Yields rise, Fed talks, Markets worry

OUTLOOK: October 4th

The ADP jobs report was better than expected… good news, right? Not really… it only made the media focus on what the Fed statement was from the FOMC and following. If the economy is too strong and the markets are too high… then this employment data will cause wage inflation. The psyche of the market is very fragile and given the wrong twist on data points the media and investors will find a way to make it more than what it really is. A full working economy is good, not bad… but, if you are trying to control money flow, interest rates, and ultimately influence the markets… you use the data to twist the fact to get what you want or at least, achieve what you are trying to control. The challenge is not getting more than you asked for! The reality is the Fed cannot control the situation they can only screw it up… free economies need to be free of manipulation by outside activities from the Fed. At the end of the day, the push higher on the data was forfeited and markets closed essentially flat on the day. Evidence of the shift in sentiment caused by the Fed on Wednesday was interest rates moving to 3.1% up more than ten basis points in one day! That is controlling the flattening yield curve… good job Mr. Powell… you just slowed the housing markets, trashed utility stocks, and hampered our ability to pay our national debt… good job controlling the economy. 

The S&P 500 index closed up 2.1 points at 2925 as the index continues to test the highs with average volume. The leaders were financials and energy with five of the eleven sectors closing in positive territory. Utilities and consumer staples were the weakest movers as interest rates play havoc with interest sensitive stocks again and Powell’s comments continue to raise havoc with the markets intraday. The chart is holding the long-term trendlines off the January/February 2016 low. Patience is key along with your stops in place.

The NASDAQ index closed up 25.5 points to close at 8025. The index remains in a pattern of consolidation near the previous highs. The intraday move started higher then reversed with semiconductors acting as a drag on the index. The uptrend remains in play and we must practice patience along with a strategic approach to managing money. Stops in place and watching how this unfolds. QQQ tried to break above the August highs but couldn’t hold the move into the close. WYNN, XLNX, BIIB, FB, and WDAY were leaders on the day as some laggards bounce, leaders lead, and patterns develop on the day. The downside came from MCHP, PAYX, TSLA, ISRG, and HAS as some leaders struggle on the day and some downtrends accelerate. Some nice pattern setups in the large-cap stocks when you scan the sector.

Small Cap index made a move lower that tests the $164.43 support. The bounce on Wednesday gave some hope to the sector near term. A break lower would be of interest on the short side should the seller take control of the activity. The leadership of this sector has been key to the bounce from the April lows and now brings into question the direction near term. The break of the 50 DMA is another negative for the move. Watching to see if the downside develops.

Transports (IYT) moved lower and tested the $202.73 key level of support and held on the day. The Dow moved to new high and thus we have some discrepancies in the short term moves between the two. Watching how this unfolds moving forward. The leader on the day was KEX, MATX, and CAR with sector showing better activity than Tuesday. Overall it has been the positive moves in the shipping and logistics stocks keeping the upside in play. Watching how this current test unfolds. Stops were hit on positions last week and we locked in a positive gain…

The dollar (UUP) closed back above the key support $25.17 as it responds to the FOMC decisions and issues globally. Italy’s struggle with debt is putting upside pressure on the dollar of late as well. This puts the dollar at $25.42 at the close.  The overall move higher is positive from my perspective, but there are many who think a weak dollar helps US companies. Simply not true… history validates a strong dollar favors the US despite the short-term setbacks.

Gold (GLD) continues to build a base following the bounce at support near the $110 level. The dollar and geopolitics have been the catalyst for the metal… both up and down. Entry $114. Stop $111. The challenges in Italy woes impacted the metal on Tuesday. Letting it settle and find some direction. The gold miners (GDX) responds to the bounce in gold Tuesday posting a solid gain. Entry $18.50. Stop $17.90. The stocks are oversold and looking for an opportunity in the bounce and reversal. Metals and Mining (XME) building a base or bottom with a test of the recent bounce higher. Cleared resistance at $34.50 but has reversed on the Fed and tariff activity. Base metals (DBB) bounced back to resistance at the $16.70 level. Hit entry $16.70. Stop $16.75 (adjusted). NAFTA agreement helps push the sector higher. Some positive moves and looking for a follow through. These sectors are news driven and high-risk trades.

