MARKET OUTLOOK FOR June 7th, 2019
The broad indexes added to the upside move on Thursday as rumors the Mexico tariffs might be delayed. Then there Fed Chair Powell and his twelve dwarfs running around assuring the world they would act on rates should the economy slow. While there is no clarity in either the rumor of empty promises there is hope. And for now, hope is what is keeping the buyers engaged. Granted the volume is weak showing there are equally as many who are cautious and willing to watch a bit longer to see how this all works out. I fall into the latter camp of caution and willingness to watch and validate any upside moves with facts versus hope. Today ends the trading week and it will start with the May jobs report… Based on the ADP data most are not optimistic about the report… it will set the tone for early trading. Stops in place and our eye on the goal. FYI here is a great piece on reality versus fiction on the Mexico tariffs.
The S&P 500 index closed up 17.3 points to 2843 holding move above the 200 DMA and another positive day for the buyers. 2844 and 2861 are the next levels to clear on the upside. The news remains centered on the Fed cutting rates and the bonus of Mexico tariffs being delayed helped add to the bounce from the lows Monday. Interest rates on the 10-year bond moved up to 2.12% on Thursday as money moved back into stocks on the day. The good news is eleven of the eleven sectors closed higher on the day as energy and basic materials led the upside. The downside came from small caps and transports closing lower. The long-term trendline remains in question as they are tested on the downside move. Looking for the next opportunity. SPXS $21.50 level is of interest should the bounce fail. A test of the $20.50 mark expected near term.
The NASDAQ index closed up 40.7 points at 7615 and moved back above the 7597 previous support level. Technology stocks were the leader again on Thursday helping lift the index from recent selling. QQQ is our indicator as it moved back above the 200 DMA on the bounce. Watching how it responds closing on the resistance at the $177.58 mark. Nothing has changed relative to the market environment. Watching and letting this play out near term. The Short entry was the confirmation of the break below the $177.58 level. SQQQ Entry $41.40. Stop $45 (adjusted & sold 1/4 @ $47.50 Monday). Hit stop on the balance of the trade Tuesday… watching to reestablish the downside trade on the bounce. Test of $41.30 level is what I am watching for now.
Small Cap index (IWM) the sector broke below the $146.71 support and on Monday showed some interest from buyers. Tuesday followed through with the buyers to clear $149.04 resistance. Still overly convincing on the moves of late and the downside is still an opportunity. TZA $10.45.
Transports (IYT) The last week+ has pushed the sector lower breaking the $182.43 support and adding to the downside. Monday there were some signs of a bottom… Tuesday followed through with $182.43 back in play. Wednesday cleared that level of resistance and Thursday tested the move to support. Watching how this unfolds as a key indicator overall.
The dollar (UUP) The big question mark for the buck remains the trade tariffs with China. Lack of a deal will favor the dollar short term. The hope of a deal will hurt the dollar. Friday and Monday the news the Fed would intervene on interest rates moving lower hurt the rise of the dollar. The ETF closed at $26.15 and tested the 50 DMA. Watching as this continues to unfold.
The Volatility Index (VIX) closed at 15.9 as buyers step in to pacify the worries about tariffs (add Mexico to the list) and calm investors emotions. The index is still elevated, but the buy side helped the last three days. Uncertainty is the key issue at hand. Interest rate worries remain in the mix and we interjected the hope of rates cuts from the Fed on Wednesday. Watching how this unfolds near term.
UVXY moved back to the $37.50 level (entry) and watching how it unfolds. Stop $38. As noted the response on the open Friday spiked the index and we locked in gains on 1/3 of the position ($40.75 exit on 1/3 for 9% gain Friday… sold another 1/3 Monday $41.50.) Hit the stop on the last 1/3 of position. As stated yesterday it is a high-risk trade that needs to be managed… solid gain on the trade. SVXY $52.38 if buyers stay engaged.
Economic Data: Some positives in the data for the month of March… showing sound improvement over February.
THURSDAY, June 6th: Weekly jobless claims were in line with expectation and the same as last weeks. This helped calm some nerves from the ADP report on Wednesday… we will see what the Friday jobs report has to say relative to May’s numbers. The trade deficit was in line with expectations as well. Even with tariffs we still show a $51b deficit in April. Productivity data showed a 3.4% increase and unit labor costs fell 1.6%. An overall positive day for the numbers… which in the end create the reality we all are looking for versus the headline noise.
