Trade worries dominate the headlines again stocks move lower

MARKET OUTLOOK FOR May 20th, 2019

Reports that trades talks pushed stocks lower on Friday ending the week right where we started. Monday stocks dumped lower on fear of more tariffs hurting both the US and global economies. Those same fears returned and selling in the last hour erased earlier gains. Economic data was positive boosting stocks into positive territory, but it didn’t hold after the reports were released by CNBC stating confident sources. As the old saying goes… been there, done that! No need to speculate we will watch how it unfolds and take it one day at a time. We remain predominately in cash as the limbo state of the market struggles for direction. We end the week with the sellers still primarily in control.

The S&P 500 index closed 16.7 points to 2859 holding above the 2815 support levels to end the week. The worries about higher tariffs returned after a three-day move from the lows. The sellers remain present and we remain cautious. One of the eleven sectors closed higher on the day as utilities are the benefactor of rotation. The downside was led by energy and industrials. The long-term trendline comes into question as they were tested on the downside move. Hit stops and banked a solid profit on move lower Monday. We added a small position on the move this week. Reentry $47.80. Stop $45.90.

The NASDAQ index closed down 81.7 points to close at 7816 back below the 7849 level of support. Technology stocks remain under pressure as semiconductors lead the downside for the sector. Software remains solid in the current uptrend. QQQ is our indicator as it moved back below the October highs. Monday moved below the $180.28 but managed to bounce off support. Having exited our positions last week we are watching for the opportunity that will result from the selling. Patience for now. Added a small position. Reentry $58.90. Stop $57.56.

Small Cap index (IWM) the sector has been in a consolidation pattern and cleared resistance last week only to forfeit the gains this week moving lower and testing at $152.28 support. Closed below the 200 DMA and remains in limbo relative to the direction.

Transports (IYT) hit some resistance at the $200.53 level and the index reversed on some solid selling. Reversed on Monday and took out all support levels and took our exit. Watching how the bounce unfolds with $192.42 level to clear on the upside.

The dollar (UUP) The big question mark for the buck remains the trade tariffs with China. Lack of a deal will favor the dollar short term. The ETF closed at $26.35 and remains in a positive pattern moving back to the top of the current trend… Watching as this continues to unfold.

The Volatility Index (VIX) closed at 15.9 on Friday as worries about tariffs return. Solid bump higher in anxiety as the China trade agreement remains a big question mark for the markets. The tug-o-war between buyers and sellers remains as some peace enters the trading environment. UVXY move below $37.50 and watching how it unfolds.

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

FRIDAY, MAY 17th: Good news as consumer sentiment was much better than expected, hitting 102.4 well above the 97.1 expected. Leading economic indicators were basically in line with expectations. Good data all week helped keep the buyers engaged… still dealing with tariffs on the other side.

THURSDAY, MAY 16th: Jobless claims fell as a positive sign for the week. Housing starts were much better in April and shows the impact of lower interest rates. Permits were up. Philly Fed manufacturing was well ahead of expectations and shows positive signs for the northeast. An overall positive day for the economic data.

WEDNESDAY, MAY 15th: Retail sales fell 0.2% well below expectations and negative sign for the economy. Even the ex-autos sales fell 0.7% and way off the mark. Industrial production was down 0.5% and capacity utilization was lower. Inventories were flat. The homebuilder’s index rose thanks to the current decline in interest rates. Overall ugly day of data… Throw in the decline in the 10-year bond yield as the inversions with the three-month bond and it is not pretty. watching how investors digest this news.

TUESDAY, MAY 14th: The small business index rose more than expected. Import prices showed a decline despite the tariffs. Household debt rose significantly as interest rates decline. Not great news, but not bad either.

MONDAY, MAY 13th: China trade realities were all the talk. What will they do to the US economy? Therein lies the challenge for the markets currently… speculation is rampant, I am willing to wait on reality. No real data released on the day just talk of what might be.

It is all about the progress and the data of late has been positives. Good signs of growth in some areas of the economy are helping keep the buyers engaged. If the tariff issues would get resolved it would have more of an impact on the markets. 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 again finding support near the $101 mark. The break lower was the small-cap stocks struggling. Holding support is positive for now, but no indications of a reversal currently. We don’t hold any positions in the sector currently. Looking for some clarity in the sector.

Semiconductors (SOXX) Exited all positions at the $207 mark. Watching the downside pressure as the sector continued lower on the week. The close below $192.43 to end the week is a negative and the short side trade in the sector (SOXS) is looking attractive near term. Watching how the new week 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 (Stop Hit). Held its own for the week and looking for some answers moving forward.

