Fed disappoints investors

Market outlook for Today August 1st

Fed day came and the cut of 25 basis points was not enough to keep the markets happy. Thus, Humpty Dumpty fell off the wall, and all the Feds talking couldn’t put Humpty back together again. The old adage of buy on the rumor and sell on the news is singing in my ears again. No matter how many times it happens it still seems to surprise people. The talking heads blathered on endlessly about what the Fed should have done. At the end of the day, the Fed is going to do what they deem right and the markets will respond. The reality for me is the markets continually show they are smarter than the Fed. Now all the question begin about where the market goes from here. Is the top in? Do we fall ten percent or more? etc. etc. etc. For me, I will watch what unfolds and what opportunities arise. We take advantage of the opportunities and avoid the pitfalls. Stops were hit on Wednesday, profit was banked, cash positions rose, and now we watch.

The S&P 500 index closed down 32.8 points to 2980 moving back below the 3000 level for now. The focus is on the Fed decision and was it too little to impact economic growth? None of the eleven sectors closed higher on the day. The downside ruled with consumer staples and basic materials leading the downside move. We hit some stops and we will manage the risk moving forward. The long-term trendline has been looking better as the uptrend has resumed, but the current activity raises questions.

The NASDAQ index closed down 98.1 points at 8175 and tested the support at the June highs. Technology leadership came under pressure with the SOXX falling more than 3% on the day. QQQ is it moves to the $191 support level as well. Honor your stops and know your exits on both short and long term holdings.

Small-Cap Index (IWM) The upside move has stalled in a trading range near the $154.90 mark. Tuesday the index rose 1.1% and fell 0.8% on Wednesday… Emotionally charged activity in the sector currently. The sector remains a laggard as money rotates to other sectors.

Transports (IYT) The sector continues in an uptrend that includes some volatility, but up nonetheless. The stairstep pattern in play allows for some opportunities on each test. Watching how it responds to the FOMC meeting.

The dollar (UUP) The dollar continued higher as the upside resumed last week. The less than expected cut in rates pushed the buck higher. Closed at $26.73.

The Volatility Index (VIX) closed at 13.7 Tuesday after moving higher on speculation about the Fed… Wednesday it closed at 16.1 spiking after the Fed action disappointed investors and the speculation drove the anxiety levels of the market higher. We took our exit at $58 on some anxiety Tuesday. UXVY moved through the $25.28 entry-level. Stop $25.63. Taking what the market offers here.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector has moved to the April highs and stalled. It remains a laggard but overall has produced solid gains for the patient investor. Tuesday produced solid gains but Wednesday erased them.

Biotech (IBB) The sector remains at support near the $104 level and looking for a catalyst to push higher. We wait with it. Attempting to show a bottom reversal. Looking for upside follow through. Struggled Wednesday with the balance of the market.

Semiconductors (SOXX) The reversal started with the Fed talk on rate cuts and the hope of the tariff talks pushed the sector higher. $192.43 entry. $210 stop. Watching how the flag pattern unfolds at the current highs. Moved lower dropping 3.3% on Wednesday. Hit stop and watching short side trade option.

Software (IGV) Hit new highs and has struggled to move from the consolidation pattern that has resulted. Stop $225. Hit stop and looking at the options on the downside move?

REITs (IYR) The upside trend remains on the long-term chart. The test of support at $87.50 bounced. Patience with our long term positions and short term watching how the FOMC meeting plays out. No real reaction yet to the Fed.

Treasury Yield 10 Year Bond (TNX) 2.05% is the level the bond remains near… waiting for the FOMC outcome. Yields fell as traders respond to the “too little” cuts by the Fed.

Crude oil (USO) Supply speculation is driving the prices up and down. After finding support at the $55.90 level the last two days have bounced back to the $58.25 resistance. Cleared resistance on Wednesday putting the upside in play. Watching today for some clarity or entry point.

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. Watching as the flag pattern near the highs awaits the Fed decision. Stop at $132. Fell in response to the Fed action… watching how this unfolds.

Emerging Markets (EEM) Remains in a trading range. Needs a catalyst from a China trade agreement or some help from lower rates from the Fed. Break below $42.30 could offer a short side trade opportunity. Hit entry point on short and gapped lower on the end of trade talks with China. EEV entry $42.80. Stop $41.70.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Watching the move lower on Monday as the reality may be playing out. No trade agreement. Many in Washington believe there will not be an agreement until after the election in 2020. Broke support at $42 and the downside is back in play. YANG Entry $49.75. Stop $49.75. The catalyst was the end of the talks with no changes in the trade agreements.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scans for July 31st: The Fed once again manages to disappoint the markets and stocks respond. The use the same old rationale for not cutting “too much, too soon”. The data supports some type of stimulus from the Fed, but they are playing it safe. Either way, the markets responded on the downside. One day does not make a trend and we have to watch how this all unfolds. Some stops were hit, some positions added, some positions adjusted. Managing money is a matter a disciplined strategy executed regardless of our thoughts, beliefs, or hopes. Wednesday was one of those days. Today we watch how things respond in follow up to the emotional response on Wednesday.

