Downside accelerates as fear rises

OUTLOOK: February 6th

Welcome to the world of selling. I don’t like irrational markets any more than the next person, but they are interesting to watch. It took the S&P 500 index four weeks to climb 7.3% and six days to fall 7.9%. That is the risk I talk about consistently in my notes. That is the risk we put stops in place to avoid. Right or wrong, explainable or not, the volatility of markets is where the risk lies. First, to our money, second, to our emotions. The mental impact of the last two days is a bigger issue than the drop in value. My email has been full of questions and comments about the trading… for me, it is about learning. I want to learn why, but more importantly, I want to learn how to avoid these situations and protect my money. I also want to know if the worst is over or is there more to come? Today is important as investors will vote to step in or continue selling. I continue to evaluate and my notes are below. Honor your stops, manage your risk, and let this unfold.

Monday the downside expanded further with the major indexes dropping more than 4%. It was bad and the charts show the damage. The move gave up the entire gain in January and then some. The headlines in the media were almost comical at one point as the Dow was down 1600 points. Emotions are in full swing… the comparisons to 1987 even came out in the news. The challenge with that is how many people were even trading then. Most Wall Street traders weren’t around. Global markets followed lower overnight with Hong Kong down 5.1% and Japan off 4.7%. The futures have been all over the place as well. They are currently near even and still moving around. I stated Friday that interest rates are the real challenge for stocks based on my views. The rise isn’t a matter of speculation it is a reality in what and how it affects the economic picture as well as consumer spending. Yellen took her final shot as she left as the Fed Chair, stating asset values were too high. She should feel good, it was the Fed stimulus that created most of that value. That aside, the comments from the new Chair didn’t help either. This is all part of the process of corrections or pullbacks, blame everyone and everything.

All eleven sectors were negative with financials (XLF) and industrials (XLI) leading the downside move. The upside didn’t exist unless you look at the short ETFs like SPXS. Scanning the charts we see a break or gap lower that impacts the trend of the charts short-term and puts us on notice relative to the longer-term charts. This has been an unprecedented move to the upside and it is starting to look like one on the downside. Remember markets sell faster than they rise (last three days validates that theme). Stops were hit all around on short-term positions. I hit plenty of stops on Friday and rest of the long positions again on Monday, but I still have to manage the long-term holding based on the original strategy, not emotions. I equally am caution as it relates to adding new positions short or long based on the current activity. It is important to look at the intraday chart yesterday and note the attempted bounce off the low failed and closed at a lower low on NASDAQ and lows of the day on others… generally opens the door to more selling near term. I have been around these types of moves and scenario seems to repeat itself with different themes. The last phase of the run is irrational and then the selling becomes equally irrational until the norm is restored. We are in the irrational phase now looking for some normal. We will always take what the market gives and exercise discipline in executing our trading strategies. The news is reactionary, beliefs are trend building… watching what belief rises out of the short-term activity currently.

The S&P 500 index closed down 113.01 points at 2648 and moved to the 50 DMA breaking support on the move. We have clearly closed the gap on the 200 DMA to more normal levels and looking at the chart we are in line with the long-term trendlines off the January/February 2016 low. The uptrend remains on the long-term charts and I state that as a matter of reference for this move. This a balancing act for the irrational move higher in January. The index gave up 4.1% on the day and has erased the gains from January. Only two stocks closed positive in the entire index… TRIP and CHD. That is not something that happens often and is a clear sign of how bad the day really was for stocks. The last ten days all the sectors are posting negative returns with energy, basic materials, and technology leading the downside moves. The last month is the same with the exception of consumer discretionary. Plenty to watch, listen and learn as this unfolds in the coming days.

