Economic data disappoints investors along with China threats

Market Outlook for December 3rd

Headlines lead the markets lower to start the new month. The focus should have been on retail sales data, but China decided to respond to the US signing the Hong Kong support bill. The new bans and demands rattled US investors. The major indices moved lower on the day and raise questions about short term direction. Tariff talk widened with Trump saying he would reinstate metal tariffs on Argentina and Brazil. China demanded all tariffs removed or no Phase One deal… Not sure there ever was a ‘Phase One’ deal. Throw in some more disappointing economic data from the ISM manufacturing at 48.1 vs 48.3 in October. All included you had a great headline day that led stocks lower. Now we watch to see how the balance of the week unfolds.

The S&P 500 index closed down 27.16 points to 3113. Starts the week with a continuation of selling from Friday. Money flow dipped on the day with money moving to cash on the day. One of the eleven sectors closed higher on the day with consumer staples higher on the day. The downside was led by industrials and REITs as most sectors to struggle. The long-term trend is higher and steady. Watching how news drives the week.

The NASDAQ index closed down 97.4 points at 8567. The move landed below the 10 DMA. Technology tested as well with a drop in semiconductors in a topping pattern. Adjusting our stops on positions and letting this unfold. Large caps joined in the selling as seen in QQQ dropping bac near support at $ 201. The long-term trend remains positive but challenged by the recent news.

Small-Cap Index (IWM) The sector led the move back to the April highs and in a consolidation pattern and finally made a break higher last week. The move above the May highs and the $158 resistance are positive. New highs anyone? Not the follow-through I wanted to see with selling on Monday. Need to hold $160 breakout. 

Transports (IYT) The sector moved to $200.55 and hit resistance including a test back to the $192.42 support level. Watching as some uncertainty creeps into the sector. Sold on Monday.

The dollar (UUP) The dollar is swinging up and down on the China trade hopes of a deal. If the deal is struck the current sentiment is it is bad for the dollar. If it is not done… good for the dollar. Watching as the tennis match plays out. Watching FXE, FXY, FXB. Big dip in the buck Monday.

The Volatility Index (VIX) closed the week at 12.6 after a move to April lows and then a bounce in volatility on Friday. We remain near the July lows and watching how this plays out in the coming weeks. SVXY remains near the current highs… managing the risk. Sharp rise in volatility with the news leading the discourse. 

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector moved to new highs and forfeited most of the weeks’ gains on Friday. The move above $198.50 level has been positive for the sector. Currently trying to establish a break higher. Dipped lower on Monday.

Biotech (IBB) Tested support at $96 bounced and moved back above the $101 and $105 resistance level. We cleared the July highs and the renewed uptrend as we manage the risk accordingly. Entry $101.45. Stop $116 (adjusted). LABU $32.55. Stop $50.53 (adjusted). Great week for the sector and we adjusted our stop. Some profit-taking… watching.

Semiconductors (SOXX) The sector bounced, cleared resistance and the July highs. The sector paused at the recent highs with a topping on the chart and a test of the $228 support level. The 10 DMA is crossing below the 20 DMA as a negative short term, but the setup on the chart is there for a continuation of the uptrend. The parts are where we have added positions versus the whole. NVDA, MU, QRVO, CCMP, SWKS, AMD, and LRCX. Watching for leadership to resume testing support again on Monday.

Software (IGV) The sector tested the lows of the trading range and bounced at support in October. The steady grind higher has not been easy. The move above $220 was a big positive for the sector. We have been looking at the leaders. NTNX, CVLT, CTXS, CDK, and PANW are few. IGV entry $220. stop $228 (adjusted). Ugly dip on Monday with sellers taking gains. 

REITs (IYR) The upside trend remains on the long-term chart but the short term moved lower breaking key support levels. Interest rates rising rattled short term investors creating the selling in the sector. Bounced at support and trying to return to the uptrend short term. Moved lower on higher interest rates Monday.

