Virus worries send markets lower

Market Outlook for May 13th

The key take away from Tuesday was the intraday activity with the market opening higher and trading well throughout the day and then selling off more than two percent in the last hour of trading. The Fed was putting money into the system by buying bond mutual funds and ETFs and that didn’t even influence the selling late in the day. This activity was definitely a test at resistance and it shows some anxiety stirring with investors. As we have stated several times recently the markets are fully priced relative to the data, but buyers have been willing to put money to work… has that changed? Watching how this unfolds with our stops in place and our eyes on the data.

In The News:

Reopening worries flamed by Dr. Fauci… He was quoted in the hearing to the Senate on Tuesday as saying… “the number of COVID-19 deaths in the US is likely higher than the official tally.” Thank you Dr. Spock for the obvious statement. I personally have no axe to grind with the man, but the fact is that he has not come close to predicting or analyzing the virus any better than anyone else in the world. But, he is still listened to by others and that unto itself is amazing. No one has been right about the virus… thus the spread. This has become a political football in the media and in Washington as witnessed by the Senate hearings on Tuesday.

Dems unveil massive stimulus plan for $3 trillion… this one is going to hurt… 1 trillion dollars in state and local aide! More money for everyone $1200-$6000 per household. $200 billion for hazard pay for essential workers. $75 billion for coronavirus testing and contact tracing (really… that’s all for the cause of the economic collapse?) Extension of the $600 Federal unemployment set to expire in July… really we aren’t even sure if people are going back to work yet? It is MAY! $175 billion in rent, utility, and mortgage assistance. Money for Supplemental Nutrition Assistance Program.. (NO COMMENT!) Subsidies for the Affordable Care Act. $10 billion for small businesses to keep employees on the payroll… slap in the face to small business seeing how state get $1 trillion… money for election safety relative to voting by mail… and of course money for the US Postal Service. The House could vote as soon as Thursday… Don’t expect it to pass the Senate as the Republicans are not on board with this bill… yet.

Mortgage applications from buyers jumped 11%… The housing market is showing signs of fo life as people go shopping. After two months of double-digit declines the buyers were out shopping for homes.

It doesn’t make sense: U.S. meat supplies dwindle as exports to China rise… President Trump has asked for the meat processing facilities to remain open despite issues with the spread of the virus. It was recently noted that exports to China have risen as a pig disease decimated their herd. The end result thus far has been beef prices rising by nearly 100% for ground beef in stores. Projections are for a decline of 30% in supply for grocery stores. Restaurants are opening to higher prices for food which in turn will be passed on to the consumer. This could be a challenge to the food supply chain for some time looking forward as packing facilities are operating at 25-30% of capacity. It is also important to note that Smithfield Foods is owned by China’s WH Group Ltd. Pork production has fallen 40% since mid-March while shipments of American pork to China have quadrupled over the same period according to the US Department of Agriculture data.

Economic News… 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. 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 down 60.2 points to 2870. The index moved back below the 2900 level again hitting resistance at the 2950 level again… where the index tested in April. The chart is defining the near term trend along with a topping pattern. We are looking for who will take the leadership role… No one on Tuesday as all eleven sectors closed in negative territory. The VIX index moved to 33 on the day showing investor anxiety. Watching how the consolidation pattern unfolds as it fails again at the previous highs.

The NASDAQ index closed down 189.7 points at 9002. The index held above the 10 DMA and tested at the 9297 resistance losing 2% for the day. The close held the 8972 support level and remained in positive territory for 2020. The NASDAQ 100 index (QQQ) was down 2% for the day and testing the move higher. The $218 level is stop for now and watching how it unfolds near term. Semiconductors (SOXX) closed down 2.6% as it tests the $243 resistance and $232. support/stop. Technology (XLK) was down 2% testing the $96.27 resistance. Testing 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 and now moving back towards the previous highs and needs to find some momentum. A solid day to end the week and watching how this unfolds next week. Resistance at $133.32 and tested down 3.6%.

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. Mr. Buffet didn’t help with his announcement of selling all his airline stock. A retest of support at the $139 level and bounced. $153.17 is level to clear. Tuesday down 2.8% and remains in trading range.

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.

