ECB comments spark rally

MARKET OUTLOOK FOR June 19th, 2019

Mario Draghi, head of the ECB, shows the Fed how to talk tough on interest rates and the economy. That sent futures higher and the market jumped more than one percent on the day. The market wants lower interest rates as a stimulus to the US and global economies… hearing the ECB state he was ready to cut pushed the money flow into stocks with semiconductors leading the way higher. Crude jumped as well on the comments more than regaining its losses from Monday. Where does this leave us? Waiting for the FOMC today. I am not sure how Mr. Powell can one up this circus, but the market will be waiting for what tricks he has up his sleeves. If I were to guess no matter what he says will make investors happy, but if he cuts rates and acts they will respond in kind with more money flow into stocks. Watching how this main act plays out.

The S&P 500 index closed up 28.1 points to 2917 and gaps above the 2887 resistance on solid gains. The questions about the direction got some answers on hopes of a rate cut pending from the Fed. Do we test here? How much more money will flow in/out of stocks? Not much to do other than follow the trends and manage our risk. The good news is eight of the eleven sectors closed higher on the day as industrials and technology led the upside. The downside came from consumer staples and utilities. The long-term trendline looking better as the short term trend moves higher. Watching how this unfolds… for now, the buyers are back, but for how long?

The NASDAQ index closed up 108.8 points at 7953 and clears the resistance at 7849 with a gap higher. Technology stocks have been the leader on the bounce off the recent lows and earnings in semiconductors push the sector lower until Tuesday posting more than a four percent gain. QQQ is our indicator as it clears resistance at the 50 DMA and moves to the $186.80 resistance. The market environment remains optimistic on hopes of a rate cut from the Fed and the meeting Wednesday. Watching and letting this play out near term. 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 and Tuesday moved above $152.28 resistance and now faces $154.90. Looking for the follow through move upside.

Transports (IYT) The sector pushed lower breaking the $182.43 support and then bounced back above that level. The move pushed the index back to resistance at 186.70 and tried again on Monday moving higher. 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 few 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 buck has found support and buyers of late contrary to the news of rate cuts. The gap higher helped keep the uptrend alive. The ETF closed at $26.36 and eclipsed all the moving averages Watching as this continues to unfold.

The Volatility Index (VIX) closed at 15.1 as the buyers step up on Tuesday. This reflects the lack of anxiety in the S&P 500 currently. The index is still elevated and closed higher 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 18th: Housing starts rose to 1.27 million ahead of expectations and slightly slower than April. Building permits remained the same at 1.29 million. Lower interest rates over the three months have helped. Watching how this impacts growth moving forward.

MONDAY, June 17th: Bad readings from the Empire State manufacturing survey… it fell to -8.6 vs 17.8 in May. That is the first negative number in two years and the largest drop ever into negative territory. This is the type of data that has analyst fixated on the Fed cutting rates as the FOMC meeting on Wednesday.

FRIDAY, June 14th: Retail sales up 0.5% and below expectations, but better than April. Sales ex-autos were better than expected showing where the slowing was in May. Industrial productions rose 0.4% much better than May’s 0.4% decline. Consumer sentiment stands at 97.9 falling from 100 in May losing some traction. Business inventories rose 0.5% showing some build up… not a good thing. Overall… not a bad day for the economic data.

THURSDAY, June 13th: Weekly jobless claims were 222,000 in line with expectations. Import price index declined 0.3% well below the previous number.

WEDNESDAY, June 12th: The consumer price index rose 0.1% in May and the year-over-year stands at 1.8%… lower than the Fed expected and puts the Fed in a precarious position on interest rates. Watching the data and the Fed response.

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. The earnings report from Broadcom brought the impact to light very clearly. 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 stock s 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. Spiked higher to start the week and break from the bottoming pattern. Entry $104.50. Stop $101. Nice follow through on Tuesday and raise our stop to $106.

