Jobs report impacts investor psyche

MARKET OUTLOOK FOR July 8th, 2019

The jobs report released on Friday showed a strong rebound in June gaining 224,000 jobs the best number in 10 months. This, of course, puts the Fed in another precarious spot on interest rates. Do they cut? Do they delay and see what July data looks like? Yes, it raised too many question marks about the next FOMC meeting and what the Fed will do. Remember the markets renewed push higher is on the premise the Fed will cut rates at the next meeting. That explains the lethargy and downward move on Friday. We will look for more concrete answers next week on how investors will respond as Friday was a very low volume day with the Independence holiday on Thursday.

The S&P 500 index closed down 5.4 points to 2995 after hitting new highs on the upside break. The one thing that continues to shine for me is the economic data, and not in a good way. The focus is on trade with China and the Fed. The President added Europe to the tariff list last week as well. The 10-year bond jumped back above the 2% mark on the speculation Friday. This showed the indication of investors doubting the Fed and rate hikes at the July meeting. Four of the eleven sectors closed higher on the day as telecom and financials led the upside. The downside was led by healthcare. We adjusted our stops and taking what the market offers. The long-term trendline has been looking better, but we will watch closely as the events continue to develop.

The NASDAQ index closed down 8.4 points at 8161 and remains near the June highs. Technology stocks leading the move higher currently. Semiconductors continued testing their move higher. QQQ is our indicator adding modest gains clearing the $188.31 resistance. Investors are putting money to work on the hopes that trade will improve with China and rates will be cut by the Fed. Adjust your stops and know your exits on both short and long term holdings.

Small-Cap Index (IWM) the sector broke below the $146.71 support and turned higher on news. The follow-through from the buyers on move above $154.90 is positive. Emotionally charged activity in the sector currently.

Transports (IYT) The sector pushed through the $186.70 mark and held on Friday. The stairstep pattern in play puts the reversal off low a chance on the upside. The weakness in the sector comes from slower economic data. Watching with entry signal.

The dollar (UUP) The big question mark for the buck has been the trade tariffs with China. Following the trade talks at the G20, it traded as if those issues were resolved… watching how this unfolds along with the tariffs. The buck moved off the lows and the ETF closed at $26.28 getting a boost from the jobs report. Watching as this continues to unfold.

The Volatility Index (VIX) closed at 13.7 after hitting the lowest level since May. The intraday volatility on Friday showed the uncertainty now in place about interest rates based on the jobs report. Uncertainty looking forward is still an issue despite the truce in trade with China. Interest rate worries remain in the mix as well. Watching how this unfolds near term. SVXY trade working well on the ease in anxiety for stocks.

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

FRIDAY, July 5th: The jobs report was much better than expected adding 224,000 jobs beating expectations and well above the June data. The unemployment rate actually ticked higher to 3.7%. Average hourly earnings rose 0.2%. Great data which cause mixed opinions on the Fed and interest rates.

THURSDAY, July 4th: Independence Day Holiday.

WEDNESDAY, July 3rd: ADP job report was positive with 102K new jobs. We will see how that translates into the jobs report on Friday. Jobless claims were 221,000 and in line with expectations. The trade deficit was $55.5 billion and in line with expectations. ISM services index fell to 55.1% from 56.9% last month and continues to show weakness. Factory orders fell 0.7% as it remains negative showing slowing sales. Mixed data continues, but it remains in a downtrend overall.

TUESDAY, July 2nd: Vehicle sales were at 17.3 million and better than expected, but lagging from the 17.4 million sold in May. Still a positive number overall.

MONDAY, July 1st: ISM manufacturing numbers held above the 50% mark at 51.7% down from 52.1% in May. Not a good number, but it could have been worse. The construction spending fell 0.8% versus 0.4% growth previous. Definitely not a positive data point for housing or commercial. These are the numbers that matter to stocks.

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 June data starts and not exactly stellar. Watching June and second quarter data as it unfolds in the coming weeks along with earnings. 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: 

MidCap (IJH) The sector found some support at the $182 mark bounced. It has been a low volume move, but up nonetheless. $195.35 resistance was eclipsed and watching the April highs. We hold no positions in the sector currently.

Biotech (IBB) The selling found support near the $101 mark. The break lower was the small-cap stocks struggling. The sector bounced higher to clear $109 and then to close back at the $109 level to end the week. Watching how this unfolds.

Semiconductors (SOXX) The downside pressure found some buyers and reversed the trend short term. The reversal started with the Fed talk on rate cuts and now the hope of the tariff talks pushed the sector higher. $192.43 entry. $192 stop. The sector has offered some individual opportunities on the move with ADI and SIMO offering trading opportunities. Watching how this unfolds. Gapped higher gaining 2.5% to start the week then spent three days testing the move. Watching.

