utilities leading the way. The downside was led by industrials and healthcare as some money rotates. Bonds and defensive stocks were the winners on the day. Watching, listening, and managing the current risk.

The NASDAQ index closed down 13.9 points at 9711. The index struggled on Thursday on concerns and uncertainty. The NASDAQ 100 large caps held steady remaining near the current highs. Semiconductors pushed higher on the day to follow through on the bounce and now at new highs. We are managing our risk and looking at what unfolds near term.

Small-Cap Index (IWM) The sector continues to lag since the highs on January 16th… The negative turn off the January 18th high found support at the $160.17 mark and is holding for now… watching. Four positive days higher and back to the previous resistance at $168.10.

Transports (IYT) The sector moved to $200.55 and hit resistance. Reversed and broke support at the $192.42 level. Found support at the 200 DMA and remains in the current trading range. Worries about the virus in China hanging over the index. Cleared resistance at the $196.75 level.

The Dollar (UUP) The buck has returned to the upside accelerating all week. Fed is back adding liquidity in the repo market helping the buck. China’s tariff relief on Wednesday pushes the buck higher along with crude. Holding on the upside move. Global challenges help the dollar.

The Volatility Index (VIX) Anxiety reversed near 15 on the week but remains elevated despite the buying all week. We closed at 15.4 and watching how the new week unfolds. The positive move on Wednesday push the anxiety levels lower to 13.7. Thursday at 14.1 on uncertainty.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector followed small caps lower breaking support at $203. Bounced early in the week showing some signs of life, but that ended and back near the $204 support. Solid fourd-day upside move.

Biotech (IBB) The sector hit highs at the $124 mark and since became indecisive. The double top pattern played out breaking below $117.90. Then bounced off the lows. Cleared $117.92 and $120.89 resistance working towards the previous highs. Finding some resistance at the previous highs. Stalled again at the previous highs. Resistance $123.91.

Semiconductors (SOXX) January 24th intraday reversal to close lower was a negative sign for the sector. Found support and bounced, but still not looking ready to resume the uptrend. Watching how this unfolds in the new week. $247.56 level to hold. Solid upside this week to follow through and back to new highs.

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. Closed the week near the highs and watching how this unfolds. Large caps weigh on the sector on FTC inquiry. Last two days resumed upside.

REITs (IYR) The sector has turned into one giant consolidation pattern. The upside resumed clearing the $93.50 resistance and hitting the $96 resistance… watching. Big boost higher from the Fed liquidity moves. Cleared $96 resistance and running higher.

Treasury Yield 10 Year Bond (TNX) The yield closed moved to 1.65% and then reversed back to 1.57% to close the week… still seeing money flow to bonds despite the rally in stocks. Something to watch. Bond yields remain in the bottoming pattern.

Crude oil (USO) Crude moved to $64.22 on speculation. Crude fell to $50 on the speculation falling short and the China virus. Watching how this plays out with the downtrend in play. SCO hit stop but still on the watch list if the downside resumes. Finally moved higher on Wednesday news about virus. Held the move on Thursday with Exxon refinery fire.

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. Remains in a trading range. $51.70 level to clear on the upside.

Emerging Markets (EEM) Downside accelerated on the coronavirus forfeiting all the upside from December. IT did bounce at the 200 DMA, but volatility remains on speculation. Watching and letting this unfold. Bounced on rumors of the coronavirus being under control… retreated on the increased number of cases.

China (FXI/YANG) Finally gets a trade deal to help the upside trend emerge… then the coronavirus erases all the gains. Watching how it unfolds. Bounced on the news of the virus is under control? Retreated on the number being higher than reported.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for February 13th: Breaking a few eggs to make an omelet… investors remain uncertain about the virus and that keeps the markets in check. Throw in the Fed stating they were going to reduce the amount of money being put into the repo market and you get a very mixed day and an uncertain outlook for Friday. Proceeding with caution.

  • Gasoline (UGA) a refinery fire at Exxon pushed the price of gas higher, but it stalled at the 200 DMA… watching how this unfolds.
  • Utilities (XLU/UPW) upside accelerates again as money rotates to safety.
  • REITs (IYR/URE) breakout accelerated the last three days.
  • Homebuilders (ITB/NAIL) solid leadership resumes.
  • Midcaps (IJH) positive move back to the previous highs… needs to follow through.

WEDNESDAY’s Scans for February 12th: Positive upside for the markets on the news relative to lower new cases for the coronavirus… Watching how the reality of that unfolds. For now, the leading sectors hit new highs and the optimism level lifts on the news. Take what the market offers and manage the risk of the move.

  • Semiconductors (SOXX) pushed to new highs. Showing some leadership again, but volume is a concern. Let it unfold.
  • Solar (TAN) the vertical move continues. Manage your risk.
  • Gasoline (UGA) reverses and clears the bottoming pattern.
  • Energy (XLE/ERX) bottoming pattern in play.
  • Healthcare (XLV), Providers (IHF) move higher in a positive trend.

TUESDAY’s Scans for February 11th: The markets remain in a positive trend currently and money flow is positive overall. There are some question marks in sectors, but the overall push it higher. Semiconductors, Brazil, China, Emerging Markets, Solar, Energy, and Europe sectors all posted a solid upside on the day and for most continue the upside move.