Crude oil (USO) Crude spiked to a new high at $75.30 Monday. Held its ground on Tuesday. Higher again on Wednesday. After testing support at $64.22 it has been a volatile uptrend as the commodity cleared the levels of resistance and added to the upside. The speculation about demand rising or production decreasing has been driving the commodity higher and creating the day to day volatility. The commodity closed at $76.41 up 1.5% on the day and watching how this will follow through. The bottom reversal offered the first opportunity for (UCO) crude price entry at $66.50. Stop $74.15 (adjusted). (UCO entry $30.15, stop $36.20)

Emerging Markets (EEM) failed to clear resistance as the double bottom pattern and is testing lower again. The question remains how the sector will unfold near term. China canceled talks ($200b new tariffs enacted), Mexico, Canada, and the US come to new NAFTA agreement, and Europe has a partial agreement. Some call it progress… some remain negative… regardless we are watching the bounce off the lows and what opportunities it offers. Add the worries in Italy to the list and you have too many worries and uncertainty as this unfolds near term with fear and news as the drivers. $44.09 is level to clear.

The Volatility Index (VIX) closed at 11.6 on Wednesday as the anxiety levels are flatlining and stocks closed the day mixed. It is of interest that the volatility has dropped to a point of complacency again… watching how this unfolds moving forward. The background noise and worries can come back into play… now we watch to see what happens. Short term the market is driven by emotions… trade accordingly by managing your risk. There is plenty on the stove that could boil over at any time… watching how this unfolds.

The week focused on the new tariffs enacted by the President against China and the Fed hiking rates and talking about the overvaluation of stocks. We all know how qualified the Federal Reserve is to address stock valuations… it brought back haunting memories of the last time this was done in 1999. One more thing to worry about and for the talking heads to discuss ad nauseam. Technology stocks struggled again with semiconductors moving below key support. Financials moved lower on the uncertainty around interest rates and European debt issues focused on Italy. Healthcare remains the shining star as it continues to move higher in the trend with biotech taking the lead for the week. Interest rates closed above 3% on the ten-year bond… the FOMC meeting made the rate hikes a reality… but, bond rose in price as money rotated based on the perceived risk of stocks looking forward… go figure. Watching how interest sensitive stocks respond with REITs and utilities finding some buyers to end the week following a dump lower. The tariffs put into work this week by the White House continues to impact specific sectors. The Chineses canceled their scheduled talks to resolve the tariff issues raising more concerns. This is an ongoing issue that will not be resolved short term. The NASDAQ was flat on the week with some concerns about technology heading into the earnings season. The S&P 500 struggled all week to maintain support and find a catalyst on the upside. Only four of the eleven sectors closed higher for the week. Technology, healthcare, and energy were the leaders for the week as money continues to find opportunities. Financials and basic materials led the downside breaking key support and showing negative reversals on the charts. The third quarter came to a close and that will bring plenty of financial and economic data along with earnings. Energy and crude oil moved higher bouncing new near-term highs for the commodity. There is plenty of dynamics working in the markets overall and we will take it one day at a time as the trend remains positive. 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.  Manage your risk and look on the horizon for answers to the trends.

Monday: we start the week with mixed emotions towards stocks. The NAFTA agreement should have been a positive, but worries about mid-term elections have derailed the enthusiasm. Crude spiked higher gaining the attention of traders. Small caps dumped lower getting my attention… and we will watch how all of this unfolds moving forward. 

Tuesday: Italy causes concerns… Fed talking down a growing economy without inflation… stocks are setting up to move higher or test lower… patience is the way we are playing it for now with our stops in place on short-term positions and looking at how the long-term trends unfold. Taking it one day at a time. 

Wednesday: great numbers from the ADP jobs report has the reverse effect on investors as worries rise about the Fed activity with interest rates. The fear is showing up in the treasury yield rising to 3.1% up better than ten basis points on the day… this rewards our downside position in bonds… but, raises plenty of questions about stocks looking forward. Hope is alive, but worry is taking the upper hand. 

(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 managed to bounce off the $116 support again and moved back to the August highs. All is well again… for now. Taking what the sector offers and managing the risk accordingly. Entry $118, Stop $116 (adjusted). Intraday reversal after new high… added downside on Tuesday… bounced on Wednesday… watching. 

Semiconductors (SOXX) No follow through to the bounce back above the $187 level as the sector proceed to give up support and retest the $182.38 level along with the 200 DMA as support. If the sector breaks lower it could get ugly. Downgrades by analyst have little effect as sector holds in range. 

