OUTLOOK: October 19th
If you go back to 1999 when the Fed was trying to control the growth and avoid inflation. They managed to stop inflation and growth! That led to the 2000-2003 downturn in the markets and the US economy. It wasn’t until tax cuts were enacted in 2003 that the economy reversed. The same activity is currently happening from the Fed. I am not speculating another market correction or downturn in the US economy, but we have to worry about current actions and manage our money accordingly. Thursday’s activity was directly related to the Fed and the determination to control something that is not controllable… inflation. For god sake let the free economy work and get out of the way. Buffer it if have to, but stalling growth in the name of inflation is not going to happen… Ask the Carter administration in the late 70’s how well that worked. We are looking a reestablishing our downside plays in light of the current developments. One day at a time one position at a time while the brain thrust attempts to control things it cannot control.
The S&P 500 index closed down 40.4 points at 2768 as the index moved back to the 200 DMA. One of the eleven sectors closed higher on the day as utilities benefitted on the worries driving the market. Worries about the Fed’s activity once again takes center stage. The downside was led on the day by consumer discretionary and technology. Last week investors hit the sell button on stocks and the charts reflect the damage to the short-term trendlines and investors psyche. Direction is the focus as the bounce gives way to more selling and a not so pretty chart pattern. Watching for how this unfolds near term. The chart is holding the long-term trendlines off the January/February 2016 low. Patience and discipline…
The NASDAQ index closed down 157.5 points to close at 7485. The index broke lower from the pattern of consolidation near the previous highs and support at the 7300 level. The move broke below the 200 DMA again and negates the bounce. The short-term trend from the April low was broken and still needs to be recaptured. QQQ is our indicator near term as we watch to see how the leaders respond and Thursday… not so good. NFLX, WDAY, CTRP, TTWO, and ISRG all reversed to move lower from the bounce. Downside play looking attractive again. Watching where the next opportunities lie.
Small Cap index made a move lower breaking below the 200 DMA again and holding the $152.28 as next support. Short side in play and accelerated with no real bounce on Friday. Tuesday finally showed upside bounce worthy of attention… but, it failed to follow through. TZA entry $10.45. Stop $9.84. The reversal failed and looking at the weakest link in the sectors. Willing to see how this one plays out looking forward.
Transports (IYT) moved lower and broke the $192.42 key level of support as the downside accelerated again. This sector is another negative indicator for the broad markets as the downside gained momentum. There was not one positive stock in the sector as the Fed talks impact the outlook for the economic picture… you have to move goods and people in growing economies… slowing ones? Not so much. Watching how this unfolds and looking at the downside trade.
The dollar (UUP) moved higher holding above the key support $25.17 as it responds to the FOMC decisions and issues globally. Italy’s struggle with debt is putting upside pressure on the dollar of late as well. This puts the dollar at $25.52 at the close with solid move higher on the day. Watching as remains in a trading range on the chart. The overall move higher is positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… history validates a strong dollar favors the US despite the short-term setbacks.
Gold (GLD) Gold gapped higher last week getting some relief from the recent selling. Last four days are digestion for the move. The support at the $111.90 held and breaks upside from the bottoming consolidation. The dollar and geopolitics have been the catalyst for the metal… both up and down. Entry $114. Stop $111. Maybe our patience paid off with the upside move… looking for more upside. The gold miners (GDX) equally respond to gold moving higher. Entry $18.50. Stop $19 (adjusted). The stocks are oversold and looking for an opportunity in the bounce and reversal which we saw on Thursday.
Crude oil (USO) Crude spiked lower again on Thursday in response to markets and supply data. The speculation about demand rising or production decreasing has been driving the commodity higher and creating the day to day volatility. The commodity closed at $68.71 Thursday as we watch how this unfolds. Now watching for direction or response to the selling.
Emerging Markets (EEM) failed to clear resistance and tested lower again. That test accelerated retesting the September lows and spiked below that level with a modest bounce that failed again and heading back to support. Too many questions in this sector with China providing the biggest question marks on trading tariffs. Emotions are high along with selling volume.
