Did markets react to the inverted yield curve?

Market outlook for August 15th

The downside returned after the bounce on Tuesday with a vengeance. The headlines focused on the inverted yield curve of the 2 and 10-year treasury bond… really? I would say it was the build-up of everything that has been hampering the markets of late and the sell button was hit by many who fear what may be on the horizon. In other words, emotions took control. Now is a good time for the famous quote, “emotions aren’t facts”. What happened on the charts is an exercise of reaction to the worries/emotions about the future. There is uncertainty and it has been in place long enough to put fear in the markets. How do we respond? Good question! We don’t. Our stops have been in place and hit last week. Our short positions are in place and we benefitted from them yesterday. We continue to take it one day at a time and let the markets determine how and where we deploy money… risk management is where we focus so we don’t have to ask the question… what do we do now… we already did something.

Today we look at taking some profits on the short positions. Why? Downsides accelerate much faster than the upside and we posted some solid gains… taking some off the table is prudent as we let the balance run. Risk management.

The S&P 500 index closed down 85.7 points to 2840 and back below the 2923 support. Wednesday was ugly from the open and we closed at the low of the day. The focus on trade, bonds, Fed, and economics remains in the headlines and the worries turned to fear which prompted the selling. None of the eleven sectors closed higher on the day as the sellers took control. The downside was led by volatility index jumping to 22.1. The energy and financials led the downside dropping 3.7%. You can see why I stated I have not abandoned my view on the short side of the market. The long-term trend remains in question with the move lower breaking the trendline from the December lows.

The NASDAQ index closed down 242.4 points at 7773. This puts the retest of the current low back in play at 7726. Technology (XLK) stocks sold back to the $77 level of support. QQQ held above support at the $180.73 level after one break above the $186 resistance. Downside still in play and watching how this follows through.

Small-Cap Index (IWM) The downside resumed on Wednesday with a move to June lows. Added a short side trade with TZA. Entry $50.25. Stop $52.24. Lack of opportunity in the growth stocks based on the data is the catalyst for the short side trade.

Transports (IYT) The sector sold back to last weeks lows. $180 level failed to hold and the short side takes a major step relative to the belief in the economic picture. $175.33 next level to hold. Short trade entry $$180. Stop $179.21.

The dollar (UUP) The dollar moved higher but retreated on the tariff actions. Retreated further on China’s yuan move. Held steady and bounced on Tuesday with the tariff delay news. Closed at $26.62. Watching the Yen (FXY/YCL) as it is the current benefactor of any tariff action.

The Volatility Index (VIX) closed at 22.1 as fear and anxiety rose on the day. UXVY entry $33.55. Stop $34.63 (stop hit). Watching… Trade entry at $35.27. Stop $36.50. Hit stop on Tuesday… added it back on Wednesday. Willing to take some gains today if it opens above $38.60.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector moved to the $190.44 support/resistance and reversed lower on Monday… offering a short side trade. The bounce on Tuesday was not convincing. MIDZ entry $56.35. Stop $58.10 (Adjusted). Growth stocks are being sold again.

Biotech (IBB) The sector remains at support near the $104 level and looking for a catalyst up or down. Broke $104 support and watching the downside.

Semiconductors (SOXX) The bear flag pattern at the current low is of interest. Statistically, it will continue the downside move. This offers us an opportunity for a short side trade. Bounced 3% on Tuesday… fell 3% on Wednesday… indecision at play.

Software (IGV) sector bounced last week and but failed to hold the move. The retest of the low is negative and we will watch how this unfolds. Bounced on Tuesday… fell 3.4% on Wednesday retest of the lows currently.

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. Tested lower to support $89.58.

Treasury Yield 10 Year Bond (TNX) fell to the 1.7% level on all the worries. Money rotated to safety and our TLT trade went vertical. Stop $138. Monday closed at 1.63% inverted yield curve has to worry the Fed? Watching and adjusting our stop on TLT. Tuesday 1.68% as the 2/10-year inverted intraday… watching how this activity unfolds. 1.58% on Wednesday and close inverted on the 2/10 year bond. Adjusted stop on TLT/TMF trade.

