Fed provides $52B in liquidity…

Market outlook for September 18th

The markets had to deal with a liquidity issue in the repo market as the Fed unraveled the $52B mess by providing additional liquidity to intrabank system. Such action should have sent the markets on a selling spree, but the drop was modest and by the end of the day the markets were positive. Now we have the FOMC meeting today and we will likely get the 25 basis point cut in rates and the Fed will present itself as doing what is necessary to keep liquidity and stimulus in place. Watching how the day unfolds and what response the market has to the Fed.

The S&P 500 index closed up 7.7 points to 3005 as the index continues to test the push towards the July highs. The markets reacts, but don’t seem phased by the activity of the bombing, the freeze in the repo markets, or tariffs. It is an interesting time of belief the Fed will help or give handouts to keep the market from falling. Eight of the eleven sectors closed higher on the day led by REITs and utilities. The downside was led by energy and telecom. Plenty of questions remain relative to how this unfolds with the up and down movement, but for now, the buyers have kept the upside in play. The long-term trend makes improvements with the return to the previous highs.

The NASDAQ index closed up 32.4 points at 8186. The index is equally testing the move higher with small caps leading and the large caps hanging tough in the midst of news. QQQ tested the move higher and holding above the $191 level of support. Technology is still the key sector to watch as this unfolds. Look for the best opportunities. Still some solid leadership in the large caps scanning has produced some nice moves higher.

Small-Cap Index (IWM) The sector is leading the upside effort last week as money rotates and moves above the $152.28 resistance. Held up well on Monday amidst the news and events. The gap higher had my attention as it cleared the $149.33 resistance. The move back to the $158 high is of interest. Hit the entry point at $152.28. Stop $155 (adjusted).

Transports (IYT) The sector sold back to the lows and bounced off support. The $182.43 resistance was cleared and $186.70 level cleared giving entry point. Entry $186.70. Stop $190.86 (adjusted). Attempted to clear the July highs on Friday met with some resistance and holding.

The dollar (UUP) The dollar moved higher on the oil field attack and lower on the Fed action in the repo market. Watching how it responds going forward. Closed at $26.72.

The Volatility Index (VIX) closed at 14.4 taking a bump higher on the oil processing plant bombing and flat on The Fed repo action. Today will be of interest as it will show how investors respond with time to digest the events. Throw in the FOMC meeting today as well.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector tested the $182.55 support, bounced, and cleared resistance at the $190.44 mark. Now moved to the July highs and providing some leadership in the current move higher for the broad markets.

Biotech (IBB) Tested support at $101 bounced and remains in the current trading range. Downtrend remains in play and watching how this resolves.

Semiconductors (SOXX) The sector bounced, cleared $210.92 resistance and moved back to the July highs and rested on Friday. Watching how the upside unfolds. Entry $211. Stop $215. Testing the move to the July highs…

Software (IGV) The sector tested the $213.40 support, bounced, cleared the $219.08 resistance and tested the move on Friday… Watching how this unfolds there is weakness showing up on the chart. Held in the trading range.

REITs (IYR) The upside trend remains on the long-term chart. Patience with our long term positions and short term watching how interest rate market unfolds. Holding at support. Bounced back from the selling on Friday. Added more upside on Tuesday.

Treasury Yield 10 Year Bond (TNX) running higher as the talk of cutting rates stimulates markets and money rotates out of bonds. The yield closed at 1.9% Friday up from 1.55% last week. Hit our stop on TLT and added the short side trade with TMV. Entry $10.50. Stop $11.10 (adjusted). Rates moved lower with some money rotating to safety.

Crude oil (USO) Tried to bounce but remains in the current range. Watching support at $52.50 and resistance at $58.25. The number of active rigs drilling declined by 5… this is the fourth week in a row the number has declined… You decide if oil is going higher anytime soon. Spiked higher on the bombing. Plenty of speculation as we watch how it all unfolds. Back to $59.34 on Tuesday… interesting nonreaction.

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. The downside has come into play as the market gains traction on stimulus and rate cuts. This has put pressure on crude hitting our stop and now looking at how the downside will play out. Watching DUST/GDX.