Semiconductors (SOXX) The downside pressure finally got some relief finding some support in the $105 area held… bounced and finds resistance at the 200 DMA. Hit our stops ad the sector was hit by earnings from Broadcom. It is a bigger challenge as it gives a sound example of the impact of the tariffs, but more importantly, taking Huawei Technologies purchasing power out of the market. Watching how this unfolds as we hit the entry level for a short side trade. SOXX $187 short. SOXS $6.32. Fell 1.1% on Monday to continue the downside move. Jumped 4% on the day clearing $182.40 resistance.

Software (IGV) The spike lower broke the uptrend at the April high. Tested support near the $200 level and bounced. Indecisive activity on the chart as buyers take some positions, but not convincing. Watching how the sector unfolds near term. This has been a key leader along with semiconductors. Moved higher with the technology sector, but failed to hold above the $215.80 level.

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 $88.50 (adjusted). A new stop on the move higher and letting it unfold. Started the week higher. Struggled on Tuesday with talk of rate cuts… watching.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.09% as money rotates to safety. Watching how this unfolds near term and what action the Federal Reserve will take at this weeks FOMC meeting. TLT is a hold if you own bonds. Flight to safety related to tariff threats and a weakening economy. TLT hit entry at $124. TMF entry $20.26. Stop $23.50. Watching the homebuilders (ITB) and real estate (IYR) sectors on the lower rates. Watching as the FOMC meeting speculation is in play. Fell to 2.06% on the day… heading lower?

Crude oil (USO) Worries about the supply data and rig counts took the price below $52 causing concerns last week and this week they remain as the price settles in near the $52 mark. 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. Worries about China’s weak economic data sends crude lower to start the week. The ECB talks on Tuesday sparked a hope rally in crude jumping 2% on the day.

Emerging Markets (EEM) The downside found support and held with a modest bounce off the lows. China helped, holding steady on news of talks still in motion on tariffs. The selling the last three days shows the uncertainty in the sector. Any positions have to be managed with a short term view… news is too much for my taste to trade the sector. Weak data from China sends the sector lower Monday. Stimulus hope from the ECB sends the sector higher 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$125 .50. Watching how this unfolds. Speculation on interest rates driving price higher.

MidCap (IJH) The sector found some support at the $182 mark bounced. It has been a low volume move, but up nonetheless. $190 resistance was eclipsed and watching. We hold no positions in the sector currently. Forfeited the move above resistance. Tuesday rallied back to the 50 DMA.

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. Too much news and indecision currently for my risk tolerance. Weak data pushing the markets lower. Tuesday found hope in the ECB announcement on stimulus.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans for June 19th: Markets get a lift from ECB comments on stimulus back on the table. The announcement in front of the Fed puts pressure on Powell to state clearly what the Fed’s intentions are. Anything less and the markets will respond negatively. This puts speculation clearly in the driver seat until the 2 pm announcement and comments following. Not wanting to speculate I will reserve my comments to be careful of the devil you don’t know. Our stops are in place and our eyes are on the charts for how they respond moving forward.

Technology (XLK/TECL) gapped higher and cleared the $77 resistance level. Managing our stop and letting this unfold.

Semiconductors (SOXX/SOXS) hit stop on our short position. Watching how the bounce plays out from here. The interest rate news doesn’t outweigh the reasons for the decline.

China (FXI) & Emerging Markets (EEM) bounce on the ECB comments about stimulus. Watching how that unfolds.

Crude Oil (USO/SCO) bounced on the stimulus news. Hit our stop on short side trade. Watching how this story-line unfolds.

Treasury Bonds (TLT) rallied on the rate decline. Managing our risk as the bond market has already priced in any cut by the Fed.

MONDAY’s Scans for June 17th: Started the week with a mixed day of activity among the sectors as the broad indexes coasting towards the FOMC meeting.

  • Semiconductors (SOXX/SOXS) downside remains in play as the selling continued on Monday. In a position to retest the $176 lows.
  • Biotech (IBB/LABU) Jumped 2.8% as Pfizer expands making an acquisition of Array. Sparked some upside in a sector that has been struggling. Added position on the move higher.
  • China (FXI/YANG) showing weakness again after bouncing from the recent lows. The country ETF is moving back towards the previous lows on the slower economic data.
  • Crude Oil (USO/SCO) downside remains in play. China data pushed the price of crude lower as the bottoming pattern continues to play out. Managing our downside position.
  • REITs (IYR/URE) upside expands after clearing resistance last week. Adjusting stop on the move.

