More tariffs more uncertainty

MARKET OUTLOOK FOR May 31st, 2019

Markets opened lower, tested the 200 DMA, and closed slightly higher on Thursday. The news hit that Mr. Trump wanted to impose a 5% tariff on all Mexican imports starting on June 10th. That prompted futures to move lower after hours, but the bigger issue is the added uncertainty about the future. Just what we needed! The good news is there was a date attached to the start of the tariff, the bad news is what will be the impact and fallout to the economy? The purpose behind the tariffs is a resolution to illegal immigration from Mexico… that is not a simple task nor one that Mexico is going to move very quickly to work on. It is Friday and we will watch how this unfolds on the day… Last day of the month and more economic data to digest next week. Proceed with caution.

The S&P 500 index closed up 5.8 points to 2788 testing the 200 DMA intraday and bouncing to close in the green was positive. The bias remains on the downside looking at the chart and the open issues are reason enough to expect the sellers to remain in control. News remains the driver day to day relative to the direction and Thursday added a new twist on an old worry. Interest rates remain a concern with the 10-year bond yield at 2.22%. It was at 2.6% when the selling started in April. Seven of the eleven sectors closed higher on the day as consumer discretionary and technology led the upside move. The downside came from energy and financials both giving up support levels and adding to the downtrend. The long-term trendline remains in question as they are tested on the downside move. Looking for the next opportunity.

The NASDAQ index closed up 20.4 points at 7567 and remains well below the 7849 support. 7597 level was tested but failed to move above on the close Thursday. Technology stocks bounced to help the index. Large-cap retailers like DLTR, ROST, WDAY led the upside. An interesting note is the SOXX added to Wednesday’s positive bounce off the current lows. QQQ is our indicator as it closed below the $177.58 level of support after testing it the last three days. It did hold above the 200 DMA. Short side signal still in play for the index.

Small Cap index (IWM) the sector broke below the $149.04 support and continued lower on Thursday as it remains one of the indexes showing weakness. This put the sector below the March 22nd lows. The short side set up remains on the chart. TZA $10.45. Stop $10.

Transports (IYT) hit some resistance at the $200.53 level and the index reversed on some solid selling. The last six days have pushed the sector lower breaking the $182.43 support. Watching how the current activity unfolds with no positions currently. Short side entry set up with break lower. $180 level failed to hold.

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. The ETF closed at $26.43 and remains in a positive pattern moving back to the top of the current trend… Watching as this continues to unfold.

The Volatility Index (VIX) closed at 17.3 as worries about tariffs (add Mexico to the list) continue to play havoc with investors emotions. Moved lower on Thursday on modest buying, but the tariff announcement after-hours are sure to turn them up to start the day. Interest rate worries will take a backseat to the tariffs on Mexico. It shows the current uncertainty in the markets and it is still impacting investors.

UVXY moved back to the $37.50 level (entry) and watching how it unfolds. Stop $37. Watch the response on the open Friday if spike enough lock in gains on 1/3 of the position and raise the stop to breakeven on the balance.

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

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.

WEDNESDAY, May 29th: No News

TUESDAY, May 28th: No news

MONDAY, May 27th: No news as markets closed for Memorial Day holiday.

FRIDAY, May 24th: Durable goods orders fell 2.1% and better than forecast with airplanes part of the issue. Still, a negative number is negative for the economic picture. Core capital goods orders fell 0.9% adding the negative news for the day and for the week. Data isn’t helping matters short term.

THURSDAY, May 23rd: Jobless claims were in line for the week. Manufacturing PMI flash report was well below expectations as was the services PMI flash report. Not a good sign for the economic picture. New home sales echoed the existing home sales falling despite the interest rate environment. Not a good day of numbers for the economic outlook.

WEDNESDAY, MAY 22nd: FOMC minutes were the only news of the day and it repeated what we have been hearing for the last two weeks… all is well with the economy.

TUESDAY, MAY 21st: One piece of data on existing home sales which actually declined in April surprising economist. With rates moving lower many expected better sales… they actually declined. Something to watch moving forward as an indicator of growth. The Fed folks are out speaking and beating the drum for interest rates to remain at current levels espousing that the economy is good… we will see.

