No Santa Rally This Year…

OUTLOOK: December 24th to year-end

The Grinch really did steal Christmas this year. The closing bell on Friday was more like an air raid siren… The good news from the Fed clarifying comments about future rate hikes in 2019 was outweighed by trade comments from Navarro that they could not put a trade agreement together in 90 days with China… then work overtime for goodness sake. Stop talking about what cannot be done and start doing it! Then there were the comments of shutting the government down since they could not get a vote to the floor on the budget. If we all ran our companies the way the government runs we would be out of business. There was whining about not being home instead of in D.C. doing their elected jobs. What about all the people in this country that work on Christmas day… I am not even going to comment on the stare of government… I will state the markets didn’t like all the comments and whining as the Dow rose early dropped lower into the close falling 808 points… investors vote by selling stocks… the Senate doesn’t even vote they just complain. I will update this report as necessary through the start of the new year… Merry Christmas and Happy New Year!

The S&P 500 index closed down 50.8 points at 2416 and adding to the downside move. All eleven sectors closed in negative territory for the third day with consumer discretionary and technology leading the downside movers. The third leg lower in the current trend is well underway on above-average volume and the Senate and China added to the woes on Friday. The long-term trendlines are broken as we moved below the October lows and set up another downside leg to the current trend. We will watch how the current activity unfolds and the impact on the trends longer term. Managing our short positions on the index. SPXS stop $34. entry $27.85. 

The NASDAQ index closed down 195.4 points to close at 6333. The index moved below the 6793 support and has not looked back. Wednesday the Fed action was was catalyst to keep the downside in play. Friday the Senate and China comment added to the move lower erasing any bounce. The sellers continue to get their way on the downside moves with above-average volume. QQQ is our indicator near term. The failed attempt at moving above the $167.53 mark offered a short signal and it continues to play out. $152.50 support failed. SQQQ entry $14.50. Stop $18.50 (adjusted). Target $16.65 (hit Monday). Not what anyone expected… letting it unfold. 

Small Cap index moved lower to take out the $133.78 support and closed at the August 2017 lows. The sector remains a laggard and not looking good on the charts. We added a short position on the move lower. TZA entry $11.95. Stop $16.25. (adjusted) Target $14.50 (hit Monday). Let it play out and manage your stops. 

Transports (IYT) moved below support at $172.33 adding to our short side trade opportunity (entry $181.70, stop $163.40). Not the outcome we were looking for short term. The near-term direction was established on the reversal of the November trend and a big negative from my perspective. The sector established a new low for the year… watching how it unfolds and managing the risk of the trade. $168.10 next support to hold. 

The dollar (UUP) moved back to the upside on the uncertainty in the Senate and the Fed news. Closed Friday at $25.94 and back near the current highs. The fear of the global weakness, inverted yield curve, and the tariffs are weighing in and the dollar is coming into question. 

Gold (GLD) moved above the $115.86 resistance digested it an moved higher on Thursday. The dollar and geopolitics have been the catalyst for the metal… both up and down. The move in the dollar lower helped the upside on Thursday. The inverted yield curve is drawing some interest to the metal short term on the upside. Tested on Friday to close at $118.72. Entry $116.50. Stop $117 (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 $19.70 (adjusted). Reverse head-and-shoulder pattern in play… need to clear $20.50 again to hold the upside trend.

Crude oil (USO) remains in a well-defined downtrend breaking the bottoming pattern with a move lower. OPEC  is unable to decrease production along with other countries producing as well. The current downside from the October 3rd high is about the speculation of higher demand being driven by Iran sanctions not panning out in the supply data. The commodity closed at $45.59 on Friday. $43.06 is the key support level for crude near term. SCO entry $26. stop $28.40. 

Emerging Markets (EEM) break from the bottoming pattern at $40.88 only to turn lower on worries about trade… Watching what happens as we are back in the bottoming pattern. Rumors of trade resolutions and talks with China helped the index but the economic data last week reversed the course. There are too many questions and rumors currently and letting it unfold. Wednesday move down towards the bottom of the current range… $37.88 level to hold. 

The Volatility Index (VIX) closed at 28.3 on Thursday with anxiety still in play and the current worries creating real volatility. Maybe the last five days are a climax sell-off and put an end to the current trend lower. Not likely, but we can hope with the Fed back in the picture. Watching how this unfolds with anxiety levels up on the charts. VXX stop $43.48. entry $39. 