WEDNESDAY, June 5th: ADP employment data weak at 27,000 versus 271,000 previous. UGLY number. ISM manufacturing index rose to 56.9% that was positive. Beige book, Feds view of the economy, was upbeat compared to the April release. Steady growth and mild inflation is the best summary of the report.
TUESDAY, June 4th: Factory orders were lower falling into negative territory. Again, another sign of a slowing economic picture.
MONDAY, June 3rd: ISM manufacturing was 52.1 vs 52.6 expected and down from 52.8 in April… there is slowing in the economy and the data is starting to confirm. Yield curve impact? Yes. Uncertainty impact of growth? Yes. If the Fed is engaged it will have to act soon on interest rates. Construction spending was flat versus 0.3% expected. Motor vehicle sales were better than expected at 17.4 million versus 16.9 expected. Key data is pointing to a slowing economy.
FRIDAY, May 31st: Personal income rose 0.5% beating expectations. Consumer spending was higher by 0.3% also beating expectations. Core inflation was in inline at 0.2% keeping the Fed happy. Chicago PMI 54.2 better than previous and consumer sentiment was off as tariff worries rise. Overall it was a positive news day for the economic picture.
It is all about the progress and the data of late has been more mixed than previously. There are still some sectors showing signs of growth, but overall it is still slowing. Monday started a new month and we will get plenty of data from May to digest and ponder. The renewed chatter on tariffs isn’t going to help things looking forward. Interpret the data versus following our emotions. Let the trend be your friend… and for now, that is down.
(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 found support near the $101 mark. The break lower was the small-cap stocks struggling. We don’t hold any positions in the sector currently. Looking for some clarity in the sector. The short side trade needs to confirm the break below $101. Bottom? Watching. The bounce followed through and $104 level to clear. Thursday struggled moving down 1%.
Semiconductors (SOXX) Watching the downside pressure as the sector continued lower on the week. The close below $182.38 was a negative and the short side trade in the sector (SOXS) in place. Watching how the downside unfolds with key support at the $175.89 mark. The consolidation pattern is of interest near term. Bottom? Watching. Back above the $182 level and watching how it follows through. Wednesday did not impress closing lower on the day. Thursday resumed the upside move.
Software (IGV) The uptrend reversed at the $167 level remains in play with a consolidation pattern near the highs. We hit our stops at $214.80 and continue to watch how this unfolds and what opportunities it brings. Support at the $204.53 is the level to watch for now. Reaction and ripple effect of the antitrust investigation. Tuesday regained the losses from Monday. Progressed higher on Wednesday and Thursday.
REITs (IYR) Sideway trading range for now. Interest rates continue to fall, but the economic picture lacks clarity thanks to the tariff talks. Holding for now and letting the news settle. Broke $75.21 and bounced… trading opportunity on reversal above $75.21. Entry $75.25. Stop $85 (adjusted). Attempting to break out to a new high. Hit new high left a doji candle on the day worth watching.
Treasury Yield 10 Year Bond (TNX) closed the week at 2.14% and down 18 basis points as money rotates to safety. Watching how this unfolds near term and what action the Federal Reserve will take. TLT is a hold if you own bonds. Flight to safety related to the China & Mexico tariff threats. TLT hit entry at $124. TMF entry $20.26. Stop $23.50. Rates are falling off a cliff as they approach 2%. Bonds are the benefactor. Small bounce on the last two days and still not looking good.
Crude oil (USO) Worries about the supply data this week pushed crude below the $58.25 support. Tanked on Thursday and Friday in response to the tariff news, but also the lack of drawdown in US supply data. Short side trade playing out well for now. Entry SCO $ 15.75. Stop $20.25 (adjusted). NOTE: speculation, emotions, and worries create opportunities. Held $52.50 level of support. Wednesday broke lower on supply data. $51.30 held. Thursday bounced back from the selling on Wednesday on hope about no tariffs.
Emerging Markets (EEM) The downside found support and held with a modest bounce off the lows this week. China helped, holding steady on news of talks still in motion on tariffs. Regained the $40.25 support and watching how this unfolds. Short side trade entry hit (EDZ) at $45.55. Stop $51.50 (Stop Hit). Bounce reversal follows through… $41.23 level to clear for an opportunity. Retreated again as worries over tariffs return.