Treasury Yield 10 Year Bond (TNX) The yield closed at 1.77% and flat on the week. Money is rotating again as investors remain focused on the deal or lack of a deal with China. Yields jumped to .1.83 on Monday.

Crude oil (USO) Held support at $52.50 and $58.25 is top of the current range. Watching as the data points show plenty of oil and lower demand. Talk from OPEC and Russia on supply is on tap next week with meetings. Watching the response to the 4.3% drop in crude on Friday. UCO entry $16. Stop $16.60 (adjusted). Bounced back from selling last week. 

Gold (GLD) The upside in gold was driven by speculation of the rate cuts and global weakness overall. The tug-o-war of tariffs, interest rates, and speculation should play into the strength of gold, but you can see on the chart the steady decline since August highs. The consolidation pattern on the chart breaks lower. GLL @ $55.43. Stop $53.

Emerging Markets (EEM) Bounced from the bottoming range established in August cleared resistance at $42.25 and cleared the September highs. The positive trend higher came from the hope of a US/China trade deal. With that in question, you can see the testing from the highs. The move below $42.80 on Friday a big negative from my view. Smaller reaction than I would expect. 

China (FXI/YANG) weaker economic data hurting the stocks currently. Negative talk from China has shifted the trend lower and the break of support on Friday is a big negative near term. Threats offset by positive economic reports… if believable.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

MONDAY’s Scans for December 2nd: Challenges with China and economic data set a negative tone for the trading day as markets move lower. It was news-driven day as implications from the economy, geopolitics, and uncertainty drive stocks lower for the second day. As always our focus is on the reality of the news… not the news itself. Reactions are expected it is the follow-through and risk factors we have to deal with. We will monitor our stops and the risk/reward of the current market environment. Taking the day in stride and making the necessary adjustments as well as looking for the opportunities.

  • S&P 500 Index (SPY) some downside breaking below $312.80 breakout level and watching $307 support. Closed below the 10 DMA for the first time since the October lows.
  • NASDAQ 100 Index (QQQ) testing the uptrend with some selling and watching how money flow unfolds in the coming days.
  • Crude Oil (USO) bounced at support… Gasoline (UGA) sold down 2%… interesting views from investors as supply data remains high.
  • Homebuilders (XHB) moved lower on the day as Construction Spending for October fell 0.8% well off the gain of 0.5% expected.
  • Treasury Bonds (TLT) dip lower on higher interest rates in reaction to the news with China trade.
  • Volatility Index (VIX/SVXY) watching how this unfolds relative to the anxiety levels.

FRIDAY’s Scans for November 29th: No big changes overall on the charts, but there were some moves noteworthy of our attention.

  • China (FXI/YANG) Selling accelerated on Friday offering a short signal. Looking for confirmation of the move to start the week.
  • Energy (XLE/ERY) downside trying to establish itself as crude moves lower. Watching the trade opportunities in the sector and surrounding parts.
  • Crude Oil (USO/SCO) The OPEC meetings and supply data are weighing on crude. Cuts in production will be necessary if prices are to head higher or stabilize at the $55 mark.
  • Natural Gas (UNG/DGAZ) the downside accelerated on Friday adding to the woes of the energy sector. Raising our stop to $155 and watching how this unfolds.
  • Russia (RSX/RUSS) downside gaining some momentum as oil talks show cracks in pricing and supply.

TUESDAY’s Scans for November 26th: Mixed day that managed to close higher. Positive housing data, more were getting close-talk from China, and the Fed continues to provide liquidity. An overall positive day with some sectors showing signs of needing help. Semiconductors are consolidating versus leading. Taking it one day at a time with the holiday week dampening trading volume. Below are stocks of interest we have found digging into the leading sectors.