Investors gave up hope and let the sellers dictate the course for the second week. It is simple to understand… investors don’t like uncertainty and the Fed, the Senate, the White House, tariffs, interest rates, budgets, spending, and all the other things that impact the economic outlook, foreign trade, jobs, opportunities… need clarity. Without clarity, money exits the markets and looks for less risky positions to reside. The result was adding to the decline of more than four percent across the major indexes last week and breaking to near-term new lows. Technically the charts accelerated in the third leg lower of the trend off the September high. There are questions to be answered… how low do we go? Do we bounce for a year-end rally? Fourth quarter earnings? The FED meeting getting clarified? China trade agreement? New Budget from the Senate, etc. Time will tell what the answer to these questions are and we will follow the trend and act accordingly. The Small Cap, financials, Nasdaq 100 and other indexes showed negative opportunities on the charts. Others are heading in that direction and we have to take what is offered up or down. None of the eleven sectors closed the week in positive territory as consumer discretionary and technology lead the downside. There are plenty of dynamics working in the markets overall and we will take it one day at a time. All we can do is manage our risk according to the charts and not speculate on what if… the greatest challenge for us all is not letting our emotions get involved in a process that requires a disciplined strategy and action.

(The 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 $101 and has not looked back since. Looking for some support at $89 or we continue lower. LABD entry $36.05. stop $46.90. 

Semiconductors (SOXX) Broke support at the $153 level… still looks better some of the other cliff dives on the chart. Looking for some opportunity here if a bounce occurs.

Software (IGV) Broke $167.88 and looking for support. Still not in horrible shape and the sector is oversold. 

REITs (IYR) Tanked on uncertainty from the Fed and the economic outlook. Broke $75.21 and watching. 

Treasury Yield 10 Year Bond (TNX) closed the week at 2.79% as yields once again move below support and the long bond rallies. TLT entry $115.25. Stop $119.50 (Adjusted). 

Energy stocks (XLE) The stocks move lower and sold more as crude oil prices remain challenged. Broke support at the $58.20 level. Crude fell 11% on the week and stocks are following the move lower. 

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

FRIDAY’s Scans 12/21: The damage is done. Adding issues with trade and China to the mix didn’t help. The Senate could not come to an agreement on a budget and threatening to close the government down added to the mix… all of it adds up to uncertainty. How low can we go? I have one rule… THE MARKET can remain irrational longer than I can remain solvent bucking the trend. Thus, we maintain our positions, manage our risk, and let the direction unfold along with any sanity returning to the markets.

  • Adjusted stops on all positions as we expect some kind of bounce in response to the selling… how much we will see.
  • Watching SOXX and IGV if we bounce for upside opportunities as the charts look the best.
  • Volatility Index peaked at 30.1 on Friday. Any positive news would help lower the anxiety and give room for a bounce. Adjusted stop on VXX trade.
  • Yields are falsely low on the anxiety and money running to safety. Watch the downside of the bond on any bounce in stocks. TBT would set up a trade as well.
  • Cash is a sector and one where money should reside currently.

Patience as this all unfolds.

THURSDAY’s Scans 12/20: More downside selling as investors continue to head for the exits. The Fed is going to do what they think is best despite what is in front of them. The worst leaders are those who manage the immediate crisis without looking towards the future. To drive defensively is to see what is in front of you… what is behind you is less likely to kill you. The Fed is trying to stop inflation now… not guide the economic growth. That, in turn, is stalling the growth and putting in question what is on the horizon. We are managing our downside positions. Keeping cash and bonds as rates tumble. Keeping our eyes on the horizon for the opportunities presented in this mess being created.

  • Adjusted our stops and managing the risk on short side trades.
  • Not willing to chase too many new positions here as this unfolds. The downside move has been a cliff dive this week and watching for a bounce to moderate the move and some digestion.
  • Holidays are here and that will create lower volume trading. Be aware of your surroundings.
  • Taking it one day at a time.

WEDNESDAY’s Scans 12/19: The short-lived bounce was met with the Fed hiking rates and pushing the markets lower. The short side trades benefitted. The challenge is how this will now unfold. More downside? A relief rally? Today we watch and see. The scans on the day only reinforced what we have been doing the last two weeks. Now looking at taking some money off the table and locking in some profits. We will keep half at least and let it unfold.

