Markets react to news of slowing economic outlook

OUTLOOK: January 23rd Outlook

After a three day weekend and some news from the IMF stating revised numbers lower for global growth investors sold stocks. Throw in China reporting the slowest growth in 28 years and you have the making of worries and uncertainty about the future. That, in turn, becomes selling for traders. Earnings will hit their stride this week as well and some are expecting some reality checks on the growth side and forecast. There is a building fear of companies falling short as seen with a staple blue-chip stock like Johnson and Johnson missing forecast on sales. Black and Decker fell 15 percent for the same reason… a disappointing 2019 forecast. The government shutdown continues to loom big in the economic picture as well as worries about another downgrade to US debt. That would impact the dollar and more dominos would begin to fall. These are all legitimate concerns about the future outlook and in turn that impacts current stock prices. We proceed with caution and our stops in place. 

The S&P 500 index closed 37.8 points to 2632 and testing the bounce from the December lows. The third leg has held and confirmed with the move higher last week and we will watch how this unfolds. Ten of the eleven sectors closed in negative territory on Monday. Utilities were the sole sector in the green. The downside was led by energy and industrials as the IMF data weighed on the outlook globally for both sectors. The long-term trendlines are improving, but still, have work to be done to offer an entry signal. We will watch how the current activity unfolds and the impact on the trends longer term. SPXL entry $33.50, stop $36.87 (adjusted). 

The NASDAQ index closed down 136.8 points to close at 7020. The drop of nearly two percent gets your attention as we forfeit the break above the 7103 resistance. The index held above 6909 resistance and establishes a test of the trend from the December lows. The index continues to be the leader for the current move as growth stocks lead. Technology stocks have shown positive upside moves. Watching the current changes. QQQ is our indicator near term. The bounce produced some opportunities to buy an upside position on clearing the $152.51 mark and holding. TQQQ entry $34.17. Stop $41.97 (adjusted). Gave up the move above the $162.48 resistance and watching how this unfolds. Manage our risk and let it run.

Small Cap index (IWM) reversed and found some buyers as the third leg of the move higher accelerates in the current trend. The sector shifted to a leadership role but tested on Tuesday and holding the $144.65 level on the day as support. Added a position on a move above the $133.78 mark. Entry $133.90. Stop $143.55 (adjusted)

Transports (IYT) the bounce off support and looks positive with the move above resistance at $172.33. Clearing the $164.73 level offered upside trade opportunity. Entry $165. Stop $172.30 (adjusted). The gap higher on Friday was a positive, but the test on Tuesday showed some nerves from investors. Watching how this unfolds near term.

The dollar (UUP) fell on talk of the Fed is done with rate hikes.  The move higher last week was helped by the economic data and hopes of a trade resolution with China. Closed Tuesday at $25.56 holding the current level following a jump early in the day. New volatility in the dollar resulting from “guess what the Fed will do”… 

The Volatility Index (VIX) closed at 20.5 Tuesday with anxiety moving higher on the day and showing elevated concerns. Watching how this unfolds with anxiety levels rising on the charts. SVXY entry $43.05. Stop $46.10 (HIT STOP). Watching how the upside unfolds with UVXY…  $63.80 level to hold.

(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 broke below support and finally bounced. $95.04 was the level to clear and did so with momentum. Entry $96. Stop $106.50 (adjusted). Solid move through $107 resistance and cleared the 200 DMA to end the week. ‘V’ bottom pattern in play with a test at the current highs in motion. JNJ earnings didn’t help matters as watch what happens in the sector. 

Semiconductors (SOXX) Broke support at the $153 level… Solid bounce… some follow through. $153.13 cleared and added a trading position on the move… entry $78. stop $88.27 (adjusted). SOXL – Raised our stop – managing the risk. A target of $167.34 touched on Friday, adjusted stop and letting it run with the upside move. Big test on Tuesday losing 2.8% for the day… stops in place. 

Software (IGV) Broke $167.88 and bounced back above the same level. The sector was oversold producing a solid bounce… and follow through. $167 level added a trading position. Entry $167.90. Stop $182.50 (adjusted). Raised stop – managing the risk. A nice move higher for the week as follow through. Tested to the 200 DMA and holding. 

REITs (IYR) Tanked on uncertainty from the Fed and the economic outlook. Broke $75.21 and bounced… trading opportunity on reversal above $75.21. Entry $75.25. Stop $77.54 (adjusted). Big move for the week as the Fed shows signs of no further rate hikes near term… benefits the sector short term.  Modest test. 

Treasury Yield 10 Year Bond (TNX) closed the week at 2.78% as yields remain below support, but has moved up on the week. The bounce off the bottom is in play… the bond responds by moving lower and hitting our stop… The downside trade hit our entry posted on TMV $19. Stop $18.35. If stocks rally continues rates will rise… China resolution with be positive for rates to rise… outlook negative for bonds near term.   Reversed on the IMF data with rates dipping to 2.73%… bond rallies. 