Gold (GLD) gapped lower to support at $126.03 and held with a small gain on Monday. There is some indecision in the metal near term, but holding above our stop for now. The dollar (UUP) worries abound, but it did manage to bounce off the current lows. Treasury Bond yields moved to 2.85% and rattled interest-sensitive stocks but closed lower on Monday at 2.79% and holding. Crude oil (USO) near the highs with the dollar creating some near-term uncertainty about the upside closed back at the support of $64. The emerging markets (EEM) dump lower breaking $47.90 support on interest rates, the dollar, and just plain worry over the US markets. The Volatility Index (VIX) jumped to 37.3 on the obvious anxiety present in the markets on Monday more than doubling from Friday’s close. That is emotions and anxiety at its best. Worth watching SVXY as this will fall as some normality returns to the markets. There is plenty on the table relative to dynamics and agendas from the government, traders and investors alike, but the emotions injected into the markets now raises questions about the downside and the level of correction that will transpire and/or the opportunities that exist after Monday’s activity. I stated in the Friday notes that Monday would be a validation day for the sellers and they confirmed they are willing to push stocks lower offer some short trade opportunities. The economic data is lost in the news with positive results the last few days. It will play a role in the rebound when it occurs so don’t lose sight of the good in the bad. The goal is to manage money, not markets. Manage your risk and stay focused on the horizon, not the rear-view mirror.

(The notes above are posted daily based on the activity of the previous days trading)


Biotech (IBB) remains a sector of speculation… The speculation from Washington relative to what will happen with drug prices and healthcare. The sector has taken on an emotional ride of ups and downs based on the current belief and market trends. Thus making it more of a trading sector than investing. The current move off the November/December bottom is testing with a move back to the $112 mark… which hit our stops on Friday. Entry $107, Stop $112.02 (Stop Hit). We watch and see what develops on Monday… in response to why not having tighter stops on this position… simply put volatility is higher in the sector and we need to give room… Back to the $107 support and watching.

REITs (IYR) The sector broke the $79 level of support and continued lower. The rise in interest rates continue to worry investors and in turn, the selling has expanded. Entry at $75.75. Stop $76.25 (Stop Hit). SRS hedge entry $30.25. Stop $32.10 (adjusted) we added to protect our principle short term. The Break of $77 level was negative. We hit our stops intraday on Friday and we remain short with the hedge. We did collect the 4% dividend achieving part of the goal and if the downside expands we will gain our equity gain with this trade. Money management is key with all positions.  Below $75.75 support and watching. Hit stop and letting the hedge run its course. 

Treasury yields (TNX) moved to 2.85% last week gaining 20 basis points. That is enough to solidify the move higher in yields and the short side trades in the bond. The lack of commitment from the Fed and Washington’s wanting a weaker currency isn’t helping, and neither is the comments from the new Fed Chair, Mr. Kaplan. Watching how this unfolds, but for now, rates have moved higher and the short side of the bond remains the trade with worries of yields rising further. TMV holding entry $18.50, stop $19.25 (adjusted). Watching how yields react to the selling? 

Gold (GLD) Gold remains in a long-term uptrend with a broad trading range in play the last six months. The volatility of the trend is speculation and news driving money. The selling speculation on the Fed hiking interest rates broke the $120.45 support, but the weaker dollar led to the rise currently of the December lows. Entry $120.70, Stop $125.30 (adjusted). Long term view is positive and the short-term boost from the weak dollar is helping the commodity. There is plenty to account for relative to gold and the gold miners (GDX). Holding at support

Crude Oil (USO) has become a story of what if’s more than what happened or is happening. Supply remains the overwhelming issue, but speculation about the dollar is impacting the price near term. The last three months the commodity has managed to fight its way back above the $50, $52.50, $57.50, and now $61.60 levels of resistance and confirm an uptrend off the June low. Entry $50.20, Stop $60 (adjusted). The price accelerated on a weaker dollar and remains in the uptrend… let it unfold and manage your risk. Some rattling about the price being overextended… let it unfold as the upside is still in control.  Holding at support. 

Energy stocks (XLE) was stair stepping upside off the August lows and the double bottom pattern clearing $63.22 for entry and a stop at $72 (adjusted). We hit our stop on Friday as the price of stocks follows the market versus oil. Why? The simple fact that oil prices have stalled and investors are willing to lock in gains relative to the markets versus and underwhelming support for higher oil prices. It is simply a matter of choosing which speculation theme to follow. Reacting with stocks lower… watch the price of crude… if it doesn’t respond on the downside could be an opportunity. 

