Yields drop again, stocks fall this time

Today’s Notes: 

On my webinar last week I spent time on the concept of SIMPLE in our trading and investing process and money management. I find the longer I am engaged in the process of trading and managing money the more I am drawn to the KISS principle. Steve Jobs gained notoriety for his comment, “simplicity is complex”. All the technology advancement in software, computers, the internet access to historical data and charting software has only served to compound the complexity we apply to process of managing money and trading stocks.

John Murphy stated, “All one really needs to do is find out which markets are rising and which ones are not. It’s really as simple as that.” If we would only take time to reflect on that statement the next time we are experiencing anxiety over buying for selling a position in our portfolio. If the sector or index is falling, and we are long the position, selling the position from our portfolio only makes since. The challenge comes with the psychology of trading and managing our money, and that is another topic all together. Bottom line Simple wins.

The story of Pavlov’s dog comes to mind when we discuss the psychology of trading. As the experiment validated, the repetition of an act will cause a response, in his case ringing a bell and feeding the dog led to the dog salivating even if no food was present when the bell was rung. Looking at stock charts, technical indicators, fundamental data relative to stocks or watching CNBC is a stimulus, if done repetitively enough. That stimulus prompts a response automatically based on how we trained ourselves to respond. Good or bad, in the end, it develops a habit. Thus, if you want to improve your trading look at what stimuli you respond to, and the resulting response. Once you have clarity in that process you will be able to work on changing or eliminating your bad habits. My choice has been to replace those with Simplicity of actions (response) to predetermined and tested stimuli (trading strategies). Simplify the stimulus and you will simplify the response.

I am going to add to this topic on Thursday, May 22nd, one week from tonight. David Henry Thoreau said, “Simplify, Simplify” — Steve Jobs said, “Simplify”. I am slow and those two quotes took me awhile to understand, but the light bulb went off one day that Steve Jobs wanted it to be even more simple. I am going to discuss the topic, “KISS”, Keep It So Simple, you can do it! There in lies the key to successful trading, Simple Action that Works. To register, ‘Simply’ log onto JimsNotes.com.

Chart to Note:

The NASDAQ composite index shows a consolidation wedge the last four weeks of trading. Going back to November we still have the head-and-shoulder pattern in play as well. A break of the 3990 support would be the negative downside play many are discussing. For now we continue to chop around looking for direction. Be patient and let the current consolidation play out. Patience is the best course of action looking at the index.

Composite Index

We posted the chart of the homebuilders Wednesday showing the downtrend in play from the March high. The homebuilders index released on Thursday didn’t help the cause on the upside, but it did stick with our evaluation of the downside being in play. Tested below support at $30.50 level of support and held, but the damage is done as the sellers believe they can press the downside.  Plenty of pressure on the stocks relative to cost of materials and availability of land. The downside is in play, but some optimism showed up on Monday as the ETF moved back above the 200 DMA, but it gave that up in trading. A break of support would open the door for more short trading activity.

We posted the chart of Japan Index (EWJ), it had gapped higher on Tuesday, and was in position to break the downtrend line off the November high. Didn’t follow through and today it moved lower, but it is still worth watching for a possible upside trading opportunity if the momentum returns. Need to confirm a move above the $11.30 ish level and then $11.45, etc.

Notes to Note:

  • EGG Scans show 30% drop in positive scan results. The drop is a result of the last two days of trading have a negative bias for stocks. This is something to watch moving forward.
  • CPI was up 0.3% and in line with expectation, but we are seeing some inflation creep into the picture. Food was up 2.7% for the second month in a row. This will impact the consumer! As we noted yesterday the PPI was up 0.6% well above the 0.2% expected.
  • Russell 2000 index sold to support at 1083, but managed to bounce back to 1097 on the close. The weakness in the sector is putting pressure on the broad markets as investors continue to struggle with believing in the growth picture being peddled by Wall Street and economist.
  • India (EPI) is up nearly 20% since the February lows and begs the question relative to valuation. The break from consolidation on Friday was positive and the follow through this week has added to the upside. I would tighten stops and protect gains here short term.
  • Oil is back to $101.50, but remains on the upside short term.
  • Volatility index (VIX) bounced to 13.77 on the early selling and then tapered off to 13.1 into the close. The losses were challenged intraday with some modest buying to keep the fear level in check. Still no real volatility, and sentiment is leaning on the positive side with a twist of negative stirred in here and there. The NASDAQ volatility move up to 16.04 on VXN. Nothing big, but we continue to watch the rumblings.
  • Financials turned lower today (down 1.1%) as the negative sentiment in place towards the banks only accelerated in the overall selling.
  • Watching for follow through on the downside tomorrow if the sellers are to gain any momentum. A bounce to end the week would only keep us in the choppy market environment and that is not conducive to anything except choppy results and anxiety.

The markets remain somewhat uncertain in direction as we have discussed for the last eight weeks. The growth sectors have sold and rotated to dividend and defensive positions, and now we are seeing further rotation to bonds. The fear factor is rising modestly and that is something we have to consider going forward. Until the picture clears and defines the trend we will continue to take it one day at  a time. Stay focused and remember that cash is a sector and sometimes the best trade relative to market risk.