The Volatility Index (VIX) closed at 20 on Thursday as the anxiety levels renew their upside pressure on Fed talk. There has been complacency in the index the last three months… but, it jumped higher as investors sold stocks. VXX at $35 is interesting if fear and anxiety result from the Fed intervention yet again.
The week focused on the Federal Reserve comments relative to interest rates, the economy, and investor psyche. The belief that the Fed will lead the markets lower with yields on the ten-year bond to 3.25% to start the week. Bonds fell more than four percent on the discussion. The reality of this activity set in as many realizes this is not good for the consumer as it puts pressure on large purchase items such as automobiles and homes. Payments are higher and fewer people will purchase large items. The outlook for growth was revised by the IMF globally. and the continued speculation in the media became a selling opportunity for those wanting to take money out fo the markets. End result… selling the NASDAQ dropped 8.7% in six trading days. Friday’s bounce is not the end… This will unfold in the coming weeks and we will look for the opportunities and the outcome of the current shift in sentiment. No change on the tariff front with China. The NASDAQ was weakest along with Small-Caps for the week. The S&P 500 struggled to maintain support and bounced back to the 200 DMA on Friday. All eleven of the sectors closed lower for the week. Basic materials, industrials, and financials lead the downside. Utilities and consumer staples lost the least. The start of the fourth quarter isn’t looking good with stocks starting off lower. Energy and crude oil moved lower as the supply data showed solid supply numbers versus dropping as speculated. There is plenty of dynamics working in the markets overall and we will take it one day at a time as the short term trend comes into question. All we can do is manage our risk according to the charts and not speculate on what if… the greatest challenge for us all is not letting our emotions get involved in a process that requires a disciplined strategy and action.
The FOMC minutes offered more anxiety levels from the Fed interest rate debate. It could have some impact moving forward based on how active the Fed is about interest rates and the longer term impact on the economy and growth. Throw in some slowing housing data and the outlook is getting more cloudy… thus, some selling from investors the last few weeks. Watching how the selling on Thursday unfolds today.
(The notes above are posted daily based on the activity of the previous days trading. The red comments are current day changes worth noting.)
KEY INDICATORS/SECTORS &LEADERS TO WATCH:
Biotech (IBB) The sector breaks lower. Closed below the 200 DMA. Held the $107 level of support. The short side played out well… adjust stops and took some profit off the table. Watching how the new week unfolds. Bounced 4.3% leading the upside for the NASDAQ. $115 level in play again. Sold back on Thursday and watching.
Semiconductors (SOXX) Sector breaks pattern at $181 offering short side trade SOXS entry $10.50. stop $11.85. Sold half at $12.30 Thursday. Sold half of remaining $13 Friday. Holding balance and managing the risk. Bounced 3.2% on Tuesday and plenty of work left to be done. Thursday erased the bounce and back to support on the downside… short trade of interest again.
Software (IGV) The sector broke support at the $197.48 level and the 50 DMA. Short side trade offered. Spikes lower to the 200 DMA. Hit stop on short side trade to $184.50. Now watching how next week unfolds for the previous leader. Bounced 3.8% Tuesday as continued bounce off the 200 DMA. Thursday… sellers return and watching how this unfolds.
REITs (IYR) UGLY decline in the sector as interest rates moved higher… The 200 DMA broke… tested the $75.21 support level and held Friday. The downside is still in play SRS $28.60 entry. Stop $30 (adjusted). Bounced 1.6% Tuesday, tested again on Wednesday… needs to recapture the 200 DMA. Modest selling on Thursday…
Treasury Yield 10 Year Bond (TNX) closed the week at 3.14% related to the Fed worries. The short side is in play. TMV Entry $19.65. Stop $21.20 (adjusted). The challenges of the Fed remain in place with some mellowing in activity on Thursday and Friday, but the risk remains for bonds. Managing our position. Higher Wednesday in response to the FOMC minutes… more downside for bonds? Rates spiked early on Thursday and settled down, but it was enough for stock investors to get a glimpse of panic selling in bonds. TLT testing $113.54 again.