Volatility Index (VIX) The negative week for stocks pushed the index above 17.3 on Friday to close at the high of the week. The worries are building and they are speculation driven… the key concern is the volume of buyers backing away and the sellers taking control near term. Watching how this unfolds moving into the new week of trading. Short VIX trade is now attractive on the emotional move. SVXY. 

The S&P 500 index closed the week down more than 70 points or 3.8% erasing nearly half of the gains for the year. The drivers last week were interest rates moving higher and supporting speculation the Fed would raise rates as well. That puts speculation in overdrive as the impact of higher rates will slow the economy initially as consumers have less spendable income. The belief is tax cuts will offset the loss and longer-term create a stronger economic growth versus the stimulus given by the government over the last eight years. All the moving averages were negative on the week and volume was above-average on the selling. There is plenty to ponder as we start the new week… not the least of which is the move in interest rates, the dollar, and comments from the Fed. The questions to ask, how low will the dollar fall? How will earnings impact the current leg higher? Will interest rates move to 3%? Will inflation raise its head to disrupt? We remain on guard about how the buck will impact the inflation picture as well as commodity prices. Remember rising commodities impact inflation relative to spending and discretionary dollars from consumers. Overall we are still cautious about the direction looking forward. Patience is required with this market overall as news leads the parade. Economic data remains mellow to start the year. Plenty of talk on the table concerning inflation as interest rates move higher. One day at a time is all we can do… Erased the gains and now comes decision time for the trend and investor beliefs. How this unfolds will be of interest for short sided trades. I don’t want to speculate or say I knew this would happen… All I want to do and say is what is happening and how to navigate the market. Watching for a bounce, don’t expect it to hold, and then the next phase of selling will tell how this plays out near term. If the bounce holds, it is a new game for the buyers. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Daily Scan Results: 

MONDAY’s Scans 2/5: Selling accelerates and the buyers sit on the sideline. I am not going to try and rehash the warnings and the need for stops and, and, and… I only want to look at where we are and where we may go from here. My beliefs are simple at this point… evaluate how the buyers respond to the last two days of selling. If they don’t hold support, more selling is on the way. Take what it gives and evaluate each day looking forward. I am only looking at the broad index in these notes to give a broader perspective of what is taking place. There are plenty of short trade opportunities that set up Thursday and Friday. They have to be managed based on the move Monday… the bigger question here is what happens moving forward. IF you added short positions… adjust your stops, bank some gains, and manage the risk. 8% downside in five days presents the opposite risk of a bounce erasing those gains if you were short. Take it for what it is and manage your money accordingly.

  • S&P 500 Index (SPY/SPXS) Confirmed the downside move in spades. Broke $267.38 support. Erased the gains from January and then some. Short side entry hit at $274 and stop is now $268. Watching how the day unfolds with the futures negative.
  • NASDAQ 100 index (QQQ/SQQQ) $157.55 level to hold. Futures are below that currently. Short side trade $163 entry. Don’t chase the downside… let this test and fail for entry if you are not already in a short position.
  • Small Caps (IWM/TZA) $148 support. If it fails more downside to $144.60 and the 200 DMA. $154.90 short trade entry and risk of that trade needs to have a stop at $150. Let this unfold.
  • Emerging Markets (EEM/EDZ) Broke $47.90 support erasing the vertical move above that level. The downside risk remains, but looking for a bounce back from the emotions and then a resulting directional move.
  • Transportation (IYT) Broke $191.70 support and held at the $186.50 mark. A key sector for direction of the broader markets overall. Watching how it unfolds in this current selling. The sector was already moving lower… a good indication of what transpired.

Plenty to evaluate and plenty of damage to evaluate in the broad market as well as key sectors. I continue to dig through the rubble and look for the value and opportunity… up or down.

FRIDAY’s Scans 2/2: Sellers take control of the direction for the week and leave us with plenty of questions to ponder. Monday will key for the follow through if the downside is to accelerate. Evaluation of the bounce, if it happens, will be key relative to breadth and volume. Now is a good time to watch, listen, and be patient.