Emerging Markets (EEM) Broke lower in the trading range as tariff threats add to the worries about an economic slowdown. China helped by announcing trade talks would resume in October… hope springs eternal and the sector rallied to break above the $41.23 resistance. Small Test on the day… watching for some downside impact near term or test of the move higher.

China (FXI/YANG) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Watching the bounce play out as Mr. Trump makes his intentions clear… as does China. With the talks resume? Will there be a resolution? In the meantime the speculation is driving the ETF higher clearing $41.49 resistance. Testing of the move higher. Watching how this unfolds moving forward.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans for September 15th: The Fed intervened in the repo markets for banks handing out $52B of liquidity… the market dropped a couple of point in response. Not your normal reaction from investors… or is it? Watching how the bombing, liquidity, and tariffs play out along with the FOMC meeting. Stops in place and avoiding speculation.

  • Crude Oil (USO) falls 3.5% on the day as some normality returns to trade. Energy (XLE) fell on the day as well following a day of speculation driving prices higher. Watching for the opportunities.
  • REITs (IYR) moved higher again as yields drop. Maintaining our stops and collecting the dividend.
  • Treasury Bonds (TLT) yields and leveled off near the 1.8% mark as we await the outcome of the FOMC meeting.
  • Solar (TAN) nice follow through on bounce at support. Upside in play.
  • Retail (XRT) failed to clear $44 and testing… watching $42 support and/or a move above the $44 level if the markets are going to move higher. Stop $41.80.

MONDAY’s Scans for September 14th: The bombing of the oil processing plant in Saudi Arabi takes center stage and oil posts single biggest day gain in history. Reaction? Yes. Challenge is the questions that arise from the geopolitical point as well as supply impact. Energy stocks jump more than 3% in the US. Taking it all in stride and watching how the broad markets unfolds. Remember the FOMC meeting is on Wednesday and there were some rumblings from the White House about tariffs relating to the Airbus and European subsidies. Taking it as it comes and managing what we know.

  • Crude Oil (USO/UCO) big spike upside and watching what opportunities arise.
  • Energy (XLE/ERX) solid upside move as the sector was already in play with the move above $49.50. Adjusting our stop and managing the outcome. Dig into the refiners and exporting companies in the US to benefit. IEZ, UGA, IEO.
  • Small Caps (IWM) held the upside move and still showing leadership for the broad markets.
  • Natural Gas (UNG/UGAZ) benefactor… adjusted our stop.
  • Biotech (IBB/LABU) moved to a position of breaking from a bottoming pattern. Watching for entry if this unfolds.

FRIDAY’s Scans for September 13th: Uneventful day as the indexes digest the move higher. The attempt to break higher met some resistance as there was some “profit-taking” at the highs. We adjusted our stops to manage the risk and look for the opportunities.

  • Small Caps (IWM) nice move above the July highs.
  • Basic Materials (XLB) solid three day run to the July highs.
  • Gold (GLD/DUST0 the goldminers offered short opportunity as trade on Thursday with follow through on Friday. Entry $7.75. Stop $7.50.
  • Natural Gas (UNG/UGAZ) tested the move higher and posted a solid gain on Friday offering another entry point.
  • Treasury Bonds (TLT/TMV) adjusted stop and letting it run as rates jump higher and push bond prices lower.

THURSDAY’s Scans for September 12th: Gapped higher on comments from Mr. Trump about delaying new tariffs for a couple of weeks. The Chinese spoke of suspending the agriculture trade restrictions as well… the markets struggled to hold the gains from the open and tested throughout the day. No big changes in the overall picture. Watching how this unfolds Friday as the indexes push against the July highs.

  • Crude Oil (USO/UCO) dropped the last two days on the supply data. Looking for some direction as the commodity remains in trading range.
  • Semiconductors (SOXX) challenged the July highs and failed to close above. Watching how the leadership responds to the resistance level.
  • Gold (GLD) responds to the PPI data showing inflation moving up.
  • Emerging Markets (EEM) responding with vertical move higher to the hope of a trade resolution. Taking it for what it is, news driven trade on trade hopes. Manage the risk.
  • Treasury Bonds (TLT/TMV) bonds moving lower as rates move to the 1.8% level… short side trade working now.

