Tariffs take center stage as markets test lower

MARKET OUTLOOK FOR May 7th, 2019

Welcome to the word of negotiation! China continues to doubt the resolve of President Trump and Monday the White House restated its willingness to enact further tariffs with China. The deadline is Friday and in turn, stocks turned lower in the US and China. The early response was very negative at the open, but stocks found support and buyers stepped in to curtail the selling. At the end of trading most indexes were slightly lower, but not near the initial response. As with most rumors and speculation, we will take what the market gives and adjust accordingly. Stops are in place and watching for the opportunities.

The S&P 500 index closed down 13.1 points to 2932 with the October highs of 2930 holding on a negative trading day. Plenty to consider as the US threatens higher tariffs with China. Two of the eleven sectors closed higher on the day. Healthcare and energy were the leading sectors. Basic materials and industrials led the downside as the sellers show some effort. The long-term trendline has resumed the previous uptrend. We will watch how the current activity unfolds and if the buyers can maintain control. SPXL entry $33.50, stop $47.93 (adjusted).

The NASDAQ index closed down 40.7 points to close at 8123 moving back slightly lower following a negative open. Technology remains a positive leadership for the index despite the selling to start the week. QQQ is our indicator near term and held the $185.05 level following an early test. Managing our risk, taking our profits when prudent, and adding positions where the opportunities are presented remains our goal. The bounce produced some opportunities to buy an upside position on clearing the $152.51 mark to start the current trend. TQQQ entry $34.17. Stop $62.54 (adjusted). The long-term trendline has resumed the upside as investors remain engaged. Solid leadership in this sector and watching how it unfolds and what opportunities are presented.

Small Cap index (IWM) the sector has been in a consolidation pattern and the move on Friday cleared resistance on solid volume. The move offers an entry point in the sector again. Tested lower on Monday, but the buyers showed resolve in the sector closing higher on the day. The chart shows the break above resistance at $158.01 and attempts to break higher. Entry $158.25. Stop $$154.90. The chart shows a clear reverse head and shoulder pattern with the breakout on Friday. We are looking at what opportunities result near term.

Transports (IYT) hit some resistance at the $200.53 level and the index reversed on some solid selling. It bounced back above the support at $192.42 level Thursday and followed through on Friday. Thus, we take the opportunity to reenter our position after getting stopped out earlier in the week. Added a position at $195.60. Stop $191.74. A perfect example of not letting our emotions get in the way and allowing our strategy and discipline to determine our actions.

The dollar (UUP) The reaction to the FOMC pushed the buck higher last week as the decision not to cut rates favors the dollar. The jobs report confirmed the Fed action at the FOMC and the dollar moved lower. The big question mark for the buck remains a possible resolution to the trade tariffs with China. Monday was negative to the resolution with the trade as China stalls and the US threatens sanctions and tariffs. The ETF closed at $26.18 and remains in a positive pattern holding support… Watching as this continues to unfold.

The Volatility Index (VIX) closed at 15.4 on Monday settling from an early spike lower. Solid bump higher as FOMC meeting rattled investors, but the jobs report calms the nerves for now. The tug-o-war between buyers and sellers is a flip of the coin. Watching how this all unfolds patiently. UVXY entry at $33. stop $32.

Economic Data: April starts a new round of data for the month of March… looking for some improvement over February.

MONDAY, MAY 6th: Nothing new on the day as investors focus on the tariff talks and Mr. Trumps response.

FRIDAY, May 3rd: April jobs report was better than expected adding 263,000 new jobs, the unemployment rate fell to 3.6%, and average earnings rose 0.2%. Beating expectation is a good thing. ISM services index fell to 55.5 and missed expectations and confirming what we got from the ISM manufacturing data… slower growth.

THURSDAY, May 2nd: Weekly jobless claims were higher than expected at 230,000. The jobs report on Friday will put this in perspective along with the ADP report from Wednesday. Productivity rose and unit labor cost fell both showing positives for jobs. Factory orders rose 1.9% as a positive as well.

WEDNESDAY, May 1st: ADP employment data was positive posting 275,000 jobs versus 151,000 in April. The jobs report is due on Friday. ISM manufacturing fell to 52.8% versus 55.3% last month. That is not a good sign for the economy. Construction spending fell 0.9%. FOMC meeting leaves interest rates unchanged… market was expecting a cut giving reason to sell following the announcement. Vehicle sales were 16.4 million versus 16.9 million expected and 17.5 million last month. This data was not great for the economic picture and we could see some market reactions especially on the interest rate decision by the Fed.

