China’s ‘calm’ approach sparks move higher

Market outlook for August 30th

The up and down movement over the last week continues with markets moving higher on Thursday. We remain in the trading range as the buyers push the indexes back to the top of the four week back an forth. The volume bars for the sellers are higher than the buyers showing an exit from stocks in motion. The catalyst was China being calm about the tariffs put in place by the US and trying a different tactic this time. The challenges remain for the broad indexes with tariffs being only the beginning. GDP for Q2 slowed to 2% slightly below estimates. The concern in the data came from corporate spending which fell in order to boost profits. Short term focus versus longer-term investing in growth. These are all signs of a contracting economy.

The S&P 500 index closed up 36.6 points to 2923 as the index bounced on China’s approach to the tariffs. The is still an emphasis on interest rates and the Fed. The index moves to the top end of the current trading range. Ten of the eleven sectors closed higher on the day led by energy and consumer discretionary. The downside was led by utilities. Plenty of questions remain relative to how this unfolds with the up and down movement. Patiently waiting on the outcome of the current range. The long-term trend remains in question with the move lower breaking the trendline from the December lows.

The NASDAQ index closed up 116.5 points at 7973. The follow-through to the bounce off support near 7725 was a positive and remains in the current trading range. Technology (XLK) stocks continue to lead the sector and moved back to the resistance at the $80 level. QQQ shows some strength in the large-cap stocks after holding support at the $180.73 level. The index remains in the current range of $180.73 and $189.47. Watching how this unfolds moving forward.

Small-Cap Index (IWM) The sector is leading the downside effort but managed to bounce at the $144.65 support. The move reinforcing the lack of conviction from the buy-side. Hit our stop on the short side trade as the index moved higher on Thursday. TZA entry $51.25. Stop $52.25 (HIT STOP).

Transports (IYT) The sector sold back to the lows joining the major indexes on the downside last week. Failed at the $182.43 level of resistance and returned to the previous lows. Bounced off the lows and looking at $192.43 resistance again. Watching how this plays out. IYT short entry $178. Stop $180.41 (hit stop).

The dollar (UUP) The dollar tanked on all the talk about tariffs last week. Bounced on the hope of some resolution to the tariffs this week. Closed at $26.77. Watching how it unfold this week.

The Volatility Index (VIX) closed at 17.88 as the tariff banter with China and the US remains in the headlines. Watching how this unfolds.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector attempted to hold and move through the top end of the current range but fell 2.7% to retest the bottom end of the range. Watching how it unfolds next week. Retest of the current lows is holding with modest bounce.

Biotech (IBB) The sector tested support near the $102 level again. The sector has been content to trade int he $102-107 range for several weeks. Watching how it unfolds. Retest of the current lows and holding with a modest bounce.

Semiconductors (SOXX) The sector shed 4.4% in reaction to the tariffs. Still in the current range, but hit our stops on current positions. Watching how the week unfolds. Held support with modest bounce… back at the $204.25 resistance.

Software (IGV) The sector fell only 1.5% and is well in the range established with the upside bias still in play. Patience. Solid moves, but remains in a trading range near the $217.40 resistance.

REITs (IYR) The upside trend remains on the long-term chart. Patience with our long term positions and short term watching how interest rate market unfolds. Holding near the highs.

Treasury Yield 10 Year Bond (TNX) fell to the 1.53% level on all the worries. Money rotated to safety and our TLT trade remains in play on the fear. Stop $142.70. Still watching the Fed talk and once again the trade war. Moved higher on Thursday at 1.51%.

Crude oil (USO) Tried to bounce on rumors of supply drawdowns and fell on the trade war with China retaliating on the US. Watching support at $52.50 and resistance at $58.25. Bounced on the supply data showing some drawdown in US supply… no big changes as trades in the range.

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. Jumped higher on worries about trade on Friday and breaking from the consolidation. Stop is now at $141.10. Moved higher as volatility rises… moved lower as volatility subsides and dollar rises.

Emerging Markets (EEM) Broke lower in the trading range as tariff threats add to the worries about an economic slowdown. Not a sector of interest currently. Small bounce with China’s comments on not adding tariffs for now… helping.