  • Crude Oil (USO) trying to break from the bottoming range. UGA made solid move upside as well… however, XLE continues to lag.
  • GE made solid upside swing and has stalled at the $11.50 mark. We have tightened our stop on the position and watching $11.21 level.
  • FCX – double bottom breakout has now moved to key resistance at the $11.90 mark… watching for the break higher.
  • MSFT – solid upside continuation following the break from the trading range. Adjusting stops and letting this run.
  • AMD – solid run higher from the October low. Flag pattern at the highs has our attention…

(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 bounced at support $55.95 level and moved back above the $60 resistance. A nice break to new highs near term. Sells on China news as would be expected. Dip on the metals tariff tweet from Trump.
  • XLU – Utilities moved lower as the move in interest rates impacts the sector. Broke support at $63.17. Bounced at support… interest rate stall helped the cause. Resistance at $63.17.
  • IYZ – Telecom picked up volatility with the markets and testing the $29.50 level of support.
  • XLP – Consumer Staples remains in the uptrend and in a near term trading range at the current highs. Patience.
  • XLI – Industrials moved back and cleared the $79 resistance. Moved above the July highs and hit new highs. Consolidation pattern at the highs and watching. Breaks support in topping pattern as tariffs weigh on investors. 
  • XLE – Energy remains in at a point of indecision. It did clear $58.19 resistance but is moving back to that level as crude moves lower. Supply data working against crude. 
  • XLV – Healthcare held support at the $86.75 level. Bounced and cleared resistance at the September highs. Taking on a leadership role as the sector moves to new highs. A solid break higher and good leadership.
  • XLK – Technology broke to new highs along with semiconductors. Both are now testing the moves and watching how it unfolds in the coming week. Strong move and leadership. Big move lower as sells with broad markets. 
  • XLF – Financials got a boost from solid earnings pushing the sector higher. Cleared $28.24 resistance. Broke to new highs and testing currently. Breaks higher from flag pattern at the highs. A solid move higher and leadership.
  • XLY – Consumer Discretionary tested lower but remains within the current trading range. Positive sales data from Black Friday should help the sector. Tested the key support levels with a nice bounce higher.
  • IYR – REITs moved lower on higher interest rate concerns. The test of support at the $90.50 held and bounced… only to retest the lows last week and bounce again. Dropped with hike in interest rates.

There are currently four sectors that are in a sideways or consolidation trend. Five sectors are in confirmed uptrends. Twp sector in a confirmed downtrend. The result is SPY in a confirmed upside trend short term. We have to remain patient and let this all unfold. 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:

Monday: not a good start to the week as investors lock in some gains on the threat tariffs and geopolitics lead the headlines. The bigger challenge was the economic data. More slowing in manufacturing… dip in construction… Asia and Europe data improved slightly offering some hope of a bottom. Overall the uncertainty level rose along with the anxiety level of investors. Watching how the rest of the week unfolds and how this is digested longer term. Rumor mill heating up and we have to manage risk short term versus the reality of what lies behind the data. Focused money management. Markets held the move higher and added some upside during the holiday week. The bounce off the August lows pushed to a solid uptrend with new highs again last week. The S&P 500 index has gained 8.8% since the low on September 30th. Is there enough hope to continue the move on the upside? Earnings have been a key catalyst to the current trend as the numbers have been solid. The economic data is on tap this week and may offer a spark to continue the move higher. Retail takes center stage as Black Friday and Cyber Monday set the tone for sales during the holiday season. The backstop of the Fed for liquidity has been key in the move higher as well as they remain engaged in the process of helping banks. Brexit remains in the background as meetings continue to find a resolution. The dollar found some support and bounced. Interest rates remain at 1.77%. Money flow has been lower overall during the last few weeks as investor conviction remains steady. The VIX index fell back to the July lows as investor sentiment shifts. The market remains controlled by the news as each day holds movement related to the speculation of what might happen. Trade with China and the US remains at the top of the list. The key is to watch the trend, know which side the Fed is on, and ultimately the data will establish the longer-term trend. We remain focused on what is working and what is failing. Therein lies the opportunities. Manage your risk accordingly and let this unfold… one day at a time.

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.