Markets move higher on hopes of rate cuts from Fed

MARKET OUTLOOK FOR June 6th, 2019

A follow through on the bounce Wednesday was helped by the belief the Fed is now willing to help and cut rates. There is no guarantee of that without weaker numbers from the economy. We are now throwing more speculation fuel on the fire. The bigger question is, would the rate cuts offset the weakness of tariffs and other issues facing the economy? Too many assumptions being made for my liking. The gains on Wednesday were broad, but the volume remains on the low side. My question, how do we proceed from here? We will watch and take what the market gives one day at a time for now. As clarity is achieved it will open the doors to more opportunities.

The S&P 500 index closed up 22.8 points to 2826 holding above the 200 DMA and another positive day for the buyers. The news of the day was centered on the Fed cutting rates and that kept the buyers engaged. Interest rates on the 10-year bond moved up to 2.12% on Wednesday as money moved back into stocks on the day. The good news is ten of the eleven sectors closed higher on the day as REITs and utilities led the upside. The downside came from energy as the sole sector to close in the red. The long-term trendline remains in question as they are tested on the downside move. Looking for the next opportunity. SPXS $21.50 level is of interest should the bounce fail. A test of the $20.50 mark expected near term.

The NASDAQ index closed up 48.3 points at 7575 and remains below the 7597 support level. Technology stocks were the leader again on Wednesday helping lift the index from recent selling. QQQ is our indicator as it moved back above the 200 DMA on the bounce. Watching how it responds with resistance at the $177.58 mark. Nothing has changed relative to the market environment. Watching and letting this play out near term. The Short entry was the confirmation of the break below the $177.58 level. SQQQ Entry $41.40. Stop $45 (adjusted & sold 1/4 @ $47.50 Monday). Hit stop on the balance of the trade Tuesday… watching to reestablish the downside trade on the bounce. Test of $41.30 level is what I am watching for now.

Small Cap index (IWM) the sector broke below the $146.71 support and on Monday showed some interest from buyers. Tuesday followed through with the buyers to clear $149.04 resistance. TZA $10.45. Stop $10.45 (Hit stop). Watching for the oversold sector to bounce… It did… now needs to follow through or we look at the short side again. Test $9.84 and watch.

Transports (IYT) The last week+ has pushed the sector lower breaking the $182.43 support and adding to the downside. Monday there were some signs of a bottom… Tuesday followed through with $182.43 back in play. Wednesday cleared that level of resistance and watching how it unfolds. The hope of a Fed rate cut is playing into the bounce.

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. Friday and Monday the news the Fed would intervene on interest rates moving lower hurt the rise of the dollar. The ETF closed at $26.24 and tested the 50 DMA. The uptrend remains in play, nice bounce on Wednesday. Watching as this continues to unfold.

The Volatility Index (VIX) closed at 16.09 as buyers step in to pacify the worries about tariffs (add Mexico to the list) and calm investors emotions. The index is still elevated, but the buy side helped the last two days. Uncertainty is the key issue at hand. Interest rate worries remain in the mix and we interjected the hope of rates cuts from the Fed on Wednesday. Watching how this unfolds near term.

UVXY moved back to the $37.50 level (entry) and watching how it unfolds. Stop $38. As noted the response on the open Friday spiked the index and we locked in gains on 1/3 of the position ($40.75 exit on 1/3 for 9% gain Friday… sold another 1/3 Monday $41.50.) Hit the stop on the last 1/3 of position. As stated yesterday it is a high-risk trade that needs to be managed… solid gain on the trade. SVXY $52.38 if buyers stay engaged.

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

WEDNESDAY, June 5th: ADP employment data weak at 27,000 versus 271,000 previous. UGLY number. ISM manufacturing index rose to 56.9% that was positive. Beige book, Feds view of the economy, was upbeat compared to the April release. Steady growth and mild inflation is the best summary of the report.

TUESDAY, June 4th: Factory orders were lower falling into negative territory. Again, another sign of a slowing economic picture.