TUESDAY, April 30th: Home price index rose 4% in line with expectations. Chicago PMI fell to 52.6 from 58.6 in March… not good news. Consumer confidence rose to 129.2 from 124.2. Pending home sales rose 3.8% and much improved over February’s -1%… data remains mixed, but good enough.

MONDAY, April 29th: Personal spending rose 0.9% better than expected in March. Income rose only 0.1% worst than expected. Core PCE (inflation indicator) was at 0.1% and 1.6% year-over-year. Some good news for the economy overall.

It is all about the progress following interest rates were hiked by the Fed… we continue for the fourth straight month to see slowing in the data. Eventually, this will show up in stock prices through earnings. Those have started and we are seeing mixed data from companies. Interpreting the data versus the emotions… following the trends.

(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 and found support near the $105 mark. The $107 level was cleared on Friday and looking for follow through to start the week. The break lower was the small-cap stocks struggling. The bounce is a positive sign as we look for opportunities in the move. We don’t hold any positions in the sector currently. Looking for some clarity in the sector. Solid follow-through above $107 offering entry opportunity.

Semiconductors (SOXX) Tested below the $210 level and bounced Friday with the broad market. Watching how this unfolds with some profit taking showing on the chart along with a flag pattern. The vertical move higher is consolidating. Earnings and growth have been driving… Stops in place and watching how this unfolds going forward. Entry $187.50. Stop $207.50 (adjusted). Sold lower and flirting with the exit point. Watching how today unfolds.

Software (IGV) Broke $167.88 and bounced back above the same level to create the December lows and start the new trend. $167 level added a trading position. Entry $167.90. Stop $214.80 (adjusted). This week we tested the move higher and watching how it unfolds. Held the trend after some early selling.

REITs (IYR) Recovered from the uncertainty from 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 FOMC news settle. Broke $75.21 and bounced… trading opportunity on reversal above $75.21. Entry $75.25. Stop $85 (adjusted).

Treasury Yield 10 Year Bond (TNX) closed the week at 2.53% with some volatility in rates from the FOMC meeting. The bounce from the low in March has stalled with the uncertainty surrounding what the Fed will do going forward. Watching how this unfolds near term. TLT is a hold if you own bonds. Yields dropped to 2.5% as bonds rally. Flight to safety related to the China tariff threats.

Crude oil (USO) Found some support at $61.60 on Friday. The trek higher hit a roadblock with Trump’s comments concerning OPEC increase production. The sanctions in Venezuela and Iran, the tension in Lybia, and global data are weighing on supply, despite the data released by the US energy sector… the saga goes on. In the end, the data will prevail relative to pricing. For now, the speculation is driving prices lower. Banked our profit in the position and looking for the next opportunity. Held support at $61.60.

Emerging Markets (EEM) Watching as the bounce from the bottoming pattern moves above the $43.80 resistance comes into play again. Rumors of trade resolutions and talks with China helped the index but needs some reality to follow through. Watching for the clarity to unfold. Cleared $40.88 and broke higher from a double bottom pattern. Entry $41. Stop $42 (adjusted). Remains a sector of news which creates volatility short term. Big drop on the tariff news and back below $43.80.

Gold (GLD) attempting to find support and a bottom. Watching how the metal responds to the dollar and global chatter of slower growth. The downtrend remains in play despite the bounce and watching how it unfolds. Goldminers (GDX) offered a short side trade on the move lower. Entry $22.60. Stop $20.40.

MidCap (IJH) The uptrend from the December low tested with a move below the $190.44 support. They have now managed to move higher and cleared the February highs completing the reversal. Friday made an attempt to break higher and through resistance at $$197.60. Entry $190.45. Stop $193.10.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Bounced off support at $43.50 level. Cleared the $45.20 resistance only to test lower again. Talk of tariff agreement back on the table… but, we have heard this too long. The break from the eight-month bottoming pattern testing the trend. Entry $39.80. Stop $43.50. As you would expect the country ETF fell 2.6% on the news.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

MONDAY’s Scans for May 6th: The comments from the White House on tariffs going into effect on Friday sent stocks lower early, but they did manage to rally back to erase most of the losses. Specific sectors impacted by the threat moved lower as basic materials and industrials led the downside moves. This is a new development for the markets and investors will make adjustments as we move towards the Friday deadline. The markets are currently priced for the tariff deal to be struct… if not, the reality of the change will send specific sectors lower if not the whole market. Watching how this unfolds in the coming days with our stops firmly in place.

