OUTLOOK: October 11th
What happened? As I stated yesterday the market was acting like it wanted to take another leg lower… and it did. The downside was credited to the Fed and interest rates, but the reality is investors are nervous and wanted out. When the collective psyche of the markets turns sour… the sellers gain the upper hand. It was building as we discussed and Wednesday was the day everyone got together and decided to sell. Stops were hit long positions, short positions ran higher, and we took the good with the bad. If I can make one point and explain one more time, the use of stops on your positions is exactly for the last 7-10 days of trading. Regardless of how good things sound and are on paper, you never know what the collective action of investors will be. We have hit many stops during this time that put money on the sidelines. We have added short positions where the strategy warranted it. We have followed our discipline as warranted. The end result is not losing sleep last night after a day where many were counting their losses. Discipline always wins in the end. Today we watch to see how the investors respond to the mini-meltdown on Wednesday. The technical data are getting to extreme levels and leaves room for a bounce.
The S&P 500 index closed down 94.6 points at 2785 as the index drops 3.2% on above-average volume. All ten sectors closed lower with REITs and utilities holding up the best. Technology and consumer discretionary fared the worst with big losses on the day. Investors hit the sell button again on these stocks the charts don’t look good. The question is how much energy is behind the selling or do the buyers step in… stops have been hit the last two weeks and now we watch and look for the opportunities. The chart is holding the long-term trendlines off the January/February 2016 low. Patience and discipline…
The NASDAQ index closed down 315.9 points to close at 7422. The index broke lower from the pattern of consolidation near the previous highs last week. The break of the 50 DMA was a negative along with the technology sector declining to lead the index lower. The close below the 200 DMA is another big negative on the day. The short-term trend from the April low is now broken. Stops were hit on short-term positions and the short side trades on technology and the NASDAQ 100 played out very well on Wednesday. QQQ broke the 50 DMA and settled at the 200 DMA. Patterns break on the downside and in play for now. Managing the risk of short side positions. Watching where the next opportunities lie.
Small Cap index made a move lower breaking the $158 support. The index moved below the 200 DMA again and looking at $152.28 as next support. Short side in play and accelerated. Watching and adjusting stops in short position.
Transports (IYT) moved lower and broke the $192.42 key level of support as the downside continues to confirm. Watching how this unfolds moving forward. All 20 stocks ended in the red again for the second day. This is another negative indicator for the broad markets and the downside gained momentum. Watching how this unfolds.
The dollar (UUP) 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 $25.39 at the close. Watching as a rolling top develops 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 lower Monday and continues to be under pressure. The support at the $111.90 level is holding for now. 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 gold early but ends the day in positive territory. Entry $18.50. Stop $17.90. The stocks are oversold and looking for an opportunity in the bounce and reversal. Metals and Mining (XME) accelerated lower to retest the August lows. Base metals (DBB) bounced back to resistance at the $16.70 level and testing the last five 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. Holding its ground as it remains in a positive short-term 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 $73.17 Wednesday and watching how this will unfold. The bottom reversal offered the first opportunity for (UCO) crude price entry at $66.50. Stop $73.15 (adjusted). (UCO entry $30.15, stop $35.95 adjusted)
Emerging Markets (EEM) failed to clear resistance and tested lower again. That test accelerated retesting the September lows and Wednesday spiked below that level. The downside is firmly in control. Emotions are high along with selling volume.
The Volatility Index (VIX) closed at 22.9 on Wednesday as the anxiety levels jumped again on intraday selling. There has been complacency in the index the last three months… jumped higher as investors sell stocks? VXX at $28.62 is of interest short term. Entry $28.62. Stop $32.79 (adjusted).
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. Breaks lower. Closed below the 200 DMA.
Semiconductors (SOXX) Sector breaks the $182.38 level along with the 200 DMA as support. $176.26 level to watch… if the sector breaks lower it could get ugly. Watching the short side trade if it fails to bounce. SOXS. Support at $175.89 breaks. $167.34 in play.
Software (IGV) The sector tested support at the $197.48 level and the 50 DMA. Watching how next week unfolds. Breaks lower offering short side trade. Spikes lower to the 200 DMA. adjust stop on short side trade to $184.50.
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 $$27.80. Small bounce at the 200 DMA… moved lower again on Wednesday.
Treasury Yield 10 Year Bond (TNX) moved to 3.19% on the interest rate hike and Fed worries. The short side is in play. TMV Entry $19.65. Stop $21.20 (adjusted). 3.22% and holding… bonds holding near lows… still risk as CPI and PPI both out this week and the Fed trade will respond.
Energy stocks (XLE) The stocks bounced off support at $72 again after a second attempt to move lower… the move up and down is all predicated on the belief behind the supply data… speculation is not a good basis for trading or investing money. Moved back to resistance and stalled. Watching as crude moves higher on the week. Entry $74.40, Stop $74.50 (adjusted). Bounced with crude on Tuesday. Sold with markets on Wednesday.
(The notes above are posted every weekend and updates are added in red daily as they change or develop.)
Daily Scan Results:
WEDNESDAY’s Scans 10/10: What do you say… just look at the charts and they tell you everything you want to know about the day of trading. Sold lower from the open, sideways for two hours, then accelerated lower into the close. Support levels broke, key trendlines broken, volume spiked higher, and the VIX spiked higher. This has been building for the last two weeks, and the move Wednesday was not overly surprising considering the warning signs. The move validates the power of collective belief. What now? We step back, let it all unfold and take what the markets give… just like we do every day.
