Markets reacting to Fed outlook

OUTLOOK: Week of October 8th

It has been building over the last two months and the last two trading days are the reality of the worries. Tariffs, geopolitics, flat yield curve, inflation talk, economic data ‘too good’, etc. If the chants happen long enough and often enough investors start to believe what they hear. Once that belief is big enough the selling begins. We can see on the charts of the major indexes the impact of the last two day… do me a favor and change the time period for the bars on the chart to weekly and look at the uptrend since February 2016. The NASDAQ is up nearly 80% for the last two and a half years or 24.6% annualized return. That is pretty solid… moving lower 3.2% the last two days does not change that trendline. The reality is we have to take the bad with the good, manage our risk, and look for the opportunities… stop listening to the talking heads talk about the end of the world. Stay focused and keep your eye on your money not the markets’ reaction to the media and the talking heads. 

The S&P 500 index closed down 16.1 points at 2885 as the index continues to test the April trendline on above-average volume. The leaders were REITs and utilities with only two of the eleven sectors closing in positive territory. Technology and telecom were the weakest movers as investors hit the sell button for the second day on stocks. The 50 DMA average is now in play along with the short term trendline. Question is how much energy will be behind the selling moving forward… Patience and stops are key. The chart is holding the long-term trendlines off the January/February 2016 low. Important to note the bounce off the low the last ninety minutes of trading… see how that holds up next week. 

The NASDAQ index closed down 91.1 points to close at 7788. The index breaks lower from the pattern of consolidation near the previous highs. The break of the 50 DMA was a negative along with the technology sector declining to lead the index lower. The short-term trend from the April low is now in question and leading the headlines. Stops were hit on positions and we are watching how this unfolds. QQQ broke the 50 DMA on the close and lands at the next level of support… $180.28. BMRN, HSIC, VRSK, ESRX, and PAYX all managed to close in positive territory and hold their respective trends. The downside came from ILMN, XLNX, DISH, COST, and TSLA as some leaders struggle on the day and some downtrends accelerate. Some nice pattern setups in the large-cap stocks when you scan the sector and watching what opportunities will arise from the action.

Small Cap index made a move lower breaking the $162.50 support. The index tested the 200 DMA as well on the day. Does this put the short side trade in effect? Watching the $162.50 mark for that activity as we closed below the level and Monday will give some answers. The leadership of this sector had been key to the bounce from the April lows and the resulting uptrend for many sectors. The question now begs if it will be the leader for the downside move? Watching to see if the downside develops.

Transports (IYT) moved lower and broke the $202.73 key level of support and tested the next level at $200.53. A break of that level would negate the June highs. The Dow tested lower as well showing some signs of reality kicking in. Watching how this unfolds moving forward. The leaders on the day were CAR, KEX, and R as the only stocks ending in positive territory. Overall it has been the positive moves in the shipping and logistics stocks keeping the upside in play. Watching how this current test unfolds.

The dollar (UUP) closed back 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 $25.40 at the close.  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) continues to build a base following the bounce at support near the $110 level. The dollar and geopolitics have been the catalyst for the metal… both up and down. Entry $114. Stop $111. Letting it settle and find some direction. The gold miners (GDX) responds to the bounce in gold Tuesday posting a solid gain. Entry $18.50. Stop $17.90. The stocks are oversold and looking for an opportunity in the bounce and reversal. Metals and Mining (XME) building a base or bottom with a test of the recent bounce higher. Cleared resistance at $34.50 but has reversed on the Fed and tariff activity. Base metals (DBB) bounced back to resistance at the $16.70 level. NAFTA agreement helps push the sector higher, but tested the last two days. Some positive moves and looking for a follow through. These sectors are news driven and high-risk trades.

Crude oil (USO) Crude spiked to a new high and is testing the move. Held its ground to end the week, but remains in a positive uptrend. After testing support at $64.22 it has been a volatile uptrend as the commodity cleared the levels of resistance and added to the upside. 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 $74.34 to end the week and watching how this will follow through. The bottom reversal offered the first opportunity for (UCO) crude price entry at $66.50. Stop $74.15 (adjusted). (UCO entry $30.15, stop $36.20)

Emerging Markets (EEM) failed to clear resistance as the double bottom pattern and tested lower again. That test accelerated retesting the September lows. The question remains how the sector will unfold near term. China canceled talks ($200b new tariffs enacted), Mexico, Canada, and the US come to new NAFTA agreement, and Europe has a partial agreement. Some call it progress… some remain negative… regardless we are watching the bounce off the lows and what opportunities it offers. Add the worries in Italy to the list and you have too many worries and uncertainty as this unfolds near term with fear and news as the drivers. Need to hold $40.80 support.

