The Grinch stole the rally

OUTLOOK: December 21st

The Grinch stole the market rally… the Fed decision and lack of communication on the outlook and future essentially put the last nail in the coffin. The first hour of trading saw some attempt at buying, but then eventually drifted lower with no real sign of buyers. All of the major indexes gave up at least 1.5%. We continued to let our positions run and will look to take some gains as we move into the weekend. The Fed is full speed ahead on interest rates despite the signs of domestic and global slowing… growth can come to a screeching halt if the money dries up… higher interest rates keeps money in the banks and investors in cash… not a good thing for the economic picture. I am taking the high road and letting cash be king along with some downside plays.

The S&P 500 index closed down 39.5 points at 2467 and adding to the downside move. All eleven sectors closed in negative territory for the second day with consumer discretionary and energy leading the downside movers. The third leg lower in the current trend is well underway on above-average volume and the Fed added catalyst on Wednesday. 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. 

The NASDAQ index closed down 108.4 points to close at 6528. The index moved below the 7100 level again last week and followed with a move below 6793 support on Monday. Wednesday the Fed action was was catalyst to keep the downside in play. 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 is the next level of support to hold. SQQQ entry $14.50. Stop $16.60 (adjusted). Target $16.65 (hit Monday). Small bounce for the index and watching. $17 level watching to take some profit if the market bounces today. 

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. In fact, we added a short position on the move lower. TZA entry $11.95. Stop $14.75. (adjusted) Target $14.50 (hit Monday). Same on taking some profit here if we rally $15 level. 

Transports (IYT) moved below support at $172.33 adding to our short side trade opportunity (entry $181.70, stop $165.24). 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. $162.60 next support to hold. 

The dollar (UUP) sold lower bringing into question the current uptrend and the 50 DMA. Closed Thursday at $25.77 and breaking down from 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. Rallied Thursday to close at $119.24. 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 $45.88 on Thursday. $43.06 is the key support level for crude near term. SCO entry $26. stop $28. 

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 $42. 

Investors gave up hope and let the sellers dictate the course for the week. 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. The blame went to global economic data on Friday as China and Europe show renewed weakness. Throw in some French protests and violence and investors were content to head to cash. Talks of China and the US settling some trade issues brought hope, but weak economic data brought sellers. Technically the charts are showing the possibility of a third leg lower in 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 on Wednesday? 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. One of the eleven sectors closed the week in positive territory as utilities continue to show money heading to defensive sectors. The downside was led by financials and industrials as both lost more than six percent on the week. 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.

Big move lower breaks support and establish the downtrend again. Markets are unstable at best currently and trying to bet against the trend is a losing proposition. Historically markets move down faster than they rise and we are seeing proof of that currently. If you still hold long positions in stocks you need to measure your risk accordingly. 

The FOMC announcement was an opportunity for the Fed to explain their view of the economy and what their collective intentions were going forward… didn’t happen. It left the feeling of uncertainty in the markets and prompted more selling. Communication is an art and many of the leaders fail to understand it is as much about how you deliver the message as it is the message itself. Too many question marks left on the day and the downside is firmly in control. We may get a sympathy bounce, but the sellers are here to stay for a while. 

(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 lower from the bounce to the 200 DMA and now retreated back near the previous lows. Watching and letting this unfold. Broke support and established the downside trend again short term. Move below $101 is bad news near term. LABD entry $36.05. stop $46.90. 

Semiconductors (SOXX) sold the bounce and is back near the previous lows… decision time. Moved lower and held support… at the October lows? 

Software (IGV) attempted to hold the $178.87 support but closed below the level on Friday. Watching how this previous leader unfolds moving forward. Moved to $165.60 support. 

REITs (IYR) Tanked on higher rates dropping and testing the $79.76 mark again. Letting this unfold. Down 5.7% on a big break lower for the week. Modest bounce on Wednesday… Thursday back to the lows on the Fed move. $75.20 level to hold. 

Treasury Yield 10 Year Bond (TNX) closed the week at 2.89% as yields once again move below support and the long bond rallies. TLT entry $115.25. Stop $119.50 (Adjusted). Fell to 2.78% as money rotates to safety. Bonds rally higher. Fed puts some fear back into the markets concerning the direction of rates. 

Energy stocks (XLE) The stocks confirmed the move lower, bounced, and sold again to break support. Crude oil prices remain challenged. Without clarity, stocks are subject to news and that is shown in the chart. Moved below support at the $60.50 level. Crude fell 7.3% on Wednesday and lower again on Thursday, stocks are following the move lower. 

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

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.

FRIDAY’s Scans 12/14: The sellers take control again with an ugly day for stocks. Short positions are working and letting this unfold. Confirmation on Monday would offer an opportunity to add to positions and establish new ones. The move is potentially the start of the third leg lower in the current trend from the September highs. Manage your risk and avoid the emotions of the moment.

  • See updates to Thursday’s post below in red. Small caps and financials leading the downside move.
  • NASDAQ 100 (QQQ/SQQQ) short side trade moved higher and letting it run for now.
  • Healthcare (XLV/RXD) short side is set up and the negative momentum is increasing in the sector…
  • Natural Gas (UNG) we noted the weakness in the break lower on Wednesday. Followed through on Friday helping our trade in DGAZ… raise stop and let it go.
  • Volatility Index (VXX/UVXY) the move higher in the index shows negative sentiment in the markets. Trading the move and watching how this unfolds.

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 – Back below the $54.15 level of support… offered short side trade. Moved below support at $50.10.
  • XLU – The utility sector broke above resistance at $55.24… got the follow through and maintaining the positive uptrend. Entry $54.60. Stop $55.20 (stop hit) Sold below $55.24
  • IYZ – Telecom moved back below the $27.63 mark support… remains in a trading range… downside bias in play… needs to bounce or shorts step in. Broke the October lows and moved lower. 
  • XLP – Consumer Staples moves back below the $54.92 level of support. The defensive money is rotating. Entry $54.10. Stop $54.10 (adjusted). Broke below the 200 DMA and the $51.86 mark. 
  • XLI – Industrials moved back below the $71.43 mark. Negative retest the lows.  Broke the October lows and more.
  • XLE – Energy stocks fell with the market and crude prices. Broke the October low and showing more selling along with crude oil. Headed lower again with crude dropping more. Broke the $58.19 level as well. 
  • XLV –  Healthcare held $86.74 support, bounced, gapped higher, and testing lower again. Big negative move on Friday as money exits the sector… watching how the week unfolds. Broke support at $86.74. adding to the downside on news. $83.24 level to hold. 
  • XLK – Technology moved below $64.78. Watching how the sector moves from here. Broke the October lows. Added to the downside.
  • 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 $13.50 (adjusted). Added to the downside trend. Not pretty and adjusting the stop on short side trade. 
  • XLY – Consumer tried to bounce… failed… moved back to the previous lows… watching. $102.50 level to hold near term. Broke support at the $102.50 level. Moved lower. 
  • RWR – REITs shifted gears to move to support at the $93.20 level. Entry $92.10. Stop $92.80 (stop hit). Letting this play out for now. Big move lower as money runs to safety. 

(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 retested the October lows on some indexes and broke lower on others. There is plenty of anxiety from investors as the speculation train continues to roll. Global economic weakness gets the blame this week, but the reality is a lack of clarity for stocks overall. Only one of the eleven sectors managed to close the week in positive territory as money rotated yet again with some 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 to neutral on interest rates which have pushed the long end of the yield curve back below 3%. Stocks responded positively at first, but now trade tariffs loom along with the economic picture. 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. 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 to do short-term. 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.