MONDAY, June 3rd: ISM manufacturing was 52.1 vs 52.6 expected and down from 52.8 in April… there is slowing in the economy and the data is starting to confirm. Yield curve impact? Yes. Uncertainty impact of growth? Yes. If the Fed is engaged it will have to act soon on interest rates. Construction spending was flat versus 0.3% expected. Motor vehicle sales were better than expected at 17.4 million versus 16.9 expected. Key data is pointing to a slowing economy.

FRIDAY, May 31st: Personal income rose 0.5% beating expectations. Consumer spending was higher by 0.3% also beating expectations. Core inflation was in inline at 0.2% keeping the Fed happy. Chicago PMI 54.2 better than previous and consumer sentiment was off as tariff worries rise. Overall it was a positive news day for the economic picture.

THURSDAY, May 30th: Weekly jobless claims met expectations, consumer spending was slightly better helping the retail sector, and pending home sales index fell into negative territory at -1.5% versus up 3.8% previous. Mixed data remains.

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. Monday started a new month and we will get plenty of data from May to digest and ponder. The renewed chatter on tariffs isn’t going to help things looking forward. Interpret the data versus following our emotions. Let the trend be your friend… and for now, that is down.

(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 stocks struggling. We don’t hold any positions in the sector currently. Looking for some clarity in the sector. The short side trade needs to confirm the break below $101. Bottom? Watching. The bounce followed through and $104 level to clear.

Semiconductors (SOXX) Watching the downside pressure as the sector continued lower on the week. The close below $182.38 was a negative and the short side trade in the sector (SOXS) in place. Watching how the downside unfolds with key support at the $175.89 mark. The consolidation pattern is of interest near term. Bottom? Watching. Back above the $182 level and watching how it follows through. Wednesday did not impress closing lower on the day.

Software (IGV) The uptrend reversed at the $167 level remains in play with a consolidation pattern near the highs. We hit our stops at $214.80 and continue to watch how this unfolds and what opportunities it brings. Support at the $204.53 is the level to watch for now. Reaction and ripple effect of the antitrust investigation. Tuesday regained the losses from Monday. Progressed higher on Wednesday.

REITs (IYR) Sideway trading range for now. Interest rates continue to fall, but the economic picture lacks clarity thanks to the tariff talks. Holding for now and letting the news settle. Broke $75.21 and bounced… trading opportunity on reversal above $75.21. Entry $75.25. Stop $85 (adjusted). Attempting to break out to a new high.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.14% and down 18 basis points as money rotates to safety. Watching how this unfolds near term and what action the Federal Reserve will take. TLT is a hold if you own bonds. Flight to safety related to the China & Mexico tariff threats. TLT hit entry at $124. TMF entry $20.26. Stop $23.50. Rates are falling off a cliff as they approach 2%. Bonds are the benefactor. Small bounce on the last two days and still not looking good.

Crude oil (USO) Worries about the supply data this week pushed crude below the $58.25 support. Tanked on Thursday and Friday in response to the tariff news, but also the lack of drawdown in US supply data. Short side trade playing out well for now. Entry SCO $ 15.75. Stop $20.25 (adjusted). NOTE: speculation, emotions, and worries create opportunities. Held $52.50 level of support. Wednesday broke lower on supply data. $51.30 held.

Emerging Markets (EEM) The downside found support and held with a modest bounce off the lows this week. China helped, holding steady on news of talks still in motion on tariffs. Regained the $40.25 support and watching how this unfolds. Short side trade entry hit (EDZ) at $45.55. Stop $51.50 (Stop Hit). Bounce reversal follows through… $41.23 level to clear for an opportunity. Retreated again as worries over tariffs return.

Gold (GLD) built a base of support and tried to start 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. Speculation would say… YES. However, I avoid speculation of this type. 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. Watching how this unfolds. Spiked higher on bonds, dollar, reacting to the antitrust and economic data. Held the gains on Tuesday… Accelerated again on Wednesday, watching.

