Early gains evaporate

MARKET OUTLOOK FOR June 12th, 2019

The intraday charts showed a gap higher at the open, then stair-stepped lower throughout the balance of the day to close flat on the day. Following a string of up days the markets now look ready to test the bounce. How much and for how long is a matter of time. We will take what the market gives and look for the opportunity as always. It was not a bad day just one that held little in terms of buying or selling. We will watch how the day unfolds and take it one step at a time.

The S&P 500 index closed down 1 point to 2885 and failed to break through the 2887 resistance. This adds some questions near term about the direction and will watch how Wednesday performs. Do we test here? How much more money will flow into stocks. The news remains centered on the Fed cutting rates and Mr. Powell has assured everyone he is willing to act if the data warrants the move. Interest rates on the 10-year bond moved back to 2.14% Tuesday. The good news is six of the eleven sectors closed higher on the day as consumer discretionary and telecom led the upside. The downside came from utilities and industrials tested their respective trends. The long-term trendline remains in question as the short term trend moves sideways. Watching how this unfolds… for now, the buyers are back, but for how long?

The NASDAQ index closed down 0.6 points at 7822 and hitting some resistance at the 7849 mark. Technology stocks have been the leader on the bounce off the recent lows. QQQ is our indicator as it moved back to the 50 DMA on Monday. The market environment has turned positive over the last five days on hopes of a rate cut from the Fed. Watching and letting this play out near term. We have not taken any upside positions thus far as the news and speculation drive the bounce. Now looking at the foundation of the move and its reality moving forward.

Small Cap index (IWM) the sector broke below the $146.71 support and turned higher on news. The follow through from the buyers to clear $149.04 resistance has been sluggish at best. Need to clear the $152.28 resistance. Volume has been on the low side showing a lack of interest in growth stocks.

Transports (IYT) The last week plus pushed the sector lower breaking the $182.43 support and then bounced back above that level. The move Tuesday failed to hold but did close above resistance. Looking for some follow through on above-average volume. This is one sector to watch for indications of growth in the economy… you have to move goods when they are sold. 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. The dollar has struggled the last two weeks on the news the Fed would intervene on interest rates and cut if necessary. Rate cuts hurt the dollar and with the belief growing the Fed will cut… the buck fell. The ETF closed at $26.08 and tested the 50 DMA. Watching as this continues to unfold.

The Volatility Index (VIX) closed at 15.9 as buyers step in on hope of a rate cut jump-starting the economy again. The index is still elevated and closed slightly lower on the day. Uncertainty is the key issue at hand. Interest rate worries remain in the mix along with tariff news. Watching how this unfolds near term.

SVXY $52.38 if buyers stay engaged.

Economic Data: Some positives in the data for the month of March… showing sound improvement over February.

TUESDAY, June 11th: Producer price index rose 0.1%. The cost of wholesale goods barely rose in May easing inflation worries. For the trailing twelve months, the increase was only 1.8% versus 2.2% last month. This is a positive sign for consumers.

MONDAY, June 10th: The only report was job openings which were slightly less than March. This confirms what we saw in the jobs report on Friday… slowing data.

FRIDAY, June 7th: The news focused on the May jobs report as it grew 75,000 jobs well below the expected 180,000. Wage growth slowed as well up 0.2% versus 0.3% expected. Unemployment rates remained at 3.6% and the number of companies hiring fell to a two year low. Not great news for the economic outlook. Consumer credit did spike to a five-month high growing $17.5 billion vs $11 billion in March. Inventories for companies also rose 0.8% showing a slowing in sales.

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.

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. The data for May has not been impressive and is giving hope to the markets the Fed will cut rates as a stimulus. The unresolved issue of tariffs hasn’t helped things looking forward. Interpret the data versus following our emotions. Let the trend be your friend… and for now, it is sideways.

(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 as the chart shows a bottoming pattern. Not a positive chart for the sector.

Semiconductors (SOXX) The downside pressure finally got some relief last week. The support in the $105 area held… bounced and now finds resistance at the 200 DMA. Are there enough positives to renew the uptrend or does the sector continue the trek lower? Watching how this unfolds going forward. Entry $187.40. Gapped higher moving to the $192.43 resistance… watching. Tuesday failed to hold the move higher closing slightly higher above the $192.43 level…

Software (IGV) The uptrend reversed at the $167 level and the consolidation pattern broke lower at $208. We hit our stops at $214.80 and exited our positions. The bounce back above the $208 level this week has us looking again at where the opportunities are in the sector. A solid move higher for the sector on Monday. Gave it all back and then some on Tuesday showing a negative on the bottom reversal.