Energy stocks (XLE) The stocks bounced off support at $72 again after a third attempt to move lower… the move up and down is all predicated on the belief behind the supply data and crude activity… speculation is driving the activity making it difficult to trade or invest money. Retesting at the $72 support.
(The notes above are posted every weekend and updates are added in red daily as they change or develop.)
Daily Scan Results:
THURSDAY’s Scans 10/18: Welcome back to the Fed. They are the easy target here, but the reality is uncertainty looking forward. Yes, the Fed is creating the uncertainty by their actions and comments as it relates to an economy that is growing too fast? It creates uncertainty about interest rates and the longer term impact on the economic picture. We do know the Fed overreacts on interest rates and in turn, creates swings in the growth rates and in turn the markets. The downside activity on Thursday is a big negative… my view. The second leg of the downturn is now set up. How or what the catalyst is a matter of time. If we move lower the second leg is historically bigger than the first. Don’t assume anything… let it happen and take the trades accordingly and then managing the risk. Friday is not generally a good day for a bounce recovery… no headlines to lean that direction and the futures are pointing slightly lower.
- Technology (XLK/TECS) more selling resumes in a key sector. Moves back to the 200 DMA. Negates the bounce and watching how this opportunity unfolds. Bear flag pattern on the chart.
- VIX Index (VXX/UVXY) anxiety levels are rising. Flag pattern on the chart and upside pressure on nerves coming from the Fed and proposed future actions.
- Emerging Markets (EEM/EDZ) renewed selling in the sector as interest rates rise along with the dollar. Short side resumes.
- Semiconductors (SOXX/SOXS) selling returns to the previous leading sector. Not a good sign for the broad markets. Retesting the $167.34 level and short side opportunity could present itself again.
- China (FXI/YANG) downside resumes breaks to new near-term lows and the outlook isn’t improving without some resolution to the tariffs. Short side trade remains in play… adjust your stops on the move.
The Scans are not pretty following a reversal day in the bounce. The NASDAQ 100 index sold back to the 200 DMA again… the downside looks stronger as the buyers continue to worry about Fed activity. Plenty of worries on the horizon beyond the Fed. The challenge for investors is keeping our heads while everyone loses theirs. Those who function with a predefined strategy and discipline to implement it are the ones that will be happy on the other side of what unfolds. Patience and more patience is required when things get ugly.
WEDNESDAY’s Scans 10/17: Not exactly the day many were looking for as it relates to the bounce unfolding into a reversal and resuming the uptrend… nothing happens according to our dreams. The test early and bounce back to even was still seen a failure to follow through on the bottom reversal on the charts. Patience is needed as we still have to confirm the move off the recent lows. Some buyers would help the cause, but we will allow this to unfold and look for the opportunities in either direction. Futures are pointing to a lower open on the day… watching how it unfolds today.
- Financials (XLF) positive bounce follow through on the day as earnings give a boost to the sector. Cleared $26.90 on the close and a follow through would offer upside trade opportunity. Brokers and insurance leading the upside move.
- Healthcare (XLV) added to the upside bounce as well. $92.85 offering an entry point for the sector. Watching the drug (IHE) and biotech (IBB) stocks as they lead the upside currently.
- Telecom (IYZ) cleared resistance at the $28.62 level and showing some promise in the reversal.
- Natural Gas (UNG/UGAZ) heading higher again after the test of $82.31. Upside remains in play raising the stop to the $82 mark.
- Crude Oil (USO/SCO) downside push is offering a possible downside trade in the commodity. The move above $14.25 is positive and looking for a follow through for entry.
Markets remain in a game of reversal… needs to follow through and show some leadership conviction. We can only take what the market offers. Speculation is not a game we play and we will follow our strategy as it unfolds currently… patience remains a key part of letting the current direction unfold.
