The market opened higher on earnings data from JPM and others beating expectations. But an hour later the sellers stepped in and challenged the direction for the balance of the day with the major indexes closing slightly lower following a solid week of gains. KBE was up nearly 2% prior to the open and closed down 1.9% as the banks showed weakness throughout the day. Economic data was limited on the day with the Consumer Sentiment rising to 72.6 versus 64.4 previous… at least the consumer is seeing things in a more positive light. The market is poised for some profit-taking after rising more than 4% from the lows two weeks ago. We will watch how things unfold in the coming week but Friday was a digestion day with some rotation as healthcare led the day. The bias remains with the mega-cap Vanguard Growth ETF (MGK) ending up 0.2% versus eight of the major sectors closing in the red. All said it wasn’t a bad day overall as the charts show a pause in the trend. We adjust our stops and watch how it all unfolds. The next focus on the agenda is earnings and the FOMC meeting in ten days. Earnings data will continue to build momentum as investors will watch for growth and outlook for more growth. The overall consensus is for banks to struggle in future quarters as lending falls and higher interest rates weigh on large purchases. Take what is offered and manage your risk accordingly.
The markets started higher and closed lower with interday volatility. Most of the key indexes closed lower on the day with healthcare leading the upside. Three of the eleven sectors closed in the green. Scanning the sectors bais was on the sell side. Inflation, earnings growth, economic conditions, and geopolitical issues remain the obstacle to clarity and investor confidence. Volume was above average on the selling. XLK and XLY are the only two sectors outperforming the S&P 500 index since the March lows. XLE, XLU, and IYZ are the worst performers since the March lows. The S&P 500 index closed down 0.1%. The NASDAQ was down 0.2%. The SOXX was down 1.2%. Small Caps (Russell 2000) were down 1%. The ten-year treasury yield closed at 3.3.81% up 5 bps. Crude (USO) was down 2.3%. (UGA) was down 1.6%. Natural gas (UNG) was down 0.4%. The dollar was up 0.1%. We are focused on managing the risk and seeing how investors respond to the optimism relative to the outlook.
ONE Chart to Watch: QQQ – 1) Moved back above the $366.14 mark after testing support and established a higher low. Closed with a doji candle. 2) Short-term trend is UP… starting from the January low. 3) Broke higher from the consolidation pattern. 4) TQQQ $39.55 Entry. Stop $42.55 adjusted. Reentered position.
Additional Charts to Watch:
SPY – Moved above the June highs and resumed the uptrend. Manage your stops accordingly. $457.60 target on the current move.
IWM – struggled and reversed off support with solid follow-through on the upside clearing the $189 level. TNA entry $36.31. Tested Friday.
SOXX – moved back above the $497.61 level and above the June highs. Friday established a higher lower and Monday followed through. Entry $497.60. Target $550.
USO – broke above the top of the range with upside pressure coming from the supply data. Hit the entry point on Friday at $65. Stop $66.23 (adjusted). Outside day on Friday.
TSLA downgraded… watching the reaction to the extended stock. Last week announced deliveries of automobiles were the highest ever… stock jumped 6.9%. Added short entry $275 July 28 puts.
IYT transports tested back to the $247.67 level bounced and moved to new highs. Watching the Wednesday high to low day… warning or some profit taking?
DIA reversed the swing trade upside and tested back to the $337.10 support… added a position $339.35. Stop $337.10. Solid gains for the week thus far. Struggling to clear $345 resistance.
DIS – double bottom pattern. Entry $89.60. Bounced at support on Tuesday.
Gold (GLD/GDX) bottoming pattern in play. Watching the dollar in freefall on Wednesday. $179.60 level to clear. UGL leveraged ETF. GDX – will trade higher if gold moves up. Entry UGL $58.80. Entry GDX $30.90.
ON TAP TODAY: 1) Small test on Friday with profit taking… watching how the new week unfolds. 2) Earnings continue with some key banks reporting on Monday and Tuesday.
Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Added 5/7. Holding. AMZN (bottom reversal) Added 5/7. MSFT (break from flag pattern). Added 5/18. NFLX (test to $350 and bounce?). Added 5/24. HON (trading range breakout). Added 6/13. TQQQ (reversal) Added 6/27. DIA (technical entry) Added 6/29.
Stops Hit: None
Quote of the Day: “Insanity is hereditary; you get it from your children.” – Sam Levenson.
