China’s response to tariffs sets tone for markets

Market outlook for August 5th

China vows to fight against the latest tariffs and investors respond again with selling stocks. Is this an excuse to sell or is there a real threat of stalling the economic growth in the US? Therein lies the issue we face as investors. If the economy stalls further due to the new tariffs we will see a downside test equal to the threat perceived… real or not. Our homework for this weekend is to research the reality versus perception and the resulting opportunities.

The S&P 500 index closed down 21.5 points to 2932 moving well below 3000 and testing the 50 DMA. The focus is on the Fed decision and now Trump’s threat. Two of the eleven sectors closed higher on the day with REITs leading the upside. The downside ruled with telecom and technology leading the move lower. We hit more stops and added some short side trades… we will manage the risk as it is presented. The long-term trendline has been looking better as the uptrend has resumed, but the current activity raises questions.

The NASDAQ index closed down 107.1 points at 8004 and broke the support at the May highs. Technology leadership came under pressure with the SOXX falling on the tariff threats. QQQ moved to support at the $186.81. Established a short side trade on the move lower and managing the risk.

Small-Cap Index (IWM) The upside move has stalled in a trading range near the $154.90 mark. Emotionally charged activity in the sector currently. Watching how it responds to the test at $152.28.

Transports (IYT) The sector was in an uptrend that included some volatility but dropped 2.5% on the tariff threats. The stairstep pattern in play allows for some opportunities on each test. Watching how it responds.

The dollar (UUP) The dollar moved higher but retreated on the tariff comments. Watching how this unfolds going forward. The less than expected cut in rates pushed the buck higher. Closed at $26.59. Watching the Yen as it is the current benefactor of the tariff talks.

The Volatility Index (VIX) closed at 13.7 Tuesday after moving higher on speculation about the Fed… Wednesday it closed at 16.1 after the Fed action disappointed investors and the speculation drove the anxiety levels of the market higher. Add the Trump tariff threats and it hit a high of 20 on Friday. UXVY moved through the $25.28 entry-level. Stop $29.15. Taking what the market offers here. Friday sold 1/3 at $32.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector has moved to the $190.44 support. The downside is a reaction to the current environment of the markets.

Biotech (IBB) The sector remains at support near the $104 level and looking for a catalyst to push higher. Waiting patiently for clarity.

Semiconductors (SOXX) The consolidation pattern at the high breaks lower on the news from the Fed and new tariff play from the White House… both news and speculation driven… the reality for semis is tariffs… the sector stands to get hit the worst. Added short side trade with SOXS.

Software (IGV) Hit new highs and reversed on the Fed/tariff news the balance of the week. Hit our stop, locked in gains, and watching how this unfolds moving forward.

REITs (IYR) The upside trend remains on the long-term chart. The test of support at $87.50 bounced. Patience with our long term positions and short term watching how interest rate market unfolds.

Treasury Yield 10 Year Bond (TNX) Fed only cuts 0.25% and rates nudged lower… Trump threatens tariffs and rates nose dive to 1.85% expanding the inverted yield curve. The flight to quality on fear of stocks falling further send treasury bonds higher… TLT/TMF trade in play.

Crude oil (USO) Big downside on the tariff threats from the White House. Bounce on Friday helped the cause, but crude is awaiting clarity on tariffs and how each country will respond.

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. Watching as the consolidation pattern near the highs as speculation is rampant about tariffs and interest rates.

Emerging Markets (EEM) Broke lower from the trading range as tariff threats add to the worries about an economic slowdown. Break below $42.30 could offer a short side trade opportunity. Hit entry point on short and gapped lower on the end of trade talks with China. EEV entry $42.80. Stop $43.01.

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. Broke support at $42 and the downside is back in play. YANG Entry $49.75. Stop $53.21.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for August 2nd: More selling equals confirmation of the downside move. Not sure how long this selling will persist as it is news dependent on the White House, China, and the Fed. I only see the charts reacting and the trade opportunity presented… the risk is managed with stops and letting this unfold one day at a time.

  • Russia (RSX/RUSS) topping pattern breaks to the downside and follows through short side trade option. entry $10. stop $10.75.
  • NASDAQ 100 Index (QQQ/SQQQ) followed through on the downside break. entry $33.98. stop $33.26.
  • Semiconductors (SOXX/SOXS) continued selling in the sector as it is believed to get hit the hardest by the tariffs. entry $42.90. stop $45.10
  • Energy (XLE/ERY) downside confirmed as crude prices struggle on tariff threats. entry $45.28. stop $45.76.
  • Treasury Bonds (TLT/TMF) upside continues with a flight to quality. entry $24.62. stop $25.75.

THURSDAY’s Scans for August 1st: Danger ahead… Mr. Trump really knows how to get the attention of the market… even though he was trying to get the attention of Mr. Powell. The ripple effect of his threats to enact new tariffs rattle investors as it creates new uncertainties about the economy and global growth. Watching how this unfolds in the coming days.

  • Gold (GLD) spiked higher on the inflationary worries around tariffs.
  • Semiconductors. (SOXX/SOXS) in the crosshairs of tariffs fall 2% confirming the short side trade in the sector.
  • Emerging Markets (EEM) and Chian (FXI) both accelerate on the downside. Adjusted our stops – tariffs don’t help either sector.
  • Treasury Bonds (TLT/TMF) accelerate on the upside as money runs for safety. Adjust stop on TMF trade.
  • NASDAQ 100 Index (QQQ/SQQQ) triggers short side entry as we manage the risk of the trade.