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 starts 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 stalled again finding support near the $101 mark. The break lower was the small-cap stocks struggling. Holding support is positive for now, but no indications of a reversal currently. We don’t hold any positions in the sector currently. Looking for some clarity in the sector. Forfeited Friday’s gains testing lower. Wednesday moved to support at the $101 level. Held on Thursday.

Semiconductors (SOXX) Watching the downside pressure as the sector continued lower on the week. The close below $182.38 to end the week is a negative and the short side trade in the sector (SOXS) is looking attractive near term. Watching how the downside unfolds with key support at the $175.89 mark. Back below the 200 DMA. Wednesday sold lower and then actually closed in the green. Thursday added to the upside. Watching how it unfolds.

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 $210 is key for the trend to remain in play. Back to support at the $208.90 level.

REITs (IYR) Recovered from the uncertainty of the Fed and the economic outlook. The interest sensitive sector reacts when the Fed is in the headlines and speculation rises. 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). Held well thanks to lower interest rates on the week. Moved lower on the talk about interest rate inversions. Added to the downside move on Wednesday. Modest gains on Thursday.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.32% with volatility in rates from the China/US trade talks. Watching how this unfolds near term. TLT is a hold if you own bonds. Flight to safety related to the China tariff threats. TLT hit entry at $124. TMF entry $20.26. Stop $21.35. Moved lower to 2.26% as investor worries rise and money moves to safety. Continued lower on Wednesday to 2.23%. 2.22% on Thursday.

Crude oil (USO) Worries about the supply data this week pushed crude below the $61.61 support. Tanked on Thursday breaking $58.25 support, but managed a small bounce on Friday to end the week. Short side entry hit SCO $ 15.75. Stop $16.75 (adjusted). Moved above $59 on Tuesday. Gapped lower on Wednesday and move back plenty of volatility on the day with little change. Down 3.7% on Thursday… accelerated lower.

Emerging Markets (EEM) The downside accelerated again this week on the worries about more tariffs with China/US. Broke the $40.25 support, negated the uptrend from the January low, and without a resolution could drop to the $38 level support. No positions currently. Short side trade entry hit (EDZ) at $45.55. Stop $51.50 (adjusted). Wednesday closed in positive territory to hold near lows. Bottom reversal attempt in play on the chart.

Gold (GLD) built a base of support and tried to start an upside move on worries about trade. That failed as the dollar gained strength and the metal tested the previous lows. The downtrend is in play and watching support. The Goldminers (GDX) offered a short side trade on the move lower. Entry $22.60. Stop $22.30 (stop hit) DUST. Lower as dollar rally and interest rates decline. Wednesday held in the range and watching. Thursday moved to resistance on a reversal attempt… tariffs driving. $121.70 entry.

MidCap (IJH) The uptrend from the December low broke and now moving sideways with the $185 level key support. Watching for the next opportunity. Testing key support levels again. Wednesday broke to $182.55 level of support and held.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Not a good week for the ETF as it showed the volatility and uncertainty present over trade. We did trade the short side of this with YANG. Entry $42.70. Stop $54.60 (adjusted). Watching with the downside in play. Holding near the current lows. A bottoming pattern emerging? Watching.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

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.

WEDNESDAY’s Scans for May 29th: The break at key support levels puts everyone on guard. There are plenty of issues facing investors with geopolitics, tariffs, inverted yield curve, Iran, North Korea, Russia, and more. Too much uncertainty for investors to have the confidence to put more money at risk. The reality is money rotating to bond or safe havens. The break lower set up short side trades for many sectors as well as the broad indexes. A sympathy bounce would off the opportunity to put on trades in these areas if you have not already. Watching for how today unfolds.

  • Semiconductors (SOXX/SOXS) Tested support at the $175.89 mark and bounced. Need to close above $180 for a reversal to have a chance… otherwise looking for adding to the short side trade.
  • Small Caps (IWM/TZA) closed below the $149.04. Needs to close above the $150.27 level to have reversal opportunity. If not looking to add to TZA position.
  • NASDAQ 100 Index (QQQ/SQQQ) closed below the $177.58 mark. Needs to close back above the $178.20 level or the downside remains. SQQQ $41.39 entry.
  • Brazil (EWZ/BRZU) closed above the $25.72 resistance… of interest for short term trade opportunity.
  • S&P 500 index (SPY/SDS) Broke above $34 entry level. Watching how today unfolds.