Gold (GLD) built a base of support and tried to start an upside move on worries about trade. The move above $121 was a positive and entry-level opportunity if you believe things will worsen globally. Speculation would say… YES. However, I avoid speculation of this type. The upside confirmed and broke higher on Mexico tariff threats… but, the real move came on the heels of speculation the Fed would cut rates, which in turn weakens the dollar, which favors gold. $122.50 entry level. Watching how this unfolds. Spiked higher on bonds, dollar, reacting to the antitrust and economic data. Held the gains on Tuesday… Accelerated again on Wednesday, watching. Added move higher on Thursday.
MidCap (IJH) The sector continued lower with the broad indexes last week. The move below the $182.55 mark was another negative for the trend. No positions as we look for the next opportunity. Bottom? Watching. Big bounce follows through… watching the 200 DMA. Some downside on Thursday and watching.
China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. The bottom has now been established at the $40 level with some consolidation on the week. We did trade the short side of this with YANG. Entry $42.70. Stop $54.60 (adjusted). Watching with the downside in play. Bounce reversal in play?
(The notes above are posted every weekend and updated daily Bold Italics)
DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT
THURSDAY’s Scans for June 6th: Upside remained for the broad markets with positive news on Mexico tariffs and the Fed is still assuring everyone they have it under control with interest rates. Rumors versus facts remain the driver. As long as the talking heads convince the markets traders all is well the downside remains at bay… the first sign it is not true the sellers will resume. Still looking for the facts… jobs report for May is out prior to the open on Friday. Watching for more facts.
- Crude Oil (USO/SCO) the selling on Wednesday was met with some buying on Thursday. Watching how this unfolds.
- Energy (XLE), Basic Materials (XLB), Technology (XLK), Consumer Staples (XLP), and Telecom (IYZ) led upside on the day and the charts show positive bottom reversal patterns in play. they need to clear the next resistance points to get my interest.
- Semiconductors (SOXX) back on the upside on Thursday… needs to clear $186.40 resistance.
- Natural Gas (UNG/DGAZ) downside accelerating and the short side trade is playing out nicely. Manage the risk and take some profits here.
- Brazil (EWZ/BRZU) showing some topping on the chart. The run has been positive. Locked in some gains on part of the position… raised stop and looking how this consolidation unfolds.
WEDNESDAY’s Scans for June 5th: Another day of positive gains for the broad indexes on lower than average volume. Will this bounce have legs? If the buyers believe large enough the Fed will cut… possibly. That belief will have to be fueled by facts like the ADP private jobs report on Wednesday. The data remains mixed and I am not convinced the Fed isn’t playing games in the media to keep the markets from selling off. It is all speculation and I will take what the market gives. Until then we have some positions that are working well and plenty of cash to deploy as the opportunities present themselves.
- Crude Oil (USO/SCO) downside remains in play as supply data disappoints investors. Short energy trade still working as well.
- China (FXI/YANG) downside stalled with bottoming pattern in play. Adjusted our stop and still have a downside bias.
- Financials (XLF) Bounced at the support of $50.29 on KRE… if the Fed does cut rates the banks will suffer as the margins shrink on loans. Watching how this unfolds near term.
- Semiconductors (SOXX) watching for clarity. The negative close on Wednesday was of interest… short side? SOXS.
- Treasury Bonds (TLT) rates bounced off the 2% level. Will Fed cut? If they do the downside in bonds will be an opportunity. Watching how this unfolds with stops in play on TLT/TMF positions.
TUESDAY’s Scans for June 4th: Rally caps on… the bounce was in the mix as oversold conditions were in place. The bounce is just a bounce for now. The buy side is under pressure to validate the move and reverse the selling trend of the last four weeks. The odds are more testing lower and potentially a retest of the December lows. Watching… letting this unfold. No need to chase the upside move on Tuesday when the bias is on the downside… the buyers have the challenge of shifting the bias and the sentiment. Some credit the Fed comments on Tuesday as a spark for the rally… the Fed is not going to cut rates until they have to… the media isn’t smart enough to read through the comments and understand the arrogance of the Fed… after all, they know more than the markets. They are obviously educated beyond their collective intellect. Watching patiently to see how this unfolds.