The Volatility Index (VIX) closed at 14.8 on Friday as the anxiety levels jumped on intraday selling. There has been complacency in the index the last three months… is it going to show a jump higher as investors juggle stocks? VXX at $28.62 is of interest short term.

The week focused on the Federal Reserve comments relative to interest rates, the economy, and the yield curve. The talk is finally taking a toll on investors beliefs as they take some money off the table relative to stocks… and bonds were trashed lower as yields on the ten-year bond rise to 3.22% to end the week. 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. Throw in high crude oil prices impacting the price of gasoline to the mix and you can see why the consumer discretionary (XLY) sector fell 4.2% this week down all five days. Technology stocks struggled as well with semiconductors moving below key support. Financials moved higher but tested on Friday. Healthcare remains the shining star but showed some weakness in the biotechs. REITs and utilities finding some buyers to end the week following a dump lower as money starts to rotate to safety. No change on the tariff front with China. The new treaty with Canada and Mexico were positive but got overshadowed by the Fed worries. The NASDAQ was weaker dropping 3.2% for the week. The S&P 500 struggled all week to maintain support and held the 50 DMA. Only four of the eleven sectors closed higher for the week. Utilities, financials, and energy were the leaders for the week as money continues to find opportunities. REITs and consumer discretionary led the downside breaking key support and showing negative reversals on the charts. The start of the fourth quarter isn’t looking good with stocks starting off lower. Energy and crude oil moved higher bouncing new near-term highs for the commodity. 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.  Manage your risk and look on the horizon for answers to the trends.

(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 tested key support at the $115 level on Friday… Watching how this unfolds with one of the key leading sectors. 

Semiconductors (SOXX) Sector breaks the $182.38 level along with the 200 DMA as support. If the sector breaks lower it could get ugly. Watching the short side trade if it fails to bounce. SOXS

Software (IGV) The sector tested support at the $197.48 level and the 50 DMA. Watching how next week unfolds. 

REITs (IYR) UGLY decline in the sector as interest rates moved higher… The 200 DMA broke on Friday… watching how it unfolds with the downside in play SRS $28.60 entry. Stop $$27.80. 

Treasury Yield 10 Year Bond (TNX) moved to 3.22% on the interest rate hike and Fed worries. The short side is in play. TMV Entry $19.65. Stop $21.20 (adjusted).

Energy stocks (XLE) The stocks bounced off support at $72 again after a second attempt to move lower… the move up and down is all predicated on the belief behind the supply data… speculation is not a good basis for trading or investing money. Moved back to resistance and stalled. Watching as crude moves higher on the week. Entry $74.40, Stop $74.50 (adjusted).  

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

Daily Scan Results:

FRIDAY’s Scans 10/5: Second day of losses impact the psyche of investors and the outlook for next week. The challenge is keeping our composure while the remainder of investors lose theirs. The short side trades are setting up and we added some. The downside is hitting stops on our positions with that strategy. The longer-term positions are being tested and we have adjusted our risk accordingly. The focus is to manage money, not the markets. Honor your stops, stick to your strategies deployed, don’t change your mind based on emotions of what happens day-to-day. Now is when you learn how to focus and not let the noise around you distract you from your goal.

  • Semiconductors (SOXX/SOXS) watching the downside opportunity if this gets worse… A bounce is likely but doesn’t mean the upside will return.
  • Consumer Discretionary (XLY) downside opportunity if the consumer spending dries up. Watching what unfolds next week.
  • Treasury Bonds (TLT/TMV) spike lower in the bond as the yields jump higher. Managing the risk of this position to protect the gains.
  • Biotech (IBB/LABD) hit the entry point for the short side trade… watching how the week unfolds.
  • NASDAQ 100 (QQQ/SQQQ) the selling last week puts the index in question… watching how this unfolds and which opportunity is presented.

Patience, disciplined startegy, focused, and turning a deaf ear to the noise… stick with your startegies for managing money and nothing more.

THURSDAY’s Scans 10/4: big drops on the charts in key sectors. How does this unfold? Only time has the answer to that question, but key indicators are showing some signs of anxiety among investors. The talking heads offered up their rationale for the action on Thursday, but at the end of the day, money has been seeking new homes for the last two-plus months. The activity shows rotation and leadership shifts. The challenge is in the prognostications of what all the actions from the Fed, the White House, geopolitics and more will have on stocks moving forward… lost in all of this is the current data still shows solid growth. What happens moving forward is unknown… all we can do is manage the day-to-day risk and look for the opportunities that arise from the trends and adjust accordingly.