FRIDAY’s Scans for June 14th: this was a week of posturing. The bounce at the June 3rd lows was based on the rumors of the Fed cutting rates soon. Those rumors came from the lips of the Federal Reserve members as they attempted to talk sense to traders and investors. Now it has set itself up for a showdown next week with the FOMC meeting slated for Tuesday and Wednesday. The outcome will have some impact depending on how much clarity the Fed offers to the markets. Thus, the stall in the advance this week. Things to watch next week as it all unfolds…

  • Interest rates and bonds. The bond market is pricing in the cuts for the Fed falling back near the 2% mark. Depending on the Fed action or inaction… bonds will respond in kind.
  • S&P 500 index will respond accordingly as well with the direction determined near term by what the Fed states.
  • NASDAQ is dealing with the reality of tariffs and trading restriction with Huawei Technologies. Watching how the downside unfolds in both technology sector as well as semiconductors.
  • Gold is the near term benefactor of the uncertainty… watching how it plays out relative to the FOMC meeting.
  • Homebuilders are getting some speculation trades based on the lower interest rates. Never assume or underestimate the economic impact on consumers more than interest rates. Not a buyer currently as the data doesn’t support the speculation.

THURSDAY’s Scans for June 13th: The upside returned, but not overly impressive relative to volume. The goal is to take what is offered and let the storyline unfold. Energy moved higher on the tanker attacks… news driven but watching the downside of crude, as well as natural gas, with inventory data showing increased supply. Interest rates moved lower again, economic data remains on the weaker side and no deal with China. Slow and steady goes the race for now.

  • Natural Gas (DGAZ/UNG) the downside pressure resumed as supply data shows increase. Since the break higher at the $128 level the short side has played out nicely… stop at $150 currently.
  • Biotech (IBB/LABU) in a bottom range and looking for the upside follow through in the sector. $44.50 level to clear.
  • Crude Oil (USO) upside on Thursday relative to tanker attacks and worries about the supply. Bottoming pattern in play as we remain patient on any positions.
  • Goldminers (GDX/NUGT/JNUG) moving higher on the bounce in gold prices as inflation, tariffs, and weaker dollar help the price of the metal… protect your downside risk.
  • Small Caps (IWM/TNA) nice move finally from the growth stocks. The break back above the $57.46 resistance is a positive and looking for the follow through on higher volume.

WEDNESDAY’s Scans for June 12th: Activity was mixed with some sectors forfeiting gains from the bounce and others holding near support. This is when you sit back and relax. No need to force trades or manufacture something to like or dislike. Go play some golf or do something fun. Put your stops in place and let this unfold near term.

  • Emerging Markets (EEM) drop on lack of movement in the Chinese/US trade agreement. Neither side seems motivated to get anything done. Manage the risk of trades in the sector.
  • Energy (ERY/XLE) the short side of the sector accelerates on the decline in crude. The bottom reversal tested back to $60.52. Watching how this unfolds and what, if any, opportunities arise.
  • Crude Oil (USO/SCO) The short side trade tested the last four days and accelerated back to recent highs Wednesday. Letting it play out. Ripple effect to DRIP and GASX.
  • Gold (GLD/GDX) Positive upside as money looks for weaker dollar on Fed activity and that favors gold. Flag pattern in play.
  • Financials (XLF/FAS) the sector doesn’t like lower interest rates. The downside is building… watching how it unfolds.