  • Healthcare (XLV) added to the upside despite the selling overall.
  • Energy (XLE) held support along with crude oil (USO).
  • Telecom (IYZ) testing support at the $29.50 mark.
  • Volatility Index (VIX) moved to 15.4 as the uncertainty creates anxiety for traders and investors. UVXY approaches entry point… watching.
  • Emerging Markets (EEM/EDZ) approaches entry point for short side trade… emotions are high watching for clarity.

FRIDAY’s Scans for May 3rd: positive jobs report sends stocks higher and in some indexes clears resistance and others push back to resistance… the key now is nothing more than a good old follow through to the upside move. Clarity on direction would be a good thing and maybe Friday was a start to investors understanding the FOMC decision and the economic picture. Doing what we do best… taking it one day at a time and managing the risk of what we know not what we think.

  • Healthcare (XLV) the one sector that made a move that meant something other than recovering what was lost the first four days of the week. Reversal trade working out nicely on upside move.
  • Biotech (IBB/LABU) double bottom pattern in place… looking for opportunity.
  • Small Caps (IWM/TNA) break from the trading range/consolidation pattern. Looking for confirm and entry point above the $69.40 mark.
  • Solar (TAN) break from the trading range/consolidation pattern. Looking for confirm and entry point above the $25.70 mark.
  • Social Media (SOCL) break upside to confirm the uptrend and resume the move higher. Adjusting stops.

Friday’s move higher was a positive… it still needs to follow through, but you still have to take what the market gives and adjust your stops, manage your risk, and be disciplined to the strategy implemented.

THURSDAY’s Scans for May 2nd: More talk about the Fed decision. Is it right or wrong? That isn’t the question… the question is how does this impact the psyche of the investor moving forward. If the negative side wins the selling will accelerate… if rationalization wins we hold the steady climb higher. You can see the indecision in the charts for the last two days on this issue. Watching, observing, and looking for the opportunities that arise from the debate.

  • Energy (XLE) is leading the downside move. Crude dropped on the rattling over the impact of the Fed decision as it relates to global growth… that sent crude down almost three percent… stocks followed breaking support and not looking good near term. Stops were hit and watching how this unfolds. Short entry hit at $65. Stops hit on Crude positions. DRIP, SCO, ERY short side ETFs hit entry points.
  • Treasury Bonds (TLT/TBT) interest rates rose as the effect of the Fed decision goes to work on bonds. The non-decision from the Fed was like a rate hike as the market expected a cut in rates. Thus, the dollar moved higher and bonds move lower on the higher yields. Watching for short side trade in bonds if we don’t get a flight to quality move on selling in stocks.
  • NASDAQ 100 (QQQ) Moved to support and managing our risk. The large cap stocks have some downside pressure on earnings. Watching how this unfolds in the coming days.
  • Gold Minders (GDX/DUST) short side trade hit entry point at $22.60 and move higher on Thursday. Impact of the FOMC meeting.
  • Homebuilders (ITB/NAIL) upside in play as data shows opportunity. Manage risk as it is highs at these levels. Stop $45.60.

Plenty of headlines and speculation flying around. Taking what the market offers day by day. Some stops hit, some entries offered. Money is in motion with some rotation and move to safety.

WEDNESDAY’s Scans for May 1st: Starting the month with an FOMC meeting turns out to be a bad idea. The economic data didn’t do much more to help. The challenge for the markets on the day was speculation/expectations versus reality. They expected move was a rate cut from the Fed. The reality was they didn’t cut rates. That leaves investors to ponder the next move by the Fed and if the economy is strong enough to continue the trend higher without the cut… again more speculation to drive prices… up or down near term. Plenty of negative headlines on that topic with projections now for as much a five percent decline… we will watch and manage our money based on reality and leave the speculation to the talking heads.

  • Small Caps (IWM) close below the 20 DMA and have our attention as leading any downside moves that may develop.
  • NASDAQ 100 (QQQ) holding up, but closed below the 10 DMA. AAPL versus GOOG earnings weight on the index? Patience as it unfolds.
  • Transports (IYT) Closed below support at the $192.42 mark. Trucking stocks were the downside leaders and not a good sign for the sector or the broad markets. Watching how this unfolds.
  • Technology (XLK) held up well relative to the selling… watching the leading sector for guidance and signals.
  • Energy (XLE) broke lower on the day and rested at the $64.80 level of support. Week of selling in the sector even with oil only dropping slightly and natural gas rising. Speculation in play.