REITs (IYR) Sideway trading range breaks out ($88.20) to new highs as interest rates decline on hopes of Fed rate cut. Broke $75.21 and bounced… trading opportunity on reversal above $75.21. Entry $75.25. Stop $87 (adjusted). A new stop on the move and letting it unfold. Some selling Monday as rates tick higher.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.08% 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 move to 2.14% and show some signs of life.

Crude oil (USO) Worries about the supply data and rig counts took the price below $52 causing concerns. The lack of a draw on US supplies despite the sanctions and tariff issues has been a warning sign to investors. We hit the stop on our short side position. Entry SCO $ 15.75. Stop $20.25 (stop hit). Watching how this unfolds and what opportunities arise. Moved down 1.3% on Monday… watching. Flat on Tuesday.

Emerging Markets (EEM) The downside found support and held with a modest bounce off the lows as it moved back to resistance at the $41.23 mark. China helped, holding steady on news of talks still in motion on tariffs. Hit our stop on short side trade… watching for the opportunity. Entry $41.50. Upside follows through as Mexican tariffs resolved. Solid follow through upside on Tuesday.

Gold (GLD) built a base of support and started 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. 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. Stop$124.50. Watching how this unfolds. Gapped lower on the Mexican tariffs taken off the table. Welcome to speculation 101.

MidCap (IJH) The sector found some support at the $182 mark bounced. It has been a low volume move, but up nonetheless. $190 resistance in play and watching how this unfolds near term. We hold no positions in the sector currently. Need to clear resistance on the close?

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 at the lows. Need to clear the $40.60 level near term. We did trade the short side of this with YANG. Entry $42.70. Stop $56 (Hit Stop). Tighter stop with the positive move last week. Breaking from a bottoming pattern… watching how this unfolds. Entry $18.35. Back to the $41.50 resistance on Tuesday… watching and managing our risk.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans for June 11th: The bounce higher stalled almost immediately and drifted lower to even on the day. This is something to watch on Wednesday. There may be a test in of the bounce near term. Tuesday was a day of watching paint dry and the grass grow… not much happening. If you like to trade the logical directions of test and bounces do so with discipline. For example, the SQQQ trade set up on the early open reversal with an entry at $36.90 and $36.50 stop. Today that trade is still on and looking for a move to the $40.25 mark with a trailing stop. Low-risk entry, managed risk, and letting the market decide. There is always an opportunity somewhere if you have a disciplined strategy. Otherwise, wait for the bigger trends to develop.

  • Brazil (BRZU, EWZ) upside resumed and raised our stop on the position short term.
  • China (FXI/YINN) followed through on the bottom reversal and raised the stop.
  • Emerging Markets (EEM/EDC) followed through on the bottom reversal and raise the stops on the positions.
  • Europe (IEV/EURL) added to the upside move and adjusted the stops.
  • Metals and Mining (XME) bottom reversal confirmed bottom reversal and adjusted our stop.

MONDAY’s Scans for June 10th: Bounce follows through. The question now looks to how much more the buyers will engage without some action from the Fed. That is the motivation after all. We have to look at where the opportunities lie. Semiconductors, software, technology, and consumer are leading the bounce. Some smaller positions were taken on the move, but this is done with caution and stops. Manage the risk of the current environment and keep looking forward. Most trades have moved enough to move the stops to break even… just where we want it.

  • Semiconductors (SOXX/SOXL) solid bounce higher to clear resistance at $187.40 only to land at the next resistance $192.43.
  • Software (IGV) another up day in the recovery. Entry $210. Stop $210 and letting this unfold.
  • Consumer Discretionary (XLY) cleared $114 entry and is now at the 50 DMA. Manage the risk. Stop $115.
  • Healthcare (XLV/CURE) cleared $90 resistance and entry. Stop $90.
  • Emerging Markets (EEM) moved above resistance offering entry as tariff news give the sector a boost.

FRIDAY’s Scans for June 7th: Big bounce to end the week as the weaker jobs report sparks upside move in stocks. Yes, the bad news is good news as investors look for the Fed to cut rates. Mexico avoids tariffs with a signed deal with the US. All is well on Wall Street… for now. The worries remain, but hope springs eternal. The hope of rate cuts is driving the markets near term. Taking what the market gives and managing our risk accordingly.