Crude oil (USO) the worries about the IMF data hit crude prices on Tuesday. Rising supply remains a concern and the breakout move from Friday comes into question. OPEC production cuts move to the back burner as a catalyst upside. The move above the $48.03 level offered some hope and opportunity to add a trading position. UCO entry $15.10. Stop $$15.10 (adjusted). Managing our risk and letting this play out. $52.51 resistance cleared on Friday and tested on Tuesday. 

Emerging Markets (EEM) Watching what happens as we bounce from the bottoming pattern. Rumors of trade resolutions and talks with China helped the index. Watching for the clarity to unfold. Cleared $40 and working on a double bottom pattern. $40.88 level to clear. Thursday closed at $40.93… with a follow through on Friday. Entry $41. Stop $40. The IMF news was too much for the sector and dropped 1.7% on the day. Global outlook remains cloudy at best. 

Gold (GLD) moved above the $120.45 resistance digested it and moved higher. The dollar and geopolitics have been the catalyst for the metal… both up and down. The move in the dollar lower helped the metal move higher of late. Friday the boost to the dollar on trade settlement sent the metal lower… Managing the risk. Entry $116.50. Stop $120.45 (adjusted). The gold miners (GDX) equally respond to gold moving. Watching how this unfolds near term with the metals and the miners moving together again… Entry $19.70. Stop $20.25 (adjusted). Miners took negative move lower on Friday. Bounced on the negative global data… 

(The notes above are posted every weekend and updated daily in red)

TUESDAY’s Scans, January 22nd: Not a pretty day of trading for stocks. The test of the current micro-trend is expected, but the news behind the move becomes a bigger concern if the data confirms it as fact versus rumor… earnings are hitting full stride and the missed forecasts from SWK and JNJ are validating the slowing growth. The S&P 500 earnings forecast is projected at 14.1% for the fourth quarter versus 20.4% for the third… this is a sign of validation from the data… that will impact investor trust and belief in stocks… this lightens the dollar committed to stocks. Taking what the market gives with our stops in place based on our strategy and risk.

  • SPXS/SOXL/TQQQ all tested the upside moves and keep us on our toes relative to our positions and revised stops.
  • Crude Oil (USO/UCO) upside move comes into question and managing our risk… supply data along with the IMF report weighing on the price of crude for now.
  • VIX index (VXX) reversal in the trend as the rise in concerns hits stocks on Tuesday… watching how this unfolds.
  • Bonds (TLT/TMF) bonds bounced as interest rates declined on the day… reversing last weeks rise in rates.

Taking the day in stride and watching how if unfolds as the week progresses… stops in place. Eye on the goal not the news.

FRIDAY’s Scans, January 18th: Another positive day and week for the broad indexes after testing on Monday and following through with four solid up days. We now face a three day weekend with markets closed on Monday. The move this week was positive for confirming the third leg higher. Watching how this unfolds as the speculation around the China tariffs being settled is the driver and if that fails to unfold the momentum could evaporate… taking it one day at a time for now.

  • Software (IGV) solid acceleration in the upside move and adjusted our stops.
  • Semiconductors (SOXX/SOXL) confirmed the upside move and adjusted our stops. This was a plus as the sector has been lagging all week.
  • Financials (XLK/FAS) positive boost to the upside following positive earnings on the week and adjusted our stop accordingly.
  • Crude Oil (UCO/USO) positive breakthrough resistance. Upside in play on hopes of China trade agreement and cuts from OPEC.
  • Treasury bonds (TLT/TMV) moving lower on interest rates creeping higher. A resolution to trade would push rates higher potentially and watching how both sides unfold with a downside trade on the bond in play.

Some stock moves worth watching and trading… INTC, VIPS, VALE, PBR, MGM, GM, SBUX.

Taking it one day at a time and managing the risk of the positions and the outlook. This is still a news-driven environment short term with a cloudy picture longer term. Focus on your strategy and honor your stops.

THURSDAY’s Scans, January 17th: Some juggling on news, but at the end of the day there were positive moves, but more resistance levels to deal with across the sectors. As seen in the notes above and below there are many sectors at decision points. The volume remains on the light side and the momentum could use a boost to take the markets higher. Plenty of discussion on both side of the argument for up or down… we will watch, managing our risk, and take what the market offers.

  • Materials (XLB) and industrials (XLI) break higher to clear resistance. Not exactly the leadership I am looking for, but an opportunity is an opportunity as both confirm the upside trends.
  • Healthcare (XLV/CURE) remains one of the key leading sectors for the broader indexes. Confirmed the move above the 200 DMA.
  • REITs (IYR/URE) solid upside trend from the December bottom continues to the 200 DMA.
  • China (FXI/YINN) confirms the upside opportunity $19.30 offering an entry point.
  • Brazil (EWZ/BRZU) flag pattern on upside move… helping lead the emerging markets (EEM) higher.

Solid gain on the day, but questions are plentiful about the future outlook for the economy, trade, Fed, and the markets. We continue to take it one day at a time.