TUESDAY’s Scans 10/16: Nice bounce to follow through on Friday. The challenges remain and the moves are just that… a bounce. Need to see more follow through. There are some solid pattern developments for the leadership and some rotation to watch as this unfolds. The FOMC minutes out today could offer some interesting insights for investors or a catalyst to sell lower. Watching how the day unfolds as well as the current bounce attempt across the sectors and the broad indexes.
- Technology (XLK/TECL) bounce follows through… needs to clear $72.30 level. Plenty of work left to do.
- Software (IGV) bounce follows through… needs to clear $192.60 level. Scanning the sector offers some interesting opportunities in the stocks with a follow through upside.
- Healthcare (XLV/CURE) big bounce back on follow through. $93 level to clear… volume… breadth… and stops on any entry points.
- Biotech (IBB/XBI) big bounce back to key support at the $115 mark (IBB). The large caps XBI made a big move but has more work to do. This is the leadership for the healthcare sector overall.
- Brazil (EWZ/BRZU) cup and handle pattern in place. The upside trade remains in play with some consolidation on move above resistance ($25.72). I like the setup for continuation of the upside move.
Plenty of activity on Tuesday… as stated it is about the follow through from here. Buyers are interested, but there is still plenty of challenges left and hurrdles to jump. Watching how this unfolds moving forward.
MONDAY’s Scans 10/15: Day of digesting, rotating, and watching. Not much to speak of across the sectors, but some individual stocks are making move. ADBE got earnings pop after-hours, ULTA made move to the top end of the pattern, and WBA broke from topping pattern. There are always positives somewhere… our jog is to find them. Too much talk about a market top from the talking heads. Letting this unfold with patience as number one priority.
- Natural Gas (UNG/UGAZ) resumed the upside move after testing support at the $82.31 level.
- Gold Miners (GDX/NUGT) added to the upside breakout trade we discussed last week.
- Technology (XLK/TECS) short side trade still trying to show upside? Watching today.
- China (FXI/YANG) at the top end of the range again? More downside or top? Watching today.
- Emerging Markets (EEM/EDZ) short side trade remains in place and watching how this unfolds.
More juggling of the leadership and money looking for a place to rest short term. Taking what the market gives and turning a deaf ear to the talking heads. Let this all unfolds patiently.
FRIDAY’s Scans 10/12: Nice bounce in some sectors, but not all were as promising… small caps left me scratching my head somewhat. They failed to participate in the bounce. There is plenty going on with the overall markets… geopolitics… tariffs… earnings started… economic data releases… Fed and interest rates… catastrophic storms making landfall… And we are supposed to manage our money in light of all this? Yes, we are. Plenty of activity as we play the hand that has been dealt. Focused, disciplined, strategic action is what we need to maintain. Friday was a positive for the NASDAQ and technology… the rest still have work to do.
- Small Caps – (IWM/TZA) entry $8.75. Stop $10.45 (adjusted). $10.65 took half off and $11.20 took half of remaining off Friday. We hold 25% of the position and adjusted our stop on the balance. Did not participate in the bounce and watching how it unfolds.
- Semiconductors (SOXX/SOXS) bounced on Friday, but not that convincing… holding our short play and watching how the week unfolds. (see above).
- Technology (XLK/TECS) entry $20. stop $22.10 (hit). $23.75 took half off (sold) Thursday. Hit stop at $22.10 on balance of the position Friday as the sector rallied leading the broad indexes higher. A good example of how to manage a position.
- NASDAQ 100 (QQQ/SQQQ) entry $12.20. stop $13.50. $14.50 took half off (sold) on Thursday. Hit stop at $13.50 on balance on Friday bounce. Risk management.
- Biotech (IBB/LABD) entry $25.40. stop $32.20. $34 took half off (sold) on Thursday. Friday raised stop to $32.20 and watching how this unfolds next week. Another area where the bounce was not convincing.
Watching the bounce in the NASDAQ and technology… they have set the tone up and down.
Watching how the S&P 500 index responds especially the financials with earnings this week.