  • Look at where to take 1/3 to 1/2 of the positions off and lock in profits.
  • If the downside continues, let it play out and make a decision into the close.
  • If the bounce is in place… review the underlying strength… volume and sentiment.
  • Patience as the Fed threw a curveball to the markets.

TUESDAY’s Scans 12/18: Selling abated, but the downside remains in place. Wednesday is the FOMC meeting and will offer some insight into the Fed activities moving forward. Watching how this all unfolds with the downside in play. Manage the risk of our positions and let it all play out as the downtrend is in play.

  • Crude Oil (USO/SCO) short side trade continues to work as the supply side continues to disappoint investors. OPEC and others continue to produce keeping the price of crude down. This is a plus for consumer, but a negative for the sector.
  • Treasury Bonds (TNX/TLT) rally is on as money flows to safety. The upside in bonds is from the rotation out of stocks. The FOMC meeting today will have an influence on what is taking place near term.
  • Technology (XLK) showing some support in the sector and some hope for the overall markets.
  • Natural Gas (UNG) Bounced after several days of selling… caught support at $28.50 and watching how this unfolds.
  • Overall taking what the market gives and letting it find its way in all the uncertainty.

MONDAY’s Scans 12/17: The sellers remained in control and the downside trades continue to pan out. We will take some money off the table if we get a continuation of Monday’s move lower and high anxiety. There really isn’t much to say… the charts say more in pictures than we can say in words. The trend is down. The volume is above average. The drivers are news and worries about growth. The Fed meeting is Wednesday and fear of higher rates are in play. Simply put the fear of owning stocks is outweighing the long-term benefits. Money moved to cash and bonds on Monday as a clear indicator of fear in play. We will manage our downside positions and look to adjust based on how this unfolds. There will be opportunities on the other side of emotional selling.

  • NASDAQ (QQQ/SQQQ), S&P 500 (SPY/SPXS), Dow (DIA/DXD), Small Caps (IWM/TZA), mid caps (MDY/MIDZ), all break key support and establish the next leg lower in the current trend. All offered short side trades last week. We own them and continue to manage them accordingly. The short side ETFs are listed – they show the upside move on the charts allowing you to see a positive in the negative trade.
  • Seven of the eleven sectors are in downtrends short term. REITs, Utilities, Consumer Staples and Healthcare took a big turn lower.
  • Manage your risk! The long-term indicators turned to the downside the last two days adding to the negative picture for the markets technically.

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 looking for support… offered short side trade. 
  • XLU – The utility sector below support at $55.24… holding steady at the $53.50 support levels. Hit stop on long positions and watching how this unfolds. 
  • IYZ – Telecom moved back below $27.63 and broke the October low. The downside is in play and letting it unfold. 
  • XLP – Consumer Staples moves back below the $51.86 level of support. The defensive money ran as well to cash. Hit stops and watching how it unfolds. 
  • XLI – Industrials moved back below the $67 level and broke the October lows. Letting the downside play out. 
  • XLE – Energy stocks fell with the market and crude prices. Broke the October low and showing more selling along with crude oil. 
  • XLV –  Healthcare broke $83.24 support and not looking good. Watch and let it unfold. 
  • XLK – Technology moved below $64.78. Watching how the sector moves from here. 
  • XLF – Financials moved lower with weakness in the sector being driven by the inverted yield curve worries. The short side trade working. FAZ – Entry $11.35. Stop $14.35 (adjusted). 
  • XLY – Consumer tried to bounce… failed… moved below $102.50 level and not looking good… letting it play out. 
  • RWR – REITs shifted gears to move below the October lows and $86.83 up next. 

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

FINAL NOTES:

Markets continued selling this week and broke the October lows as the broad-based selling accelerated on the Fed, China, and Budget impasse. Throw in some economic worries and you get more selling. Lack of clarity is the death of any bull market. None of the eleven sectors managed to close the week in positive territory as money rotated yet again with most heading to cash versus other sectors. We continue to take this one day at a time. There is plenty of influencers in the markets currently and headlines are the drivers. We have discussed the tariffs, interest rates, geopolitics, the Fed, earnings, the economic picture, and many other issues over the last few months and they continue to stimulate speculation. 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 2.79%. 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 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.