Crude oil (USO) Fell lower on the speculation around global slowing economically. Bounced Friday on European news of drawdowns in supply. Watching support at $52.50 and resistance at $58.25. Big jump on Tuesday to $57.10 as supply data is showing signs of dropping in the US. At least that was the rumor… the reports are due out today. Wednesday China/US words on tariffs pushed crude lower…

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. Jumped higher on worries about economic data. Stop now at $139.93. Upside resumes on Monday. Tuesday sold on the tariff delays… but it did bounce from the intraday lows. Wednesday moved higher again on tariff banter… Watching.

Emerging Markets (EEM) Broke lower from the trading range as tariff threats add to the worries about an economic slowdown. Banked our gains on the short side trade. Watching for the opportunity. Downside back in play on Monday with a retest of last weeks lows. Tuesday bounced as you would expect with the delay in tariffs… watching. Gave up Tuesday’s gain and then some to close at a new low on Wednesday.

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 remains in play. YANG Entry $49.75. Stop $61.38 (adjusted). Hong Kong issues back in headlines pushed ETF lower. Bounced Tuesday on the tariff delays from President Trump. Gave up Tuesday’s gains and hit new near term lows on the move Wednesday… adjust stop.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scans for August 14th: China doesn’t believe the President will enact the new tariffs and went on the offensive Wednesday. The end result is a game of Chicken between the two countries. All the banter, along with an inverted yield curve sent stocks lower. As stated yesterday, I believe the downside is still in play. Our short side trades did well and we adjusted our stops. The long trades in gold and treasury bonds did well also and we adjusted those stops as well. Watching how today unfolds as we are at the previous lows. Do we bounce or accelerate through this level of support to new near term lows? We will see how this unfolds. Not willing to take unnecessary risk and will manage what the markets give near term.

  • Added VIX trade back with UVXY and will manage how it unfolds today.
  • Natural Gas (UNG/GASX) short side trade continues to run higher. Adjust your stop and manage the risk.
  • Energy (XLE/ERY) downside accelerated from the rest/consolidation to move higher.
  • Russia (RUSS) short side accelerated as pressure builds on crude.
  • Semiconductors (SOXX/SOXS) triangle consolidation pattern on the chart… short side? or does it rally?

TUESDAY’s Scans for August 13th: Tariff delays ruled the trading direction from the open. The important data came after that… which sectors held the gains which forfeited them. This is where we have to focus our efforts and understand that news is temporary… facts/data move stocks longer term. I am not saying the move wasn’t a positive… I am saying be cautious about what you believe to be true… facts speak louder to me than news.

  • Industrials (XLI) and Basic Materials (XLB) gave up half of the early gains as seen in stocks like CAT and DE.
  • S&P 500 index moved to the May highs and retreated… resistance is alive and well.
  • Small (IWM) and Mid-caps (IJH) gave back half of the gains on the move higher. Not a confidence builder.
  • Gold (GLD) fell 2.3% early and was off only 0.6% at the close. This is a tariff trade… shows the belief factor in the delays is just that, temporary.
  • Treasury Bonds (TLT) like gold fell early but managed to regain most of the losses intraday.

MONDAY’s Scans for August 12th: Downside is back in vogue. The pressure from interest rates and China leading the way on the day. This opens the downside trades again and we added those above in various sectors. Remember downside reactions move on average three times faster than the upside… meaning we have to manage our risk equally to the environment.

  • China (FXI/YANG) accelerated lower on the Hong Kong news Monday adding to our short side trade.
  • Volatility Index (VIX/UVXY) spiked higher on the selling and headlines.
  • Treasury Bonds (TLT/TMF) resumed upside move on the flight to safety.
  • Small and Mid-Cap (IWM, IJH) accelerated lower offering short side entries.
  • Watching on the downside for trade opportunities: XLE, XLF, IYZ, BZQ, DIA, QQQ, SOXX, EEM, EFZ

THURSDAY & FRIDAY’s Scand for August 9th: Solid gains on Thursday were negated on Friday… This is the market environment currently as uncertainty is fueled by speculations. The fundamental data is lost in the speculation of what might or could happen. Our job is to find opportunities in volatility. We locked in gains on short side trades as the bounce materialized on Wednesday. Friday showed we may not be done yet, but there will have to be another catalyst point. Upside positions in gold, short trades in China and others are still playing out well. The scans are a mess with the Friday decline and deferring to Monday’s to see what happens. Exercise some patience and manage your risk accordingly.