Software (IGV) The six-day reversal remains in play after a spike lower broke the uptrend at the April high. Hit new highs on the week as the parts are moving even better than the whole. Dig in for the leadership.

REITs (IYR) The upside move took a turn lower after hitting new highs at $91. The shift in the economic picture and the housing data sent money to other areas. We hit our stop and locked in solid gains on the position. Found support at the $86.30 level and bounced… watching how this unfolds going forward.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.04% as money moves out of bonds on the jobs report on Friday. TLT entry at $124. TMF entry $20.26. Stop $23.50. Watching how this unfolds to start the new week.

Crude oil (USO) Supply data worries remain along with Iran tension as a point of issue for the price of crude. The move lower came on the news and the move higher on Friday was the same. UCO entry $17.15. Stop $18.50.

Gold (GLD) Volatility picked up as the news creates some uncertainty in the metal. As a result, the flag pattern is developing near the highs. Interest rate cuts, tariffs, and failing economies globally favor the upside. On the opposite side, they don’t favor gold rising. Some of both in the news creating the consolidation pattern. Hit our stops, locked in our gains and watching.

Emerging Markets (EEM) The downside found support and held with a bounce off the lows. China helped as expectation are high on the trade talks. Letting the weekend happen and then we will evaluate the opportunities. No positions.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. The bottom was established in May. The reversal was established in June. Now we are looking for the confirmation of the uptrend to be established. Gapped higher on trade talks and proceeded to give it all back. Watching.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for July 5th: Solid economic data from the jobs report was a twist some didn’t expect. The challenge now is will the Fed cut rates in July meeting? That speculation turned some things upside down intraday and posed more questions than we have space to discuss. We will suffice to say… only time will tell how this unfolds. Patience is required.

  • Treasury Bonds (TLT) moved lower as rates rose on the jobs report.
  • Financials (XLF) bounced on speculation of rates.
  • Crude Oil (USO) bounced on Iran tensions.
  • VIX Index (VXX) big intraday volatility on the news.
  • Natural Gas (UNG) jumped 5.6% on supply data.

WEDNESDAY’s Scans for July 3rd: Economic day ruled the day as most were weaker but still manageable. New highs on the major indexes show investor engagement. The patterns and trends are following through on the upside moves. Software hit a new high. Some testing of the gap higher in semiconductors, but overall not a bad day and trend remains in play.

  • Software (IGV) new highs to keep the uptrend alive and well.
  • Interest Rates & Bonds (TLT) ten-year yield fell to 1.95% and bonds moved higher. Inversion of the 3 month and 10-year widen. 2-year tops the 5-year yield. This is not a good thing FYI. The Fed is watching and waiting too long as usual.
  • Semiconductors (SOXX) fills the gap higher with two day test. This is a solid setup for the sector to move higher. Watching for the opportunity to add to positions.
  • Volatility Index (VIX) moving lower as money flow turns positive. SVXY in play and raised our stops.
  • Financials (XLF) move to the May highs and in position to continue the uptrend.
  • FRIDAY is jobs report. Watching for a solid number or it could unnerve the buy side.

TUESDAY’s Scans for July 2nd: One truce turns to another threat. The Europe tariff discussions from Trump set the tone of the day. The consolidation in some sectors was positive on the charts setting up an opportunity to move to new highs and joining the S&P 500. Taking it easy as the volume is likely to be low with the 4th of July holiday sandwiched between the next two trading days. Drop-in crude is of interest to me as it moves back below the $58.25 level. Gold gains back losses as tariff worries remain… it is a nervous market, to say the least, but one thing is keeping it together, the Fed and promise of a stimulus.

  • Crude Oil (USO)- Fell 4.8% and watching how it unfolds.
  • Gold (GLD) – rose 2.1% regaining Monday’s losses.
  • REITs (IYR) led the upside move… defensive sector.
  • Utilities (XLU) gained 1.3%… defensive sector.
  • Small Caps (IWM) lost 0.6%… growth sector.
  • The market continues to juggle between defensive and offensive moves. The mixed signals are of interest as they show the indecision about the outlook and the lack of clarity overall… Trade accordingly.

MONDAY’s Scans for July 1st: Tariff truce with China sets the tone for the open. The gap higher faded with a bounce into the close. The biggest gains came from semiconductors and emerging markets as they are seen as the biggest benefactors. The reality nothing changed! Nothing. Some believe we will see a trade agreement signed soon… I believe nothing changed and until it does the market is trading on speculation. That as it may be the entry signals given last week paid off on Monday. Stops must be raised and diligence remains as we manage the risk of the current environment. As much as I may disagree with the headlines and prognosis for the future… I will still trade the charts.

