Santa is a day late

OUTLOOK: December 27th to year-end

Santa showed up on Wednesday to post one of the most impressive days in a long time… albeit the market was excessively oversold, year-end rebalancing for mutual funds and pensions helped, economic data on retail was positive, and the President said this was a buying opportunity. All is well, right? There is plenty in the headlines about mutual fund redemptions, 401k redemptions, etc. The reality is the selling has to always reach a peak. My only question, have seen the worst? Time will tell, but for now, we hit our stops on our short side positions… watching where the best opportunities lie… semiconductors and some others we have mentioned lined up well. By no means do I assume anything. I always invest looking forward. What has happened is a good lesson building exercise for learning, but we have to look forward and the charts have plenty to validate if the upside is to return. With that in mind… enjoy the bounce that was on Wednesday, and manage the risk in front of you as it unfolds. 

The S&P 500 index closed up 116.60 points at 2467 and adding a big bounce to the downside. All eleven sectors closed in positive territory for the first time in a long time. Energy and technology let the upside with the consumer discretionary getting a solid bounce from the retail sales data. The third leg lower in the current trend is still underway and we have to manage the outcome near term. 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. Sold 1/3 @ $37, 1/3 @ 35.75, and balance hit the stop at $34. 

The NASDAQ index closed up 361.4 points to close at 6554. The index moved below the 6793 support and finally found some support. 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 have had their way on the downside moves with above-average volume. The bounce Wednesday is good for the markets and we will watch how it unfolds. QQQ is our indicator near term. The bounce produced some selling in our position. SQQQ entry $14.50. Stop $18.50 (adjusted). Target $16.65 (hit Monday). Sold 1/3 @$20, 2/3 @ 18.50 stop. 

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. The bounce helped the near term some on Wednesday, but still has plenty of work to be done. TZA entry $11.95. Stop $16.25. (adjusted) Target $14.50 (hit Monday). Sold 1/3 @ 17.50, 1/3@16.25, and stop hit on balance $16.25. 

Transports (IYT) moved below support at $172.33 adding to our short side trade opportunity (entry $181.70, stop $163.40). Sold 1/2 @ $160. Balance at stop $163.40. 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. Watching how the bounce unfolds.

The dollar (UUP) Fell on Monday’s worries with trade. Rallied on Wednesday with stocks bouncing. Closed Monday at $25.68 with bounce off the lows. 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. 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 Monday. The inverted yield curve is drawing some interest to the metal short term on the upside. Tested on Wednesday closed at $119.66. Entry $116.50. Stop $118.11 (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 $20.25 (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 $46.22 on Wednesday. $43.06 is the key support level for crude near term. SCO entry $26. stop $30.50. Sold position at the stop. 

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 30.4 on Wednesday with anxiety stalling as the buyers show up in force. Maybe last week was the 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. Hit stop. 

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. Solid bounce… need follow through. 

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. Solid bounce… need follow through. $153.13 level to hold. 

Software (IGV) Broke $167.88 and looking for support. Still not in horrible shape and the sector is oversold. Solid bounce… need follow through. $167 level to hold. 

REITs (IYR) Tanked on uncertainty from the Fed and the economic outlook. Broke $75.21 and watching. Solid bounce… need follow through.

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). Manage the risk of the upside move in yields. 

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. Solid bounce… need follow through.

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

WEDNESDAY’s Scans 12/26: Solid bounce higher… as stated above need to follow through on many of the accelerated moves intraday. There is so much work to be done if the reversal is to hold and move higher. Hit stops on our short side positions and laddered of many based on the intraday momentum from the buyers. Letting this unfold. Areas to watch…

  • Semiconductors (SOXX) needs to hold above $153.13 mark. we will evaluate as it unfolds.
  • Software (IGV) needs to hold above the $167.88 mark. Evaluate and trade accordingly.
  • Technology (XLK) needs to follow through on the upside or at least show parts worthy of trading.
  • Treasury Bonds (TLT/TBT) short side trade if the yields move above the 2.8% mark with momentum.
  • NASDAQ 100 (QQQ) needs to move above the $152.51 mark. Watching how it unfolds.

Patience and diligence. You have to be willing to trade at the level of risk you can tolerate. Letting it all unfold one day at a time.

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.

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. Bounced and watching.
  • 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. Bounced and watching.
  • IYZ – Telecom moved back below $27.63 and broke the October low. The downside is in play and letting it unfold. Bounced and watching.
  • 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. Bounced and watching.
  • XLI – Industrials moved back below the $67 level and broke the October lows. Letting the downside play out. Bounced and watching.
  • XLE – Energy stocks fell with the market and crude prices. Broke the October low and showing more selling along with crude oil. Bounced and watching.
  • XLV –  Healthcare broke $83.24 support and not looking good. Watch and let it unfold. Bounced and watching.
  • XLK – Technology moved below $64.78. Watching how the sector moves from here. Bounced and watching.
  • 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 $14.50 (adjusted). Sold 1/3@16, 1/3@15, and balance hit stop. Bounced and watching.
  • XLY – Consumer tried to bounce… failed… moved below $102.50 level and not looking good… letting it play out. Bounced and watching.
  • RWR – REITs shifted gears to move below the October lows and $86.83 up next. Bounced and watching.

(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.