Watching how this all unfolds. One day of modest selling does not reverse the trend. Watching investor psyche and the Volatility index. Plenty to learn and understand. Stops in place in case the panic button is hit.

TUESDAY’s Scans for April 30th: Last day of the month closed down on the NASDAQ thanks to Google. S&P 500 holds steady with some sectors on the upside. No big changes on the charts, but the shift in sentiment, some rotation, and news driving this week. China/US tariff talks back in the headlines, economic data on positive side overall, Apple earnings after-hours will help the technology sector… watching how it all unfolds one day at a time.

  • NASDAQ 100 (QQQ) feels the impact of Google drop. Holds the 10 DMA and still in a position to move higher. AAPL will help today.
  • Semiconductors (SOXX) positive day to hold support and close back above $210.92. NXPI, ON, ADI post solid upside day.
  • Software (IGV) continues solid leadership overall. ADBE, VMW, ZNGA adding to upside trends.
  • Financials (XLF) adding to the upside with MA positing solid numbers. Insurance stocks moving higher to lead the sector as well.
  • Netherlands (EWN) continues uptrend after a small test… one of the leading European countries.

Sector Rotation of S&P 500 Index:

  • XLB – New lows and found support… got the move above the $50.35 mark. Entry $50.50. Stop $56.75 (Hit Stop). Upside hit resistance at the $58.13 level. Moved back to support at $56 and bounced. Sold below the $56 support.
  • XLU – The utility sector found support at $51.11… moved above $52.72 for entry. Cleared $57.10 resistance and showing some near term topping. Watching and managing the risk. Entry $53. Stop $56.75. Topping pattern showing on the chart and the $57.12 level of support in play.
  • IYZ – Telecom has a rolling top pattern and hit our stops to lock in our gains. The uptrend is still in place and watching how this test unfolds. Testing a key level of support at $29.50.
  • XLP – Consumer Staples found new lows and bounced. Cleared $50.50 and continued upside trend. Managing our risk. Entry $51.90. Stop $54.25 (adjusted).
  • XLI – Industrials moved to near-term low and bounced. $65 level cleared for trade opportunity. Entry $65. Stop $76.50 (adjusted). Broke above the $76.80 resistance and now in a trading range.
  • 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 $41. Held support.
  • 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. Solid move on Friday to confirm the reversal. Nice follow through on upside move.
  • XLK – Technology moved to near-term lows and bounced. $61.70 cleared for trade opportunity. Entry $61.70. Stop $75.93 (adjusted). Trading at new highs. SOXX, IGN, HACK, SOCL, and IGV all part of the puzzle for the upside to continue. Adjusting our stop.
  • 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 followed through. Positive earnings push the sector above resistance and renewing the uptrend.
  • XLY – Consumer fell to near-term lows and bounced. $98.96 level cleared for trade. Entry $99. Stop $117.50 (adjusted). Cleared resistance at $113.50 level. Taking on a solid leadership role and in a positive uptrend.
  • RWR – REITs broke lower… bounced from lows clearing $93.21 resistance… positive upside move. Entry $88. Stop $95.50. Watching and managing the risk. Bounced from the test of support and back to the previous 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.)

FINAL NOTES: What did we learn from the trading week?

Markets tested and held key support levels after breaking above the October highs. Friday they recovered most of the losses from earlier in the week to keep the uptrend in play. The S&P 500 and NASDAQ closed the week up 0.2% as the jobs report gave new life to the indexes. Transports tested lower but bounced on Friday showing some of the anxiety about the economic picture. Looking at the charts you can see the key levels of support holding, the key resistance levels remain in play as well. April economic data isn’t showing much improvement over March as it remains mostly mixed. The FOMC meeting created some anxiety about the Fed not cutting interest rates. The jobs report justified the move and stocks rallied to end the week. The talk in Washington of social medical programs has raised concern. Throw in some chatter on debt relief on student loans and the political picture is heating up. 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 look 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.

Seven of the eleven sectors managed to close the week in positive territory as money continues to move with some rotation. Healthcare and financials led the upside for the week adding to their respective trends. Gold found support, the dollar is at a near term high, and the stronger than expected jobs report helped the buy side. Seven sectors remain in a positive uptrend with three moving sideways in consolidation patterns. One (XLE) has broken into a new downtrend short term. Healthcare reversed its downtrend the last two weeks. Interest rates ended at 2.53% as they moved lower on the week helping the bond bounce back this week. Crude declined on the OPEC news and Mr. Trump. 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.