Modest bounce on President’s tweet

MARKET OUTLOOK FOR May 15th, 2019

The President tweets hope and the markets produce a half-hearted bounce. He also stated he wanted the Fed to match China with stimulus from lower interest rates. Oh what a tangled web we weave when we attempt to control the markets. They will react to the news, but in the end, the reality of the economies will determine how it all unfolds. We hit plenty of stops on Monday… got a small bounce on Tuesday that faded into the close. Question is what happens from here? The markets ignored the ten-year bond yield dipping below the three-month yield… inverted yield curve anyone? I am not convinced they indices are ready to move higher, in fact, they look more inclined to test further. Taking it as it comes and looking for the opportunities.

The S&P 500 index closed up 22.5 points to 2834 moving back above the 2815 support levels on the close. The continued worries about higher tariffs weigh on investors and the sellers, my view, remain in control of the direction for now. Volatility subsided on Tuesday but remains elevated. Ten of the eleven sectors closed higher on the day with technology and energy leading the rise. Utilities were the only sector to close in negative territory. The long-term trendline comes into question as they are tested on the downside move. This puts our stops in action as we look to see how this unfolds. SPXL entry $33.50, stop $48.85 (Stop Hit). Looking for the next opportunity.

The NASDAQ index closed up 87.4 points to close at 7734 on the modest bounce. Technology was the leading sector but has plenty of work remaining to reverse the current trend. QQQ is our indicator as it moved back below the October highs. Monday moved below the $180.28 and barely recaptured that level on Tuesday. Having exited our positions last week we are watching for the opportunity that will result from the selling. TQQQ entry $34.17. Stop $62.54 (STOP HIT). The long-term trendline has come into question again. Patience for now.

Small Cap index (IWM) the sector has been in a consolidation pattern and cleared resistance last week only to forfeit the gains this week moving lower. Watching $149.04 level of support. No positions currently as we hit our stops.

Transports (IYT) hit some resistance at the $200.53 level and the index reversed on some solid selling. Reversed on Monday and took out all support levels and took our exit. Entry $195.60. Stop $190 (Stop Hit). Watching how the bonce unfolds from Tuesday.

The dollar (UUP) The reaction to the Fed comments and the China trade issues to push the dollar up and down. The jobs report confirmed the Fed action at the FOMC and the dollar moved lower. The big question mark for the buck remains the trade tariffs with China. Lack of a deal will favor the dollar short term. The ETF closed at $26.21 and remains in a positive pattern holding support… Watching as this continues to unfold.

The Volatility Index (VIX) closed at 18.1 on Tuesday taking a small breather from Monday. Solid bump higher in anxiety as the China trade agreement remains a big question mark for the markets. The tug-o-war between buyers and sellers being won by the sellers over the last week. UVXY gapped higher from the open and closed higher. Watching how this unfolds as we exited our positions last week.

Solid bump higher in anxiety as the China trade agreement remains a big question mark for the markets. The tug-o-war between buyers and sellers being won by the sellers over the last week. UVXY gapped higher from the open and closed higher. Watching how this unfolds as we exited our positions last week.

Economic Data: April starts a new round of data for the month of March… looking for some improvement over February.

TUESDAY, MAY 14th: The small business index rose more than expected. Import prices showed a decline despite the tariffs. Household debt rose significantly as interest rates decline. Not great news, but not bad either.

MONDAY, MAY 13th: China trade realities were all the talk. What will they do to the US economy? Therein lies the challenge for the markets currently… speculation is rampant, I am willing to wait on reality. No real data released on the day just talk of what might be.

FRIDAY, MAY 10th: Consumer Price Index (CPI) rose 0.3% and below expectations. The core CPI rose just 0.1. Year-over-year numbers now stand at the magical 2% the Fed likes to see. The biggest concern in the numbers was rising rents and gasoline prices… both cut at the core of living expenses and discretionary income for consumers. Watching what the Fed says about this as well as how the economy responds.

THURSDAY, MAY 9th: Weekly jobless claims rose slightly. The trade deficit in line with projections. PPI (producer price index) shows a modest decline to keep inflation worries at bay. Wholesale inventories declined nicely in March and show some hope for growth. The Fed was out talking about the economy is good, interest rates are stable, and inflation under control.

WEDNESDAY, MAY 8th: Consumer credit remains at the $15 billion mark… you would think in this economy it would be going down, not up. That is a bad sign should we have any type of recession.

It is all about the progress following interest rates were hiked by the Fed… we continue for the fourth straight month to see slowing in the data. Eventually, this will show up in stock prices through earnings. Those have started and we are seeing mixed data from companies. Interpreting the data versus the emotions… following the trends.