(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 held support at the $55.95 level and hit resistance at $58.13. Downside Monday, upside Tuesday? Breaks the previous low on Wednesday selling.
  • XLU – Utilities remain in the trading range of $59-61.23. Collecting the dividend and letting it play out.
  • IYZ – Telecom holding near support at $28.62. Watching. Downside Monday, upside on Tuesday? Breaks the previous lows on Wednesday.
  • XLP – Consumer Staples held $57.75 support bounced and watching.
  • XLI – Industrials held 200 DMA support and bounced… 75.572 level to clear for now. Downside renewed Monday. Breaks the previous lows and the 200 DMA on Wednesday.
  • XLE – Energy held $74.17 support and $75.72 resistance to clear. Downside renewed Monday. Traded higher on Tuesday. Accelerates the downside move adding a short side trade signal.
  • XLV – Healthcare held $89 support and $91.67 resistance to clear. Wednesday closed below the 200 DMA and testing last weeks low.
  • XLK – Technology held $75 support and $78.90 resistance to clear. Downside Test on Monday. Upside relief on Tuesday. Gave up gains to test lower again on Wednesday.
  • XLF – Financials under pressure held the 200 DMA and $27.42 level to clear near term. Downside renewed Monday. Bounced on Tuesday. Broke below the 200 DMA and previous lows on Wednesday… May lows next?
  • XLY – Consumer Discretionary held $113.80 support and $118.80 resistance to clear. Downside renewed Monday. Bounced on Tuesday. Tested the previous lows on Wednesday.
  • IYR – REITs held $88 support and cleared the $90.80 resistance on Friday… Watching and letting it unfold. Sold lower on Wednesday but remains above support.

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

Wednesday was ugly! Emotions hit their limits and the sellers emerged to take the major indexes back to last weeks lows. Before we throw in the towel and assume the markets are heading lower… we have some key levels to break in sectors. Watching how this unfolds and keeping the talking heads on MUTE! Plenty of news, speculation, and pontification on each and every matter facing the markets. That is of no use to me… the facts are all that matters and as stated in the opening remarks… “emotions are not facts”.

Tuesday was a bounce driven by the delayed tariffs on some items. The early bounce helped give some relief to the downside move on Monday. It was a suspect move for some sectors as seen above. It was a day of ignoring data such as the CPI jumping 0.3% and no response. Germany showed slowing growth again and could add to the stress globally for stocks. Facts versus News/Speculation is where the market finds itself… time is in favor of facts… short term favors the news… know what you are trading and where your risk lies.

Monday was not good news for the buyers. The downside renewed with a rise in volatility a spike in downside sentiment. The volume was below average if we want to find some good in the bad. Key sectors are testing and we have to watch, act, and manage our money accordingly. Opened some new short side trades and watching how the week unfolds.

Markets gapped lower to start the week and found support… bounced and watching how this is going to play out. This is currently a market controlled by headlines as each day holds movement related to the speculation of what might happen. My question is will the downside continue? Trade is a major issue… but, economic growth is the real issue at the end of the day. Focus on facts like economic data, earnings, and global data reports. The ISM manufacturing data for July fell to 51.2% and the ISM services data dropped to 53.7% showing weakness in the economy. July added 164,000 jobs and was in line with expectations. PPI fell for the first in over two years… My question, what is the Fed looking at? Why are they not more engaged? Trump is right on this front. Remember within all of this data lies the opportunities we are all looking for. Crude oil speculation remains in the news as price moved below $53 level and bounced on the European supply data. 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 at 1.73% in response to fear and flight to safety. We remain focused on what is working and what is failing. Therein lies the opportunities. The balance of the market will eventually figure out a direction.

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.