  • Semiconductors (SOXX/SOXS) downside of 3.3% hit stops. Opened the door for short positions if the downside confirms.
  • China (FXI/YANG) end of trade talks without any resolution sends the country lower. YANG in play and watching how it unfolds near term. Emerging Markets (EEM/EDZ) equally traded on the downside and short opportunity.
  • NASDAQ 100 Index (QQQ/SQQQ) downside fell to the key support level and looking at the short side trade options and if they unfold.
  • Volatility Index (VIX/UVXY) hit our stop on Tuesday in the SVXY trade… Wednesday opened the entry for the UVXY trade as anxiety spiked in the markets on the Fed decision. Stop in place.
  • Treasury Bonds (TLT/TMF) upside trade back on break from consolidation pattern on Wednesday. Flight to safety trade in play again.

TUESDAY’s Scans for July 30th: Mixed day as investors juggle money in front of the FOMC meeting. It was like watching a roulette table in Vegas… Place your bets… Watching how the day unfolds and looking at what opportunities result from the decision and the comments from Mr. Powell about the economic picture.

  • Small Caps (IWM/TNA) $158 is the level to clear on the upside. Watching for the opportunity to unfold.
  • Biotech (IBB) Bottoming pattern needs to clear $107 on the upside to offer any opportunity.
  • Crude Oil (USO/UCO) Bounced from the bottoming range to follow through and offered an entry point at $18.78. Lower risk trade with a stop at $17.71.
  • Homebuilders (ITB/NAIL) positive upside move in anticipation of a rate change. Needs to break above the $39.50 resistance level to offer opportunity.
  • Silver (SLV/AGQ) followed the path of gold finally on the upside. Now stalled at the $28.75 in a flag pattern. Looking for the break higher to continue the upside move.

MONDAY’s Scans for July 29th: Start the week looking at the Fed for clues about interest rates and the FOMC meeting on Wednesday. Speculation is a game I am not interested in. I want to focus on the reality and data provided by the markets. The reality is a stall at the current highs awaiting to hear from the Fed. Thus we wait and watch…

  • S&P 500 Index (SPY) $299.40 first level we will watch if the downside starts.
  • NASDAQ 100 Index (QQQ) $193.51 first level to watch on downside.
  • Gold (GLD) $132.69 first level to watch on the downside.
  • Semiconductors (SOXX) $214.27 first level to watch on the downside.
  • Crude Oil (UCO) $18.65 first level to watch if upside resumes.

(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 – Broke support at the $54.15 mark and bounced at $52.49 support. Entry $55.25. Stop $58. Watching the volatility created by the Fed.
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Starting a topping pattern/trading range again. Watching the outcome of the FOMC. At the bottom of the current range.
  • IYZ – Telecom cleared $29.50 resistance and tested. Resumed the uptrend. Stop $$29.80. Moved lower in response to the Fed.
  • XLP – Consumer Staples moved lower, bounced and hit new highs and remains in the uptrend. Rotation of money to safer havens helping… watching the upside move. Stop $59.50. Forfeited gains and hit stop in response to the Fed.
  • XLI – Industrials remains volatile but also in an uptrend. Stop $77.50.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Watching the $62.15 level of support. No positions in the sector. Bounced on the move in Crude.
  • XLV – Healthcare continues to deal with the proposed “Medicare for All” healthcare from Washington. Obviously rumor-driven… Found support $91.25. $86.80 entry. Stop $91.25. Hit stop as the sector continues to inch lower.
  • XLK – Technology sold and found support and moved above the entry point at $75. Stop $81.30. Hit stop and moved lower on the Fed decision.
  • XLF – Financials bounced from the May lows and forming a stair-stepping pattern on the upside. Entry $27. Stop $29.90.
  • XLY – Consumer stocks remain in an uptrend with a flag pattern of consolidation near the highs. Stop $122. Hit Stop.Gapped lower on Fed decision and watching how this unfolds.
  • IYR – REITs pushed to new highs, tested, moved back to new highs, and testing again… interest rate worries are the issue in play currently.

There are currently six sectors in confirmed short term uptrends. Five sectors in consolidation or sideways trends. Zero in confirmed downtrends. The result is SPY in a confirmed uptrend. 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:

Markets got the answer from the Fed and the speculation of a half-point cut was not realized. The results all dip in stocks. The question now is will the downside continue? Because the amount of the cuts were less than expected it opens the door to more speculation around the Fed and future decisions. China trade is another point of issue that remains for investors as the trade talks conclude with no changes… they are scheduled to resume in September… allowing for more speculation on what will happen. Iran remains a challenge for investors as well. Crude oil speculation remains in the news as prices creep back above the $58 level. And let us not forget the inverted yield curve for bonds as yields moved lower in response to the Fed on Wednesday. Focus on facts like economic data, earnings, and global data reports. The Chicago PMI data on Wednesday showed a decline for the region… today we get the ISM manufacturing data for July and it will have an impact on the outlook for the economy. Within all of this data lie the opportunities we are all looking for. Wednesday gave some insight to the Fed and the market’s response gave some insight to investors… now we will manage our risk accordingly and focus on what we know versus speculation.

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.