Trade, China, & recession banter sinks markets

Market outlook for August 6th

Investors remain unhappy about the lack of resolution towards China/US trade war. The reality is it is getting worse, not better. Thus, indexes dove lower to test the 200 DMA… it took only three days for investors to erase two-thirds of the gains from the June lows. It took seven weeks to move up… three days to move down. My point… markets move faster on the downside than they do on the upside… why? It is easier to believe bad news than it is to accept the good news. This is why I talk so much about risk management. I have had at least thirty conversations of late about what is going to happen in the markets. The answer is no one really knows… news, speculation, and reality are what determine the markets direction and ultimate trends. Our job is to manage the risk of our positions based on the current environment. Nothing more, nothing less.

The situation with China is not good… it hasn’t been good since China was allowed to join the WTO in 2001. It is not going to be good until everyone is on a level playing field, and that is not likely to happen anytime soon. Monday the yuan fell and triggered a sell-off for equities. The yuan/dollar ration fell to 7.1 and passed the line in the sand of 7:1 causing more selling in US equities. What happens from here? More rumors, more speculation, more talking… what do we do… manager our short side positions, manage our risk and focus on what we know not what others think.

The S&P 500 index closed down 87.3 points to 2844 moving well below 3000 and testing the 2815 level of support. The focus to China devaluation of their currency as a trigger to move lower. None of the eleven sectors closed higher on the day. The downside ruled with financials and technology leading the move lower. We hit more stops and are managing our short side trades… we will manage the risk as it is presented. The long-term trendline comes back into question with the move lower breaking the trendline from the December lows.

The NASDAQ index closed down 278 points at 7726 and bringing 7597 support into play. Technology stocks were under pressure losing 4.1% on the day and the SOXX falling 4.3%. QQQ moved to support at the $180.73. Established a short side trade on the move lower last week and managing the risk. SQQQ entry $32.55. stop $36.12.

Small-Cap Index (IWM) The upside move stalled in a trading range near the $154.90 mark and broke lower testing the $146 level of support. Emotionally charged activity in the sector currently. No positions currently in the sector.

Transports (IYT) The sector was in an uptrend that included some volatility but dropped 2.5% on the tariff threats. Dropped 3.2% on the currency devaluation. Testing support at the March lows. Watching how it responds. No positions currently.

The dollar (UUP) The dollar moved higher but retreated on the tariff comments. Retreated further on China’s yuan move Monday. Watching how this unfolds going forward. Closed at $26.46. Watching the Yen (FXY/YCL) as it is the current benefactor of the tariff talks.

The Volatility Index (VIX) closed at 24.5 Monday after moving higher on speculation about the Fed… then the Trump tariffs, and now currency devaluations. UXVY moved through the $25.28 entry-level. Stop $35. Taking what the market offers here. Friday sold 1/3 at $32. Monday sold 1/3 at $37. Raised stop on the balance.

KEY INDICATORS/SECTORS & LEADERS TO WATCH: 

MidCap (IJH) The sector has moved to the $190.44 support. The downside is a reaction to the current environment of the markets. Testing the March lows.

Biotech (IBB) The sector remains at support near the $104 level and looking for a catalyst to push higher. Waiting patiently for clarity. Testing the $101 support.

Semiconductors (SOXX) The consolidation pattern at the high breaks lower on the news from the Fed and new tariff play from the White House… both news and speculation driven… the reality for semis is tariffs… the sector stands to get hit the worst. Added short side trade with SOXS. Fell 4.3% leading the downside move on Monday. $192.43.

Software (IGV) Hit new highs and reversed on the Fed/tariff news the balance of the week. Hit our stop, locked in gains, and watching how this unfolds moving forward. Fell 3.8%… looking for support.

REITs (IYR) The upside trend remains on the long-term chart. The test of support at $87.50 bounced. Patience with our long term positions and short term watching how interest rate market unfolds. Moved back to the $88 level of support on Monday.

Treasury Yield 10 Year Bond (TNX) Fed only cuts 0.25% and rates nudged lower… Trump threatens tariffs and rates nose dive to 1.85% expanding the inverted yield curve. The flight to quality on fear of stocks falling further send treasury bonds higher… TLT/TMF trade in play. Yields moved to 1.73% flight to safety continues for money. Adjust stop on TLT trade.