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 27.5 level. The move below 31 is significant for the index and signifies some calm is being restored to the markets. Watching how this unfolds going forward. Support at 27.5 tested and moved to 33 on Tuesday showing some anxiety.

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

MidCap (IJH) The sector remains volatile with a solid week of gains to respond to last week’s selling. Next is to clear the recent highs to keep the upside trend in play. Stop at $157.52. Entry $145.50. Resistance at $167.81 tested lower down 3.6% on Tuesday.

Biotech (IBB) The sector tested the $121.70 support and moved back to the previous highs… watching for a breakout from the consolidation range. Lower volume has been a concern but raising the stops on holdings. Solid break higher gaining 4.2% and clearing the July 2015 highs. Tested down 2.1% on Tuesday and watching.

Semiconductors (SOXX) The sector tested support at the $223 mark and moved up five straight days. The next hurdle is the $243.50 level. Watching how the new week unfolds follow the test and bounce. Down 2.6% on Tuesday $232.68 is support.

Software (IGV) The sector established a bottom at $185 and bounced. Stop at $237.50. Entry $205.10. Solid five days on the upside for the week to recover from last weeks selling. Adjusted our stop and letting it play out. Added 1.4% to the uptrend on Monday. Fell 2.4% on Tuesday to test the move.

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 has moved into a descending triangle pattern. Looking for some conviction… either direction. Broke support at $71.31 and opened the door for short side trade.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 0.68% up from .64% last week. TLT hit resistance at $170.35 and hit our stop at $167.50. Watching how this unfolds near term. No real upside in yields seen currently. Yield climbs to 0.72% on Monday. Moved to 0.67% on Tuesday with some selling in stocks… bonds ready to rally?

Crude oil (USO) Crude moved to $26.17 this week and up from the $19.68 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 falls 4% on worries about the return of coronavirus. Rose 4.9% on Tuesday… consolidating at the current highs.

Gold (GLD) The metal moved to a high of $163 and then reversed to test support at the $158 level. Holding near the highs and in a trading range. Watching how this unfolds going forward and the China-US trade talks. Remains in the consolidation pattern.

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.

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.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

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.

MONDAY’s Scans for May 11th: Mixed day for stocks without much on the docket relative to change. Crude moved lower as fear of a second wave of coronavirus hits the news. Biotech breaks higher gaining more than 4%. Financials continue to struggle and it was a day of juggling overall. No real breaks in major indices as we look for a follow-through upside.

  • Biotech (IBB) new highs and new hope in the sector. Adjusted our stops. Healthcare (XLV) and pharma (XPH) moved higher as well.
  • Financials (XLF) testing support in the lower end of the trading range.
  • Volatility Index (VXX) remains in a correction phase.
  • Cloud Computing (SKYY) adding to the upside leadership in the technology sector. Software (IGV) adding upside as well.

FRIDAY’s Scans for May 8th: Solid upside for stocks at the debate rages on about valuations and the economic outlook for stocks. My view is to take what the market offers and keep moving forward with your stops adjusted to account for the risk.

  • Technology (XLK) remains the bright spot for the markets as it remains the leader.
  • Healthcare (XLV) a benefactor of the money from the CARES act to help find a cure for the virus remains a positive for the markets overall.
  • Energy (XLE) crude has bounced off the lows and remains somewhat steady at the $25 mark. Watching how this sector unfolds moving forward.
  • Treasury Bonds (TLT/TBT) coming under pressure as the yield start to creep higher. Watching the downside play for bonds.
  • NASDAQ 100 (QQQ) leadership remains in place for the sector and watching how it unfolds near term.

THURSDAY’s Scans for May 7th: Another day of moving higher and then fading part of the gains into the close. The indexes are inching higher with the NASDAQ leading the way. The close on Thursday put the composite index into positive territory for 2020. There is plenty of speculation on the China-US trade front as negotiators talked for the first time since the coronavirus started. Jobs report is out Friday and many expect bad news which may make it good news for stocks. Not really sure how this will unfold but we will continue to take what the market offers and tighten our stops along the way.