WEDNESDAY’s Scans, January 16th: The broad markets started higher and then reversed into the close not holding the gains or follow through from Tuesday… this raised questions from analyst and the talking heads. It could be the start of something or it could be nothing. The reality is what happens going forward. We will manage our risk, adjust our stops, and let the market decide how this unfolds. No big changes on the day, but some sectors remain a concern near term.

  • Semiconductors (SOXX) stalled at key levels and this is a key sector for leading the upside move. Clearing $165 resistance would be positive, but move back below the $159.20 level would be a negative.
  • NASDAQ 100 (QQQ) cleared $162.48 resistance only to return to that level on the close… watching how this unfolds. We started the third leg higher in the reversal and failing to hold the move is a negative sign near term.
  • Financials (XLF) gapped higher on earnings and acting like a leading sector again. Accepting the gains for what they are and adjusting stops. IAI, KRE, KBE gapped higher as well.
  • REITs (IYR) added to the upside moves and looking positive near term.
  • China (FXI/YINN) solid upside move to clear the 50 DMA and add some upside hope to the country ETF.

The question marks only arise from the lack of follow through to the break higher on Tuesday. Technically it raises questions about the conviction of the buyers… but, we have to watch, manage our risk, and move forward with the markets. Assumptions are never a strategy for managing our money they only lead to irrational decision making.

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:

  • XLB – New lows and found support… got the move above the $50.35 mark. Entry $50.50. Stop $52.25. Upside continues with a gap higher on Friday. Test of the upside move.
  • XLU – The utility sector found support at $51.11… moved above $52.72. The PG&E bankruptcy news sent the sector lower… but, buyers returned and we are back above the $52.72 level again and managing our risk. Entry $53, Stop $52. solid move in negative day. 
  • IYZ – Telecom found new lows and bounced…  $26.25 level cleared for upside trade. Entry $26.35. Stop $26.90 (adjusted). Nice follow through to close the week with gap to the 200 DMA.  Tested the $27.63 level. 
  • XLP – Consumer Staples found new lows and bounced. Cleared $50.50 and looking for upside trade opportunity. $51.86 next level to clear and gapped above to close higher on the week. tested the $51.86 level of support. 
  • XLI – Industrials to near-term low and bounced. $65 level to cleared for trade opportunity Entry $65. Stop $67.80 (adjusted). Upside leader with two solid days moving higher to end the week. Tested the move higher. 
  • XLE – Energy stocks bounced with the market. OPEC talks to cut production is helping the upside move clearing $58.20 and now $62.20 resistance. Entry $58.30. Stop $61.30. (adjusted). Cleared resistance $60.52 on rumored cuts from OPEC. Solid move higher to end the week. Tested on the supply and IMF data. 
  • XLV –  Healthcare fell to near-term lows and bounced. $85.74 level cleared for upside trades. Entry $85.25. Stop $88 (adjusted). Cleared $89 resistance and posting positive upside moves for the week. Adjusted stops. JNJ news didn’t help as tested on Tuesday. 
  • XLK – Technology moved to near-term lows and bounced. $61.70 cleared for trade opportunity. Entry $61.70. Stop $63.45 (adjusted). Cleared $63.69 resistance and followed through upside. Semiconductors lead the downside for the sector. 
  • XLF – Financials moved to recent lows and bounced. $23.76 level cleared for trade. Entry $23.80. Stop $25.10. Solid earnings on week boosted the sector and adjusting our stop. Modest test of the upside move. 
  • XLY – Consumer fell to near-term lows and bounced. $98.96 level cleared for trade. Entry $99. Stop $104 (adjusted). Cleared resistance at $105 and positive short term. Tested the $105 support. 
  • RWR – REITs broke lower despite lower interest rates… bounced from lows clearing $88 level and $91.20 on the close Friday… positive upside move. Fed talk keeping rates in check and the buyers engaged. Held its own on a negative day. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

Markets continue the bounce from the December lows with solid gains overall. The broad-based buying this week helped confirm the third leg higher for the markets. The economic worries as it relates to the government shutdown remain in play. But, the hopes of a trade settlement with China are keeping the buyers engaged for now. A lack of clarity is the death of any bull market as we saw in the October to December decline. Fed remains at bay… concerns about trade, economy, government jobs, politics, geopolitics all remain in the headlines… thus, this remains a traders market. Ten of the eleven sectors managed to close the week in positive territory as money rotates modestly. Financials, industrials, and energy led the upside for the week. Interest-sensitive sectors fared well despite the move higher in interest rates last week. We continue to take this one day at a time. There is plenty of influencers in the markets currently and headlines are the drivers. The Fed remains the biggest influencer with a shift again on interest rates which have pushed the long end of the yield curve back below 3% to 2.78%. Tariff wars coming to an end would be a huge influence in the outcome looking forward. How this all unfolds is a matter of time and confidence. There is no reason to panic just follow your strategy… Disciplined entry and exit points allow for you to manage your risk in up or downtrends. Investing and trading 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 of issues and plenty of speculation short-term. What we need is confidence in the outlook going forward… until that happens, expect more volatility and possible downside. 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.