The S&P 500 index closed down 5 points to 4505 the index was down 0.1% with above-average volume on the day. The index held the move above the 4400 level. 4585 next resistance level to watch. Three of the eleven sectors closed higher on the day with healthcare as the leader up 1.5%. The worst performer of the day was telecom down 2.7%. The VIX index closed at 13.3 and remains at the previous lows. The uptrend from the October low remains in play.
Point of Interest: The S&P 500 index’s top 2 holdings of AAPL and MSFT now account for 14.4% of the overall weighting of the index. That is the highest combination in the history of the index. The previous high was IBM & T at 10.9%. Something to think about in trading SPY. The top 5 stocks make up 24.1%… starting to invalidate the index as a benchmark for the broad markets.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials solid week as the chart clears $81.75 resistance to move higher. The sector was up 2.5% for the week. No Positions.
XLU – Utilities Bottom bounce and a double bottom pattern… need to clear $67. The sector was up 2.2% for the week. No Positions.
IYZ – Telecom In a downtrend from the February highs, bounced at support and failed to move higher. Need to clear $22.30 resistance. The sector was down 2.6% for the week. No Position.
XLP – Consumer Staples messy consolidation pattern in play and moved back to the 50-day MA. The sector was 1.1% for the week. No Positions.
XLI – Industrials The trend broke to the upside breaking above resistance at the $102.40 level. Tested the breakout and moved higher. The sector was up 2.2% for the week. XLI entry $102.40.
XLV – Healthcare Remains in a consolidation pattern from the March lows. Tough week as it traded lower in the pattern with a bounce on Friday. The sector was up 2.1% for the week. No Positions. UNH was up 7.2% on strong revenue.
XLE – Energy Bounced and cleared the $82.74 level only to reverse on Friday. The sector was up 0.8% for the week. No Positions.
XLK – Technology The sector continued the move higher in an uptrend. The sector was up 2.8% for the week. XLK entry $151.53.
XLF – Financials holding above $33.35 support and in an uptrend from the March lows. The sector was up 1.9% for the week. KIE breaking above resistance. Entry $40.60. Stop $40.60. Watching earnings in the sector. SKF entry $17.85.
XLY – Consumer Discretionary continued higher in the uptrend. The sector was up 3.2% for the week. Remains in a leadership role. XLY Entry $147.10. New 52-week highs.
IYR – REITs moved above the $85.50 resistance level with the target now $90.47. The sector was up 2.9% for the week. The negative influence of interest rates and reports of vacancies in commercial rentals are rising but money flow has increased to other areas of the sector. No Positions.
REITs on watch with interest rates rising above 4% and the latest round of mortgage data showing a 4.4% decline in applications. That is the first decline in four weeks. 30-year mortgage jumped to 6.85%. IYR and ITB are on watch relative to the downside. Watching the downside risk in commercial properties.
Summary: The index made a move to establish a higher low in the uptrend clearing the previous highs. The next challenge is earning season begins and it should be interesting. Three of the eleven sectors closed higher on the day as we saw some profit-taking. Ten of the eleven sectors were higher for the week. Remains a sector-driven market with breadth building. The broad index remains in an uptrend from the October lows with some interim testing. Remember two things; first, the trend is your friend, and second, don’t fight the Fed.
(The notes above are posted at the end of each week based on activity from the previous week’s trading. The BOLD/ITALIC comments are the current-day changes worthy of note.)
KEY INDICATORS/SECTORS & LEADERS TO WATCH:
The NASDAQ index closed 25 points to 14,113 as the index was down 0.18% for the day. The index remains in the uptrend with a higher low in play. Support is 13,762. Watching how the trend unfolds short term. SOXX was down 1.2% on the day. IGV was up 0.1%. Taking what is offered in the current trend.
NASDAQ 100 (QQQ) was down 0.02% on the day. Moved back above the $366.14 support and the 10-day MA. The mega-caps remain extended from the May break higher and thus we manage the risk short term. The sector had a negative bias with 35 of the 100 stocks closing in positive territory for the day.
Special Rebalance – The NASDAQ exchange operator is set to rebalance the NASDAQ 100. An announcement will be made on July 14th with the change taking place on July 24th. Since we invest in QQQ regularly it will be news of interest relative to the asset’s future growth. Link to article.