- NASDAQ 100 (QQQ/SQQQ) short position accelerates… raise the stop to $13.35. $14.50 take half off and raise stop and let it unfold.
- Biotech (IBB/LABD) raise stop to $32. $34.50 take half off and raise stop again and let it unfold.
- Technology (XLK/TECS) raise stop to $22.10. $$23.75 take half off and raise stop again and let it unfold.
- Semiconductors (SOXX/SOXS) raise stop to $12.15. $13.25 take half off and raise stop again and let it unfold.
- Small Caps (IWM/TZA) raise stop to $10.10. $10.65 take half off and raise stop again and let it unfold.
These a few of the short side trades we discussed and now you have to manage the risk of the trades and protect the gains.
Looking for early selling and then the buyers to show up. Not sure how this will unfold near term as the VIX index has not peaked relative to anxiety from investors. Taking one day at a time and managing the risk of our positions. Remain patient.
TUESDAY’s Scans 10/9: There was some early buying, some selling, and the more selling into the close to end the day basically flat. Basic materials and industrials led the downside as many throw in the towel on the economic picture… inflation worries, interest rates worries, earnings worries, and investors head to the sidelines. Some rotation in place, but cash is becoming king.
- Energy (XLE) stocks break higher on the move in crude oil. The upside remains in place as Iran sanctions are enacted and supply questions get bigger. ERX raise the stop to break even at $36.65.
- Oil Services (IEZ) positive follow through on upside move. Worth scanning the sector for the leaders and opportunities. TDW, ESV, RDC, and HLX are a few on the rise.
- Utilities (XLU) moved back to the September highs and hit some resistance. Watching as the money flow has picked up the last week.
- Latin America (LBJ) Brazil (EWZ) continue to break higher as follow through to the move on Monday.
- Small Caps (IWM/TZA) held support, but at the point of breaking lower and offering a short side trade on the sector. Let it unfold and don’t speculate direction.
Overall the markets are at support. The activity leans towards more downside. The charts are key to seeing how it unfolds moving forward. The break lower here offers the next leg lower and short side opportunities. The energy sector is benefitting from the speculation in supply relative to Iran sanctions… trades have worked, but we have to manage our risk. Taking it all one day at a time.
MONDAY’s Scans 10/8: More selling in the major indexes with the NASDAQ leading the downside. Tech continues to be the weakest sector and the intraday bounce off the lows was less than impressive. Money is moving to the blue-chip stocks KO, WMT, PFE, DIS, etc. Still downside pressure on stocks and the sentiment shift isn’t helping… earnings are on the horizon and maybe they will be a catalyst for the upside.
- REITs (RWR), consumer staples (XLP), and utilities (XLU) are the benefactors of money rotating to safety. The money will always migrate to where it is treated the best soonest.
- Financials (XLF) bounced on the day back to resistance. Watching how they respond.
- Technology (XLK) broke support at $73 and watching if the downside confirms today.
- Brazil (EWZ/BRZU) upside resumes and breaks resistance at $25.72. Adjust your stops on this position… $24.50.
- Natural Gas (UNG/UGAZ) more upside after a test at the $82.31 mark. Adjust stops to $78. Take 1/3 of the position off to lock in profit.
Downside confirmations on LABD, TECS, SOXS, SQQQ… looking for follow through or if the buyers step in… any trades are just that… manage the risk and adjust your stops accordingly.
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 strategy, focused, and turning a deaf ear to the noise… stick with your strategies 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.
(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 strategy and timelines… don’t let the short term selling disrupt your longer term strategies. Wednesday was a win for the sellers… we remain focused on our strategies and manage our risk accordingly. Short side trades are playing out well and you have to now manage the gains in those positions.
- XLB – $58.44 fails to hold as the chart challenges the next support at $57.80. Watching. Tested lower as the downside is taking root. Added to move lower on Tuesday with the short side in play. Wednesday only added to the downside in play.
- 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. Solid bounce off the lows continued on Tuesday. Some profit taking on Wednesday but held up well.
- IYZ – Telecom moved below the $29.51 support and hit stop… watching. Selling lower. Breaks support at $28.62 and resting on the 200 DMA.
- 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. Solid as it holds support at the 200 DMA.
- XLI – Industrials made a move above the 76.80 level again and cleared the highs of February. Entry $72.50. Stop $78.20 (stops hit). Watching. Downside gains some momentum on Tuesday (stops hit). Accelerates on Wednesday
- 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). Bounced higher Tuesday, followed the market on Wednesday.
- 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 (stops hit). Followed market lower on Wednesday and stops hit.
- XLK – Technology moves lower. Hit stops. Watching how it responds this week. Added to the downside and prompting short side trades (TECS) entry $20. stop $22… manage risk and let this unfold. Wednesday accelerated.
- XLF – Sector bounced back to the $28.24 mark. Stalled Friday… watching this week. Nice bounce but no follow through on Tuesday. Followed market lower on Wednesday.
- XLY – Consumer is under pressure from interest rates. Hit stops. Watching this week. Followed the market lower on Wednesday.
- RWR – REITs have been under pressure from interest rates. Hit stops. Watching this week. Nice bounce. Holding support at the 91.20 mark.
(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 as the sellers take control on above-average volume. Taking what the market gives one day at a time… no reason to panic just follow your strategy… stop have been hit over the last two weeks on many positions looking in gains and avoiding losses (hindsight). Short side trades have been added and they benefitted Wednesday (hindsight). Being in or getting our of positions prior to major moves is a matter of discipline. It is not magic. It not begin a prophet. It is about following your defined strategy one day at a time.
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, stocks fall three times faster than they rise. The 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.