Crude oil (USO) Big downside on the tariff threats from the White House. Bounce on Friday helped the cause, but crude is awaiting clarity on tariffs and how each country will respond.

Gold (GLD) The upside in gold has been driven on speculation of the rate cut and global weakness overall. Watching as the consolidation pattern near the highs as speculation is rampant about tariffs and interest rates. Jumped higher on speculation… let it (GLL) run and adjust your stops.

Emerging Markets (EEM) Broke lower from the trading range as tariff threats add to the worries about an economic slowdown. Break below $42.30 could offer a short side trade opportunity. Hit entry point on short and gapped lower on the end of trade talks with China. EEV entry $42.80. Stop $47.24. Gapped lower on Monday… adjust the stop on short trade.

China (FXI/YANG) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Watching the move lower play out as Mr. Trump makes his intentions clear… as does China. Broke support at $42 and the downside is back in play. YANG Entry $49.75. Stop $59.18. Gapped lower on Monday… adjust stop on short trade.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

MONDAY’s Scans for August 5th: More selling as currency devaluation brings out global sell-off in stocks. Why ask now what to do with stocks? That question should have been answered with stops in place to protect your money. Short side trade setups have played out well and we have to adjust our stops and let this unfold. You would have to expect a bounce at some point as the oversold indicators are flashing on the charts. Watching how today unfolds and we will lock in some gains on trades and let the rest play out. The scans all show cliffs on the charts as the last three day concluded in a 5.6% decline in the S&P 500 index and a 6.8% decline in the NASDAQ… Look at stop adjustments. Watch how Tuesday unfolds.

FRIDAY’s Scans for August 2nd: More selling equals confirmation of the downside move. Not sure how long this selling will persist as it is news dependent on the White House, China, and the Fed. I only see the charts reacting and the trade opportunity presented… the risk is managed with stops and letting this unfold one day at a time.

  • Russia (RSX/RUSS) topping pattern breaks to the downside and follows through short side trade option. entry $10. stop $10.75.
  • NASDAQ 100 Index (QQQ/SQQQ) followed through on the downside break. entry $33.98. stop $33.26.
  • Semiconductors (SOXX/SOXS) continued selling in the sector as it is believed to get hit the hardest by the tariffs. entry $42.90. stop $45.10
  • Energy (XLE/ERY) downside confirmed as crude prices struggle on tariff threats. entry $45.28. stop $45.76.
  • Treasury Bonds (TLT/TMF) upside continues with a flight to quality. entry $24.62. stop $25.75.

THURSDAY’s Scans for August 1st: Danger ahead… Mr. Trump really knows how to get the attention of the market… even though he was trying to get the attention of Mr. Powell. The ripple effect of his threats to enact new tariffs rattle investors as it creates new uncertainties about the economy and global growth. Watching how this unfolds in the coming days.

  • Gold (GLD) spiked higher on the inflationary worries around tariffs.
  • Semiconductors. (SOXX/SOXS) in the crosshairs of tariffs fall 2% confirming the short side trade in the sector.
  • Emerging Markets (EEM) and Chian (FXI) both accelerate on the downside. Adjusted our stops – tariffs don’t help either sector.
  • Treasury Bonds (TLT/TMF) accelerate on the upside as money runs for safety. Adjust stop on TMF trade.
  • NASDAQ 100 Index (QQQ/SQQQ) triggers short side entry as we manage the risk of the trade.

WEDNESDAY’s Scans for July 31st: The Fed once again manages to disappoint the markets and stocks respond. The use the same old rationale for not cutting “too much, too soon”. The data supports some type of stimulus from the Fed, but they are playing it safe. Either way, the markets responded on the downside. One day does not make a trend and we have to watch how this all unfolds. Some stops were hit, some positions added, some positions adjusted. Managing money is a matter a disciplined strategy executed regardless of our thoughts, beliefs, or hopes. Wednesday was one of those days. Today we watch how things respond in follow up to the emotional response on Wednesday.

  • Semiconductors (SOXX/SOXS) downside of 3.3% hit stops. Opened the door for short positions if the downside confirms.
  • China (FXI/YANG) end of trade talks without any resolution sends the country lower. YANG in play and watching how it unfolds near term. Emerging Markets (EEM/EDZ) equally traded on the downside and short opportunity.
  • NASDAQ 100 Index (QQQ/SQQQ) downside fell to the key support level and looking at the short side trade options and if they unfold.
  • Volatility Index (VIX/UVXY) hit our stop on Tuesday in the SVXY trade… Wednesday opened the entry for the UVXY trade as anxiety spiked in the markets on the Fed decision. Stop in place.
  • Treasury Bonds (TLT/TMF) upside trade back on break from consolidation pattern on Wednesday. Flight to safety trade in play again.