There is plenty on the table… in some ways too much! Follow the leaders… track what and how they respond to the current environment and watch the money flow… where is money migrating? Cash? Safety? If it is leaving the market like Thursday… not a good sign looking forward. Patience and disciplined actions.
(The Scan Notes are posted daily. The trailing five days remain on the update to follow the developments. These scans are looking for trends, reversals, breakouts, and other notes of interest.)
Sector Rotation of S&P 500 Index:
Sellers were in control last week. The bounce on Friday, for now, is nothing more than that. Watching how the week unfolds and what the psyche of the investor does moving forward.
Tuesday follow through to bounce on Friday and watching how this unfolds and what opportunities result.
Wednesday didn’t confirm the move on Tuesday… thus, we watch and see how this continues to unfold… patiently.
Thursday reversed the bounce and invited the sellers back to the table. Looking at how this unfolds today… a break of support will start a second leg lower and historically it is deeper and more methodical… longer in duration. Let this unfold.
- XLB – $58.44 fails to hold as the chart accelerates on the downside. Short side trade entry at $57.40. Did not trade this. Only so many positions you can trade and manage. The stop would be $54.75. Downside bounce not convincing. Bounced off the lows… sold lower on Thursday… next leg down?
- XLU – The utility sector uptrend was disrupted by the move higher in interest rates. Volatility has picked up and some sideways activity within a defined range is the result… letting this unfold. Best looking pattern short term. I expect more consolidation here.
- IYZ – Telecom broke below the $29.51 support and hit stop… watching. Managed to move to the $27.63 level for support. Uptrend from the April low still in play. Bounced… cleared the $28.62 mark, looking for follow through on the upside.
- XLP – Consumer Staples broke the uptrend from the May lows and tested back to the $51.86 support. Locked in a nice gain on the position last week. Bounced back to the $53.50 level needs to clear upside.
- XLI – Industrials broke support at the $78 level (locked in nice gain) and move back to $73 level of support and managed a bounce on Friday. Bounced… fails returns to previous lows.
- XLE – Energy stocks fell with the market on Wednesday, fell on crude supply data on Friday testing the $72 level of support hit our stop and exited at break even on position. Held support.
- XLV – Healthcare broke the uptrend from the May lows and hit our stops locking in a solid gain. Watching how this unfolds. Solid bounce with biotech leading the move. Tested on Thursday.
- XLK – Technology breaks lower opening short side trade. That accelerated lower with a bounce on Friday. Watching how the bounce unfolds. Solid bounce… solid selling on Thursday to erase.
- XLF – Financials have traded sideways amongst the noise on interest rates, Italy finance problems, and the anticipation on earnings. Tested July lows and watching how this unfolds. Bounced off lows… cleared $26.90 resistance… failed to follow through and testing lower again.
- XLY – Consumer is under pressure from interest rates. Watching this week. 200 DMA held on Friday? Bounced… failed to hold and returning to previous support.
- RWR – REITs have been under pressure from interest rates. Opened short side trade with SRS (see above). The downside is in play and looking for the $87 level to hold. Bounced… FOMC minutes didn’t help and let this unfold.
(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)
Markets sell off on Wednesday and Thursday as the sellers take control on above-average volume. The modest bounce on Friday is just that a bounce. There is plenty of influencers on the markets currently. We have discussed the tariffs, interest rates, geopolitics, earnings, the economic picture, and many other issues over the last few months and they continue to stimulate speculation and now some selling. How this all unfolds is a matter of time and the reality rising through the smoke and noise. Taking what the market gives one day at a time… no reason to panic just follow your strategy… stops have been hit over the last two weeks on many positions locking in gains and avoiding losses (hindsight). Short side trades have been added and they benefitted Wednesday and Thursday (hindsight). Being in or getting out of positions prior to major moves is a matter of discipline. It is not magic. It is not being a prophet. It is about following your defined strategy one day at a time.
There is plenty to do short-term. Let it unfold… take the trades or opportunities offered… manage your risk and remember cash is a sector and there are times when it makes the most sense versus forcing something that really isn’t there… patience is a strategy as well.
“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.