MidCap (IJH) The sector continued lower with the broad indexes last week. The move below the $182.55 mark was another negative for the trend. No positions as we look for the next opportunity. Bottom? Watching. Big bounce follows through… watching the 200 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 on the week. We did trade the short side of this with YANG. Entry $42.70. Stop $54.60 (adjusted). Watching with the downside in play. Bounce reversal in play?

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scans for June 5th: Another day of positive gains for the broad indexes on lower than average volume. Will this bounce have legs? If the buyers believe large enough the Fed will cut… possibly. That belief will have to be fueled by facts like the ADP private jobs report on Wednesday. The data remains mixed and I am not convinced the Fed isn’t playing games in the media to keep the markets from selling off. It is all speculation and I will take what the market gives. Until then we have some positions that are working well and plenty of cash to deploy as the opportunities present themselves.

  • Crude Oil (USO/SCO) downside remains in play as supply data disappoints investors. Short energy trade still working as well.
  • China (FXI/YANG) downside stalled with bottoming pattern in play. Adjusted our stop and still have a downside bias.
  • Financials (XLF) Bounced at the support of $50.29 on KRE… if the Fed does cut rates the banks will suffer as the margins shrink on loans. Watching how this unfolds near term.
  • Semiconductors (SOXX) watching for clarity. The negative close on Wednesday was of interest… short side? SOXS.
  • Treasury Bonds (TLT) rates bounced off the 2% level. Will Fed cut? If they do the downside in bonds will be an opportunity. Watching how this unfolds with stops in play on TLT/TMF positions.

TUESDAY’s Scans for June 4th: Rally caps on… the bounce was in the mix as oversold conditions were in place. The bounce is just a bounce for now. The buy side is under pressure to validate the move and reverse the selling trend of the last four weeks. The odds are more testing lower and potentially a retest of the December lows. Watching… letting this unfold. No need to chase the upside move on Tuesday when the bias is on the downside… the buyers have the challenge of shifting the bias and the sentiment. Some credit the Fed comments on Tuesday as a spark for the rally… the Fed is not going to cut rates until they have to… the media isn’t smart enough to read through the comments and understand the arrogance of the Fed… after all, they know more than the markets. They are obviously educated beyond their collective intellect. Watching patiently to see how this unfolds.

  • There were plenty of rebounds on Tuesday… all worth watching. The bottoming patterns followed through as noted yesterday.
  • Vertical moves hit stops – thus why we have them.
  • Opportunities remain and we will take what the market gives.
  • Watching how Wednesday unfolds. The oversold bounce is in play.

MONDAY’s Scans for June 3rd: Mixed news and mixed moves in the broad markets and specific sectors. Technology is hit by the rumored antitrust investigation from the DOJ. Energy stocks bounce, dollar tanks, gold spikes, defensive stocks seeing some buying, and some bottoming patterns emerge. Yes, technically stocks are oversold. But, I know one thing, markets can remain irrational longer than I can remain solvent trading against them. Stay focused. Manage risk. Have a defined strategy for every position. Avoid speculation and rumors. Trade what you know, not what you think.

  • Bottoming patterns to watch… IWM, FXI, XLF, IYT, XLE, SOXX
  • Vertical moves to manage… TMF, GLD, UVXY, SCO, SQQQ
  • Opportunities… SIL, NUGT, IGV, XLV, IBB
  • Key Issues… Interest rates, tariffs, economic data, antitrust, all are creating their respective level of uncertainty. They all have an influence on the markets short term… the longer term issues are how they impact growth moving forward.
  • Patience.

FRIDAY’s Scans for May 31st: All hell broke loose on the speculation surrounding tariffs, interest rates, and the geopolitics. Gapped lower from the opening bell with a modest attempt to bounce, but close at the lows of the day. This move confirmed the downtrend again from the May highs. No need to chase short side trades on Friday. We have some positions on that benefitted from the move and we adjusted stops. Bonds have gone vertical on the interest rate moving lower and we raised stops on those positions. Watching how the news unfolds over the weekend and taking what the market has to offer.