(The notes above are posted daily based on the activity of the previous days trading. The BOLD/ITALIC comments are current day changes worth noting.)

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

Biotech (IBB) The selling stalled and found support near the $105 mark. The break lower was the small-cap stocks struggling. Holding support is positive for now, but no indications of a reversal currently. We don’t hold any positions in the sector currently. Looking for some clarity in the sector. Moved to $101 support and watching. Small bounce on Tuesday.

Semiconductors (SOXX) Tested below the $210 level and watching how this unfolds with some profit taking showing on the chart along with some support at the 50 DMA. Letting the emotions and news play out near term and this looking for the next opportunity in the sector. Entry $187.50. Stop $207.50 (HIT EXIT). More selling at the sector declines below 200 DMA. Bounced at support and watching.

Software (IGV) Broke $167.88 and bounced back above the same level to create the December lows and start the new trend. $167 level added a trading position. Entry $167.90. Stop $214.80 (Stop Hit). Breaks below the $209 level of support. Back to the October highs. Held support on Tuesday.

REITs (IYR) Recovered from the uncertainty from the Fed and the economic outlook. The interest sensitive sector reacts when the Fed is in the headlines and speculation rises. Holding for now and letting the FOMC news settle. Broke $75.21 and bounced… trading opportunity on reversal above $75.21. Entry $75.25. Stop $85 (adjusted). Held well on a day of selling. Moved higher on lower rates.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.45% with some volatility in rates from the China/US trade talks. The bounce from the low in March has stalled with the uncertainty surrounding what the Fed will do going forward. Watching how this unfolds near term. TLT is a hold if you own bonds. Flight to safety related to the China tariff threats. TLT hit entry at $124. TMF $20.26. Yields touch 2.4 on Monday.

Crude oil (USO) Found some support at $61.60 all week. The trek higher hit a roadblock with Trump’s comments concerning OPEC increase production. The sanctions in Venezuela and Iran, the tension in Lybia, and global data are weighing on supply, despite the data released by the US energy sector… the saga goes on. In the end, the data will prevail relative to pricing. Banked our profit in the position and looking for the next opportunity. Small reaction to the selling over China trade. Holding support.

Emerging Markets (EEM) The bottoming pattern moves above the $43.80 resistance failed again as the issues with China-US trade talks remain a thorn in the side of the sector. Moved to $41 support and held. Entry $41. Stop $42 (stop hit). News driven sector and watching how the opportunities unfold. More downside on tariff chatter. Bounced on Tuesday along with China.

Gold (GLD) building a base of support and looking for a catalyst to return to the uptrend. The dollar has been strong and outlook for global growth weak adding to the pressure on the metal. The downtrend is in play, but a bottom is forming near term. The Goldminers (GDX) offered a short side trade on the move lower and looking for a break above the $24.34 level. Entry $22.60. Stop $21 (adjusted) DUST. Big bounce on trade worries and money looking for safety. Tested on Tuesday as nerves ease over trade.

MidCap (IJH) The uptrend from the December low tested with a move back to the $190.44 support. Watching if the bounce on Friday can follow through or more of the same? The attempt to break higher and through resistance at $197.60 reversed. Entry $190.45. Stop $193.10 (Stop Hit). Moved below the $190 support. Watching. Modest bounce on Tuesday.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Not a good week for the ETF as it traded down 6.5% overall with a lot of activity. We did trade the short side of this with YANG. Entry $42.70. Stop $50. Watching how the new week unfolds. Fell in reaction to the tariff talks and threats… Ugly chart. Small bounce on Tuesday and watching.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans for May 14th: Modest bounce back from the selling on Monday, but faded into the close giving up some of the gains. As stated above not convinced the indices to retest the support near the 200 DMA and other levels. Letting this unfold near term. The charts show a modest bounce from the lows, but that does not indicate reversal at this point. Need more evidence and more positive activity as it relates to volume.

Watching the following… XLK, SPY, QQQ, XLK, SOXX, XLY, TLT… looking for clarity of direction and how any bounce or reversal will unfold. Patience as this all plays out.

MONDAY’s Scans for May 13th: More reactions to the China news of believing they can survive a trade war with the US. Only time will answer that question, but in the meantime, investors believe it will impact stocks and they selling accelerated. Sell on the rumor? We will see how this unfolds. Not really willing to chase the downside acceleration and watching for now how this unfolds. Some opportunities will arise from the ashes as news continues to drive the markets near term.

  • Major support levels broken… SPY, QQQ, IWM, XLK, SOXX, MDY. No shorts taken on the move, but willing if this all confirms.
  • Treasury Bonds (TLT) flight to safety remains in play.
  • Gold (GLD) moves higher on the look for safety.
  • China (FXI) tanks on the news.
  • Technology (XLK) not good sign as breaks lower.