WEDNESDAY’s Scans for July 31st: The Fed once again manages to disappoint the markets and stocks respond. The use the same old rationale for not cutting “too much, too soon”. The data supports some type of stimulus from the Fed, but they are playing it safe. Either way, the markets responded on the downside. One day does not make a trend and we have to watch how this all unfolds. Some stops were hit, some positions added, some positions adjusted. Managing money is a matter a disciplined strategy executed regardless of our thoughts, beliefs, or hopes. Wednesday was one of those days. Today we watch how things respond in follow up to the emotional response on Wednesday.

  • Semiconductors (SOXX/SOXS) downside of 3.3% hit stops. Opened the door for short positions if the downside confirms.
  • China (FXI/YANG) end of trade talks without any resolution sends the country lower. YANG in play and watching how it unfolds near term. Emerging Markets (EEM/EDZ) equally traded on the downside and short opportunity.
  • NASDAQ 100 Index (QQQ/SQQQ) downside fell to the key support level and looking at the short side trade options and if they unfold.
  • Volatility Index (VIX/UVXY) hit our stop on Tuesday in the SVXY trade… Wednesday opened the entry for the UVXY trade as anxiety spiked in the markets on the Fed decision. Stop in place.
  • Treasury Bonds (TLT/TMF) upside trade back on break from consolidation pattern on Wednesday. Flight to safety trade in play again.

TUESDAY’s Scans for July 30th: Mixed day as investors juggle money in front of the FOMC meeting. It was like watching a roulette table in Vegas… Place your bets… Watching how the day unfolds and looking at what opportunities result from the decision and the comments from Mr. Powell about the economic picture.

  • Small Caps (IWM/TNA) $158 is the level to clear on the upside. Watching for the opportunity to unfold.
  • Biotech (IBB) Bottoming pattern needs to clear $107 on the upside to offer any opportunity.
  • Crude Oil (USO/UCO) Bounced from the bottoming range to follow through and offered an entry point at $18.78. Lower risk trade with a stop at $17.71.
  • Homebuilders (ITB/NAIL) positive upside move in anticipation of a rate change. Needs to break above the $39.50 resistance level to offer opportunity.
  • Silver (SLV/AGQ) followed the path of gold finally on the upside. Now stalled at the $28.75 in a flag pattern. Looking for the break higher to continue the upside move.

MONDAY’s Scans for July 29th: Start the week looking at the Fed for clues about interest rates and the FOMC meeting on Wednesday. Speculation is a game I am not interested in. I want to focus on the reality and data provided by the markets. The reality is a stall at the current highs awaiting to hear from the Fed. Thus we wait and watch…

  • S&P 500 Index (SPY) $299.40 first level we will watch if the downside starts.
  • NASDAQ 100 Index (QQQ) $193.51 first level to watch on downside.
  • Gold (GLD) $132.69 first level to watch on the downside.
  • Semiconductors (SOXX) $214.27 the first level to watch on the downside.
  • Crude Oil (UCO) $18.65 first level to watch if upside resumes.

(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 – Broke support again… banked profit. Watching how this unfolds.
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Starting a topping pattern/trading range again.
  • IYZ – Telecom cleared $29.50 resistance moved lower in response to the Fed. AND Mr. Trump.
  • XLP – Consumer Staples moved lower, bounced and hit new highs and remains in the uptrend despite the test last week. Rotation of money to safer havens helping… watching the upside move.
  • XLI – Industrials remains volatile in an established sideways trend. Stop $77.50.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Broke the $62.15 level of support. Established a short side position in the sector.
  • XLV – Healthcare continues to deal with the proposed “Medicare for All” healthcare from Washington. Obviously rumor-driven… Watching for the next opportunity.
  • XLK – Technology sold as semiconductors and software tumble lower. Established a short side trade in SOXS.
  • XLF – Financials held up on the Fed news… but, failed on the Trump tariff news. Tested $27.30 support. Watching.
  • XLY – Consumer stocks respond to the tariffs… testing $118.10 support.
  • IYR – REITs pushed to new highs, tested, moved back to new highs, and testing again… letting it unfold.

There is currently one sector in confirmed short term uptrend. Nine sectors in consolidation or sideways trends. One 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:

Markets got the answer from the Fed and the speculation of a half-point cut was not realized. The results, a dip in stocks. Mr. Trump added to the excitement with his threat of new tariffs. The question is will the downside continue? Because the amount of the cuts were less than expected it opened the door to more speculation around the Fed and future decisions. Mr. Trump didn’t wait… he walked through the door and added tariffs to the excitement. The Fed has been using a resolution to tariffs as a reason not to cut rates… Welcome, Mr. Trump as he takes that excuse away. China trade is a key point of issue that remains for investors as the trade talks just escalated to a new level… they are scheduled to resume in September… now there are questions of if it will happen. Iran remains a challenge for investors as well. Crude oil speculation remains in the news as prices crept back above the $58 level… They spiked lower to $53 level on comments about tariffs… modest bounce to end the week and definitely on our watch list. And let us not forget the inverted yield curve for bonds as yields moved lower in response to the Fed actions at the FOMC. They closed the week at 1.85% in response to Mr. Trump. Focus on facts like economic data, earnings, and global data reports. The ISM manufacturing data for July fell to 51.2% showing the impact on the economy. July added 164,000 jobs in line with expectations but failed to offset the new on tariffs. Within all of this data lies the opportunities we are all looking for. FOMC gave some insight to the Fed and the market’s response gave some insight to investors, Tariffs renewed added a new dimension of speculation… we will manage our risk accordingly and focus on what we know versus speculation.

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.