Powell delivers the doves

MARKET OUTLOOK FOR July 11th, 2019

Mr. Powell said what investors wanted to hear in his dovish comments to Congress and the S&P 500 index went to 3000! Is this the top? How does the market respond to this going forward? His dovish comments all sounded good and they played well for the markets. The bigger story is the truth behind the words… global economics are in poor shape at best, Brexit, trade, etc. This could play out well for the US with the trade negotiation currently underway. What I am watching from earnings… first, banks should be the bright spot. If they aren’t, look for a reaction in the prices of stocks. Second, technology could be in for rough times ahead. It that unfolds the sector could decline significantly. Third, healthcare is one of the stronger sectors technically and earnings should set a tone for more upside. Fourth, the US economic data has to find some footing and show growth. My focus is on the data points (facts) not what the Fed will do (speculation). Trade the data, not speculation.

The S&P 500 index closed up 13.4 points to 2993 after hitting new highs on the upside break. The focus this week has been on the Fed and interest rates. Mr. Powell confirmed in his testimony to Congress that he will do whatever it takes to keep the economy going. i.e. cut rates. The earnings game will start soon and it will capture the attention of traders. China trade is still on the back of the stove simmering along with the issues in Iran. The 10-year bond jumped back above the 2% mark and holding for now. Eight of the eleven sectors closed higher on the day as energy and telecom led the upside. The downside was led by financials. We adjusted our stops and taking what the market offers. The long-term trendline has been looking better, but we will watch closely as the events continue to develop.

The NASDAQ index closed up 60.1 points at 8202 and moved above the June highs. Technology stocks bounced back again on Wednesday with semiconductors finding support in the uptrend from the May lows. QQQ is our indicator adding modest gains clearing the $186.31 resistance and back above the April highs. Investors are putting money to work on the hopes that trade will improve with China and rates will be cut by the Fed. Adjust your stops and know your exits on both short and long term holdings.

Small-Cap Index (IWM) the sector broke below the $146.71 support and turned higher on news. The follow-through from the buyers on move above $154.90 is positive. Emotionally charged activity in the sector currently.

Transports (IYT) The sector moved back below the $186.70 mark Tuesday and is struggling to regain the upside mojo. Boeing has been a drag on the sector with the 737 struggles. The stairstep pattern in play puts the reversal off low a chance on the upside. The weakness in the sector comes from slower economic data. Watching with entry signal.

The dollar (UUP) The big question mark for the buck has been the trade tariffs with China. Following the trade talks at the G20, it traded as if those issues were resolved… watching how this unfolds along with the tariffs. The buck moved off the lows and the ETF closed at $26.24, but struggled on the Fed comment relative to rate cuts… lower rates hurt the dollar. Watching as this continues to unfold.

The Volatility Index (VIX) closed at 13.03 back near the lows of May. Uncertainty looking forward is still an issue despite the truce in trade with China. Interest rate worries remain in the mix as well. Watching how this unfolds near term. SVXY trade working well on the ease in anxiety for stocks.

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

WEDNESDAY, July 10th: Wholesale inventories rose 0.4% and much better than the 0.8% last month. Powell testimony to Congress focused on the economy and was forthright about the weakness.

TUESDAY, July 9th: Small business index fell to 103.3 down from the 105 reading last month. The Fed puppets were out talking about the state of the economy and attempting to pacify both sides of the street.

MONDAY, July 8th: Slow day with only consumer credit out and it was flat at $17 billion.

FRIDAY, July 5th: The jobs report was much better than expected adding 224,000 jobs beating expectations and well above the June data. The unemployment rate actually ticked higher to 3.7%. Average hourly earnings rose 0.2%. Great data which cause mixed opinions on the Fed and interest rates.

THURSDAY, July 4th: Independence Day Holiday.

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. The data for May has not been impressive and is giving hope to the markets the Fed will cut rates as a stimulus. The June data starts and not exactly stellar. Watching June and second-quarter data as it unfolds in the coming weeks along with earnings. Interpret the data versus following our emotions. Let the trend be your friend… and for now, it is sideways.

(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: 

MidCap (IJH) The sector found some support at the $182 mark bounced. It has been a low volume move, but up nonetheless. $195.35 resistance was eclipsed and watching the April highs. We hold no positions in the sector currently.

Biotech (IBB) The selling found support near the $101 mark. The break lower was the small-cap stocks struggling. The sector bounced higher to clear $109 and then to close back at the $109 level to end the week. Watching how this unfolds. Moved back to the $109 level as test Monday. Moved higher on Tuesday as the back and forth continues.

Semiconductors (SOXX) The downside pressure found some buyers and reversed the trend short term. The reversal started with the Fed talk on rate cuts and now the hope of the tariff talks pushed the sector higher. $192.43 entry. $192 stop. The sector has offered some individual opportunities on the move with ADI and SIMO offering trading opportunities. Watching how this unfolds. Gapped higher gaining 2.5% to start the week then spent three days testing the move. Watching. Monday testing continued in the sector. Nice bounce on Tuesday at support. Gapped higher on Wednesday to confirm the bounce.