- There were plenty of rebounds on Tuesday… all worth watching. The bottoming patterns followed through as noted yesterday.
- Vertical moves hit stops – thus why we have them.
- Opportunities remain and we will take what the market gives.
- Watching how Wednesday unfolds. The oversold bounce is in play.
MONDAY’s Scans for June 3rd: Mixed news and mixed moves in the broad markets and specific sectors. Technology is hit by the rumored antitrust investigation from the DOJ. Energy stocks bounce, dollar tanks, gold spikes, defensive stocks seeing some buying, and some bottoming patterns emerge. Yes, technically stocks are oversold. But, I know one thing, markets can remain irrational longer than I can remain solvent trading against them. Stay focused. Manage risk. Have a defined strategy for every position. Avoid speculation and rumors. Trade what you know, not what you think.
- Bottoming patterns to watch… IWM, FXI, XLF, IYT, XLE, SOXX
- Vertical moves to manage… TMF, GLD, UVXY, SCO, SQQQ
- Opportunities… SIL, NUGT, IGV, XLV, IBB
- Key Issues… Interest rates, tariffs, economic data, antitrust, all are creating their respective level of uncertainty. They all have an influence on the markets short term… the longer term issues are how they impact growth moving forward.
FRIDAY’s Scans for May 31st: All hell broke loose on the speculation surrounding tariffs, interest rates, and the geopolitics. Gapped lower from the opening bell with a modest attempt to bounce, but close at the lows of the day. This move confirmed the downtrend again from the May highs. No need to chase short side trades on Friday. We have some positions on that benefitted from the move and we adjusted stops. Bonds have gone vertical on the interest rate moving lower and we raised stops on those positions. Watching how the news unfolds over the weekend and taking what the market has to offer.
- Adjusted stops on TMF, YANG, SOXS, UVXY, SCO, and others. Manage your risk and remember that markets decline nearly three times faster than the rise. Reaching oversold levels technically.
- Moves of interest on Friday… GLD/NUGT, DGAZ, SCO, UVXY, FAZ, SIL.
- Brazil (EWZ/BRZU) adjust stop on the move higher.
- Small Caps (IWM/TZA) adjust stop on the move lower.
- Financials (XLF/FAS) downside could accelerate if the Fed steps in and lower interest rates. Hurst margins for the banks. Watching.
Sector Rotation of S&P 500 Index:
- XLB – Selling resumes breaking support at the $54.15 mark and watching $52.49 now as support. Bottom reversal? Nice follow through on Tuesday and Wednesday.
- XLU – The utility sector found support at $51.11… moved above $52.72 for entry. Cleared $57.10 resistance. Entry $53. Stop $58.45 (Stop Hit). Bounced following three days of selling. Upside resumes. Nice follow through on Wednesday and Thursday.
- IYZ – Telecom facing$29.50 resistance and looking for near term direction. Some good news in the sector on the Huawei delays… still a challenge for the sector if the sanctions are put in force. Testing the $28.62 level of support again. Nice bounce last three days.
- XLP – Consumer Staples found new lows and bounced. Cleared $50.50 and entry $51.90. Stop $56 (Stop Hit). Moved lower and watching how it unfolds. Bottom? Watching. Follow through the last three days and back to the previous highs.
- XLI – Industrials moved below support $74.17 and the 200 DMA. Watching. Bottom? Added upside last three days.
- XLE – Energy stocks have struggled on the uncertainty about supply and production. Crude moved lower and the downside followed in stocks accelerated offering a short side entry on the break of support. ERY – Entry $39.60. Stop $51.40 (adjusted). Watching how this unfolds on speculation. Bottom? Solid bounce on Tuesday. Sold on Wednesday supply data. Solid bounce Thursday following crude oil.
- 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 (stop hit). A big move lower and hit our stop on the position. Moved to $86.74 support level. Held support and bounced the last three days and back at the 200 DMA resistance.
- XLK – Technology sold and looking for support. Gapped lower with semis leading the downside move. Spiked lower on Antitrust allegations. Snapped back on Tuesday. Followed through on Wednesday and Thursday.
