The markets start sharply higher on solid earnings reports but fails to hold the gains as sellers entered the game. Some say profit-taking, some say the market is overextended, and some say an economic storm is on the horizon. We say watch the charts and follow your disciplined strategy for investing. The facts are some of all three rationales are in play as the intraday reversal is not a good sign technically. The swing of 1.5% on the S&P 500 index wasn’t huge but it was enough to get our attention. Economic news was plentiful with jobless claims better than expected, GDP at 2.4% versus 2% previous, and Durable Goods up 4.7% versus 2% previous. Both show some surprising growth. Pending home sales were 0.3% versus -2.7% previous, also better than expected. The biggest moves on the day came from the telecom sector, which is the only sector to close in the green. Semiconductors gave up some of the early gains but managed to close up 1.9%. Treasury bonds moved as interest rates moved above 4% again on the 10-year bond. The Bank of Japan surprised global markets with a change in stance towards rates allowing it to rise up to 1%… which rattled the US bond markets. Worth watching going forward. Earnings continue to provide some fuel with Intel, Ford, and Boston Beer beating earnings after hours. Taking what the markets offer and managing our risk accordingly.
Looking at the key indicators we see mixed data and the charts are showing some topping patterns with some breaking below support near term. We have adjusted stops based on current activity. One of the eleven sectors closed in the green the leadership came from IYZ. Volume was above average on the day. Scanning the ETFs The leaders were GLD, GDX, SOXX, TMV, and USO. The S&P 500 index closed down 0.6%. The NASDAQ was down 0.5%. The SOXX was up 1.8%. Small Caps (Russell 2000) were down 1.2%. The ten-year treasury yield closed at 4.01% up 16 bps. Crude (USO) was up 1.1%. (UGA) was up 1.3%. Natural gas (UNG) was down 3%. The dollar was up 0.9%. 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) Held above the $366.14 mark but closed negative in intraday selling. 2) Short-term trend is UP… starting from the January low. 3) Moved below the 10-day MA. 4) Watching for entry up or down? No Positions.
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. Hit the target intraday on Thursday. Watching the current test near the highs. Sold half of position.
IWM – struggled and reversed off support with solid follow-through on the upside clearing the $189 level. TNA entry $36.31. Stop $38. Resumed upside and tested at resistance. Intraday reversal on Thursday.
SOXX – moved back above the $497.61 level and above the June highs. Testing the latest move higher. No positions and watching how this unfolds near term. Holding the 20-Day MA. Solid upside move on Thursday.
USO – broke above the top of the range with upside pressure coming from the supply data. Hit the entry point at $65. Stop $67.70 (adjusted). $66.23 support in play with downside pressure from China. Broke higher and back near the April highs. Higher on Thursday.
IYT transports tested back to the $247.67 level bounced and moved to new highs. Entry $231.20. Stop $255. Gave up the gains from Wednesday… watching the trend.
DIA reversed the swing trade upside and tested back to the $337.10 support… added a position $339.35. Stop $350. An uptrend in play. Tested Thursday.
Gold (GLD) big drop on Bank of Japan rate surprise… dollar was higher, interest rates higher, rattled the commodity and the miners. Hit stops at breakeven on all positions.
Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Added 5/7. DIA (technical entry) Added 6/29.
Stops Hit: None
ON TAP TODAY: 1) Earnings. 2) Economic data. PCE will be important. 3) QQQ, XLK, SOXX do they bounce or sell further? 4) Bond reactions to the BOJ, do they continue to sell? TMV. 5) Bank’s response to higher interest rates as well as the Fed.
Quote of the Day: “Talent alone won’t make you a success. Neither will being in the right place at the right time, unless you are ready. The most important question is: ‘Are your ready?’ – Johnny Carson.
The S&P 500 index closed down 29 points to 4537 the index was down 0.64% with above-average volume on the day. The index held the move above the 4400 level. 4585 next resistance level which was hit intraday and reversed. One of the eleven sectors closed higher on the day with telecom as the leader up 0.1%. The worst performer of the day was REITs down 2.2%. The VIX index closed at 14.4 with intraday volatility worthy of note. The uptrend from the October low remains in play.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials solid week as the chart holds above the $81.75 resistance to move higher. The sector was up 0.6% for the week. No Positions. Broke above the March highs and stalled.
XLU – Utilities Bottoming range broke higher on Friday and looking for follow-through to the move… The sector was up 2.4% for the week. Entry $67.05.
IYZ – Telecom In a downtrend from the February highs, bounced at support and back to the top of the current range. Need to clear $22.30 resistance. The sector was up 3.4% for the week. No Position. Stalled at resistance.
XLP – Consumer Staples broke higher from the consolidation pattern. Added at $74.72. The sector was 1.8% for the week.
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 0.8% for the week. XLI entry $102.40.