Downside in play and watching how this unfolds today. If it bounces we will give it a day and look for the sellers to reemerge or the buyers to show some conviction. Patience.

TUESDAY’s Scans for May 28th: Downside resumes as investors turn worries to the inverted yield curve. From my view, it is a reason to sell not the cause. The charts are the cause. The micro trend from the May 3rd high is lower… we are at key levels of support at the September, November, December, February highs… break here could mean more downside for the broad markets. Watching the short side set up and looking where the best opportunities lie should we break lower. Patience and discipline is the key.

  • VIX Index (UVXY) hit entry point on Tuesday and watching how today unfolds. Entry $37.50. Stop $35.
  • Technology (TECS/XLK) leading the downside move with semiconductors. The entry $15.72. Stop $15.06. Watching how the day unfolds.
  • Small Caps (IWM/TZA) break above the $10.45 level entry.
  • Treasury Bonds (TLT/TMF) upside in play and added to the move on Tuesday as rates continue to tumble. Stop to $21.75.
  • Semiconductors (SOXX/SOXS) short side accelerating. Adjust your stops and manage the risk of the sector.
  • NASDAQ 100 (QQQ/SQQQ) set up the short side with a move above the $41.39 mark. Watch and set stop at the $40.50 mark tight stop of it is a false break.

Other issues to pay attention to if you have positions… CORN run away upside $16.10 current stop on that move. SOYB gapped higher form the consolidation pattern. WEAT gapped higher and adjusting stop to $5.45. Financials (FAX) setting up for upside trade.

MONDAY’s Scan for May 27th: Markets Closed for Memorial Day holiday.

FRIDAY’s Scans for May 24th: No big changes with the indexes unable to hold the early gains. Showed some selling into the early buying and not a good sign for the buyers. The sellers are gaining confidence and with each day they do there could be another leg lower in store for the broad markets. Key sectors continue to struggle with semiconductors being tops on the list. A long weekend with the Memorial Day holiday on Monday. Watching, digging, and looking at where the opportunities lie based on the next moves in the current trends.

  • Semiconductors (SOXX) down 17.2% from the April high. Key support at the $175.58 mark and watching how this unfolds. Small position in the short side trade, but managing the risk of a bounce.
  • Downside acceleration on news in FXI, EEM, USO, XLE, XLK, QQQ.
  • Charts of interest… WEAT, CORN, ITB, IWM, IYT, IHI… each is making a move or at a key level of support/resistance. Digging for opportunities as they present themselves.
  • Stocks of interest… S, TMUS, FNMA, ERIC, BSX, MRK… always opportunities if you are willing to look.
  • Treasury Bonds (TLT/TMF) rally in bonds is at a testing point with interest rates on the 10-year bond dropping to 2.3% lowest level since December. Flight to safety still in play, but watching how it unfolds in coming week.

THURSDAY’s Scans for May 23rd: Seller defined the day. Short side entry points hit on key sectors like IWM, IJH. Others accelerated in their downtrends like EEM, SOXX, FXI. Some negative moves in energy with crude accelerating lower on speculation. I am taking what trades present themselves and avoiding the anxiety and chatter of the rest. There was some buying at the lows of the day into the last hour of trading… positive sign technically if the buyers show up and follow through on Friday. Watch, define, and execute with discipline.

  • Semiconductors (SOXX) gapped lower, traded lower throughout the day and bounce in the last half hour of trading… watching the open.
  • Transports (IYT) same picture as semis on the day. Watching it trades on Friday.
  • Crude Oil (USO/SCO) Was their negative supply data? No, just good old speculation accelerating the selling on worries about demand falling if US/China trade wars accelerate. IF the storyline changes from what was deemed to be true… the prices will react. For now, they are reacting… added a short side trade on the news… tight stops.
  • Small Caps (IWM/TZA) break support and hit short side entry point. Watching how this unfolds.
  • Treasury Bonds (TLT/TMF) accelerates higher as interest rates drop 10 basis points on the ten-year bond to 2.29%. The thirty-year bond fell to 2.73%. Flight to safety and we raised our stops.