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). Held well thanks to lower interest rates on the week.

Treasury Yield 10 Year Bond (TNX) closed the week at 2.39% with some volatility in rates from the China/US trade talks. Watching how this unfolds near term. TLT is a hold if you own bonds. Flight to safety related to the China tariff threats. TLT hit entry at $124. TMF $20.26.

Crude oil (USO) Found some support at $61.60 all week and bounced. The trek higher hit a roadblock with Trump’s comments concerning OPEC increase production. The sanctions in Iran are creating some tension with pricing and supply worries. Watching how the story unfolds near-term on pricing.

Emerging Markets (EEM) The downside accelerated this week on the worries about more tariffs with China/US. Broke the $41.23 support, negated the uptrend from the January low, and without a resolution could drop to the $38 level support. No positions currently.

Gold (GLD) built a base of support and tried to start an upside move on worries about trade. That failed as the dollar gained strength and the metal tested the previous lows. The downtrend is in play and watching support. The Goldminers (GDX) offered a short side trade on the move lower. Entry $22.60. Stop $21 (adjusted) DUST.

MidCap (IJH) The uptrend from the December low tested with a move back to the $190.44 support. No clarity in the sector and watching how this unfolds near term.

China (FXI/YINN) the country ETF is a good benchmark for what is taking place with the current news and tariffs. Not a good week for the ETF as it showed the volatility and uncertainty present over trade. We did trade the short side of this with YANG. Entry $42.70. Stop $50. Watching how the new week unfolds.

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

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENT

FRIDAY’s Scans for May 17th: buyers were quiet as headlines brought back anxiety about trade with US/China. Losses weren’t terrible, but they were enough to end the week on a sour note. The scans are more of the same… the gains from Thursday were given back and we show a bottom on the charts near the recent lows. Taking it for what it is… emotionally driven market without direction. Until there is clarity on the trade issues it will be hard for the overall market to establish a clear trend.

  • Watching Treasury Bonds (TLT) as yields continue to fall. Bonds have rallied nicely and we will monitor our positions.
  • Watching Crude Oil (USO/UCO) held support and bounced on Friday. Worries about supplies are back as the Iran sanction escalate with the US. Looking at the opportunities should this show up in the data reports on supply. UGA is on watch list as well.
  • Watching the consumer… XRT, XLY, both show some topping and key support levels in play. Scanning the stocks and data shows some weaker trends in play the last four months.
  • Watching the weakness in Semiconductors (SOXX), small caps (IWM), and biotech (IBB). Key sectors for growth and they are not impressing at all near term.
  • Watching the rotation and money flow as money is shifting to defensive sectors and safety. All signs of worries from investors.

THURSDAY’s Scans for May 16th: more buying, but it did show some conviction this time. Software, telecom, basic materials were upside leaders and garnered my attention. The weakness in the SOX was duly noted as a disappointment. There were some bright spots with AMD and NVDA beating earnings. Taking it for what it is currently… a bounce willing to trade the strength and avoid the weakness. Be focused and disciplined in any trade opportunities short-term.

  • S&P 500 Index (SPY/SPXL) upside trade opportunity with the confirmation of the bounce from the lows. Watching how this unfolds.
  • NASDAQ 100 Index (QQQ/TQQQ) upside trading opportunity with the confirmation of the move higher on Wednesday. Managing the risk of the sector and watching how the semiconductors unfold. Software (IGV) leading the upside move along with SOCL, HACK, SKYY.
  • Semiconductors (SOXX) watching how negative sentiment unfolds in the sector relative to Apple. NVDA and AMD earnings could help shift the tide.
  • Crude Oil (USO/UCO) upside resumed and watching for follow through. UGA also broke higher on the day. Energy stocks added some upside as well.
  • Positive moves from IYZ, IBB, XLF, XLK, ITB, XLV, UNG, USO, XLE.
  • Negative moves from SOXX, IWM, TLT, XRT, EEM, GLD.

WEDNESDAY’s Scans for May 15th: the bounce continued on the rumors of a delay in auto tariffs. Is that enough to elevate stocks and prompt a rally back to the previous highs? Not likely. Looking at the push to the 50 DMA along with volume and sentiment. Still plenty of question marks and willing to be patient and let this all unfold.

