Trade with China remains focus

MARKET OUTLOOK FOR June 28th, 2019

The focus remained on the G20 along with the China/US trade talks this weekend. The broad markets traded from early lows to close higher on the day. The volume was well above average the opposite of Thursday’s trading. Most don’t expect any progress on the tariff fronts, but if no new tariffs are enacted that would be seen as a win by Wall Street. DOW and CSCO were a drag on the Dow index. The NASDAQ moved higher as semiconductors took another step higher, and small caps were the leader for the second day finally finding some support after selling lower. Solid move to end the first half of the year. There will be plenty of data to digest over the next week with all stats being released on the economy and markets globally. Lots of homework to do.

The S&P 500 index closed up 16.8 points to 2941 holding near the new highs from last week. There are plenty of challenges facing investors and not the least of which is the economy. The possibility of a test near term is still on my list of issues. The focus is on trade with China and the Fed. The Fed approved the capital plans for large banks giving them a clean bill of health helping the sector move higher and lead the index higher. Eight of the eleven sectors closed higher on the day as energy and financials led the upside. The downside was led by consumer staples. We adjusted our stops and letting this unfold. The long-term trendline has been looking better, but we will watch closely as the events continue to develop.

The NASDAQ index closed up 38.4 points at 8006 and holds above the previous resistance at 7849 and is moving back towards the June highs. Technology stocks led the move higher on Friday. Semiconductors got a boost from earnings reports pushing the sector up 5% the last three days. QQQ is our indicator. It cleared $186.60 resistance only to forfeit the gains again and holding near that level on Friday. The overwhelming number of issues facing the markets is still in place and we will let this unfold. Adjust your stops and know your exits both short and long term holdings.

Small Cap index (IWM) the sector broke below the $146.71 support and turned higher on news. The follow through from the buyers on move above $154.90 has been challenged by the economic data of late. The move below $152.28 support was negative to start the week. Big bounce at support and followed through on Friday with a move back above the $154.90 level. Emotionally charged activity in the sector currently.

Transports (IYT) The sector pushed lower breaking the $182.43 support and then bounced back above that level only to forfeit the gains and recover them again. Uncertainty defines the movement. The weakness in the sector comes from the economic data showing weakness. The bounce on Thursday and Friday helped keep the sector in the current trading range and looking for a break higher.

The dollar (UUP) The big question mark for the buck remains the trade tariffs with China. Lack of a deal should favor the dollar short term. The hope of a deal will hurt the dollar. The dollar has struggled the last few weeks on the news the Fed would intervene on interest rates and cut if necessary. Rate cuts hurt the dollar and with the belief growing the Fed will cut… the buck fell. The buck moved off the lows and the ETF closed at $25.97 and finding some support. Watching as this continues to unfold.

The Volatility Index (VIX) closed at 15.08 as the sellers take a break but remain present. The index remains elevated. Uncertainty is the key issue at hand. Interest rate worries remain in the mix along with tariff news. Watching how this unfolds near term.

Economic Data: Some positives in the data for the month of March… showing sound improvement over February.

FRIDAY, June 28th: Personal income rose 0.5% same as last month. Consumer spending rose 0.4% down from 0.6% last month. Core inflation rose 0.2% same as last month. Chicago PMI was 49.7 versus 54.2 last month. That shows yet another region slowing economically. Consumer sentiment was 98.2 below the last reading of 100 last month.

THURSDAY, June 27th: Weekly jobless claims rose to 227,000 above expectations and feeds the fuel for next weeks jobs report. GDP remained at 3.1% for Q1. Pending home sales rose 1.1% versus the decline of 1.5% last month. The data is mixed as usual. Next week will be of interest with the month of June coming to an end and all the new data will be released.

WEDNESDAY, June 26th: Durable goods orders were down 1.3% versus -0.3% expected. That was better than April, but the numbers are still negative. Some chose to take out Boeing and state it was up 0.3%… BUT, Boeing is part of the data and thus it was negative. The core capital goods number did show growth at 0.7%. All is not lost, but all is not good.

TUESDAY, June 25th: Consumer confidence fell to 121.5 versus 131.3 last month. This is more bad news for investors. Home prices rose 3.5% in April making the affordability of homes even more of a stretch for many. New home sales were 626,000 versus 669,000 expected… all the numbers are weaker of late and not making a case for the upside to continue in stocks.

MONDAY, June 24th: The Dallas Fed PMI data gapped lower into negative territory at -12.3 versus -0.1 expected. That mirrors the moves in New York and Philadelphia. The markets are all about the economy… no growth equals weakness in stocks… eventually.