FRIDAY’s Scans for May 10th: The trade talks remain the key headline to watch for investors. The speculation on one side ended Friday as Trump stated he would levy tariffs on the remaining imports from China. The talks will continue along with the speculation. The upside bounce into the close on Friday was more relief of knowing what the White House plans to do than continued uncertainty of what may lie ahead. Taking it for what it is… news. CPI numbers were positive and hope springs eternal about the outlook.

  • China (FXI/YANG) Watching how this unfolds next week with some reality given on Friday and the speculation that builds into the outlook.
  • Uber (UBER) failed to impress on their debut on the NYSE. The stock fell 7.6% from the offering price of $45. Plenty of talk about this all day… Don’t chase butterflies.
  • Managing the risk of positions… stops were hit this week on long term holdings and we will watch how they respond from here. It is never a bad thing to bank gains and holding cash during uncertainty in the markets. We made some solid trades in the VIX index as well as the short side of China. Taking what the market offers.
  • Looking for some clarity in the coming week for stocks. Energy stocks are moving nicely at the individual level and looking for opportunities in the sector as a whole.
  • Best trading opportunities last week came from YANG, SOXS, EDZ, UVXY, and TECS.

THURSDAY’s Scans for May 9th: More challenges from the China-US trade talks. Trump attempted to help with comments of a letter received and hopes of an agreement this week. That helped ease the selling but there need to be results for the markets to hold up at this point. Plenty of downside tests and break of support levels, but the bounce helped keep some in play. Watching, managing our risk and looking for the opportunities that will result from the speculation.

  • Stops are hit on positions and we have sold, but we also will watch how they bounce should we get a resolution to the trade agreement. Leaders will lead and the laggards may not bounce.
  • Treasury Bonds (TLT) are the benefactor of fear and have risen on the news. Watching how they unfold.
  • China (FXI) down 9% since the trade news started. If this gets settled watch the upside opportunity here. The short side trade in YANG is still in play… looking to take some profit today and hold minimal position into the weekend.
  • Emerging Markets (EEM) also on the downside on the trade talks. Looking here for upside trade on resolution. No short side trades here currently.
  • Technology (XLK) downside move has my attention… semiconductors are weaker on earnings, growth projections, and speculation… watching how this unfolds.

WEDNESDAY’s Scans for May 8th: The threat remains relative to tariffs and the market is weighing its options. The selling in the last half hour shows the uncertainty and the continued worries about growth with Intel announcing lowered estimates at their shareholder’s meeting. The market is acting like it wants to test lower. I am not convinced we will see a big sell-off, but a test to the 50 or 200 DMA would be a possibility. As with any speculation or projections looking forward… we have to let the market validate the moves and then act accordingly. The futures are pointing lower this morning and watching how Thursday unfolds.

  • Tariffs – sell on the rumor and buy on the news? Some believe this may actually be sell on the news… depending on what is said. Don’t trade on speculation trade on reality.
  • Intel (INTC) gapped lower on earnings… added to the downside with comments at their shareholder meeting. At the 200 DMA and not looking good… shorts are in.
  • Volatility Index (VIX/UVXY) intraday movement was mixed. Locked in gain on one-third of position at $42 and looking at how today unfolds with futures trading lower.
  • China (FXI/YANG) managing the downside trade with resistance at $50 level. Willing to take some profit here as well at $50 on one-third of the position.
  • Natural Gas (UNG/UGAZ) double bottom pattern as the commodity attempts to move higher. Watching for the upside opportunity if it breaks higher.

Sector Rotation of S&P 500 Index:

  • XLB – New lows and found support… got the move above the $50.35 mark. Entry $50.50. Stop $56.75 (Hit Stop). Upside hit resistance at the $58.13 level. Sold below the $56 support. $54.15 support held with bounce on Friday. Breaks support again on Monday. Small bounce on Tuesday.
  • XLU – The utility sector found support at $51.11… moved above $52.72 for entry. Cleared $57.10 resistance and showing some near term topping. Watching and managing the risk. Entry $53. Stop $56.75. Topping pattern showing on the chart and the $57.12 level of support held with a solid bounce on Friday. Climbed again on flight to safety. Gave some back on Tuesday’s bounce.
  • IYZ – Telecom has a rolling top pattern and hit our stops to lock in our gains. Broke $29.50 support and bounced off the 200 DMA on Friday… watching how it unfolds. Breaks 200 DMA and support at $28.62. Small bounce on Tuesday.
  • XLP – Consumer Staples found new lows and bounced. Cleared $50.50 and continued upside trend. Managing our risk. Entry $51.90. Stop $54.25 (adjusted). Solid bounce on Friday. Hung tough on Monday. Nice bounce on Tuesday.
  • XLI – Industrials moved to near-term low and bounced. $65 level cleared for trade opportunity. Entry $65. Stop $76.50 (Hit Stop). Broke support hit stop and watching how it unfolds. Moves to the 200 DMA and support at $74.17. Modest bounce on Tuesday.
  • XLE – Energy stocks have struggled the last two weeks on the uncertainty about supply and production. Crude moved lower and the downside in stocks accelerated offering a short side entry on the break of support. ERY – Entry $39.60. Stop $42. A modest move lower. Held at support on Tuesday.
  • XLV –  Healthcare fell below the 200 DMA and accelerated. The cause of the doom-and-gloom for the sector is a proposed “Medicare for All” healthcare from Washington. Obviously rumor-driven… Found support bounced, offered reversal trade at $86.80 entry. Stop $88.50. Gave back the gains from Friday.
  • XLK – Technology moved to near-term lows and bounced. $61.70 cleared for trade opportunity. Entry $61.70. Stop $75.93 (Stop HIt). Tested the 50 DMA and holding for now… patience. Big drop of 3.7% on Monday and watching the outcome…
  • XLF – Financials moved to recent lows and bounced. $23.76 level cleared for trade. Entry $25.76. Stop $25.76. Cleared $26.33 level of resistance and followed through. Holding support of the February highs. Ugly drop to the 200 DMA and $24.65 support. Small bounce on Tuesday with plenty of work left to reverse the trend.
  • XLY – Consumer fell to near-term lows and bounced. $98.96 level cleared for trade. Entry $99. Stop $117.50 (Stop Hit). Cleared resistance at $113.50 level. Bounced at the 50 DMA. More selling as the downside takes hold. Broke the 50 DMA. Modest bounce on Tuesday.
  • RWR – REITs broke lower… bounced from lows clearing $93.21 resistance… positive upside move. Entry $88. Stop $95.50. Watching and managing the risk. Bounced from the test of support. Held under pressure. Added upside on Tuesday.

(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.)

WHAT DID WE LEARN: Tuesday

First and foremost, markets hate uncertainty. The downside risk from Monday did not evaporate, but it did take a small break. There is still no deal on trade and the tweets by the President only helped for the day… need real results if the market is to make a concrete move to the upside. Clarity is key to the markets functioning efficiently. The lack of a deal or the possibility of a deal near term invites speculation and with that comes volatility. Remember it is all about reality over time… trading news is higher risk and we will watch where the opportunities build from.

When you lock in profits and know where your exits are you are more calm than the markets. The reality is we have posted solid double digit gains the first four months of the year and even we sit in cash the balance of the year we are fine. Point being, disciplined money management creates peace of mind.

Last, but not least, this issue of trading isn’t over and volatility in fully in play currently. Futures are pointing to a positive open on Tuesday and we will see how it unfolds. Taking it one day at a time.

FINAL NOTES: What did we learn from the trading week?

Markets tested and held key support levels after trading lower all week. Key issue this week was a trade deal with China. No deal, but we did get clarity of why and what is happening for now. The indexes closed in the red for the week, but it could have been worse. Sectors broke lower and we hit stops on positions. We traded some volatility with the VIX. We traded the volatility in China. We exited where the risk rose and now we look to find the next opportunities as we move forward. Economic data was on the positive side with the PPI and CPI showing inflation under control. The Fed kept its line of communication being the economy is steady. The talk in Washington of social medical programs continues to raise concerns in the healthcare sector. Some sectors are moving higher, some are moving lower, some remain sideways. Plenty of question marks and only time will tell the outcome. There are some issues facing investors as the trade agreement has not materialized with China. We will continue looking at positions to take profits, adjust stops, and manage the risk of the current environment. Holding cash is not a bad thing during uncertain periods… remember one thing… you can make up for lost opportunities, but the loss of principle is much harder to regain. The goal is to avoid speculation and follow our disciplined strategy for each position. Taking it one day at a time.

All of the eleven sectors managed to close the week in negative territory as money continues to move with some rotation. Technology and industrials led the downside for the week and raising new questions about the trend. Gold found support, the dollar is holding steady, and the economic data will help the buy side and the rumors and speculation subside. Seven sectors remain in a positive uptrend with three moving sideways in consolidation patterns. One (XLE) has broken into a new downtrend short term. Crude is holding support at current levels. We continue to take this one day at a time. There are plenty of influencers in the markets currently and headlines are the drivers.

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.