- XLF – Financials moved to recent lows and bounced. $23.76 level cleared for trade. Entry $25.76. Stop $26.50 (stop hit). Fed back in the picture as interest rates tumble. Watching FAZ trade $8.86… Bottom? Nice bounce last three days. Watching news on Fed rate cut… not good for banks.
- XLY – Consumer stocks under pressure of late and looking at how it manages with support at the 200 DMA. Sold lower on news Monday. Bounced back last three days.
- RWR – REITs broke lower… bounced from lows clearing $93.21 resistance… positive upside move. Entry $88. Stop $97 (adjusted). Watching and managing the risk as it attempts to maintain the uptrend. Collecting the dividend and letting it unfold. The sole sector in the red on Tuesday. Thursday back to the previous highs…
(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:
THURSDAY: The news on Mexico tariffs, Fed promises to be diligent on interest rates, and good economic data help keep the upside in play. There are enough positives to outweigh the negatives for now. The May jobs report is due out Friday morning and the reality of the numbers will set the tone for the day. The last three days have helped squelch the noise driving the downside and we will watch how it unfolds. Moving to key resistance areas and volume is on the low side. Watch and take what the market offers.
WEDNESDAY: The power of the Fed. The words eluded to a possible cut in rates if the economic data continues to weaken. A carrot for investors to jump at? Maybe. Possibly. Could. Should. Might. All speculation. Welcome to the world of uncertainty. Without clarity of direction traders and investors alike will grab at anything to make themselves believe. Taking what the Fed says with a grain of salt and watching how investors vote on the chart. Some good looking patterns emerging from the bounce. The question mark comes from volume/conviction in the move. Letting this unfold moving forward and taking what the market gives not what I think. Patience.
TUESDAY: The bounce from oversold conditions happens and investors are gitty. A bounce is a bounce until it validates otherwise. If the talking heads are right and the Fed comments sparked the rally… watch out below. The Fed will not act until the music stops and everyone is scrambling for a chair. We will watch how thing unfolds on Wednesday… don’t count the sellers out. We didn’t learn too much on Tuesday that was different… still plenty of uncertainty looking forward and the bulls never die easy. Watching and looking a the bounce as a downside opportunity… if that is the wrong outlook the markets will tell me and we will adjust accordingly. Please note, despite my downside bias I still took the exits where stops were hit… we can always reenter positions. Always remain true to your discipline.
MONDAY: That the government can keep adding to the challenges the market faces. I am not a conspiracy theorist, but the timing of this in conjunction with the tariffs is interesting. Regardless, the outcome of the day was reactionary selling. How it unfolds will only be known in time. We avoid the areas of news, trade what we know, and let the rest settle itself out. Speculation is easy, disciplined trading is hard.
FRIDAY: Worry about trade is taking stocks lower. The big question… will this really happen or is there a resolution? The more investors believe it will happen the more the markets will price it into stocks. Volatility picked up, but not at crazy levels yet. The course of action for me is taking what the market gives… some short side trade currently. Manage the risk of the trade… adjusted our stops higher. And, focus on what we know, not what we think. Plenty of speculation flying in every direction currently. Patience is key.
We remain in heavy cash positions for now. Looking for the opportunities worthy of the risk. Taking our time to understand the current environment of emotions versus logic. Patience wins the race in periods like this.
Markets lower as the news of additional tariffs on Mexico rattled an already nervous investor. The indexes closed in the red for the week again with the S&P 500 index dropping another 2.4%. The index is currently down 6.5% since the highs in May. The sellers are in control of trend near term. Friday only embolden them as the news continues to favor the downside trade. We exited where the risk rose and we added positions where the risk was appropriate for our terms. Economic data was on mixed with some good news on Friday, but it was lost in the tariff talks. Rotation is in play as money heads to safety and cash. This is where we find ourselves as well. Plenty of question marks and only time will tell the outcome. 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.
Eleven of the eleven sectors managed to close the week in negative territory as money continues to move with some rotation. Consumer staples and energy led the downside for the week and raising new questions about the trend. Gold rose, the dollar was flat, and the economic data was overall mixed with some positive points where they count. Four sectors are moving sideways in consolidation patterns. Seven sectors are in micro downtrends. Crude broke lower for the week as supply data worries investors. 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.