  • Some short side positions hit stops. We take our exits with modest gains and look at how the upside unfolds.
  • Technology (XLK) offered the biggest bounce as it led the downside move. SOXX, IGV, IGN, SOCL, HACK all had positive moves from the recent lows.
  • Volatility Index (VIX/UVXY) Ran higher to start the week and then retreated on the buying. Watching as the index remains elevated at the 16.3 mark.
  • Growth is a big question mark… Fed interest rate decision is a big question mark… money is rotating to where it believes it will be treated the best… Gold (GLD/UGL), NASDAQ 100 (QQQ/TQQQ), Healthcare (XLV/CURE), treasury bonds (TLT/TMF), Brazil (EWZ/BRZU), Commodities (WEAT, CORN, SOYB, DBA) Follow the money it will lead you to the opportunities.
  • Moves of interest to watch as we start a new week. IBB, UCO, EURL, FAN, EDC, FDN, MSFT, XLY, TAN, SCJ, and EFA.

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.

Sector Rotation of S&P 500 Index:

  • XLB – Broke support at the $54.15 mark and bounced at $52.49 support. Reversed and moving back towards the April highs. Entry $55.25. Stop $55.95. Stalled at the resistance of the April highs.
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Testing the move as interest rates help the sector. Testing on the move higher in rates.
  • IYZ – Telecom facing$29.50 resistance and looking for near term direction. Bounce from the recent selling in play and looking for a move above resistance.
  • XLP – Consumer Staples moved lower, bounced and is now at new highs. Rotation of money to safer havens helping… watching the upside move. New highs.
  • XLI – Industrials moved below support $74.17 and reversed back into the previous trading range. Tested lower.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Crude moved lower and the downside followed in stocks. ERY – Entry $39.60. Stop $51.40 (hit stop). Watching how this unfolds on speculation and bounce in crude to end the week.
  • 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 $90. Reversal trade back and cleared the 200 DMA resistance on Friday. Monday followed through on upside move.
  • XLK – Technology sold and found support. moved above the entry point at $75. Stop $74. Low-risk trade and watching how it unfolds this week. Continues to lead the indexes higher.
  • XLF – Financials moved to recent lows and bounced. Resistance at the $27.15 mark as rate cuts tend to not favor banks. Watching how it unfolds. Nice move higher on Monday.
  • XLY – Consumer stocks fell to the 200 DMA and bounced. Watching how the progress unfolds. Helping lead the upside move.
  • 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 break from the current trading range. Tested lower on Monday.

(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:

TUESDAY: Every bounce has to be tested and Tuesday was a day of testing… how much more will there be? Watch and let it all unfold. No news on the day which left investors to their own demons in their minds of speculation. Letting this unfold. Managing our stops. Managing our profits. Cutting our losses.

MONDAY: The power of the Fed over the markets. The belief is in play. As long as investors believe the Fed will cut rates they are putting money to work. The rotation into stocks the last six days has been impressive despite the lower volume. The Mexican tariffs off the table turn the attention back to the Fed and the Chinese tariffs. Always another shoe to drop… keep your stops in place and let this all unfold.

FRIDAY: Hope springs eternal as jobs report fuels the speculation of a rate cut from the Fed. It is one of those buy on the rumor issues. We will watch how that piece of the equation unfolds. Then there was the tweet from President Trump that there would be no Mexico tariffs as a deal was reached between the two countries. That leaves China, a weakening domestic economy, and geopolitical issues on the table. In other words, nothing has changed and the news remains the driver… the only change this week was investor sentiment. Watching how this all unfolds and what opportunities it presents.

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.

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.

FINAL NOTES:

Markets higher on speculation the Fed will now cut rates as the economic data shows signs of weakness. The indexes closed up 4% for the week confirming the bounce from the current lows. The bounce hit our stop levels on short side trades and produced some upside opportunities. We exited where the risk rose and we added positions where the risk was appropriate for our risk tolerance. Economic data was mixed May jobs report confirming a slowing in hiring. The bad news is good news as this fuels the interest rate cut rumors relative to the Fed… stocks rally. Watching how traders respond in the coming week and if they are willing to put on risk or remains subdued. Volume on the move higher was below average. Some rotation is in play as money buys the biggest losers, but most are still migrating to the safety of bonds and defensive stocks. 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 positive territory as money continues to move looking for the best opportunities. Basic materials and technology upside for the week and attempts to renew the uptrends. Gold rose, the dollar was lower, and the economic data was overall mixed with jobs pointing to weakness on the horizon. Four sectors are moving sideways in consolidation patterns. Seven sectors are bouncing in their micro downtrends. Crude broke found a bottom… maybe watching how that unfolds. 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.