Large Caps Lead the Day

Moving the markets on Wednesday was large-cap stocks once again. The challenge for the markets remains leadership other than large caps… a look at the small and mid-cap sectors shows one continuing higher while the other tests. Technology and REITs led the day but there was a lot of juggling on the day overall. Maybe investors are moving money where they believe the opportunities lie or maybe there is plenty of guessing and hoping. Interest rates moved lower again with the 10-year bond at 4.52% and the 10-year bond auction was okay, not great. The end-of-the-year rally seems to be the focus for now. Technically the NASDAQ moved above the down trendline from July highs offering further confirmation of the upside move, albeit closed on a doji candle. The SP500 index is trying to clear resistance at the October highs but struggled closing on a doji candle. Time will tell, but opportunities on the upside are in play and we are taking what the market offers. Bear flag patterns on charts broke to the upside and reversed the third leg lower, now looking for confirmation of the current move higher. We will watch how Thursday unfolds… could pause and then run as the 6.4% move in seven days needs to find more money flow. The economic data remains questionable at best but optimism springs eternal. Just look at the headlines and listen to the financial talking heads. Solid day on the charts as the major indexes started higher, tested lower, and closed flat on the day. Oil, precious metals, and oil stocks head lower on the day again as speculation about demand remains. The volatility index dipped lower as markets bounced pushing SVXY higher. Overall positive day as buyers remained hopefully engaged with stocks. Taking what the market gives and managing the risk.

Wednesday was a positive day for the markets overall as buyers remain in play along with rotation… The charts are not a picture of strength but the bounce is in play and we will take the good with the bad. The technology and REIT sectors led the day. Earnings have been good and bad turning it into a stock picker market. The complexity of the outlook for global economics, domestic economics, and uncertainty remains in the background as money chases the belief the Fed is done with interest rates. The major indexes were flat to higher on the day as we view this as a relief bounce until the emotional trade is done. The S&P 500 index closed up 0.1%. The NASDAQ was up 0.1%. The SOXX was up 0.1%. Small Caps (Russell 2000) were down 1%. The ten-year treasury yield was 4.52% down 5 bps for the day. Crude (USO) was down 2.2%. (UGA) was down 1.4%. Natural gas (UNG) was down 1%. The dollar was down 0.03%. We are focused on managing the risk in the current environment.

Charts to Watch: See Notes on “Reality of the Markets” & “Jim’s Beliefs About the Market” pages…

Quote of the Day: “Anyone who lives within their means suffers from a lack of imagination.” — Oscar Wilde

Additional Charts To Watch

KBE/KRE – The banking sector is being challenged by higher rates. Despite the solid earnings from the sector the overhang of rates pushed both the money center banks and the regional banks below the October lows and renewed the concerns over balance sheets. As seen in the reversal in rates relative to the Fed’s statements following the FOMC meeting has reversed the trend in banks… both KRE and KBE were up nearly 5%. All is good for banks… no more financial issues with balance sheets… 🙂 The last few days show a test of the gap higher from last week… Looking for an opportunity on the test.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed up 4 points to 4382 moving the index up 0.1% with below-average volume on the day. The index moved to resistance at the 4386 level and the October high. Five of the eleven sectors closed higher on the day with technology as the leader up 0.5%. The worst performer of the day was energy down 1.2%. The VIX index closed at 14.4 moving lower on the day. Plenty to ponder between the headlines and facts. The index needs to clear the resistance and then the down trendline from the July highs.

XLB – Basic Materials broke support at the $77 level reversed and back to resistance at $79.50. Needs to clear resistance to maintain the bounce. The sector was up 5% for the week. No Positions. Tested back to $77… previous support.

XLU – Utilities found support at the $56 level… bounced and broke resistance at the $60.15 level. The sector was up 5.3% for the week. Entry point offered on the break above resistance. Tested the move last few days. $60.15 support.

IYZ – Telecom bottom reversal along with most sectors and cleared the $21.30 resistance. The sector was up 9.2% for the week. No Positions. Tested the move back to $21.30.

XLP – Consumer Staples Moved higher from the consolidation pattern to resistance at $69.30. Need to break above the resistance near term. The sector was up 3.2% for the week. No Positions. Holding near resistance.

XLI – Industrials bottom reversal in play $102.41 level to clear. The sector was up 5.3% for the week. No Positions. Testing the move higher.

XLV – Healthcare bottom reversal in play. $129 level to clear near term as it moved above the October lows. The sector was up 3.4% for the week. No Positions. Solid follow through with IBB showing positive move and test.

XLE – Energy moved back to $84.33 support bounced… $87.50 next hurdle and not looking great on the chart. Earnings were the downside catalyst. The sector was up 2.1% for the week. Moved below the $84.33 level of support offering a short signal. Added to the downside on Wednesday… relief bounce in the downtrend would be normal.

XLK – Technology bottom reversal and solid upside move to lead for the week. The sector was up 6.6% for the week. Entry XLK $166. Stop $171. Solid follow-through upside breaking above the downtrend line and facing the August highs.

XLF – Financials relief in interest rates moving lower sparks rally off the bottom. Gapped higher with a move above the $33.64 level a positive. The sector was up 7.4% for the week. Tested and held near $33.65.

XLY – Consumer Discretionary bottom reversal needs to clear resistance at the $163 level. The sector was up 7.1% for the week. No Positions. Holding the move higher.