FRIDAY, June 21st: Federal reserve members were out in force talking about their intended actions… Blah, blah, blah. Flash manufacturing and services data were slightly lower, but still in positive territory. Existing home sales were better than expected with 5.34 million sold versus 5.21 million in April.

It is all about the progress and the data of late has been more mixed than previously. There are still some sectors showing signs of growth, but overall it is still slowing. The data for May has not been impressive and is giving hope to the markets the Fed will cut rates as a stimulus. The unresolved issue of tariffs hasn’t helped things looking forward. Next week starts the next round of data as the June comes to an end along with second-quarter data. Interpret the data versus following our emotions. Let the trend be your friend… and for now, it is sideways.

(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 found support near the $101 mark. The break lower was the small-cap stocks struggling. The sector sold lower to start the week then bounce the last two days to close back at the $109 level which is where we started the week. Watching how this unfolds.

Semiconductors (SOXX) The downside pressure found some buyers and reversed the trend short term. The reversal started with the Fed talk on rate cuts and now the hope of the tariff talks pushed the sector higher. $192.43 entry. $192 stop. The sector has offered some individual opportunities on the move with ADI and SIMO offering trading opportunities. Watching how this unfolds.

Software (IGV) The spike lower broke the uptrend at the April high. Tested support near the $200 level and bounced. Moved through resistance and held. No position in the broad ETF, but digging in offered some interesting upside moves in DBX, SYMC, EVTC, and IIIV.

REITs (IYR) The upside move took a turn lower after hitting new highs at $91. The shift in the economic picture and the housing data sent money to other areas. We hit our stop and locked in solid gains on the position. Looking for support at the $86.30 level to hold. If so, we will consider reestablishing our positions.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.0% as money rotates to safety and TLT is showing a topping pattern. Flight to safety related to tariff threats and a weakening economy. TLT entry at $124. TMF entry $20.26. Stop $23.50.

Crude oil (USO) Supply data worries may get a boost from the OPEC meeting on Monday as many expect production cuts to be announced. Iran/US tensions remain and are also helping the upside for crude prices. The break above the $57.43 level remains in an upside trend. UCO entry $17.15. Stop $18.50.

Emerging Markets (EEM) The downside found support and held with a bounce off the lows. China helped as expectation are high for trade talks. Letting the weekend happen and then we will evaluate the opportunities. No positions.

Gold (GLD) built a base of support and started an upside move on worries about trade. The move above $121 was a positive and entry-level opportunity. The upside confirmed and broke higher on the heels of speculation the Fed would cut rates, which in turn weakens the dollar, which favors gold. $122.50 entry level. Stop $132. Vertical move showing a pennant pattern… watching with stops in place.

MidCap (IJH) The sector found some support at the $182 mark bounced. It has been a low volume move, but up nonetheless. $190 resistance was eclipsed and watching $193.35. We hold no positions in the sector currently.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. The bottom was established in May. The reversal was established in June. Now we are looking for the confirmation of the uptrend to be established. Trade talks with the US this weekend will shed light on the future.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for June 28th: The end of the quarter and the first half of the year. Plenty to look at and discussions will be all the rage next week. The S&P 500 index is up more than 17% for the year. That is awesome but worrisome. It raises questions of sustaining the increase based on the current environment. But, it is not ours to speculation on what will happen, but to invest based on our beliefs, strategies, and discipline. The markets will always lead the way to where our money should be deployed. For now, we watch how the trade talks unfold this weekend. OPEC meeting on Monday. Both will impact specific sectors as well as the broad markets.

  • Financials (XLF) Banks were given a green light by the Fed approving their capital plans and the sector rose 1.4% along with KBE and DPST posting solid moves higher.
  • Biotech (IBB) solid bounce reversal the last two days following some early week selling. Upside remains in play. Digging into the ETF offers some solid opportunities in SRPT, SYRS, CERS, UBX.
  • Small Caps (IWM/TNA) attempting to show some positive moves on the upside. Watching how this unfolds and digging into the sector for the leadership. Midcaps (MDY/MVV) moving higher as well.
  • Europe (IEV/EURL) solid move higher and trading in a flag pattern… looking for more upside from the country ETF.
  • Oil Services (OIH) bottom reversal followed through and upside in play. Watching how the OPEC meeting impacts the sector next week.

THURSDAY’s Scans for June 27th: The markets respond to rumors of the trade talks offering a truce on tariffs. Not likely to be that simple, but hope was in the headlines nonetheless. Watching patiently as it all unfolds… some notes to watch from Thursday’s trading.

