Reality shows up in manufacturing data

Market outlook for October 2nd

So much for the gains on Monday… the ISM manufacturing numbers were released for September and it fell to 47.8% from 49.1 in August… the manufacturing sector shows two months of contraction in the sector and that rattled investors about the forward-looking prospects for growth. As I have stated many times, the data doesn’t matter, until it matters. Guess what, yesterday it mattered. The sellers were in control and the charts broke key support levels on the major indexes leaving us below the 50 DMA and with plenty of questions about the downside risk in stocks. Plenty of things to ponder and pontificate, but one key element to remember is the Fed is fully engage in support the markets with liquidity in the form of quantitative easing (QE). Watching as stops were hit on our long positions and adjusted stops on our short positions.

The S&P 500 index closed down 36.4 points to 2940 as the index sells back from the recent highs and breaks support at the 2951 level. The market was lower on key economic data showing contraction. Eleven of the eleven sectors closed lower on the day led by industrials and basic materials. The downside was led by speculation about the outlook for growth. Plenty of questions remain relative to how this unfolds with the up and down movement and raises questions about the move higher. The long-term trend will be challenged if the downside finds momentum.

The NASDAQ index closed down 90.6 points at 7908. The index started the week positive, but reversed on Tuesday moving below the 50 DMA and testing 7899 level of support. Questions remain relative to growth stocks and large caps have been very sluggish adding to the technical breaks on the charts. QQQ reflects the struggles with a test of the $187 support again. A move below the $186 mark would offer a short side trade opportunity. Technology is still the key sector to watch as this unfolds. A continued move lower at this level would be a negative for the broad markets.

Small-Cap Index (IWM) The sector had been leading the upside effort with money rotating into the growth stocks… that changed this week as we move back below the $152.28 support. Watching how this unfolds as we hit our stops locked in a small gain on our position. Sector continues to struggle with no real gain on Monday. The downside accelerated on Tuesday dropping 2%. Raised our stop on the short side trade.

Transports (IYT) The sector forfeited the move above the $192.42 resistance, but faded as earnings and warnings in the sector push the sector back below the $186.70 level of support. We hit our stop on positions locking in modest gains. Watching how this unfolds near term. Tried to bounce on Monday, but failed to follow through. Follow through on the downside move offer short side entry at $$185.45.

The dollar (UUP) The dollar moved higher as the Fed comments on further rate cuts say no more cuts this year. Watching how it responds going forward as it hits near term highs. Closed at $27.01. The buck struggled on Tuesday dropping back to Friday’s close and watching how this unfolds.

The Volatility Index (VIX) closed at 17.2 as worries remain in play. The index had some big intraday volatility the last week after hitting the lowest levels in seven weeks previously… the activity/rumor mill is picking up. Watching how this unfolds near term. Monday declined to 16.2 as buyers step in on the day. Tuesday jumped to 18.5 as the uncertainty and anxiety rise for investors. UVXY entry $27. Stop $25.80.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector moved to the July highs and is now testing the move. Watching how this unfolds. Failed to hold the $193.35 support. Sector joined the broad markets with solid bounce on Monday… reversed and closed below the $190.44 support showing downside risk.

Biotech (IBB) Tested support at $101 bounced, failed to hold the move and reconfirmed the downtrend from July high. Breaks the $101 level of support and setting ups a short side trade opportunity. LABD entry $22.75. Stop $25.25 (adjusted). More struggles for the sector and remains below the $101 level. Accelerated on Tuesday on the downside and adjusted our stop.

Semiconductors (SOXX) The sector bounced, cleared $210.92 resistance and moved back to the July highs. The last two weeks has tested the move and broke support at $210.92 on Friday. Watching how this unfolds with the short side setting up. Nice bounce on Monday to start the week. Tuesday tested key support and watching how this plays with the downside opportunity.

Software (IGV) The sector is trying to remain in the trading range, but showed weakness on Friday dropping 2.2% and testing the 200 DMA. Short side setup in place. Found some buyers on Monday to bounce off the bottom on of the trading range. Tuesday retested the bottom of the range… setting up short side trade.

REITs (IYR) The upside trend remains on the long-term chart. Patience with our long term positions and short term watching how interest rate market unfolds. Bounced back from the selling and holding near the current highs. Held near the highs. Tuesday sold back to support.

Treasury Yield 10 Year Bond (TNX) were moving higher on the rate cuts by the Fed… then the global economic worries pushed rates lower as money rotates back towards bonds. The yield closed at 1.67% Friday down from 1.95% just two weeks ago. Rumor mill making money nervous and looking for safety. Watching how this one unfolds near term. No real change on Monday. Tuesday sold back to support.

Crude oil (USO) The Saudi bombing impact has disappeared as supply returned faster than expected. Watching support at $52.50 and resistance at $58.25. Moved back below $58.25 support? Tested $55.60 on the downside move. Watching the downside effect. Moved lower to the $54 level as supply worries rise again. Tested $53.17 level of support and testing the previous lows.