XLV – Healthcare Finally broke higher from the consolidation pattern from the March lows. Solid trading week for the sector. The sector was up 3.4% for the week. Entry.$132.64. Stalled at the highs.
XLE – Energy Bounced and cleared the $82.74 level and trying to break the downtrend from the October highs. The sector was up 3.5% for the week. Entry $81.95. Broke above the 200-Day MA. Set to return to leader?
IEO – broke higher as offshore interest rise. Entry $85. Stop $89. WTI breakout entry $4.40.
XLK – Technology The sector is testing the move higher closed on the 10-day MA. The sector was up 0.08% for the week. XLK entry $151.53. Tested with weakness in SOXX. SOXX led on Thursday?
XLF – Financials holding above $33.35 support and in an uptrend from the March lows. The sector was up 2.9% for the week. KIE breaking above resistance. Entry $40.60. Stop $40.60. Earnings mixed in the sector. UYG entry $45.60. Continued upside move. Tested the uptrend. 16 bps hike on Thursday.
XLY – Consumer Discretionary Tested the move higher in the uptrend. The sector was down 2.2% for the week. Remains in a leadership role. XLY Entry $147.10. Sold @ $173.27. Big test… locked in solid gain.
IYR – REITs moved above the $85.50 resistance level with the target now $90.47. The sector was down 0.01% 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. Selling on rates moving above 4%.
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. Rolling top on the chart.
Summary: The index was challenged by midday selling closing in negative territory. One of the eleven sectors closed higher on the day with some rotation to safety showing in trading. 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 down 77 points to 14,050 as the index was down 0.55% for the day. The index remains in the uptrend with some testing. Support is 13,762. Letting the test unfolds as tech and mega caps test their respective highs. SOXX was up 1.9% on the day. IGV was down 0.8%. Watching support and how the activity unfolds.
NASDAQ 100 (QQQ) was down 0.24% on the day as mega caps reverse intraday to close lower. Remains above the $366.14 support. The mega-caps, as we have discussed, are/were extended from the May break higher and thus we manage the risk short term. We don’t have any positions currently. Watching for the next directional opportunity. The sector had a negative bias with 34 of the 100 stocks closing in positive territory for the day.
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 down 1.4% for the week. Sold position for a solid gain. $497.61 level to hold. Volatility remains in the sector.
Software (IGV) Broke higher from the consolidation pattern on the chart. The sector remains above the $336 level of support. Added IGV $291. Stop $351 (adjusted). The sector was up 0.08% for the week. Tested lower.
Biotech (IBB) The sector broke above the $128.35 resistance level. The sector was up 2.5% for the week. Entry $129.10. Stop $129.10 hit stop. Moved back below the $128.35 support.
Small-Cap Index (IWM) Cleared the $189 resistance level to establish an uptrend. The sector was up 1.5% for the week. Entry TNA $36.31. Intraday reversal watching.
Transports (IYT) Made a break above the January highs and showed solid momentum as it tests near the highs. The sector was up 2.7% for the week. IYT Entry $231. Gave up the gains from Wednesday.
The Dollar (UUP) The dollar tanked retesting the April lows and bounced. The dollar was up 1.3% for the week. More chatter about losing dollar status globally as BRIC nations establish gold-backed currency. No Positions. Upside move resumed.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.83% up from 3.81% last week. TLT was up 0.4% for the week. Moved back in the 3.7-3.85% range. Up 16 bps… back above 4%.
Crude oil (USO) Broke higher from the consolidation pattern showing positive momentum based on supply data during the week. USO was up 2.2% for the week. UCO entry $24.15. Reestablished the uptrend as supply tightens. Continues to climb on supply tightening.
Gold (GLD) The commodity broke higher from the base. Entry $179.36. UGL entry $59. Hit Stop. GDX entry $31. Hit stop $31. Letting this unfold. The metal was up 0.45% for the week. Watching the dollar bounce. Stronger dollar on Fed action.
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 shifted 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 week started solid but some testing to end the week is in play. The FOMC meeting is on Wednesday and all eyes and ears will be focused on the Fed comments following the meeting. Some rotation to the defensive sectors the last few days has our attention as well looking forward. Tightening our stops on intermediate and short-term positions. We locked in some gains on technology positions and added some others as money rotated. 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 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.
Thursday: Intraday reversal showed some profit-taking. Some juggling as some money continues to rotate and some flight to safety on the day. We have added positions in the benefactor sectors and exited others as we manage our risk accordingly. 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 plays out. Plenty to ponder as we progress in the current environment.
What I am watching on Friday: 1) SPY, QQQ, SOXX, directional decision. 2) Commodities reacting to the Russia/Ukraine issue for grain exports. Gold reacting to the BOJ news. 3) TLT reaction to BOJ. 4) Currency reaction to the BOJ. 5) Economic data PCE will be key on the day.
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.