IYR – REITs bottom reversal gains momentum on interest rate decline favoring the sector. Cleared $79.50 resistance eat the October high. The sector was up 8.7% for the week. No Positions. Testing the move higher.

Summary: The investor is buying into the rhetoric of the Fed being done… all is well scenario being played out in the media. Wednesday was a third consolidation day for sectors as the market looks for overall leadership. Watching how this unfolds near terms with some consolidation in play for now. On the positive side interest rates were lower again helping the psyche of the markets. The index moved back to the 4386 resistance level. For now, this is a relief bounce and could turn into the year-end rally many analysts are hoping and asking for… Patience is key. Entry points hit for upside trades as low-risk trades were available. Banked some profits on the day taking some off the table and letting this unfold. The near-term move extended and watching how it unfolds with our stops in place. 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 up 10 points to 13,650 as the index was up 0.08% for the day. The index tested lower intraday but managed to close flat on the day. 13,618 level cleared along with the down trendline from the July highs. Solid move as the index takes on the leadership role near term. Patience and stops in play.

NASDAQ 100 (QQQ) was up 0.06% for the day as the mega-caps were slightly higher showing some consolidation on the day. The sector added to the upside and broke the down trendline from the July highs. Cleared $366.15 resistance and followed through. The sector had a negative bias for the day with 46 of the 100 stocks closing in positive territory for the day. Adjust stops and let it play out. Entry $354.20. Stop $365.

Semiconductors (SOXX) The sector moved $473 on a bottom reversal. The sector was up 84% for the week. SOXL entry $448. Stop $468. Holding above the resistance line and looking for follow-through.

Software (IGV) bottom reversal moved above the $345 resistance to post a positive week. The sector was up 6.2% for the week. Test and follow through last two days. Added IGV $336. Stop $352.50 (adjusted).

Biotech (IBB) bottom reversal cleared $115 and $119 resistance levels. The sector was up 6.5% for the week. LABU Entry $115. Stop $118. Bounced… testing $119 and watching.

Small-Cap Index (IWM) bottom reversal with gaps higher and needs to clear the $176 level. The sector was up 6.5% for the week. No Position. Watching as the sector stalls at resistance. Testing support at $169.50.

Transports (IYT) bottom reversal bounce… all too many reasons for this to fail. Letting it unfold and take what is given. The sector was up 7.6% for the week. No positions. Solid reversal but testing currently.

The Dollar (UUP) The dollar dumped to end the week following FOMC rhetoric. Watching for a bounce this week. The dollar was down 0.8% for the week. No Positions. Topping pattern.

Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.66% down from 4.84% last week. TLT was up 4.3% for the week. Watching how the Fed manages the aftermath of the FOMC announcement. Yields driving markets short term on optimism around the Fed… slippery slope.

Crude oil (USO) Crude sold lower on worries about consumption. An increase in supply for the week was a concern and crude moved back near $81 a barrel. USO was down 4.4% for the week. Up and down activity all week. Dumped lower on Tuesday and Wednesday… watching how this unfolds.

Gold (GLD) The commodity remains in a topping pattern… the dollar is flattening and the outlook is positive. Expect some testing of the move near term. The metal was down 0.7% for the week. Added positions at $172. Stop $182 (HIT STOP). Managing the risk. Tested with some volatility and broke lower on Wednesday.

FINAL NOTES

Our longer-term view remains a downside bias as the upside trend from the October lows was broken. The current bounce needs to clear 4386 first and the down trendline from the July highs second. The short-term upside move last week is good, but leaves plenty of work to be done from a longer-term perspective. If the longer-term trend is to resume the short-term downtrend needs to reverse… The activity for the week is trying to bounce but has plenty of work to do. Nothing, as we all know, 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 plenty of volatility along the way. With the trend broken, it puts the broad indexes in an intermediate downtrend… the last eleven weeks’ short-term trend has offered downside trades… solid gains posted… now they have reversed offering some upside trades. The current bounce off the lows is in play but challenged by uncertainty in the economy and geopolitics. Current activity raises questions relative to direction and growth. We look to charts and fundamentals for some answers. 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.

Wednesday: Indexes were basically flat after a small test lower on the day. The technology and large-cap stocks are in the leadership role and if this is to continue the breadth needs to widen. Watching how the relief bounce unfolds… maybe a relief bounce and some selling? Maybe the start of the year-end rally? Maybe speculation around the Fed? Maybe a bond rally? Whatever the rationale, the fact remains to follow the charts and manage the risk while waiting for the facts to confirm the belief over time. There is no lack of issues on the table with each taking their respective turn in the spotlight. There is a lack of leadership overall although tech made a good move along with consumer discretionary the last seven trading days… Economic data is confirming the ugly outlook. I would expect the data to remain negative with the only real caveat being how negative it will be. We have put money to work short term based on the technical moves and we continue to manage risk and take what the markets give. Remember all upside moves at this point are relief rallies and we will treat them as such until they validate otherwise. Watching XLK, QQQ, SOXX, IGV as opportunities and leaders.

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.

Explore the following links for new pages that dig into data both In & Outside the markets. Jim’s insights highlight potential opportunities emerging from the current market environment. The pages also discuss the Reality of closed opportunities, whether they proved profitable or fell short of our expectations.

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