  • Adjusted stops on TMF, YANG, SOXS, UVXY, SCO, and others. Manage your risk and remember that markets decline nearly three times faster than the rise. Reaching oversold levels technically.
  • Moves of interest on Friday… GLD/NUGT, DGAZ, SCO, UVXY, FAZ, SIL.
  • Brazil (EWZ/BRZU) adjust stop on the move higher.
  • Small Caps (IWM/TZA) adjust stop on the move lower.
  • Financials (XLF/FAS) downside could accelerate if the Fed steps in and lower interest rates. Hurst margins for the banks. Watching.

THURSDAY’s Scans for May 30th: Held support. Volume on the low side. Not exactly promising for a reversal setup. The sellers, my view, still have the upper hand and the bias remains on the downside. The Trump tweet after-hours about tariffs on Mexico with an exact start date will impact stocks on Friday. Watching and taking the setups from Wednesday as our cue. Short side is in play and letting the day unfold. Don’t trade on emotions focus and remain disciplined. Manage your stops accordingly and make the adjustments necessary based on the moves Friday.

  • Short Oil & Gas Production (DRIP) entry $13.50. Stop $12.25. Raised stop on SCO $16.75. Raised stop on ERY $48.
  • Commodities running… WEAT, CORN, JJGTF, SOYB, DBA… raising stops and taking some profits on the move.
  • Brazil (EWZ/BRZU) raised stop on move higher. Entry $25.72. Stop $25.72 no loss on the trade now.
  • Treasury Bonds (TLT/TMF) running as rates decline and money rotates to safety. Raise the stop $22.
  • Small Caps (TZA/IWM) manage the stop on the move higher.
  • NASDAQ 100 (QQQ/SQQQ) Manage the position as the volatility picks up.

Sector Rotation of S&P 500 Index:

  • XLB – Selling resumes breaking support at the $54.15 mark and watching $52.49 now as support. Bottom reversal? Nice follow through on Tuesday and Wednesday.
  • XLU – The utility sector found support at $51.11… moved above $52.72 for entry. Cleared $57.10 resistance. Entry $53. Stop $58.45 (Stop Hit). Bounced following three days of selling. Upside resumes. Nice follow through on Wednesday.
  • IYZ – Telecom facing$29.50 resistance and looking for near term direction. Some good news in the sector on the Huawei delays… still a challenge for the sector if the sanctions are put in force. Testing the $28.62 level of support again. Nice bounce last two days.
  • XLP – Consumer Staples found new lows and bounced. Cleared $50.50 and entry $51.90. Stop $56 (Stop Hit). Moved lower and watching how it unfolds. Bottom? Watching. Follow through the last two days.
  • XLI – Industrials moved below support $74.17 and the 200 DMA. Watching. Bottom? Added upside last two days.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Crude moved lower and the downside followed in stocks accelerated offering a short side entry on the break of support. ERY – Entry $39.60. Stop $51.40 (adjusted). Watching how this unfolds on speculation. Bottom? Solid bounce on Tuesday. Sold on Wednesday supply data.
  • 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 $88.50 (stop hit). A big move lower and hit our stop on the position. Moved to $86.74 support level. Held support and bounced the last two days.
  • XLK – Technology sold and looking for support. Gapped lower with semis leading the downside move. Spiked lower on Antitrust allegations. Snapped back on Tuesday. Followed through on Wednesday.
  • XLF – Financials moved to recent lows and bounced. $23.76 level cleared for trade. Entry $25.76. Stop $26.50 (stop hit). Fed back in the picture as interest rates tumble. Watching FAZ trade $8.86… Bottom? Nice bounce last two days. Watching news on Fed rate cut… not good for banks.
  • XLY – Consumer stocks under pressure of late and looking at how it manages with support at the 200 DMA. Sold lower on news Monday. Bounced back on Tuesday & Wednesday.
  • RWR – REITs broke lower… bounced from lows clearing $93.21 resistance… positive upside move. Entry $88. Stop $97 (adjusted). Watching and managing the risk as it attempts to maintain the uptrend. Collecting the dividend and letting it unfold. The sole sector in the red on Tuesday. Wednesday back to the previous highs…