China (FXI/YANG) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Watching the move lower play out as Mr. Trump makes his intentions clear… as does China. YANG Entry $59.75. Stop $8.47. Added short trade back on the news. Small bounce… big question marks remain. No additional tariff comments helped the ETF.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

THURSDAY’s Scans for August 29th: follow-through day for the broad indexes as they added to the upside. The catalyst was the Chinese stating they would take a calm approach to the new tariffs from the US and resume talks. In addition, the Chinese sent more troops to Hong Kong some see the tariff comments as a cover for the later… big issues facing them in the outcome of Hong Kong protests. Plenty of issues facing the markets, but they were all put on the back burner on Thursday. We remain in the trading range and volume remains on the low side. Taking it one opportunity at a time and protecting our capital.

  • S&P 500 index (SPY) upside move to the top of the range. $204.04 is resistance level to clear.
  • NASDAQ 100 (QQQ) upside move to the of the current range. $188.51 level to clear if the upside is to gain momentum.
  • Consumer Discretionary (XLY) cleared resistance at the $119.40 level and shows leadership from retail.
  • Natural Gas (UNG/UGAZ) churning to the upside slowly and building the bottom reversal pattern. Raised stop to $13.74.
  • Cloud (SKYY) positive move as the bottom reversal attempting to follow through.

WEDNESDAY’s Scans for August 28th: a positive day following the negative open. Buyer step in albeit on lower volume. The selling volume is higher than the buying volume showing distribution overall from stocks. The good news is the markets have not broken down… thus, we watch patiently how this will unfold.

  • China (FXI) offers an olive branch putting any new tariffs on hold. Watching how the ETF responds along with the emerging markets (EEM).
  • Retail (XRT/XLY) earnings set the upside tone for the sector and looking for the leaders for opportunities. COST, DLTR, BOOT, WMT, etc.
  • Crude Oil (USO/UGA/UCO) upside bounce on supply data. Cleared $17.50 resistance with upside move. Next resistance is the $18 mark.
  • Earnings helping stocks as HPQ posts better than expected numbers. NTNX, OKTA also beat… adding to the positive data from retail.
  • Homebuilders (ITB/NAIL) upside remains steady as lower rates prevail.

TUESDAY’s Scans for August 27th: early gap gave up the gains and left investors looking for answers. Small caps leading lower along with transports. Gold inched higher on nerves and declining interest rates. Stocks remain in consolidation mode within the current trading range. We remain cautious as this unfolds. Taking the opportunities presented and limiting the risk exposure short term.

  • Small Caps (IWM/TZA) short side trade remains in place as the lack of interest in growth stocks remains a theme. Adjusted our stop on the move on Tuesday.
  • Transports (IYT) negative momentum in the sector remains as we manage our short side trade on the sector.
  • Treasury Bonds (TLT) remain the benefactor of declining interest rates. Adjusted our stops. Yield inversion widens and is feeding the recession fears.
  • Financials (XLF) Testing the lows again… downside risk risking in the sector.
  • NEWS: insider selling is on the rise. Big surprise. The reports stated as much as $600M per day was being liquidated. Another indicator that is not positive for stocks.

MONDAY’s Scan for August 26th: bounced off the support levels again following the selloff. The change in tone from Trump sent stocks higher… but for how long? The bounce was positive, but the conviction in the technical data was not. Watching how Tuesday and the balance of the week unfold. The scans reflect the bounce off of support, but they also remain in the trading range. The buy-side volume was low for the day.

  • NASDAQ 100 index (QQQ) solid bounce on the chart.
  • Semiconductors (SOXX) bounce was not convincing.
  • Retail (XRT) parts are looking good from earnings. Watching how they respond to Friday’s selling.
  • Software (IGV) looked good as it didn’t fall as much on Friday.
  • Treasury Bonds (TLT) held steady with no real move in rates.

FRIDAY’s Scan for August 23rd: downside came back on the tariff wars. The day was supposed to be ruled by the comments from Mr. Powell. Another good example of not know what the day holds. Stops were hit on several long positions taken. Entries on several short side trade setups. Stocks move back to the bottom of the current trading ranges. Anxiety levels jump. And, the uncertainty issue spikes again. This leads us to next week as we watch to see how this news progresses and the impact on stocks.

  • NASDAQ 100 index (QQQ) in a trading range, but break lower will set the tone overall… Short side setups in place.
  • Technology (XLK) at the bottom of the trading range, and like QQQ, will set the tone moving forward.
  • Treasury Bonds (TLT) bounced on the decline to previous lows in interest rates… watching the flight to safety trade.
  • Small Caps (IWM) downside in play. Managing the risk of the trade and looking at how growth stocks unfold.
  • Transports (IYT) downside in play. Managing the risk of the trade and looking at how this key indicator unfolds.

