Markets

Waffling start to the day… and throughout the day… but, we did manage to close higher! As I stated my post yesterday on telling the future… it is a losing proposition… I am just waiting for the trend to begin. Anything else at this point is a flip of the coin. Look at the chart below on the S&P 500 index intraday… to me it puts the emotions and lack of clarity in perspective currently. 

Unless you are a day trader beating your head against the wall isn’t worth the headache. Focus on what you know, practice discipline and keep going forward. The consolidation pattern forming on the indexes showing the lack of clarity and investors/traders are working out their beliefs near term. until there is a catalyst in place to establish a trend this is likely to continue. Take a vacation.

The ten sectors of the S&P 500 index all remain in a downtrend. Healthcare was upside leader on Thursday and telecom was the leader on the downside. Neither did anything to change the chart. Telecom was in position to break higher, but failed to follow through and remained in the pattern. Healthcare bounced back some for the selling on Wednesday, but equally remained in the trading range. There is little to hang our hat on currently and it is steady as we go looking for the trade-able opportunities as they unfold.

The seven assets classes are trending lower as well with the dollar moving sideways. The  emerging markets (EEM) have been attempting to break from the bottom consolidation, but the day to day activity is keeping pattern or consolidation in place. A move above $33.90 would be a positive to the sector near term. The EAFE index (EFA) likewise attempted to move higher, but needs some momentum to push through the near term resistance. Still too much uncertainty to claim any leadership at this point.

The volatility index attempted to move again on Thursday, but held above 24 level to keep the index elevated and reflecting the uncertainty in the markets. VXX is still alive and well, but if the clarity picks up SVXY will be the trade of choice as volatility evaporates. No clarity and plenty of intraday volatility currently.

The ten year treasury bond yield settled at 2.22% level on Thursday as bonds have sold lower on expectation of a rate hike again. This is shifting again relative to belief of the Fed hiking rates at the next FOMC meeting. You can see in the yield movement everything is still up in the air and speculation remains… Don’t bet against the Fed to hike rates.

Crude oil was up 3.4% on the close with the price back near the $46 mark again. The question mark is sustainability of price in relationship to demand? I am still cautious about any upside attempt at this point and I am more than willing to be patient until there is a catalyst or definitive trend in place. One day at a time. Looking for OIL to test the $8 level of support.

The continued challenge of interest rates and the Fed will remain in place as we move toward the FOMC meeting. Be patient and let the direction unfold before jumping to any conclusions. China is still a challenge despite the comments about currency and putting stimulus on the table again. Emerging markets are gaining as China moves off the lows. I like the bottom process, but it will need to establish a buying opportunity. As said, patience is still the name of the game.

Markets find their footing after a rough start to September. As you have read in every headline of late China is to blame. Well let’s not leave out the Federal Reserves love affair with hiking interest rate threats… someday? The two together have created uncertainty relative to the outlook and until it gains some clarity the outlook if for more of the same. I am not going to bore you with the details of who said what or speculates what, you can go the financial websites and read plenty on that topic. But, I do want to review some sectors of interest going forward.

The S&P 500 index (SPY) has started a consolidation pattern of a bear pennant. This is generally a negative pattern on the breakout and with the volume on the buying Wednesday on the weak side I would be inclined to lean that direction technically. The short term trend is lower and the index has failed to move back above the 10 DMA. $197.65 is the level on the upside we would need to clear with some volume to gain any interest on the upside. Take into account that all ten sector of the index are also pointing in the same direction… downtrends. NASDAQ 100 index (QQQ) and Dow (DIA) are showing very similar patterns on their respective charts.

Crude oil (OIL) went on a run that posted nearly a 25% gain before testing the move the last two days. The test of the support/resistance line at $8.06 level held on Wednesday and could be a positive omen for the upside in crude. As I wrote in the post earlier this week about the speculation in oil it is a high risk trade unless we can develop a pattern that offers us reasonable risk/reward on a trade. The test and bounce was a plus from my view and offered a low risk trade in the commodity. Entry at $8.20 off the intraday bounce and target of $9.35 with a stop at $8 offered a reasonable risk/reward trade. Watching the doji candle left on the trading day Tuesday for confirmation on the direction near term.

Treasury bonds (TLT) the bonds have been under pressure from the rise in interest rates. But, as you can see on the chart below the recent move lower in TBT, Short Treasury 20+ year ETF as been declining which reflects the move higher in TLT or the Treasury bonds. This is divergence from the belief or speculation that the Fed will hike rates at the September FOMC meeting. The move was a result of China’s influence on the global economic picture. Thus, putting pressure on the Fed not to hike rates near term. As the speculation wears off the continued banter is for the hikes to take place you can see the bottom pattern in TBT set up for a short term trading opportunity. The break above the $44.37 mark is where we posted the entry last week and it has successfully cleared that level and held. The next resistance near the $45.80 level is in play now and if it clears that resistance a run near the $49 mark would be expected. This is something to watch as we progress further and the Fed clarifies their position on moving rates… finally.