Gold (GLD) The upside in gold has been driven on speculation of the rate cuts and global weakness overall. The tug-o-war of tariffs, rate cuts, and speculation are keeping gold in play and in a current trading range. The metal moved lower the last three days back to the lower end support at $140.37. Breaks support and opens the door for short side trades. Bounced Tuesday on the negative news about the economy.

Emerging Markets (EEM) Broke lower in the trading range as tariff threats add to the worries about an economic slowdown. China helped by announcing trade talks would resume in October… China canceled the trip to the heartland and sector reacts. President Trump rumored to talk about delisting all Chinese stocks from US markets. Too much news driving the sector for my taste. Sold lower on the week offering a short side trade entry. We didn’t trade it as news driven speculation is not my cup of tea. Modest bounce on the day… watching how this unfolds. Added to the downside Tuesday testing the $40.50 level of support.

China (FXI/YANG) the country ETF is a good benchmark for what is taking place with the current news and tariffs. The move lower over the last week is a result of the chatter from China and the US about tariffs. Throw in the delisting of Chinese stocks and the downside accelerated. Watching how this unfolds currently. We already held a short side position with YANG. Entry $55.90. Stop $56 (adjusted). Modest bounce on the day… watching how this unfolds. Tuesday moved lower and testing the next level of support.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

TUESDAY’s Scans for October 1st: Negative reaction to the ISM manufacturing data… Major indexes break the 50 DMA, look at the next level of support, but the internal numbers didn’t show excessive selling. Raises questions of emotions versus logic in the markets currently. The VIX jumped, but not to levels of fear showing up. We have to focus on what the market offers technically at this point in time and trade with a defined strategy in place. We have open short positions that benefitted from the move lower and long positions that hit stops on Tuesday. End result we have to manage the process and let this all unfold. Take what is offered, manage the risk, and don’t trade with emotions.

  • Small Caps (IWM/TZA) entry $45. stop $47.60. Added trade on Friday and managing the risk with tight stop for now.
  • Biotech (IBB/LABD) downside accelerated last week adding the short side trade $23.40… adjusted our stop $25.50. Letting this unfold.
  • Natural Gas (UNG/DGAZ) raised stop $136. Letting it run. ($105 entry have room to let this unfold.)
  • Energy (XLE/ERY) raised stop $49. Downside accelerated on Tuesday and letting this run.
  • VIX Index (VIX/UVXY) upside opportunity as money moves towards safety and anxiety rises.
  • Watching the downside opportunities unfold in QQQ, XLF, XLB, DIA, SPY, EEM, FXI, and others.

MONDAY’s Scans for September 30th: The buyers stepped in on the day, but not with great conviction as seen in the volume. The week will unfold with plenty of data. The downside is showing up in several sectors as stated above… the questions are big… and data will play a big role in the coming weeks as earnings, economic, and global data all converge. Watching and taking what the markets offer… one day at a time.

  • Crude Oil (USO/SCO) the downside in crude continues as supply data is being hit by Saudi Arabia production coming back on line faster than expected. Hit entry on SCO at $15.65.
  • Inside day for SPY, QQQ, XLK, IGV, SOXX others. Watching for follow through if the upside is to have any chance.
  • Energy (XLE/ERY) downside playing out after breaking support at $61. Raised stop to protect positions.
  • Natural Gas (UNG/DGAZ) short side trade gaining traction and raised our stop on the positions.
  • Gold Miners (GDX/DUST) short side trade added to the upside move. Managing the risk of our trade taken last week.

FRIDAY’s Scans for September 27th: Rumors of delisting Chinese stocks in the US markets sent some towards the exits and pushed ETFs and listed Chinese companies lower on the day. Not a great end to the week and the technical look on the charts deteriorated showing some short-side trades and breaks of key support levels. Watching how this unfolds and which opportunities meet our risk profile and strategies.

  • Small Caps (IWM/TZA) downside entry at $45. The negative momentum towards growth stocks showed up all week. Trade position as we manage risk. Stop $45.65.
  • Software (IGV) broke support with negative signs on the chart. Short $211.04. Stop $213. Watching the 200 DMA.
  • Semiconductors (SOXX/SOXS) setup on the short-side. Looking for follow through next week.
  • NASDAQ 100 (QQQ/SQQQ) broke key support on Friday amid the news driven day… watching for follow through on Monday.
  • Continued trades adjusted… DGAZ, SCO, YANG, TMF
  • Additional opportunities to watch… TECS, DUST, UVXY, ZSL, EDZ, DRIP, RXD, GLL, GREK

THURSDAY’s Scans for September 26th: Tried to follow through upside but failed to continue the move. Another test. Holds support. Need some momentum in the growth stocks, but money is rotating to safety and the defensive sectors. Patience remains the key for now.

  • REITs (IYR), consumer staples (XLP), utilities (XLU), materials (XLB) and treasury bonds (TLT) are leading… not exactly a vote of confidence on what should have been a follow through day.
  • Biotech (IBB/LABD) downside trade broke through resistance at the $23.40 level for entry signal. Manage the risk of the trade.
  • Natural Gas (UNG/DGAZ) Bottom reversal in the short side ETF. Entry at the $105 mark. $122 resistance and adjusted stop to $112.
  • Energy (XLE/ERY) short side trade setting up as crude prices continue to stumble. $46.25 entry level to hold.
  • PATIENCE – let this unfolds and manage your risk.