Software (IGV) The six-day reversal remains in play after a spike lower broke the uptrend at the April high. Hit new highs on the week as the parts are moving even better than the whole. Dig in for the leadership. Nice gap higher on Wednesday to new highs.

REITs (IYR) The upside move took a turn lower after hitting new highs at $91. The shift in the economic picture and the housing data sent money to other areas. We hit our stop and locked in solid gains on the position. Found support at the $86.30 level and bounced… watching how this unfolds going forward. Moving back to the June highs.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.04% as money moves out of bonds on the jobs report on Friday. TLT entry at $124. TMF entry $20.26. Stop $23.50. Watching how this unfolds to start the new week. Holding above the 2% mark for now. Hit 2.06% on Wednesday.

Crude oil (USO) Supply data worries remain along with Iran tension as a point of issue for the price of crude. The move lower came on the news and the move higher on Friday was the same. UCO entry $17.15. Stop $18.50. Inched higher on hopes of agreements with China Tuesday. Gapped higher on the Powell comments Wednesday. Cleared the $60 resistance.

Gold (GLD) Volatility picked up as the news creates some uncertainty in the metal. As a result, the flag pattern is developing near the highs. Interest rate cuts, tariffs, and failing economies globally favor the upside. On the opposite side, they don’t favor gold rising. Some of both in the news creating the consolidation pattern. Hit our stops, locked in our gains and watching. Gapped higher on the Powell comments.

Emerging Markets (EEM) The downside found support and held with a bounce off the lows. China helped as expectation are high on the trade talks. Letting the weekend happen and then we will evaluate the opportunities. No positions. Reversed from current low as Fed sends dovish message to stocks.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. The bottom was established in May. The reversal was established in June. Now we are looking for the confirmation of the uptrend to be established. Gapped higher on trade talks and proceeded to give it all back. Watching. More selling in China as the economy slows. Wednesday found some support.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

WEDNESDAY’s Scans for July 10th: Mr. Powell speaks to Congress on how the economy is failing and offered to do whatever he needed to keep the growth alive. i.e. cut rates. Markets respond with an upside move. My question is how much more upside is there following the nine-plus percent rise in stocks from the June lows. That is what we will watch moving forward and manage the risk accordingly in the current environment.

  • S&P 500 Index (SPY/SPXL) new highs.
  • NASDAQ Index (QQQ/TQQQ) new highs.
  • Technology Sector (XLK/TECL) new highs.
  • Healthcare (XLV/CURE) at the new highs.
  • Gold (GLD/UGL) Goldminers (GDX/NUGT) at the new highs.
  • Manage your gains, adjust your stops, take what the market offers, understand the current environment.

TUESDAY’s Scans for July 9th: No solutions just speculation. Following the leaders and letting this unfold. Positive moves in Large caps, financials, and retail. Watching how earnings data impacts the trends. Banks will be the first to report and they are expected to do well. Taking what is there and remaining patient for now.

  • Semiconductors (SOXX) found some support and bounced. Looking for leadership from the sector.
  • Large Caps (QQQ) doing well and providing some leadership… AMZN, GOOG, FB, and NFLX.
  • Technology (XLK) helped move the needle to the upside with AMD, WDC, FTNT, and MU leading upside.
  • Social Media (SOCL) posted a positive move… OLED, ENPH, TWTR and FB leading upside.
  • Gold (GLD) moved higher again… the speculators are betting the Fed will cut rates.

MONDAY’s Scans for July 8th: More worries pile on relative to the Fed cutting rates or not… the jobs report adding plenty of fuel to the fire and speculation surrounding the news. It is a good time to sit back and manage current positions, trade the swings in the news, and remain patient.

  • Crude Oil (USO) volatility has picked up in both directions… supply data is favoring the downside, and Iran tensions is favoring the upside… watching who wins.
  • Brazil (EWZ/BRZU) is following through on the upside.
  • REITs (IYR) seeing some defensive money rotate back into the sector following some selling last week.
  • Utilities (XLU) defensive money is moving in again after small move lower.
  • Bonds (TLT/BND) moved higher as money looks for safety and speculation on the future of interest rates.

FRIDAY’s Scans for July 5th: Solid economic data from the jobs report was a twist some didn’t expect. The challenge now is will the Fed cut rates in July meeting? That speculation turned some things upside down intraday and posed more questions than we have space to discuss. We will suffice to say… only time will tell how this unfolds. Patience is required.

  • Treasury Bonds (TLT) moved lower as rates rose on the jobs report.
  • Financials (XLF) bounced on speculation of rates.
  • Crude Oil (USO) bounced on Iran tensions.
  • VIX Index (VXX) big intraday volatility on the news.
  • Natural Gas (UNG) jumped 5.6% on supply data.