  • NASDAQ 100 (QQQ) downside move in the index is key as the large caps have been the key leadership in the current trend. Test of support at the 50 DMA and the $180.28 level is what I am watching. Scanning the index for leaders and losers. Need to know where money is going and where it is leaving.
  • Interest Rates (TNX) ten-year bond approaches 3.2% as investors continue to sell bonds. The reaction to the FOMC meeting and the continued Fed talk of the economy being too good. The markets being overvalued. The reality of their fear tactics is taking root near term. TMV is playing out well on this rhetoric.
  • Technology (XLK) some rotation out of the sector with SOXX, IGN, IGV, HACK, SOCL and others showing signs of breaking lower.
  • Small Caps (IWM) headed lower again and testing the $162.50 key level of support. Watching how this unfolds from the previous leadership.
  • Biotech (IBB) dumped lower around speculation. The key point is the mid-term elections playing havoc on the sector as affordable care act comes back into play potentially. Remember this is speculation, not fact. Speculation creates opportunity as the reality unfolds.

All is well! Believe it or not, it is well… the markets go through natural ups and downs as it adjusts to the reality of data versus the speculation of belief. The speculation currently in play is interest rates and what challenges they will present to the consumer and spending. Throw in higher oil prices, tariffs, and the mid-term elections and you have enough to rattle the markets short term. Watching how this unfolds and what opportunities it creates.

WEDNESDAY’s Scans 10/3: interest rates rise above 3.1% on the ten-year bond. Interest sensitive stocks decline. Energy prices rising. Small-cap sector struggling. Earnings on the horizon. Positive jobs data twisted to negative in light of the Fed activity and comments. Geopolitics alive and well. Italy living in a delusional world of debt. The market psyche is changing and we have to manage our short-term risk. Taking it one day at a time.

  • Treasury Bonds (TLT/TMV) raised our stop on short side trade as interest rates spike on the day. Worries about the Fed taking control is pushing the yield higher in advance of their action. This is impacting housing, financing of any consumer products, and interest sensitive stocks.
  • Energy (XLE) follow through on the move higher yesterday. Added a position in stocks (ERX) to go with the crude (UCO), gasoline (UGA), natural gas (UGAZ), and services sector (IEZ). Managing the stops of each.
  • REITs (IYR/SRS) the downside has been put in play by the move in interest rates. Managing our risk and the outlook as rates move on Fed speculation. Utilities (XLU) equally downside play in place.
  • Brazil (EWZ/BRZU) hit our target ($25.70) on Wednesday and took half of the trade off locking in a solid gain. Letting the balance unfold near term.
  • Emerging Markets (EEM/EDZ) short side back on the radar as the selling resumes on the worries in rates ripple into the sector.

Plenty on the table relative to speculation. Some of this speculation is becoming reality through actions taken. We will continue to take what the market offers and let the speculators deal with themselves. As the old adage goes, “be careful what you wish for…” is coming true relative to the Federal Reserve. Manage your risk accordingly and let it all play out one day at a time.

TUESDAY’s Scans 10/2: an interesting day for stocks as the Fed continues to believe they can control the outcome of the economy by talking stocks down. Free trade is a theory that is constantly tested by governments and banks… human tendencies is to control versus letting things take their natural course with cause and effect. Too much theory for this early in the morning… taking what the market offers.

  • Utilities (XLU) bounce as the ‘V’ bottom pattern takes shape. Yields have taken a break on the Fed comments and sparked a mini-rally in the sector. Not worthy of the risk in the sector, but some stocks are of interest by scanning the sector. AES, EIX, AWK
  • Energy (XLE) continues higher as the price of crude take a rest, but remains at the current highs. Crude (UCO) remains in play, gasoline (UGA) remains in play, oil services (OIH) are trying to break higher at $25.52, and natural gas (UNG/UGAZ) remains in play.
  • Consumer Discretionary (XLY) reacting to the Fed… testing key support in the trading range. 50 DMA is also in play and a break lower would be another negative to add to the pile of disappointments of late.
  • Brazil (EWZ/BRZU) added solid upside move to the position established last week on the break out from the bottoming pattern. Target is $25.70 barring any unforeseen input.
  • Small Caps (IWM/TZA) added profit to the downside trade as the move lower in the sector creates concerns. Raise stop to $8.50 or break even.

The Fed is not going to stop talking and justifying their actions. The markets are reacting to the talk. The key for you and I is to stay our course and manage our risk according to the environment that is. We have to manage our money, not the markets. Manage your positions against the objective defined for each.. short and long term.