Sector Rotation of S&P 500 Index:

  • XLB – Selling found some support at the $54.15 mark and watching how it unfolds in the coming week. Breaks lower setting up short side.
  • XLU – The utility sector found support at $51.11… moved above $52.72 for entry. Cleared $57.10 resistance and showing some acceleration to end the week. Entry $53. Stop $58.45 (adjusted). A big move lower on interest rate talk and profit taking
  • 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.
  • XLP – Consumer Staples found new lows and bounced. Cleared $50.50 and continued upside trend. Managing our risk. Entry $51.90. Stop $55.75 (adjusted). Holding upside for now. Bid dip lower on the interest rate chatter. Gapped lower on Wednesday to confirm the downside move.
  • XLI – Industrials moved to support $74.17. Watching. Moved lower to the 200 DMA and key support. Back below the 200 DMA. Short side signal on move lower.
  • XLE – Energy stocks have struggled the last two weeks on the uncertainty about supply and production. Crude moved lower and the downside in stocks accelerated offering a short side entry on the break of support. ERY – Entry $39.60. Stop $48.50 (adjusted). Watching how this unfolds on speculation. Moved lower despite the bump higher in crude. Added to the downside move adjusting the stop one ERY.
  • 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.
  • XLK – Technology sold and found support at the $73.50 mark and watching how it unfolds near term. Gapped lower with semis leading the downside move. Back to the $72.35 support.
  • XLF – Financials moved to recent lows and bounced. $23.76 level cleared for trade. Entry $25.76. Stop $25.76. Cleared $26.33 level of resistance and testing on the week. Sold back to support.
  • XLY – Consumer stocks under pressure of late and looking at how it manages with support at the $113.50 level. Closed below support and watching how it unfolds. Confirmed the move lower with short side implications.
  • RWR – REITs broke lower… bounced from lows clearing $93.21 resistance… positive upside move. Entry $88. Stop $95.50. Watching and managing the risk as it attempts to maintain the uptrend. Collecting the dividend and letting it unfold. Big shift lower on the chatter on interest rate inversion… watching. Added to the downside move.

(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:

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.

TUESDAY: The sellers are back and remain in control of the direction. The headlines were worried about the inversion of interest rates… the reality is investors are worried about the trend of the charts and the uncertainty of the future growth level for the stocks. We follow the trends, not the news. We study the underlying fundamentals, not speculation. The micro trend is on the downside. The underlying fundamentals are mixed or neutral at best. Take the trades that fit your risk tolerance and let the rest unfold one day at a time.

MONDAY: Markets Closed for Memorial Day.

FRIDAY: That the sellers are gaining confidence. The positive open eroded throughout the day forfeiting the bulk of the early gains. We can attribute this to the long weekend ahead and traders not wanting to hold positions over the weekend or we can build a case for the downside. Either way, the technical indicators are favoring the downside for now. We have to let this unfold and not fall prey to the speculation and worries. Taking a break for three days and enjoying some good wine, food, family.

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 tested and held key support levels after trading lower all week. The key issue this week remained no trade deal with China. The indexes closed in the red for the week again and the sellers are taking control of trend near term. Monday saw accelerated selling and Thursday advanced the downside again. The weak attempt to bounce on Friday was not a good sign for the upside. We traded the volatility in China. We exited where the risk rose and now we look to find the next opportunities as we move forward. Economic data was on the negative side this week as seen above. Some sectors are moving higher, some are moving lower, some remain sideways. Plenty of question marks and only time will tell the outcome. There are some issues facing investors as the trade agreement has not materialized with China. 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.

Eight of the eleven sectors managed to close the week in negative territory as money continues to move with some rotation. Technology and energy led the downside for the week and raising new questions about the trend. Gold fell, the dollar rose, and the economic data was overall is taking on a negative tone. Two sectors remain in a positive uptrend with seven moving sideways in consolidation patterns. Two are in micro downtrends. Crude broke lower for the week. 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.