  • S&P 500 Index (SPY/SPXS) downside move of 70 points opens the door for sellers. Watching how this unfolds and what is leading the downside. REITs (SRS) and utilities (XLU) were the leaders for now. However, all eleven sectors lost on the week and it will evolve if the downside becomes the trend.
  • NASDAQ 100 (QQQ/SQQQ) cleared the $17.25 entry level for a speculation short trade on the index. This was on my watch list and I did add a position based on the technical move and sentiment. The bigger perspective is the large caps sold the most as they were the upside leadership. Watching how they progress in the coming week. $157.50 (QQQ) is the key support level to watch.
  • Small Caps (IWM/TZA) This was a laggard on the upside despite the modest gains in January. The drop this week erases the move above the key level of $155. The key level is $152.50 and a break lower would be a bigger negative for the sector. TZA hit entry at $11.42 on Friday as the bottom reversal created technical trade. We are watching how this unfolds near term.
  • Semiconductors (SOXX/SOXS) Broke the 20 DMA and $181.60 support levels. Still not in bad shape and watching how the leadership of this sector impact technology (XLT) near term. Not enough here to interest me in a short last week, but looking forward and watching the 50 DMA as a key level of support.
  • Treasury Bonds (TLT/TMV) interest rates move to 2.85% and cause havoc in the markets. This is a key example of how investors can override the reality short term. The economy is improving… interest rates should tick higher… except when the Fed intervenes more than it should. Thus, the delay in rates rising is now coming to roost (as my mother used to say.) I don’t expect them to fall unless the economic picture shifts to negative again. The last two quarters have seen 3% plus growth… that is a good reason for rates to rise. Watching and staying short bonds at this point.

Closes like Friday tend to cause havoc in the early week trading. Will there be a sympathy bounce? Will there be more selling? Either way, the likelihood of more downside is the greater probability moving forward. This is a time for caution and not speculation. The trend will validate and the opportunities will be clear. Patience, however, is the key.

THURSDAY’s Scans 2/1: Not a great start for the month as money starts to rotate. Interest rates rise which in turn pushes bonds lower, crude oil higher along with other commodities, and the dollar remains on the weak side. Number one question I am getting is… do we sell our positions? Second, do we short the market? Both legitimate questions, but both answers ask for speculation and I am not a fortune teller or speculator… let the trends unfold and take the opportunities presented.

  • REITs (RWR/SRS) moved lower on the day in response to rates and the short side setup is in place. We added SRS as a hedge to our positions at $30.50. If it moves above $32.50 we will adjust by adding to our short position and selling our long position to be net short in the sector.
  • Natural Gas (UNG/DGAZ) selling continues and the short side trade is setting up at $24.50. The negative sentiment over the outlook for the economy impacting, but the inventory data is moving the commodity short term.
  • Treasury Bonds (TLT/TMV) short side trade confirms the move above $19.25 and clears the October highs. Adjust your stops to $18.70 and let this play out for now.
  • China (FXI/YANG) uptrend showing fatigue. Watching what transpires near term. Casino news impacting the stocks, but the emerging markets are getting nervous about rates and economic growth. EDZ was higher on the action Thursday.
  • Some short ETFs to watch in the coming days… SQQQ, SMN, SRS, EDZ, YANG, DGAZ, SOXS, and TMV.
  • Other sector charts to watch… UCO, LBJ, OIH, IAI, EWW, ULE, KRE, KBE, SOCL, and DBC.

Watch and act based on a defined strategy… don’t react based on emotions.

WEDNESDAY’s Scans 1/31: January comes to a close and there was plenty to celebrate despite the closing three days of the month. I am still watching the reaction to the State of the Union, FOMC, and interest rates. Earnings are still in play as well with reports coming from the large-cap stocks that have been leading the charge higher. Charts are holding up and the upside is still the trend. Patience is the key along with a clearly defined strategy of how to approach the current market environment.