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. Rolling top in play.
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Solid additions for the week. Starting a topping pattern.
  • 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. Moving lower again. Bounced on Tuesday… need follow through.
  • XLP – Consumer Staples moved lower, bounced and is now at new highs. Rotation of money to safer havens helping… watching the upside move. Rolling top.
  • XLI – Industrials moved below support $74.17 and reversed back into the previous trading range. break above resistance at $75.72.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Crude moved lower and the downside followed in stocks. Watching how this unfolds with the bear flag pattern in play. Bounced at support again. Added to the move on Tuesday.
  • 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. Watching the flag pattern in play this week. Added upside on Tuesday.
  • XLK – Technology sold and found support and moved above the entry point at $75. Stop $75. Low-risk trade and watching how it unfolds this week following the semiconductors move lower on earnings. Solid bounce with the help of news.
  • 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. Under pressure heading into the FOMC meeting. Bounced on ECB Tuesday.
  • XLY – Consumer stocks fell to the 200 DMA and bounced. Solid upside reversal moving above the 50 DMA with some solid retail sales data ex-autos. Solid gap higher on Tuesday.
  • IYR – REITs broke lower… bounced from lows clearing resistance… positive upside move. Entry $83.79. Stop $88.50 (adjusted). Watching and managing the risk as it moves above the range and hits new highs. Added upside move on Monday. Mixed on Tuesday with rate hike as a topic of discussion.

(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: ECB steals the thunder from the FOMC meeting. This puts pressure on Powell and the Fed. The saga in the headlines will be all about interest rates. What happens if the Fed doesn’t act dovish enough on interest rates? What happens if Powell and the twelve dwarfs hike rates today? What happens if they delay until later in the year? Oh what a tangled web we weave when we speculate to the point of indecision. I say wait and see how it unfolds today… let the Fed Chair speak. Allow the twelve dwarfs to run around tomorrow speaking and assuring everyone it will be okay… and maybe by Friday, we will have some clarity about the future. Take what the market offers one day at a time.

MONDAY: More indecision with specific moves in specific sectors as the broad markets remain in a holding pattern. The FOMC meeting on Wednesday will set the tone. Too much riding on the decision for my taste. The economic data is pointing towards the Fed cutting, the President wants a cut, traders on Wall Street want a cut… we will see how that unfolds. What we will learn is how speculation and news impact stocks before and after the event. Use this as a learning experience. Take notes and use them to help become a better trader in times of speculation.

FRIDAY: It has been a week of questions without answers. Tariffs? Federal Reserve and interest rates? Oil Prices and attacks on tankers? And many more. As we state all the time… investors don’t like uncertainty. Thus, we have elevated cash levels from hitting our stops on positions. We have done some short term trades with a rate of success. We hold some bonds and other positions that are working nicely. Now we look to next week and the reality of the FOMC meeting as the hope is the Fed will shed some light on their outlook and plans for interest rates. The most important thing we learned this week is… PATIENCE.

THURSDAY: The upside resumed but it was like the downside moves the last two days… no volume and little conviction. The earnings from Broadcom after-hours will impact the semiconductors Friday. There are too many questions and too few answers. Thus, the back and forth of the current trend. Take what is offered and shorten your time horizon relative to new positions. The news and data are not supporting a longer-term rally in stocks which produces short term trend cycles. Adjust to the current environment of the market and manage your money accordingly.

WEDNESDAY: The challenge remains no news and speculation about the future outcome for interest rates and growth in the US economy as it relates to the tariffs. Taking it for what it is… the calm before the storm.

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.

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 remain focused on the speculation the Fed will now cut rates as the economic data shows signs of weakness. The FOMC meeting this week will shed some light on that speculation. The indexes closed up 0.5% for the week confirming the bounce from the current lows. We exited where the risk rose and we added positions where the risk was appropriate for our risk tolerance. The slower week shows some concerns ahead of the FOMC meeting. Watching how traders respond in the coming week and if they are willing to put on risk or remains subdued. Some rotation is in play as money moves to where it believes it will be treated the best. 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.

Seven of the eleven sectors managed to close the week in positive territory as money continues to look for the best opportunities. Consumer discretionary and utilities led the upside for the week with news driving some lower. Gold rose, the dollar bounced, and the economic data was overall mixed with retail sales holding steady. Four sectors are moving sideways in consolidation patterns. Six sectors are bouncing from their micro downtrends. One is treking lower. 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.