  • Semiconductors (SOXX/SOXL) upside continues to gain on the news with China. Adjust stops and let it run.
  • China (FXI/YINN) upside gained momentum on the trade truce. Adjust stop and let it unfold.
  • Crude Oil (USO/UCO) upside on OPEC agreement to maintain production levels for crude.
  • Financials (XLF/FAS) solid gain adding to the previous move as banks seen as a benefactor to the Fed.
  • Europe (IEV/EURL) upside in play and hitting resistance at the previous highs. Watching.

Sector Rotation of S&P 500 Index:

  • XLB – Broke support at the $54.15 mark and bounced at $52.49 support. Reversed and break above the April highs. Entry $55.25. Stop $55.95. Watching for follow-through. Follow through to break higher.
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Starting a topping pattern. Tested lower and watching.
  • IYZ – Telecom cleared $29.50 resistance and looking for near term direction. Moved back below the $29.50 level and watching. Breaking from trading range on the upside.
  • XLP – Consumer Staples moved lower, bounced and hit 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. Broke above resistance at $75.72. Cleared the $76.80 resistance.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Crude moved higher on Iran speculations taking stocks higher as well. Watching how this unfolds as stalls near the 50 DMA.
  • 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 $91. Hit some resistance at the $93.32 level. Broke to a new high.
  • 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. Semiconductors and Software push the upside. Hits new high. 
  • XLF – Financials moved to recent lows and bounced. Resistance at the $27.15 mark as rate cuts tend to not favor banks. Capital plan approval by the Fed gave a boost to the sector to end the week. Watching how it unfolds. Moving higher and breaking above resistance.
  • 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. Watching how the new high plays out.
  • IYR – REITs broke lower… housing data, worries about consumer slowing and some overall rotation in the markets. We will watch how this unfolds near term.

(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:

FRIDAY: News can change perspective and create volatility. It was a case of good news being not so good news. The positive jobs report was enough to create question marks as it relates to the Fed cutting rates at the July FOMC meeting. That question created debate and intraday volatility in the markets. At the end of the day, only time will tell on the direction along with the Fed. We now get to practice our patience.

THURSDAY: Independence Day creates great pride in being American. Great day to reflect on what made this country what it is today.

WEDNESDAY: Positive follow through to the upside started on Monday. The buyers are still engaged and willing to put money to work. This is a good lesson in how the data doesn’t matter… until it matters. The hard data on the economy is weakening. The yield curve is screaming for the Fed to act. The earnings have not been stellar. But, the hope of stimulus from the Fed is acting as a backstop to stocks currently. Thus, follow the trends, manage your stops, and let this play out one day at a time.

TUESDAY: A market without direction is a market that will make you nauseous from the ups and downs. Tariff truce on Monday. Tariff threats on Tuesday. Economic data is mixed. Earnings on the horizon. Fed promises. It is like a juggler with too many things to keep in the air. We must remain disciplined in our approach… take what the market gives, but protect against the risk. Manage the part where they meet the criteria and manage the whole when it works.

MONDAY: Talk is better than action? There were no actions taken on trade agreements with China only more talk. Markets rallied on the relief of no new tariffs and the hope of an agreement soon. The little boy who cried wolf comes to mind… this has been the promise since January. I was taught that actions speak louder than words… thus, may be why the market failed to keep the early gains. Watching how all of this unfolds… stops in place and watching how the economic data unfolds.

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 cut rates. The jobs report made that a little less clear, but the hope remains. The June data on the economy shows slower slowing:) The challenge is speculation versus allowing time for it to all unfold, but nonetheless, the economy did show signs of hope. The other major issue is China/US trade talks at a stalled point again and no clarity on future actions. Throw in the US/Iran tensions and you get volatility in crude oil. The indexes closed up 1.6% for the week keeping the bounce from the current lows in play. We exited where the risk rose and we added positions where the risk was appropriate for our risk tolerance. Watching how traders respond in the coming week and if they are willing to put on risk or run for safety. 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. 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 look for the best opportunities. REITs and financials led the upside for the week with news driving money flow. Gold holding near highs, the dollar found support and bounced, and the economic data was overall mixed with some positive signs in the jobs report. Four sectors are moving sideways in large trading ranges. Six sectors are bouncing from their micro downtrends. One is executing a bottom reversal short term. Crude followed through on a bottom reversal helped by the Iran tensions rising. 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.