  • REITs (IYR/URE) building a bottoming pattern as interest rates rise. Did the FOMC make the Fed more positive on rates? The sector responded in that manner on Wednesday and it has my attention. Looking for a follow through the bounce off support.
  • Utilities (XLU/UPW) bottoming pattern has moved to the breakout level $51.12. Good volume on the move higher and watching how interest rate story unfolds. Willing to add a position if this makes a follow-through move.
  • Healthcare (XLV/IBB) the sector is subject to speculation, rumors, and fear. Not a good place to if you are an emotional trader. The downside remained in play on Wednesday and watching how this unfolds and what opportunities it brings. LABD bottoming pattern is on my watchlist… $3.40 level of interest.
  • Natural Gas (UNG/DGAZ) drops on data and watching how that unfolds following the strong upside move. Hit stops at $25.50.
  • Semiconductors (SOXX/SOXL) holding in a consolidation pattern currently and is one of the keys looking forward. Scanning the stocks shows some positives with QRVO up after-hours on earnings, AMD rallied on earnings, MU, BRKS, and ON in good setups, QUIK still in positive trend, and MCHP in holding pattern… all still in position to rise.

There is plenty happening in and around the markets. We have to be patient and let them unfolds. Take what it gives and keep our focus on what beliefs are driving the trends both short and long-term.

TUESDAY’s Scans 1/30: Another negative day of trading as money rotates based on speculation and news. Some money coming out of the market as profits are booked. Large-cap stocks were the hardest hit, but they also had the biggest gains. Managing our stops, looking for the truth in the moves, and looking for the resulting opportunities.

  • Short side ETFs – they were the biggest movers the last two days. Plenty of emails about buying them currently. You can always trade speculation in markets as they create changes in charts, but they also come with the higher risk probability and that is not my strategy for managing money. My view… let this unfolds further and then take the positions when there is clarity and measurable risk. DRIP, ERY, SOXS, YANG, SCO, TECS, and DUST are the ones on my radar following Tuesday’s move.
  • Energy (XLE/ERY) downside move is worthy of attention. Cleared $7.62 entry level for bottom reversal trade. Speculative at best based on the news. If this holds the move above $7.62 worth trading with a stop at $7.38… measurable risk, and target of $8.86… measurable reward… strategy defined.
  • Healthcare (XLV) downside move of two percent. Closed on the 10 DMA. $88.06 level to break on the downside to interest me in the short side trade. Watching biotech (IBB) as well as this unfolds. The news impacts the providers (IHF) and watching how that unfolds as well.
  • Financials (XLF) some downside and below the 1o DMA. The uptrend is in place and the sector has been a benefactor of the move in rates and optimism towards the economic picture. $28.50 level to watch on the downside. KIE is where the risk resides in the sector based on the current news.
  • Treasury Bonds (TLT/TMV) short side continues to gain momentum and confirms the move above $19.25. Added to our position at $19.60 with a stop at $18.90.

Plenty to watch, avoid the speculation, focus on the horizon, and measure the outcome on the charts. Taking it as always… one day at a time.


(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

Sector Rotation: 