  • S&P 500 (SPY) needs to clear resistance 2860 and offer clear entry point. Watching today.
  • NASDAQ 100 (QQQ) $182.50 entry level cleared… watching today for confirmation. Large cap techs did well on Wednesday with GOOG leading the upside.
  • Technology (XLK) $75.05 level to clear if we are to take a position. Watching how today unfolds.
  • Treasury Bonds (TLT) still rising on the decline in rates. The flight to safety remains in play short term. Adjusting the stop.
  • Homebuilders (NAIL) topping pattern of consolidation. Managing our stops, but looking for a follow through upside as yields favor buyers.

TUESDAY’s Scans for May 14th: Modest bounce back from the selling on Monday, but faded into the close giving up some of the gains. As stated above not convinced the indices to retest the support near the 200 DMA and other levels. Letting this unfold near term. The charts show a modest bounce from the lows, but that does not indicate reversal at this point. Need more evidence and more positive activity as it relates to volume.

Watching the following… XLK, SPY, QQQ, XLK, SOXX, XLY, TLT… looking for clarity of direction and how any bounce or reversal will unfold. Patience as this all plays out.

MONDAY’s Scans for May 13th: More reactions to the China news of believing they can survive a trade war with the US. Only time will answer that question, but in the meantime, investors believe it will impact stocks and they selling accelerated. Sell on the rumor? We will see how this unfolds. Not really willing to chase the downside acceleration and watching for now how this unfolds. Some opportunities will arise from the ashes as news continues to drive the markets near term.

  • Major support levels are broken… SPY, QQQ, IWM, XLK, SOXX, MDY. No shorts taken on the move, but willing if this all confirms.
  • Treasury Bonds (TLT) flight to safety remains in play.
  • Gold (GLD) moves higher on the look for safety.
  • China (FXI) tanks on the news.
  • Technology (XLK) not a good sign as breaks lower.

Sector Rotation of S&P 500 Index:

  • XLB – Selling found some support at the $54.15 mark and watching how it unfolds in the coming week.
  • 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 and a trading range. Entry $53. Stop $56.75.
  • IYZ – Telecom has a rolling top pattern and hit our stops to lock in our gains. Held $28.62 support and watching.
  • 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). Holding upside for now.
  • XLI – Industrials moved to support $74.17. Watching.
  • 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 $42.
  • 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.
  • XLK – Technology sold and found support at the $73.50 mark and watching how it unfolds near term.
  • 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. Testing and holding at the 200 DMA.
  • XLY – Consumer stocks under pressure of late and looking at how it manages with support at the $113.50 level.
  • RWR – REITs broke lower… bounced from lows clearing $93.21 resistance… positive upside move. Entry $88. Stop $95.50. Watching and managing the risk as it turns sideways. Collecting the dividend and letting it unfold.

(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: Week of May 13th

News and speculation work in both directions. The President tweets all is well and rumors of delayed tariff on autos sparks some upside. CNBC states sources that the trade deal is dead and stocks sell. The economic data and earnings are helping stabilize some of the anxieties for now. We will watch and see, but in the meantime, we added some short-term trading positions on the move. You have to manage the risk of these type of trades and keep your eye on the prize. As stated above there were some positives and some negatives on the day. Some setups for downside trades as well.

Remember the markets hate uncertainty despite the bounce on the rumors and data. The economic news from China was weaker again as expected… FXI resumed its downward trek. US economic data was positive helping to balance the not so good news on trade. This continues to be a tightrope we are walking relative to growth and government policy. The test of the April low in interest rates gets noticed by investors. The inversion on the yield curve is deepening and the impact could be inflation… This is a key fact to watch moving forward.

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 tested and held key support levels after trading lower all week. The key issue this week was no trade deal with China. The indexes closed in the red for the week, but it could have been worse. Monday saw accelerated selling and then a bounce midweek and selling on Friday. We traded the volatility in China. We exited where the risk rose and now we look to find the next opportunities as we move forward. Economic data was on the positive side as seen above. 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 continue looking at positions to take profits, adjust stops, and manage the risk of the current environment. Holding cash is not a bad thing during uncertain periods… remember one thing… you can make up for lost opportunities, but the loss of principle is much harder to regain. 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 negative territory as money continues to move with some rotation. Financials and industrials led the downside for the week and raising new questions about the trend. Gold fell, the dollar rose, and the economic data was overall positive. Seven sectors remain in a positive uptrend with two moving sideways in consolidation patterns. Two are in micro downtrends. Crude held support with small move upside to end the week. 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.