Gold (GLD) is another sector getting plenty of headlines of late. The bottom was established in late July with a three week base and then break higher for the upside trade. The uptrend remains intact, but the test of the move on August 24th and 25th hit our stops and we are looking at the reentry to the upside trade. The consolidation wedge is setting up a nice trade short term if it follows through on the upside. $109.50 mark is the level to clear with a stop near the $108 mark.

Base metals (DBB) has also established a short term trend reversal. The bottom hit in late August is shown on the chart below and I am looking for a move above the $13.22 mark as a breakout opportunity short term. The ‘V’ Bottom reversal has stalled and is in position to break through resistance. Steel  and Copper have been move higher and the risk of the trade is manageable with a stop at the $13 mark.

The markets bounced back on Wednesday from the selling on Tuesday and it is only adding confusion for some relative to direction. The swings are a result of the volatility in the markets due to the lack of clarity. This will all work out and the process will take some time… we have to be patient and take what the market gives as we move forward. News is still driving the bus and the emotions of traders are high. Take it one day at a a time. As I outlined above look for the trades that offer reasonable risk returns relative to the strategy for the trade. Stops are a must near term with the heightened volatility to manage the day to day risk. Tomorrow we see how everyone responds to the upside move.

The market reacts yet again to the issues in China. The manufacturing data in China was at a three year low for August! Is that really the reason for the selling in the US? Maybe it was our weak economic data with the ISM showing 51.1 versus the 52.2 expected. Weakness in the US is more impact to our markets than China, at least that would be my view. Then why the nearly 3% decline on the S&P 500 index on Tuesday? Simply put… EMOTIONS! They are being driven by news and perception of what might be if the cow jumps over the moon and sheep escape to the meadows. YES, I am making a reference to the nursery rhyme. The whole rationale behind the jump in oil, the selling in stocks, and the Fed not know what to do with interest rates is one big nursery rhyme.

I would like to go on record as stating that the manufacturing data is important to the outlook for the growth of the Chinese economy. However, the greater concern from where I sit is the banking system in China. This is a house of cards built on an economic voodoo, and if the wind blows the house over the impact globally will be felt more than the news of a slowing economy. Remember what happened in the US markets with the failure of Lehman Brothers… China is not immune to the same fate. I am not trying to instill fear, just trying to recognize the level of risk the markets could experience. This allows me to put my money where I believe it will be treated with respect/lower risk. FXI declined 4.7% on the day and the S&P 500 index fell 2.9% neither impressive and both causing turmoil in the equity markets.

The emotional reaction is something I discuss regularly and here it is again in full color. When the market lacks clarity it raises the nervous level of investors. The more uncertainty the more emotions and eventually it rises to a fever pitch that creates selling based on fear. This is nothing short of a fear driven market of what might be or could be or should be based on whatever makes sense today.

I had support near the 1930 level on the day and we moved through that like a knife through butter on a summer day. As I used to say in my trading days, the only thing going down faster is free beer at a fraternity party. The 1868 low is in play again and we will have to watch how this unfolds tomorrow. Being that I am not a speculator, and that we reside predominately in cash, patience is an easy step at this point. One day at a time is all I am will to prognosticate. Tomorrow is either a bounce or continuation of the selling and with it being a news driven market we will look for the new of the day in the morning and roll with what comes. Remember a pattern has to emerge (consolidation) before we gain any significant clarity going forward.

One of the more interesting moves of the day was the 8% decline in crude oil. Of course the move lower had to shoulder some of the blame for the selling in stocks. After all the upside in crude on Monday got credit for stemming the selling in stocks intraday. Crude was up more than 24% the previous three days of trading and today’s decline back to the $45 level helped relieve the speculation factor that was taking on a life of it’s own on the upside. As I stated last night this is pure speculation at its best. Trading without discipline in the commodity is a good way to lose your rear end.

Volatility index hit 33.1 on a jump prompted by the fear of investors looking forward. The bottom line is volatility remains elevated as the anxiety of the unknown is building to the point of distrust in stocks. This will subside, but for now it is the reality that investors perceive that is driving the volatility.

All ten sectors ended the day lower with financials leading the downside… so much for the move higher on Monday. All ten sectors are now in a downtrend short term validating the downside for the broader indexes. If we cannot find any leadership other than selling the downside will remain the trend going forward.

The ten year treasury bond yield fell back to 2.17% pushing the bond slightly higher on the day. There was not much upside or rotation to the safe haven. Thus, the belief of the Fed hiking rates is still in play and the fear we are all discussing may not be as much as it is perceived to be. In other words, watch the bond for clues on where money is flowing as it comes out of the market.

Tomorrow is another day and there is plenty more economic data in the US to ponder, but most eyes will remain on China and how it unfolds near term.