  • Technology (XLK) remains the leader for the markets as they break to new highs from the March lows. IGV, HACK, SOCL, WEBL are all leading the way higher.
  • Volatility Index (VXX/VIX) is sitting on support as the index inches lower. A break lower would show less anxiety and some positives to the market’s psyche.
  • Gold Miners (NUGT) pushed to the key resistance point at $73 and looking for upside break higher.
  • Treasury Bonds (TLT) Tested the 50 DMA and bounced. Watching the move higher as it reversed some of the selling in bonds with money in rotation to stocks.
  • Medical Devices (IHI) trying to break higher from the flag pattern on the chart.

WEDNESDAY’s Scans for May 6th: Mixed day as some sectors show upside and others show testing… the key is none are breaking to new highs. Volume is lower and not conviction showing in the charts this week. Taking what is there and managing the risk accordingly. Not willing to say we are heading lower and not convinced we are heading much higher. Dull market and letting it play out.

  • Crude Oil (USO/USL/UCO) holding on to the gains and watching the stocks (XLE) and other parts such as gasoline (UGA). We are also looking at the oil-producing countries relative to the impact.
  • Utilities (XLU) break below key support at $55.24… short-side setup for trading?
  • Financials (XLF) testing key level of support at $21.30.
  • Telecom (IYZ) testing key level of support at $25.25.
  • REITs (XLRE) testing key level of support at $32.46.

(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. A solid move higher for the week and looking at the previous highs.
  • XLU – Utilities continue to struggle moving off the $61 highs and testing the $55.24 support. Watching how this unfolds near term.
  • IYZ – Telecom moved to $28 and tested support at $26.25 and remains in a trading range. Watching how this unfolds… parts are better than the whole currently. Moved lower in the trading range.
  • 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.
  • XLI – Industrials remain in a consolidation pattern. with $65 level to clear on the upside. Watching. Moved to the bottom of the trading range.
  • XLE – Energy moved above the $31.20 entry-level as the bottom was established. The uptrend remains in play with plenty of testing along the way. $38.90 level to clear to break through resistance.
  • 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. Solid upside added with biotech rising to new highs. Resistance in play at the $101 mark.
  • 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. Leadership remains strong.
  • XLF – Financials remain in a consolidation pattern as the outlook for stocks remains questionable. $23.50 level to clear on the upside. Testing support again. Short side trade set up.
  • XLY – Consumer Discretionary tested the 20 DMA and bounced back to the previous highs. In good shape to continue the current leg higher.
  • IYR – REITs have worked into a consolidation pattern with the support at $71.31 holding for now. Watching how this unfolds with plenty of concerns around the commercial real estate sector. Short side trade with break of support on Tuesday.

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… Four sectors are in confirmed uptrends and seven are in consolidation patterns. The result for SPY is consolidation pattern short term. The strong leadership is helping overall, but 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:

Tuesday: the downside close put some sectors in a position to correct or test the downside. Others gave up solid gains from Monday and the nerves of investors are showing up again in the volatility index. All that negative said, we still have to let it unfold on the charts and take what the markets offer. There are set up defined on the downside. There are tests of the uptrends. But, at the end of the day we follow what happens, we don’t speculate on the outcome. Stay focused and disciplined with your money.

Monday: consolidation day from my view as some indexes struggle at resistance points. Watching how they unfold as the week progresses and the data continues to unfold. Biotech breaks to new highs and technology continue to provide leadership. Patience and risk management remain the name of the game.

Weekend Wrap & Outlook… The coronavirus remains center stage as the number of cases continues to flatten and more states have started to reopen businesses. This presents opportunities and expectations from stocks and the economic picture. There is no lack of question marks for the markets moving forward, but for now, investors are willing to put money to work. The jobs report on Friday was dismal as expected with 20.5 million jobs lost in the month of April. Unemployment jumped to 14.7% and average hourly earnings rose 4.7%. Despite the ugly news stocks rose higher on Friday and for the week. The major sectors ended the week all in positive territory. The optimism about reopening the country for business is helping, but it is being weighed against future damage. The VIX index fell to support at 27.5 and shows some lower anxiety from investors. 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. There is some testing in play, but the bounce back this week started a new leg higher. Healthcare, energy, and technology are the leaders currently. Gold has moved to near term highs and stalled. Crude oil has bounced off the lows showing some signs of life. 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. 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.