  • Semiconductors (SOXX) followed through on bounce and added to the upside move. Earnings are the catalyst, but trade will be the deciding factor.
  • Small Caps (IWM) bounce following four days of selling to remain in the current trading range. Positive, but still not convincing.
  • Treasury Bonds (TLT) yields dropped again as money pushed back towards bonds on the day.
  • G20 Talk – plenty of speculation on trade. The bigger storyline from my view is the discussion on the world economy. The weakness is evident and it elevating the rhetoric about global leadership. Brexit is still an issue to be discussed relative to economic impact. Plenty of news worthy of attention away from tariffs.
  • Dollar (UUP) strong dollar generally means a strong economy and healthy consumer spending. Watching how the dollar responds currently after selling back to support with weaker data.

WEDNESDAY’s Scans for June 26th: The markets now looking for a trade deal at the G20 meeting. Love how twenty-four hours can change the comments and outlook 180 degrees. I for one, am willing to let this unfold. Trade what works for me based on my strategies. I will leave the speculation to the talking heads and look at what offers the least risk and best opportunity. For now, that is cash for the most part. We still have positions working, but hit our stops on REITs and small caps. The key elements in play are interest rates, trade, and the economy. The biggest is the economy if the downside trend continues in the data stocks will eventually follow. My outlook is very short term until clarity is gained in the three areas above.

  • Energy (XLE/ERX) jumped on oil moving through resistance as worries grow relative to the Iran/US conflict. This is another area where speculation rules. Adjust stop on crude oil positions.
  • Semiconductors (SOXX) given up for dead… springs to life with the positive earning from MU. Watching how today follows up.
  • Utilities (XLU) tank 2.1% as interest rates move back above the 2% mark. Rotation is happening as money seeks greener pastures.
  • REITs (IYR/SRS) fell 1.8% as interest rates move back above 2%. The rotation is in effect in this sector as well.
  • Gold (GLD) some selling as money rotates and lock in gains. Not a bad ideal on a portion of position in gold and gold miners.
  • Treasury Bonds (TLT) some selling as well with rotation in play.

TUESDAY’s Scans for June 25th: The markets react to the Fed comments about rate cuts. Add in worries about G20 summit. Add in economic data starting to show bigger cracks of slowing down. Downside setting up in stocks. The charts have not broken down, but they have failed at the previous highs. Watching how the next few days unfolds and if the buyers are willing to step in or step away. It is a critical time for the indices to decide up or down… not sure they will give clarity in direction, but we will be patient in letting it unfolds. My bias lies on the downside currently taking into account all the data. That said, I will let the charts unfold and let the market decide.

  • Technology (XLK/TECS) breaks below $77.90 for short side trading opportunity. High risk trade, but low risk entry point. Entry $12.72. Stop $12.44.
  • Semiconductors (SOXX/SOXS) breaks lower to lead the downside for tech. $187.40 level key breaking point. Watching how this sector unfolds.
  • REITs (IYR/SRS) Broke lower on the day and showed some reaction to the home sales data. Watching as the internals for the sector showing some near term weakness.
  • Transports (IYT) weakness in the sector continued on Tuesday as economic data remains in a downtrend. Leading indicator.
  • China (FXI/YANG) downside move as the talks near at the G20 summit. Regardless the impact on the Chinese economy has been weaker… watching how the recent uptrend unfolds near term.

MONDAY’s Scans for June 24th: Market is showing signs of segmentation as small and midcap tumble on economic data. Large caps held the own and the defensive sectors led on the day. This is getting interesting and the emotional side of the trade wants to go short the markets… the logical side shows no reason to do so. With the data showing weakness, we have to tighten our stops and manage the potential risk. However, the charts are still in positive shape and we have to follow the trend. Holding positions, locking in some gains where prudent, and letting this unfold. It is the uncertainty of the current environment that no one likes, including me. One day at a time.

  • Gold (GLD/UGL) adding to the upside vertical move. Money is running to speculation of global slowing. NUGT equally moving higher as well… adjust your stops accordingly.
  • Crude Oil (USO/UCO) moving higher again and now facing some near term resistance. Manage the stops and see how this plays out.
  • Small Caps (IWM/TZA) weakness as economic data falls again. The downside trade starting to look attractive. $9.84 level to clear.
  • Treasury Bonds (TLT/TMF) yields drop back following the bounce Friday and bonds move back near current highs.
  • Base Metals (DBB) showing some signs of a bottoming pattern in the downtrend from the April highs. Watching the parts as well as the whole.