  • XLB – Materials topping pattern breaks lower hitting our stop and threatens the trendline for the sector. $60 is the next level to watch on the downside and the trend needs to hold that level to remain in place short term. Erased December and January upside. Let it find support. 
  • XLU – Utilities have been under pressure from the speculation of higher interest rates from the Fed and a weaker dollar. Now that rates are pushing above 2.85% look for more pressure on the sector. Looking for support and the next opportunity as the fear evaporates and reality settles in. Erased the bounce off $50 and tested it again on Friday… breaks lower from the bottom range and looking for support again. 
  • IYZ – Telecom has become more of a trading sector than the buy and hold historically. The volatility has increased and thus swing trading works better. Some buying? Some selling? Some consolidation. The bounce was positive and we added a position on the upside move… $28.55 entry. Stop break even $28.55 (Stop Hit). Stalled at the $29.50 level of resistance in a trading range the last nine weeks.  Broke lower from trading range. November lows in play. 
  • XLP – Consumer Staples remain in an uptrend despite the dump lower on the week. Not pretty and it closed at support as one of the downside leaders for the week. Entry $54.80, Stop $57.25 (Stop Hit). Let it unfold and then we decide any action to take moving forward. Downside move ugly and watching for support. 
  • XLI – Industrials moved higher and they accelerated to a flag pattern… which broke lower on Friday… watching how the week starts with our stops in place. The long-term uptrend remains in play. Stop at $77.50 (Stop Hit).  Big move lower and looking for support. 
  • XLE – Energy is a house of cards with volatility in the commodity and news surrounding the production and supply data. The cards have been dealt a straight with the climb higher as a result of the rise in crude oil. Entry $65.20 with a stop at $72 (Hit stop). Divergence in oil prices and stock prices again as the speculation in stocks overall is pushing them lower. Watch and see how it unfolds. Sold back to the previous trading range. 
  • XLV – Healthcare has been a big roller coaster ride with a promise to reform healthcare and then the failure to follow through. The test of support at $81 bounced and followed through on the break higher. Entry $83.85, Stop $87.75 (Stop Hit). Last week it moved lower as the sellers took control. Watching how it unfolds and the next opportunity in the sector. Sold back to the previous trading range.
  • XLK – Technology breaks the flag pattern lower on Friday. The uptrend is still in play as we watch to see how this unfolds. Entry $48.50. Stop $65 (Stop Hit). Semiconductors (SOXX) created some angst last week with the selling below $181.60 support. Watching how the parts unfold near term. Sold back to the previous trading range.
  • XLF – Financials remain in an uptrend as money flow remains positive in the sector. Moved above the $28.25 level adding upside and current trend. Entry $26.40, Stop $28.75 (Stop Hit). Interest rates benefit the sector on a move higher… but, too much and it will act as a negative for the stocks. Watch how this unfolds. Sold back to the previous trading range.
  • XLY – Consumer Discretionary has been a key leader since the November move higher. Entry $83.50. Stop $104 (Stop Hit). For all the positives the sector has offered over the last three months it is now decision time for traders. Speculation on interest rates, dollar, and spending impact the sector. Plenty of damage to the move and looking for support. 
  • RWR – REITs reacting to the current uncertainty around the hike in interest rates. The longer-term view clearly shows the trading range and the move near the December 2016 lows as support. We added the position last December (entry $91) on the move off the lows and continue to babysit the dividend of 4%. This is a sector to watch relative to higher rates. Broke support and managing our short positions (see above).

Finished the week with the S&P 500 and NASDAQ indexes forfeiting nearly 1/2 of the gains for the year. The market environment is volatile with speculation on many fronts impacting the near-term direction. Last week interest rates move to 2.85% was enough to ruffle some beliefs and the sellers took over. As a result, stops were hit, stops adjusted and views questioned. We have been taking some money off the table as it relates to specific positions and activity. We keep some invested and let it run, but hit stops on Friday for many of the remaining positions. Our mindset is one of risk management as we look for the next opportunity. Some rotation into safety and cash last week. The outlook is patience to let the next opportunity unfold along with the short-term trend. The sellers had the upper hand last week and now comes the decision point with a follow-through move. Eight sectors are trending higher, two trending lower, and one moving sideways… The moves last week put all of that in question and we will watch patiently for confirmation of bounce. We have to remain disciplined in our approach to investing our money. The goal is risk management as the story-lines continue to unfold. Charts reflect the damage done the last week. Now we watch and adjust according to how it unfolds. We now have no holdings in the sector. We do have some short side trades and we will manage them aggressively relative to the activity. Patience as the next trend is defined. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)


Downside week for the market raises questions. Traders are driving the short term swings and opportunities with news as the catalyst along with a pinch of speculation. The week was filled with questions, speculation, and selling overall. Volume was above-average with the selling accelerating on Friday. The focus remains on the impact of the tax cuts, earnings, and interest rates. The speculation relative to the highs being to0 high to continue became a self-fulfilling prophecy. Our goal is to take the opportunities that meet our strategies and allow us to manage our money with the least amount of risk. Positive employment data Friday was lost in the speculation relative to interest rates. The market trades looking forward and evaluates based on past data. They ignored one piece of data in exchange for another that led to the selling. There are plenty of short-term trading speculation I have little interest in, but the long-term remains in an uptrend overall. We will proceed with caution and patience taking what comes our way and fits our strategy for investing both short and long-term.

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly. 

“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.