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

Sector Rotation of S&P 500 Index:

  • XLB – Basic Materials broke support at the $55.95 level and offered short side entry at $55.63. Added to the bottom bounce.
  • XLU – Utilities broke from the trading range and tested on Friday. Collecting the dividend and letting it play out. Held near highs.
  • IYZ – Telecom held support at $27.62. Watching for a bounce. Small bounce followed through with $28.62 resistance in play.
  • XLP – Consumer Staples held support and the uptrend line. Watching how this unfolds near term. Holding near the current highs.
  • XLI – Industrials moved back to support in the current trading range. Small bounce followed through at resistance…
  • XLE – Energy broke support at $58.19. The short side is still in play. ERY. Oil caught in the crossfire with China and US. Small bounce followed up with more upside… still a lot of work to do.
  • XLV – Healthcare broke $89 support and watching how it unfolds. Held support… small bounce followed by modest gain… plenty of work to do.
  • XLK – Technology moves lower on comments about tariffs. Testing support and watching how it unfolds. Small bounce followed through at the top fo the current range.
  • XLF – Financials under pressure moved below the 200 DMA and $26.33 support. Watching how it unfolds. Small bounce followed with additional gains… plenty of work left.
  • XLY – Consumer Discretionary was moving higher on earnings from the retail sector earnings… then the tariff talks set it back to the bottom of the current range. Moved through resistance providing leadership.
  • IYR – REITs held $88 support and cleared the $90.80 resistance. Watching and letting it unfold. Remains near the high.

There are currently four sectors in confirmed short term uptrend. Two sectors in consolidation or sideways trends. Five in a confirmed downtrend. The result is SPY in a confirmed sideways trend. This is a big adjustment based on the current market environment. Remember the parts make up the whole.

(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.)

FINAL NOTES:

Thursday: added to the bounce and remains near the top of the current trading range. Volume is an issue. Conviction is an issue. Even if we break higher it would need some volume from the buy-side. China taking a different path and acting as though they want to settle trade issues. Some see it as a deflection to how they will deal with the protests in Hong Kong… only time will tell. Taking what is given, managing our risk, and letting this all unfold.

Wednesday: bounce day as up and down continues. China holding off on raising tariffs was the big news of the day along with supplies lower in the US crude. Nothing has changed with the outlook still in limbo. Taking what we are offered and remaining patient.

Tuesday: rubber match between the buyers and the sellers. Not much changed on the day as the indexes closed in negative territory. News is still driving, but the underlying current is focused on economic worries. The recession fears are rising and that could be the undoing of the markets near term. There are some bright spots, but the overall theme is downside concerns. I have not abandoned my belief in the downside trade… just being patient as it develops. We have some short side trades, some upside trades, and plenty of cash to deploy as this unfolds. Taking what the market gives one day at a time.

Monday: got the bounce everyone was hoping for as Mr. Trump talks nice about China and resuming the talks. The daily talk is focused on the news, but the underlying data remains my concern. Durable goods showed a rise of 2.1% in July vs 1.8% expected… good news. The details, however, show without transports the number was negative 0.4%. Thank goodness for the transports. The metals were negative… shipments negative… capital expenditures lower than expected… overall positive thanks to one segment of the data. Trade is an issue, but the economy is slowing. There is lies the issue for stocks… a trade agreement will not change the economic picture near term. Stay focused on what you know not what the headlines are saying.

Markets gapped lower to end the week and for the majority found support. This is currently a market controlled by headlines as each day holds movement related to the speculation of what might happen. Friday was supposed to be focused on the Fed Chari Mr. Powell, but instead, Mr. Trump took the stage with China on trade tariffs. The call for US companies to leave China sent the markets lower on the concern. This raises the question of if the downside will continue? Trade is a major issue… but, economic growth is the real issue at the end of the day. Markets fell on the worry of a recession not tariffs directly. Focus on facts like economic data, earnings, and global data reports. Existing home sales rose nicely in July adding some hope to the homebuilders. Jobless claims fell to 209k for the week. Retail earnings were a bright spot for the week posting solid gains. Markit PMI was not good falling to 49.9 and showing contraction for the first time in ten years. Remember within all of this data lies the opportunities we are all looking for. The speculation trade is back with the escalating trade wars with China. We remain focused on what is working and what is failing. Therein lies the opportunities. The return to the bottom end of the current range is a key concern moving into the new trading week. Manage your risk accordingly and let this unfold… one day at a time.

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.