Software (IGV) The sector tested support, bounced, remains in an uptrend, and is a leader. The long-term uptrend remains in play along with the near-term volatility. Watching how this unfolds to start the week. Entry $193.78. Stop $199. FTNT, RP, ZEN, BB, and WDAY lead the week. MSFT hits new highs. Wednesday sees some buying in the sector. There are stocks breaking down that are key… ORCL, OTEX, and MANH… watching how this unfolds.  

REITs (IYR) UGLY decline in the sector as interest rates moved higher… UGLY gap lower on the Fed announcement. Breaks the $79.76 mark of support and recovers on Friday to end the week… watching how this unfolds to start the week. Hit stops on our positions and locked in a nice gain.  Failed to recover the $79.76 mark and continues to struggle. Testing the 200 DMA on the data reports and interest rates rising. 

Treasury Yield 10 Year Bond (TNX) moved to 3.06% on the interest rate hike and Fed worries. This is an anxiety move… watching how this unfolds and the short side of bonds… TMV. The short side is in play. Entry $19.65. Stop $21.20 (adjusted). The strange reaction of bonds bouncing higher following the rate hike is money moving towards safety… watching how that unfolds. 3.16% as yields jump ten basis points. The impact the bond is obvious and the short side trade unfolds again. 

Energy stocks (XLE) The stocks bounced off support at $72 again after a second attempt to move lower… the move up and down is all predicated on the belief behind the supply data… speculation is not a good basis for trading or investing money. Moved back to resistance and stalled. Watching as crude moves higher on the week. Entry $74.40, Stop $74.50 (adjusted).  A solid move higher as crude jumps to new four-year high. Breaking through resistance points of interest and gaining on the May highs.

(The notes above are posted every weekend and updates are added in red daily as they change or develop.)

Daily Scan Results:

WEDNESDAY’s Scans 10/3: interest rates rise above 3.1% on the ten-year bond. Interest sensitive stocks decline. Energy prices rising. Small-cap sector struggling. Earnings on the horizon. Positive jobs data twisted to negative in light of the Fed activity and comments. Geopolitics alive and well. Italy living in a delusional world of debt. The market psyche is changing and we have to manage our short-term risk. Taking it one day at a time.

  • Treasury Bonds (TLT/TMV) raised our stop on short side trade as interest rates spike on the day. Worries about the Fed taking control is pushing the yield higher in advance of their action. This is impacting housing, financing of any consumer products, and interest sensitive stocks.
  • Energy (XLE) follow through on the move higher yesterday. Added a position in stocks (ERX) to go with the crude (UCO), gasoline (UGA), natural gas (UGAZ), and services sector (IEZ). Managing the stops of each.
  • REITs (IYR/SRS) the downside has been put in play by the move in interest rates. Managing our risk and the outlook as rates move on Fed speculation. Utilities (XLU) equally downside play in place.
  • Brazil (EWZ/BRZU) hit our target ($25.70) on Wednesday and took half of the trade off locking in a solid gain. Letting the balance unfold near term.
  • Emerging Markets (EEM/EDZ) short side back on the radar as the selling resumes on the worries in rates ripple into the sector.

Plenty on the table relative to speculation. Some of this speculation is becoming reality through actions taken. We will continue to take what the market offers and let the speculators deal with themselves. As the old adage goes, “be careful what you wish for…” is coming true relative to the Federal Reserve. Manage your risk accordingly and let it all play out one day at a time.

TUESDAY’s Scans 10/2: an interesting day for stocks as the Fed continues to believe they can control the outcome of the economy by talking stocks down. Free trade is a theory that is constantly tested by governments and banks… human tendencies is to control versus letting things take their natural course with cause and effect. Too much theory for this early in the morning… taking what the market offers.

  • Utilities (XLU) bounce as the ‘V’ bottom pattern takes shape. Yields have taken a break on the Fed comments and sparked a mini-rally in the sector. Not worthy of the risk in the sector, but some stocks are of interest by scanning the sector. AES, EIX, AWK
  • Energy (XLE) continues higher as the price of crude take a rest, but remains at the current highs. Crude (UCO) remains in play, gasoline (UGA) remains in play, oil services (OIH) are trying to break higher at $25.52, and natural gas (UNG/UGAZ) remains in play.
  • Consumer Discretionary (XLY) reacting to the Fed… testing key support in the trading range. 50 DMA is also in play and a break lower would be another negative to add to the pile of disappointments of late.
  • Brazil (EWZ/BRZU) added solid upside move to the position established last week on the break out from the bottoming pattern. Target is $25.70 barring any unforeseen input.
  • Small Caps (IWM/TZA) added profit to the downside trade as the move lower in the sector creates concerns. Raise stop to $8.50 or break even.