(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:

WEDNESDAY: The power of the Fed. The words eluded to a possible cut in rates if the economic data continues to weaken. A carrot for investors to jump at? Maybe. Possibly. Could. Should. Might. All speculation. Welcome to the world of uncertainty. Without clarity of direction traders and investors alike will grab at anything to make themselves believe. Taking what the Fed says with a grain of salt and watching how investors vote on the chart. Some good looking patterns emerging from the bounce. The question mark comes from volume/conviction in the move. Letting this unfold moving forward and taking what the market gives not what I think. Patience.

TUESDAY: The bounce from oversold conditions happens and investors are gitty. A bounce is a bounce until it validates otherwise. If the talking heads are right and the Fed comments sparked the rally… watch out below. The Fed will not act until the music stops and everyone is scrambling for a chair. We will watch how thing unfolds on Wednesday… don’t count the sellers out. We didn’t learn too much on Tuesday that was different… still plenty of uncertainty looking forward and the bulls never die easy. Watching and looking a the bounce as a downside opportunity… if that is the wrong outlook the markets will tell me and we will adjust accordingly. Please note, despite my downside bias I still took the exits where stops were hit… we can always reenter positions. Always remain true to your discipline.

MONDAY: That the government can keep adding to the challenges the market faces. I am not a conspiracy theorist, but the timing of this in conjunction with the tariffs is interesting. Regardless, the outcome of the day was reactionary selling. How it unfolds will only be known in time. We avoid the areas of news, trade what we know, and let the rest settle itself out. Speculation is easy, disciplined trading is hard.

FRIDAY: Worry about trade is taking stocks lower. The big question… will this really happen or is there a resolution? The more investors believe it will happen the more the markets will price it into stocks. Volatility picked up, but not at crazy levels yet. The course of action for me is taking what the market gives… some short side trade currently. Manage the risk of the trade… adjusted our stops higher. And, focus on what we know, not what we think. Plenty of speculation flying in every direction currently. Patience is key.

THURSDAY: A modest bounce attempt, but an after-hours tweet from Trump is likely to give the control back to the sellers. Speculation reigns! We have established some short side trades… we will manage them according to the responses. Taking what the market offers and make the most of the opportunities given based on the risk we are willing to accept. We still have plenty of cash as a cushion and ready to deploy when the opportunities are right.

WEDNESDAY: More selling and a break of key support levels across the board. The break offers short side signals in most sectors and indexes. This raises the questions of a bounce reaction… if so, it offers a clearer entry point on the downside should it resume. IF the downside accelerates will it take out the sellers as profit taking will bloom on the gains? Key is not to speculate but to trade accordingly. Watching how the day unfolds Thursday and what signals we confirm and which we set up further. Patience and discipline.

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 lower as the news of additional tariffs on Mexico rattled an already nervous investor. The indexes closed in the red for the week again with the S&P 500 index dropping another 2.4%. The index is currently down 6.5% since the highs in May. The sellers are in control of trend near term. Friday only embolden them as the news continues to favor the downside trade. We exited where the risk rose and we added positions where the risk was appropriate for our terms. Economic data was on mixed with some good news on Friday, but it was lost in the tariff talks. Rotation is in play as money heads to safety and cash. 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.

Eleven of the eleven sectors managed to close the week in negative territory as money continues to move with some rotation. Consumer staples and energy led the downside for the week and raising new questions about the trend. Gold rose, the dollar was flat, and the economic data was overall mixed with some positive points where they count. Four sectors are moving sideways in consolidation patterns. Seven sectors are in micro downtrends. Crude broke lower for the week as supply data worries investors. 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.