Semiconductors (SOXX) The sector broke higher from the consolidation pattern. Established a higher low followed through in a continuation of the uptrend. The sector was up 4.8% for the week. Entry $511.
Software (IGV) Broke higher from the consolidation pattern on the chart. The sector remains above the $336 level of support. Added IGV $291. Stop $335.90 (adjusted). The sector was up 5.5% for the week.
Biotech (IBB) The sector tried to break above the $128.35 resistance level. The sector was up 3.1% for the week. No Positions.
Small-Cap Index (IWM) Cleared the $189 resistance level to establish an uptrend. The sector was up 3.7% for the week. Entry TNA $36.31.
Transports (IYT) Made a break above the January highs and showed solid momentum as it tests near the highs. The sector was up 1.9% for the week. IYT Entry $231.
Worry: UPS is going on strike if they don’t get a new contract by July 31st. Supply chain disruption will be a challenge for the economic picture.
The Dollar (UUP) The dollar tanked for the week retesting the April lows. The dollar was down 2.1% for the week. More chatter about losing dollar status globally as BRIC nations establish gold-backed currency. No Positions.
Yellen says to expect a gradual decline in the dollar’s share of global reserves… amazing how between Obama and Biden the dollar has deteriorated.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.81% down from 4.05% last week. Big treasury action this week took rates lower… guess who was buying? You are right the Fed pushing rates lower to help banks. TLT was up 2.2% for the week.
Crude oil (USO) Broke higher from the consolidation pattern showing positive momentum based on supply data during the week. USO was up 2.4% for the week. UCO entry $24.15. Big test on Friday.
Gold (GLD) The commodity broke higher from the base. Entry $179.36. UGL entry $59. Letting this unfold. The metal was up 1.5% for the week.
Questions to Ponder: Navigating Uncertainty
Banks passed their respective stress tests two weeks ago. The treasury yields fell 20 bps following a strong auction Monday… Fed was buying to help banks with lower interest rates. Bank earnings showed positive results… Everything is good… right? Dig into the earnings reports and you will see plenty of questions concerning the future as it relates to nonperforming loans, higher reserves, etc. KBE was up 2% in the premarket on Friday it closed down 2% after solid earnings… maybe we aren’t the only ones believing there could be problems on the horizon.
FINAL NOTES:
Our longer-term view is shifting to neutral as the upside trend from the October lows remains in play. Nothing goes straight down or up… there are always positive and negative swings in a longer-term trend. A look at the daily chart from the October lows validates exactly that premise with the trend higher overall but plenty of volatility along the way. With the trend higher it puts the broad indexes in intermediate uptrend… this is a positive overall for the broad markets. The higher low in the last leg of the trend has pushed stocks up more than 4% over the last weeks. Some profit-taking on Friday was expected, but the outlook now begs what’s ahead. Tightening our stops on intermediate and short-term positions. Trading the volatility has performed better than holding through the cycle. Sector-driven activity is in play short term with some testing at the highs. The uptrend resumes following the recent test it is the fifth stage of the move higher. News has been in the driver’s seat as we take positions that are technically moving and offering opportunities. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal is to manage the risk of positions, take what is offered… short or long, and then manage your money. Listen to the market not the talking heads.
Friday: The Fed and interest rates remain a topic of choice but weaker CPI & PPI data have the buyers in control… earnings started Friday with banks… positive new… negative results on the chart… FOMC meeting on July 26th looms, and let’s not forget the sudo stimulus in the form of the Fed’s bank rescue funds… that money is making its way into the markets to offset underperforming assets on banks’ balance sheets from the low-interest rate environment as seen in the earnings data. Thus, the need to pass the stress test from the Fed… one hand washes another. Solid upside for the week and managing the risk as the indexes move higher. Trading the trends in sectors showing strength and weakness… We see the overall trend is still up from the October lows. Watching where money is going near term for clues of what is on the horizon. Manage the risk that is and let the current trend play out.
What I am watching on Monday: 1) DIA cleared resistance $342.55 needs to follow through. 2) Dollar needs to bounce. 3) GLD, SLV, lagging… GLD broke higher as the dollar struggled. 4) Bank earnings FRCB, JPM, BLK, WFC, C… all positive stocks gave up early gains… do they continue to fall?
Decide what you’re doing before the market opens based on your beliefs. Entry. Exit. Target. Define the risk of the position. Nothing more… Nothing less.
“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 develops 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.