  • Semiconductors (SOXX/SOXL) Pushed higher again moving back near the previous highs.
  • NASDAQ 100 (QQQ) struggled to hold gains on the day closing flat as the FTC investigation into acquisitions by large-cap stocks push the index down following the news. Watching how this unfolds going forward.
  • Europe (IEV/EURL) positive upside continues with the ETF pushing back towards previous highs.
  • Emerging Markets (EEM) and China (FXI) moved higher on the second day of lower numbers being reported from the virus. Still, a very uncertain situation that is having a huge impact on China.
  • Healthcare (XLV/CURE) moving back towards the previous highs.

FRIDAY’s Scans for February 7th: The markets find their way lower on the day after a solid start. Profit-taking? I would say there were some as the technical data on the charts are not support the move we see higher. It doesn’t mean the buyer won’t remain engaged… it just means the move is contrary to the data. Watching and letting this unfold one day at time with our stops in place. We did hit stops on several positions this week locking in some solid gains. We will see how this all plays out.

  • Semiconductors (SOXX/SOXS) The sector continues to show some weakness technically. Close below the $254 support levels again on Friday… letting it play out.
  • NASDAQ 100 (QQQ) showing a positive upside on the week and positive leadership from the large-cap stocks.
  • Crude Oil (USO/SCO) downside remains in play as the supply data remains elevated. Hopes of a quick recovery from the coronavirus are fading and the downside risk remains.
  • Small Caps (IWM) still not looking good overall. The weakness in the chart is confirmed by the declining money flow. Money has rotated out of the sector.
  • Treasury Bonds (TLT) the reversion of the yield curve was positive on the week, but the sharp move higher for the bond Friday was a concern worth our attention moving forward.

(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 $58.10 level and back near the previous highs. Remains in long term uptrend and watching.
  • XLU – Utilities are the current benefactor of lower rates and money looking for safer havens. Rolling top on the chart. Adjust stop on the vertical move. Broke higher on Thursday.
  • IYZ – Telecom picked up volatility with the markets and tested the $29.50 level of support. Holding for now with modest bounce on the week. A solid break higher on Tuesday.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs. Some downside on the rotation.
  • XLI – Industrials held support at $81.10. Managing the risk that is. Solid break to new highs.
  • XLE – Energy remains in downside move as anxiety rises about China and consumption. Hit stop on ERY locked in solid gain. Watching. Bottoming pattern in play.
  • XLV – Healthcare breaks lower from the topping pattern. Closed below the 50 DMA and support at 101. Bounced and watching.
  • XLK – Technology in an uptrend and showing a flag pattern at the current levels. Watching how leadership unfolds.
  • XLF – Financials have been in a trading range with IAI being the key leader within the sector. Watching as it hits resistance again at the previous highs. At new highs.
  • XLY – Consumer Discretionary tying to be the bright spot for the markets. Holding solid uptrend. Breaks higher to follow through on the upside move.
  • 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. Closed the week near the highs. Fed, dollar, and interest rates helping the break higher clearing resistance. Vertical move upside.

There are currently no sectors in a sideways or consolidation trend. Ten sectors are in confirmed uptrends. One sector in a confirmed downtrend. The result is SPY in an uptrend 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: More news on the coronavirus and it was opposite of Wednesday. The number of deaths rose along with new cases… there is too much uncertainty around this issue. We will watch the impact near term as it unfolds. The Fed decided to announce it was reducing the amount of money put into the repo market… interesting timing considering how much they have put in over the last two weeks. It was a day of consolidating and some rotation towards safety, but no big changes overall. Taking one day at a time.

Wednesday: News of lower virus cases sends stocks higher. The challenge is knowing all the facts and until we do news remains the driver of the last five days of trading. Take what is offered and manage the risk of reality. The Dow put in an impressive upside move on the day as it hit new highs. The NASDAQ and S&P both hit new highs on average volume, but not quite as impressive. The semiconductors are pushing higher, but it is a labor to do so. It was a positive day and we will take it in stride. Tomorrow is another day and we will manage what unfolds.

Tuesday: I took a break on Monday, but the news remains consistent at this point as it relates to politics, geopolitics, the virus, the economy, the Fed liquidity push, and earnings. That has helped the markets move higher the last seven trading days, but now the government wants to step in… The FTC inquiry into acquisitions put a cloud over the large-cap stocks and watching how that storyline unfolds. The Fed testimony to congress started Tuesday and will end with the Senate on Wednesday… no real news as Powell continues to justify the liquidity dump into the repo markets and more. Never fight the Fed. Taking this one day at a time and letting the truth unfold.

The coronavirus remains center stage but ignored all week. Why? Simply put liquidity from the Fed and China. Both are putting money into the economic system for different reasons, but that money is making its way into the markets. All the speculation that was causing grief two weeks ago was nonexistent this week. Money flow was highs, volume was higher, and thus stocks were higher. 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 as January shows improvements all around. That provided some hope as well to investors. Yields on the ten-year treasury bond rose to 1.57% unable to hold the move earlier to 1.65% The dollar remains strong. Gold is holding near the current highs with worries still backing the metal. Money is rotating to where it will be treated the best. Energy has taken the worst hit as crude prices continue to decline. Watching with interest how the new week unfolds… the profit-taking on Friday got my attention with the afternoon selling. 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.