Sector Rotation of S&P 500 Index:

  • XLB – Broke support at the $54.15 mark and bounced at $52.49 support. Reversed and break above the April highs. Entry $55.25. Stop $55.95. Watching for follow-through. Follow through to break higher. Tuesday broke below support at $58.13.
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Starting a topping pattern. Tested lower and watching.
  • IYZ – Telecom cleared $29.50 resistance and looking for near term direction. Moved back below the $29.50 level and watching. Breaking from trading range on the upside. Resumed the uptrend.
  • XLP – Consumer Staples moved lower, bounced and hit new highs. Rotation of money to safer havens helping… watching the upside move. Rolling top.
  • XLI – Industrials moved below support $74.17 and reversed back into the previous trading range. Broke above resistance at $75.72. Cleared the $76.80 resistance. Back below the $76.80 mark.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Crude moved higher on Iran speculations taking stocks higher as well. Watching how this unfolds as stalls near the 50 DMA. Bounced with the rise in crude oil.
  • 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 $91. Hit some resistance at the $93.32 level. Broke to a new high.
  • XLK – Technology sold and found support and moved above the entry point at $75. Stop $75. Low-risk trade and watching how it unfolds this week. Semiconductors and Software push the upside. Hits new high. 
  • XLF – Financials moved to recent lows and bounced. Resistance at the $27.15 mark as rate cuts tend to not favor banks. Capital plan approval by the Fed gave a boost to the sector to end the week. Watching how it unfolds. Moving higher and breaking above resistance.
  • XLY – Consumer stocks fell to the 200 DMA and bounced. Solid upside reversal moving above the 50 DMA with some solid retail sales data ex-autos. Watching how the new high plays out. Tuesday retail moved higher.
  • IYR – REITs broke lower… housing data, worries about consumer slowing and some overall rotation in the markets. We will watch how this unfolds near term. Moved back to the June highs.

(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:

WEDNESDAY: The power of words from the Fed. The old adage on Wall Street is don’t fight the Fed. As we have seen over the last few weeks… true words of wisdom to live by. We will watch how these words impact the longer-term view of the markets… as many of us were taught in sports, talk is cheap action wins games.

TUESDAY: That a market steeped in speculation can’t make up its collective mind. There is plenty to ponder, but all that matters is what the market does. Keeping our focus and listening to what Mr. Powell espouses to Congress today.

MONDAY: Worries about the data preempting the Fed on hiking interest rates is all the buzz. Not worthy of much discussion as speculation is in control. Thus volatility is alive and well intraday. Stay focused on what you know not what is in the headlines.

FRIDAY: News can change perspective and create volatility. It was a case of good news being not so good news. The positive jobs report was enough to create question marks as it relates to the Fed cutting rates at the July FOMC meeting. That question created debate and intraday volatility in the markets. At the end of the day, only time will tell on the direction along with the Fed. We now get to practice our patience.

THURSDAY: Independence Day creates great pride in being American. Great day to reflect on what made this country what it is today.

WEDNESDAY: Positive follow through to the upside started on Monday. The buyers are still engaged and willing to put money to work. This is a good lesson in how the data doesn’t matter… until it matters. The hard data on the economy is weakening. The yield curve is screaming for the Fed to act. The earnings have not been stellar. But, the hope of stimulus from the Fed is acting as a backstop to stocks currently. Thus, follow the trends, manage your stops, and let this play out one day at a time.

TUESDAY: A market without direction is a market that will make you nauseous from the ups and downs. Tariff truce on Monday. Tariff threats on Tuesday. Economic data is mixed. Earnings on the horizon. Fed promises. It is like a juggler with too many things to keep in the air. We must remain disciplined in our approach… take what the market gives, but protect against the risk. Manage the part where they meet the criteria and manage the whole when it works.

MONDAY: Talk is better than action? There were no actions taken on trade agreements with China only more talk. Markets rallied on the relief of no new tariffs and the hope of an agreement soon. The little boy who cried wolf comes to mind… this has been the promise since January. I was taught that actions speak louder than words… thus, may be why the market failed to keep the early gains. Watching how all of this unfolds… stops in place and watching how the economic data unfolds.

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 remain focused on the speculation the Fed will cut rates. The jobs report made that a little less clear, but the hope remains. The June data on the economy shows slower slowing:) The challenge is speculation versus allowing time for it to all unfold, but nonetheless, the economy did show signs of hope. The other major issue is China/US trade talks at a stalled point again and no clarity on future actions. Throw in the US/Iran tensions and you get volatility in crude oil. The indexes closed up 1.6% for the week keeping the bounce from the current lows in play. We exited where the risk rose and we added positions where the risk was appropriate for our risk tolerance. Watching how traders respond in the coming week and if they are willing to put on risk or run for safety. Some rotation is in play as money moves to where it believes it will be treated the best. This is where we find ourselves as well. Plenty of question marks and only time will tell the outcome. We will continue looking at positions to take profits, adjust stops, and manage the risk of the current environment. The goal is to avoid speculation and follow our disciplined strategy for each position. Taking it one day at a time.

Eleven of the eleven sectors managed to close the week in positive territory as money continues to look for the best opportunities. REITs and financials led the upside for the week with news driving money flow. Gold holding near highs, the dollar found support and bounced, and the economic data was overall mixed with some positive signs in the jobs report. Four sectors are moving sideways in large trading ranges. Six sectors are bouncing from their micro downtrends. One is executing a bottom reversal short term. Crude followed through on a bottom reversal helped by the Iran tensions rising. Watching how that unfolds. 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.