WEDNESDAY’s Scan for September 11th: Solid upside continuation with the indexes adding to the upside move with a minor test on the charts. Semiconductors, small caps, midcaps, and materials continue to lead the indexes higher. The large caps have lagged some during the move with the others playing catch up. The rotation has run its course and looking for the move to challenge the July highs. Adjusting stops according to the risk and letting this unfold as hope springs eternal about a resolution to trade. No major changes on the day just taking what we have and letting it run.

(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 broke support at the $55.95 level and reversed and moved back to the July highs… watching. Gave back the gain.
  • XLU – Utilities broke from the trading range and is now testing as interest rates move higher. Support is at the $62.50 mark. Collecting the dividend and letting it play out.
  • IYZ – Telecom held support at $27.62. Hit entry at $28.70 and followed through on upside move to close the week. Stop $29.40. Tested the move higher.
  • XLP – Consumer Staples held support and the uptrend line. Watching how this unfolds near term. Holding near the current highs. Negative move on Monday.
  • XLI – Industrials moved back to support in the trading range and bounced clearing $76.80 resistance. Cleared the July highs.
  • XLE – Energy broke support at $58.19 tested and then bounced clearing resistance. Broke higher on crude adding position ERX $15.60. Stop $17.39. Nice upside added to the gains. Tested lower on move lower in crude. Posted solid gains on the news… adjusting stop. Moved lower as calm returns to the sector.
  • XLV – Healthcare held support… small bounce followed by modest gain… plenty of work to do. $91.75 entry-level to watch. Attempted to move higher twice and failed both times. Watching.
  • XLK – Technology tested lower, bounced, cleared resistance with a gap higher and held. In a position to test the July highs.
  • XLF – Financials have been under pressure with lower rates and global weakness. The positive data and higher interest rates gave some life to the sector and hit entry $27.60. Added to the move higher Friday clearing $28.24. Tested the move higher.
  • XLY – Consumer Discretionary moving higher on earnings from the retail sector earnings… gapped higher from the trading range on positive data… Added to the upside holding near the July highs. Tested the move to the July highs.
  • IYR – REITs held $88 support and cleared the $90.80 resistance. Remains in a positive uptrend… collecting the dividend and letting this run with a stop in place. Interest rates having a negative impact to end the week. Bounced back from the selling.

There are currently four sectors in confirmed short term uptrend. Four sectors in consolidation or sideways trends. Two in a confirmed downtrend. The result is SPY in a confirmed sideways trend. The positive gap higher last week could offer some upside trading opportunities going forward. 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:

Tuesday: The Federal Reserve stepped in to add $52B in liquidity to the repo market. The reaction was minimal for such activity. Taking it in stride on the day and looking to the FOMC meeting. Market is Fed centric currently as they focus on the economic stimulus. Plenty of talk about the 2007 financial crisis repeating itself. As we did then we will do now… let it unfold, keep our stops in place and follow the direction of stocks… up or down.

Monday: Week starts off with event in Saudi Arabia that dominated the news and market reactions were calm. If this happened ten years ago the world markets would have reacted with major declines. Watching how this impacts the markets going forward and how the geopolitics unfold. FOMC meeting on Wednesday and tariff talks towards the Airbus in Europe. The news just keeps coming and we remain focused on the facts not the news. Manage your risk one day at a time.

Markets found enough buyers to break from the five-week trading range and make a run at the July highs. While positive on the surface the challenge comes with the conviction behind the move. There was a modest test of the break higher, but not enough to change my doubts about the move. Will the test come at the July highs? Watching and managing our risk. Small caps took on a leadership role for the week and helped as money rotated to higher risk assets. The treasury bonds took a hit as money rotated out of bond and yields climbed to 1.9% from last weeks 1.55%. That was a significant move in the bond yields. The risk remains high for upside opportunities as the underlying data remains weak. The market remains controlled by headlines 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 with China once again wanting to resume talks in October and both parties talking about delaying future tariffs. Throw in Brexit and other global issues and you get the picture. The economic data showed mixed news with the PPI and CPI creeping higher. There are still too many questions unanswered and that invites speculation and volatility. Speaking of volatility the index fell to a six week low as the buyers stepped forward. We remain focused on what is working and what is failing. Therein lies the opportunities. The break from the five-week trading range is on my watch list moving into the new trading week. 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.