MONDAY’s Scans 10/1: Tried to move higher on the trade agreement announcement over the weekend but failed to hold the move. Plenty of questions on the direction aspect of the markets. We could see a test lower in October and a bounce higher with large-caps leading the way into the year-end. Watching, managing risk, and looking for the opportunities in the moves. Nothing more…

  • Crude Oil (USO/UCO) jumped higher on the day gaining more than two percent. Rationale… November 4th deadline for countries to halt purchasing Iranian crude. Watching and taking the gains for now with our stops in place.
  • Basic Materials (XLB) bounce off the lows following the trade agreement announced this weekend. Watching how it unfolds.
  • Treasury Bonds (TLT) dump lower on higher yields. Watching how the Fed deals with this issue and we remain short treasury bonds. TMV.
  • Natural Gas (UNG/UGAZ) nice spike higher in the commodity as it continues to rise along with crude speculation. Raising our stop to $69.
  • Small Caps (IWM/TZA) short side confirms the break lower and offers a trade entry $8.50. Stop $8.10.

Plenty of news and activity to start the week… interestingly enough none of it is economic news. Watching how that impacts the markets as well with the jobs report due on Friday morning. ISM manufacturing data showed 59.8% versus the 60.3% expected… this is still a solid number for the sector. ISM services data is due on Wednesday with 58.3% expected. Watching the data with earnings on the horizon.

(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:

It is important to note that the volatility has picked up and the short-term trendlines are breaking lower… that prompted our stops on short-term positions… long term we still hold positions and we manage them according to the weekly charts and you can see uptrend are still in place… remain focused on your startegy and timelines… don’t let the short term selling disrupt your longer term strategies.

  • XLB – $58.44 fails to hold as the chart challenges the next support at $57.80. Watching. 
  • XLU – The utility sector uptrend was disrupted by the move higher in interest rates. The bounce higher to end the week was in reaction money looking for safety. Watching. 
  • IYZ – Telecom moved below the $29.51 support and hit stop… watching. 
  • XLP – Consumer Staples has been in a gradual uptrend from the May lows, but they have faced resistance at the $54.92 mark. Entry $50.50. Stop $53.25. Stops in place and let this unfold. 
  • XLI – Industrials made a move above the 76.80 level again and cleared the highs of February. Entry $72.50. Stop $78.20 (adjusted). Watching. 
  • XLE – The stocks bounced off support at $72 and back to the resistance. The bounce in crude was helped by the supply data and the stocks have followed the bounce. Entry $74.40, Stop $74.50 (adjusted).  
  • XLV –  In June the sector bounced off $83.24 support and accelerated higher. Solid uptrend for the sector as we let trend run and manage our risk. Entry $83.25. Stop $93.25 (adjusted). 
  • XLK – Technology moves lower. Hit stops. Watching how it responds this week. 
  • XLF – Sector bounced back to the $28.24 mark. Stalled Friday… watching this week. 
  • XLY – Consumer is under pressure from interest rates. Hit stops. Watching this week. 
  • RWR – REITs have been under pressure from interest rates. Hit stops. Watching this week. 

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

FINAL NOTES:

News remains a key driver for the markets short term. The challenge currently is traders and investors are starting to believe the news enough to sell in specific sectors. The short-term trendlines are breaking and this could accelerate if the belief is big enough. One key stat to remember is stocks fall three times faster than they rise. Bad news is easier to panic from than good news is to embrace. Tariffs, Fed, interest rates, geopolitics, White House banter, and economic data all remain in the headlines and in the minds of investors. They influence the day-to-day activity, but the real driver at the end of the day is fundamentals. With the third quarter done we have seen the impact of good news on worried beliefs as it relates to the Fed and interest rates. Of course, they have helped with the continued banter and talk about the economy being “too good”, and stock prices being “too high”. The economic growth, earnings growth, and positive sales growth are the keys. We have to focus on our own strategy and ignore the news/speculation game. We have booked positive gains on positions as the volatility in some sectors rose. We still hold short positions on sectors that are in downtrends. We continue to find investable strategies and opportunities by ignoring the rumors and trading the trends. All of the economic data remains on track for growth. There is always something to worry about, but at the end of the day it is about the trend and we continue to see a positive uptrend for stocks despite the below-average volume. The S&P 500 index produced a negative week dropping 1% with four of the eleven sectors moving higher for the week. The NASDAQ struggled with stocks picking up some volatility and warnings the index declined 3%. Bonds reacted lower to rates moving up to 3.22%. Utilities moved lower but bounced off the lows for the week. Crude moved higher as the supply rumors continue to drive the near-term direction. The dollar gained on the Fed activity and debt worries in Italy. We will keep our focus on our strategy in the current market environment. We continue to manage all our short-term positions as trades until we gain some clarity on the longer term views. The long-term uptrends remain in place and we will manage our longer-term holdings in light of that trendline. The goal remains money management, not market speculation…

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly.

“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.