TUESDAY’s Scans for July 30th: Mixed day as investors juggle money in front of the FOMC meeting. It was like watching a roulette table in Vegas… Place your bets… Watching how the day unfolds and looking at what opportunities result from the decision and the comments from Mr. Powell about the economic picture.

  • Small Caps (IWM/TNA) $158 is the level to clear on the upside. Watching for the opportunity to unfold.
  • Biotech (IBB) Bottoming pattern needs to clear $107 on the upside to offer any opportunity.
  • Crude Oil (USO/UCO) Bounced from the bottoming range to follow through and offered an entry point at $18.78. Lower risk trade with a stop at $17.71.
  • Homebuilders (ITB/NAIL) positive upside move in anticipation of a rate change. Needs to break above the $39.50 resistance level to offer opportunity.
  • Silver (SLV/AGQ) followed the path of gold finally on the upside. Now stalled at the $28.75 in a flag pattern. Looking for the break higher to continue the upside move.

(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 – Broke support again… banked profit. Watching how this unfolds. Monday moved to $55.95 support?
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Starting a topping pattern/trading range again.
  • IYZ – Telecom cleared $29.50 resistance moved lower in response to the Fed. AND Mr. Trump. Retesting the June lows.
  • XLP – Consumer Staples moved lower, bounced and hit new highs and remains in the uptrend despite the test last week. Rotation of money to safer havens helping… watching the upside move. Broke below the June lows.
  • XLI – Industrials remains volatile in an established sideways trend. Stop $77.50. Testing the May lows.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Broke the $62.15 level of support. Established a short side position in the sector. Broke the May lows.
  • XLV – Healthcare continues to deal with the proposed “Medicare for All” healthcare from Washington. Obviously rumor-driven… Watching for the next opportunity. Broke the $89.58 support.
  • XLK – Technology sold as semiconductors and software tumble lower. Established a short side trade in SOXS. Tested the $75 support.
  • XLF – Financials held up on the Fed news… but, failed on the Trump tariff news. Tested $27.30 support. Watching. Moved to the 200 DMA.
  • XLY – Consumer stocks respond to the tariffs… testing $118.10 support. Gapped lower $114 support?
  • IYR – REITs pushed to new highs, tested, moved back to new highs, and testing again… letting it unfold. Tested the $88 support.

There is currently one sector in confirmed short term uptrend. Nine sectors in consolidation or sideways trends. One in a confirmed downtrend. The result is SPY in a confirmed sideways trend. This is a big adjustment based on the current market environment. 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:

Markets got the answer from the Fed and the speculation of a half-point cut was not realized. The results, a dip in stocks. Mr. Trump added to the excitement with his promise of new tariffs. Monday China lowers currency and triggers more selling. The question is will the downside continue? Because the amount of the cuts were less than expected it opened the door to more speculation around the Fed and future decisions. Mr. Trump didn’t wait… he walked through the door and added tariffs to the excitement. The Fed has been using a resolution to tariffs as a reason not to cut rates… Welcome, Mr. Trump as he takes that excuse away. China trade is a key point of issue that remains for investors as the trade talks just escalated to a new level… they are scheduled to resume in September… now there are questions of if it will happen. Currency wars were added to the issues on Monday by China. Crude oil speculation remains in the news as prices crept back above the $58 level… They spiked lower to $53 level on comments about tariffs… modest bounce and definitely on our watch list. And let us not forget the inverted yield curve for bonds as yields moved lower in response to the Fed actions at the FOMC. They closed the Monday at 1.73% in response to fear and flight to safety. Focus on facts like economic data, earnings, and global data reports. The ISM manufacturing data for July fell to 51.2% and the ISM services data dropped to 53.7% showing weakness in the economy. July added 164,000 jobs in line with expectations but failed to offset the new on tariffs. Within all of this data lies the opportunities we are all looking for. FOMC gave some insight to the Fed and the market’s response gave some insight to investors, Tariffs renewed added a new dimension of speculation… we will manage our risk accordingly and focus on what we know versus speculation.

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.