WEDNESDAY’s Scans for September 25th: nice bounce at support. Looking for follow through and any upside opportunities… Cautious as money flow is still showing rotation to safety.

  • NASDAQ 100 (QQQ) need to see upside follow through at $190.
  • Semiconductors (SOXX) need to see follow through on the upside move. $214.25 level to clear.
  • Technology (XLK) 80.75 level to clear if bounce is to follow through on the upside move.
  • Small Caps (IWM) $79.25 level to clear if bounce on test is to reverse.
  • Retail (XRT) $42.30 level to clear for support test. Need this sector to continue upside leadership if we are to head higher overall.

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

Sector Rotation of S&P 500 Index:

  • XLB – Basic Materials broke support at the $55.95 level and reversed and moved back to the July highs… watching. Broke $58.13 support. Big move lower breaking near term support.
  • XLU – Utilities broke from the trading range and moved higher. Support is at the $62.50 mark. Collecting the dividend and letting it play out. Broke to new highs showing rotation to safety.
  • IYZ – Telecom held support at $27.62. Hit entry at $28.70 and testing the move higher. Stop $29.40 (stop hit). Moved lower breaking support at $29.35. Testing the 200 DMA. Big move lower breaking lower to the next support at $28.62.
  • XLP – Consumer Staples held support and the uptrend line. Watching how this unfolds near term. Testing the current highs. Nice gain on Monday to help the cause.
  • XLI – Industrials moved back to support in the trading range and bounced clearing $76.80 resistance. Testing support with several down days. Broke below the $76.80 level of support and tested $75.72.
  • XLE – Energy broke support at $60.50. Watching how the downside unfolds. Heading lower following the drop in crude oil. Adding to the downside move with crude moving lower.
  • XLV – Healthcare held support… small bounce higher and now more testing to the downside. Watching how it unfolds. Weakness in IHF, IHE, IBB, not helping. Nice gain on Monday. Negative move on Tuesday.
  • XLK – Technology tested lower bounced and tried to move to new highs. Failed with selling in the semiconductors. Watching the short side setup. Nice gain on Monday. Negative move on Tuesday with big volatility in the sector.
  • XLF – Financials have been under pressure with lower interest rates and global weakness. Hit entry $27.60. Stop $27.75. Showing some positive on the week. Big downside move on Tuesday as markets deal with reality of slowing economic picture.
  • XLY – Consumer Discretionary moving higher on earnings… gapped higher and then tested the move to the July highs. Watching how we progress.
  • IYR – REITs held the $88 support and cleared the 90.80 resistance. Holding near the highs for now.

There are currently six sectors in confirmed short term uptrend. Two sectors in consolidation or sideways trends. Three in a confirmed downtrend. The result is SPY in a confirmed sideways trend. The test at the July highs is weakening on the downside. We have to remain patient and let this all unfold. Remember the parts make up the whole.

(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.)

FINAL NOTES:

Tuesday: Not a good day for stocks as investors see the reality of a slowing economic outlook with manufacturing posting a second month of contraction in the sector. Reality is always present it is just a matter of how long it takes us to believe it. Hope is always the default emotion for investors following optimistic periods… the last default is reality. The economic picture has been slowing since last September… a year later some are starting to believe it. The prop or hope for the market is the Fed and liquidity. They are engaged, but is it too little too late? Watching and trading accordingly.

Monday: Solid gain for the broad indexes as we start the week on a positive note. There are plenty of question marks for the markets to deal with as we head to a week full of data from economic to earnings. Taking it one day at a time as the challenge remains for stocks. Earnings will be one big hurdle to jump as they start to report and analyst measure the impact of the tariffs and slower spending from the consumer.

Markets found enough buyers to break from the five-week trading range and make a run at the July highs. Test of the move deepened this week leaving plenty of question marks for me. Some pressure on Friday from the rumored discussion of delisting Chinese stocks from the White House. The close Friday left plenty of questions we addressed above. I continue to raise the question about the conviction behind the move. There is a test of the break higher, but I still have my doubts about the move. Thus, managing our risk. Small caps took on a leadership role on the upside and now doing so on the downside as buyers quickly abandon growth stocks. The treasury bonds took a hit as money rotated out of bond and yields climbed to 1.95%, but this week money found its way back with yields at 1.67%. The risk remains high for upside opportunities as the underlying data remains weak. The market remains controlled by headlines as each day holds movement related to the speculation of what might happen. Trade with China and the US remains at the top of the list with both making interesting statements. Throw in Brexit and other global issues and you get the picture. The economic data showed mixed news and earnings show impact to tariffs with specific sectors. There are still too many questions unanswered and that invites speculation and volatility. Speaking of volatility the index bounced back above 17 after a brief stay at the 13 level. We remain focused on what is working and what is failing. Therein lies the opportunities. Manage your risk accordingly and let this unfold… one day at a time.

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.