Sector Rotation of S&P 500 Index:

  • XLB – Broke support at the $54.15 mark and bounced at $52.49 support. Reversed and break above the April highs. Entry $55.25. Stop $55.95. Watching for follow through.
  • XLU – The utility sector broke higher at $59 clearing the top of the trading range. Starting a topping pattern. Tested lower and watching.
  • IYZ – Telecom cleared $29.50 resistance and looking for near term direction. Moved back below the $29.50 level and watching.
  • XLP – Consumer Staples moved lower, bounced and hit new highs. Rotation of money to safer havens helping… watching the upside move. Rolling top.
  • XLI – Industrials moved below support $74.17 and reversed back into the previous trading range. Broke above resistance at $75.72. Cleared the $76.80 resistance.
  • XLE – Energy stocks have struggled on the uncertainty about supply and production. Crude moved higher on Iran speculations taking stocks higher as well. Watching how this unfolds as stalls near the 50 DMA.
  • 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 $91. Hit some resistance at the $93.32 level.
  • XLK – Technology sold and found support and moved above the entry point at $75. Stop $75. Low-risk trade and watching how it unfolds this week.
  • XLF – Financials moved to recent lows and bounced. Resistance at the $27.15 mark as rate cuts tend to not favor banks. Capital plan approval by the Fed gave a boost to the sector to end the week. Watching how it unfolds.
  • XLY – Consumer stocks fell to the 200 DMA and bounced. Solid upside reversal moving above the 50 DMA with some solid retail sales data ex-autos. Watching how the topping pattern unfolds.
  • IYR – REITs broke lower… housing data, worries about consumer slowing and some overall rotation in the markets. We will watch how this unfolds near term.

(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.)

WHAT DID WE LEARN:

FRIDAY: Trade talks remain the driver… what happens this weekend will define Monday’s trading. Speculation is like going to the horse track and betting on something you know nothing about. We will take what we see and manage the risk accordingly… that means what we see on Monday will offer some opportunities. Be prepared and do your homework. Trade with China is only one piece of the puzzle. Economic data and stats for June, second quarter and the first half of the year will be delivered.

THURSDAY: It is interesting to note how the media and investors will ignore the important data to report sound bites of information. The G20 summit isn’t about trade with China… it is about the state of the global economy and what can be done to improve the role of each country. There is plenty of weakness globally currently and we have to take note of how this all unfolds. Take time to read between the lines instead of just the headlines. There are some positive takeaways as well as some not so positive.

WEDNESDAY: Weaker economic data. The hope of trade agreement with China. The hope of interest rate cuts from the Fed. End result mix trading day. For me, another day of watching the parts unfold and the direction move sideways. We need clarity. That will come with defined action or inaction in all three areas above. Until then, we watch and act based on our strategy and discipline.

TUESDAY: Weaker economic data with consumer confidence and new home sales posting lower than expected numbers. The data doesn’t matter until it matters. Tuesday the data mattered along with what the Fed Chair stated concerning the level of cuts they are willing to make along with other confusing conjectures. Markets react to reality and traded lower. Watching waiting and looking for where the opportunities lie. Patience.

MONDAY: Economic data doesn’t matter… until it matters. The outlook is not optimistic. The Fed is dragging its collective feet. China is stating “No Deal” at the G20 meeting. There is plenty of worries in the headlines and we get to play wait and see. We know we have to manage risk and that is what we are doing. Reducing the size of our positions in the higher risk sectors. Hitting stops in those moving lower. Watching where the next opportunities lie and taking it one day at a time. Focused and disciplined with our money.

We remain in heavy cash positions for now. Looking for the opportunities worthy of the risk. Taking our time to understand the current environment of emotions versus logic. Patience wins the race in periods like this.

FINAL NOTES:

Markets remain focused on the speculation the Fed will now cut rates as the economic data shows signs of weakness. The FOMC meeting shed some light on that speculation but deferred the decision to the next meeting in July. We now look at the China/US trade talks this weekend as the next piece of the puzzle to unfold. The indexes closed up 1.9% for the week keeping the bounce from the current lows in play. We exited where the risk rose and we added positions where the risk was appropriate for our risk tolerance. Watching how traders respond in the coming week and if they are willing to put on risk or run for safety. We saw some risk on trading as small caps posted solid gains during the last two days. Some rotation is in play as money moves to where it believes it will be treated the best. This is where we find ourselves as well. Plenty of question marks and only time will tell the outcome. We will continue looking 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.

Only four of the eleven sectors managed to close the week in positive territory as money continues to look for the best opportunities. Basic materials and financials led the upside for the week with news driving money flow. Gold holding near highs, the dollar found support, and the economic data was overall mixed with some positive signs. Four sectors are moving sideways in large trading ranges. Six sectors are bouncing from their micro downtrends. One is executing a bottom reversal short term. Crude followed through on a bottom reversal helped by the ECB and Fed stimulus talks and Iran tensions rising. Watching how that unfolds. 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.