The Fed is not going to stop talking and justifying their actions. The markets are reacting to the talk. The key for you and I is to stay our course and manage our risk according to the environment that is. We have to manage our money, not the markets. Manage your positions against the objective defined for each.. short and long term.

MONDAY’s Scans 10/1: Tried to move higher on the trade agreement announcement over the weekend but failed to hold the move. Plenty of questions on the direction aspect of the markets. We could see a test lower in October and a bounce higher with large-caps leading the way into the year-end. Watching, managing risk, and looking for the opportunities in the moves. Nothing more…

  • Crude Oil (USO/UCO) jumped higher on the day gaining more than two percent. Rationale… November 4th deadline for countries to halt purchasing Iranian crude. Watching and taking the gains for now with our stops in place.
  • Basic Materials (XLB) bounce off the lows following the trade agreement announced this weekend. Watching how it unfolds.
  • Treasury Bonds (TLT) dump lower on higher yields. Watching how the Fed deals with this issue and we remain short treasury bonds. TMV.
  • Natural Gas (UNG/UGAZ) nice spike higher in the commodity as it continues to rise along with crude speculation. Raising our stop to $69.
  • Small Caps (IWM/TZA) short side confirms the break lower and offers a trade entry $8.50. Stop $8.10.

Plenty of news and activity to start the week… interestingly enough none of it is economic news. Watching how that impacts the markets as well with the jobs report due on Friday morning. ISM manufacturing data showed 59.8% versus the 60.3% expected… this is still a solid number for the sector. ISM services data is due on Wednesday with 58.3% expected. Watching the data with earnings on the horizon.

FRIDAY’s Scans 9/28: The end of the quarter is here… earnings season is on tap and then there is plenty to deal with after a week of tariff hikes, interest rate hikes, and speculation about how the economy will respond. Throw in budget worries with Italy and we have plenty to think about over the weekend. Not really, we need to manage our positions and let the speculation be handled by the talking heads. 

  • Interest Rates and Bonds… Rates held at 3.06% on the ten-year bond. TLT bounced off the lows as money rotated towards bonds following the FOMC meeting… letting this one unfold as some fear over the Fed going too far is reasonable… but, it will take another six months for that to unfold… any aggressive downside be from fear and speculation. 
  • Crude Oil (USO/UCO) the move above $73 is of interest as the buyers continue to put money to work on belief demand is outpacing supply. The Iran sanctions are starting to affect supply and US will not be able to make of the difference soon enough. Managing the positions and letting this unfold. Energy (XLE) has moved off the lows and in position to break higher.  Raise stops to account for the move higher in crude. 
  • Financials (XLF) not a pretty picture on the chart as the move higher takes a move lower and back below $28.24 and the 50 DMA. Worries about the flat yield curve, European debt, and a Fed that seems hell-bent on hiking rates… watching for the resulting opportunities. 
  • Base Metals (DBB) double bottom pattern in play and looking at how this is going to unfold. Tariffs have been raising havoc on the sector near term. DBC also making a solid move on the upside of late. 
  • Healthcare (XLV) remains a leader in a positive uptrend. The changes to the Affordable Care Act has prompted more spending in the sector… thus more opportunities. The upside from biotech, healthcare providers, medical devices, and insurance have all added to the upside move. 

Positive outlook, worries about the Fed, worries about Europe, worries about tariffs, optimism towards earnings, and hope of a new leg higher remains in the headlines… Manage your risk and let the rest take care of itself. 

THURSDAY’s Scans 9/27: The bounce in large-caps and technology helped keep the markets in positive territory for the day, but the concern rests in the balance of the market sectors as small and mid-caps test the break lower on Wednesday. Watching the rotation and looking for the developing opportunities… Friday ends the quarter and likely to see some juggling in response… we will see how this all unfolds. 

  • Technology (XLK) The consolidation pattern on the chart shows the lack of conviction from investors near term… there was enough movement on Thursday to push back to the top end of the current range. AAPL, XLNX, TTWO, ATVI all made solid upside moves to continue in their respective uptrends. 
  • Utilities (XLU) bounced back some from the selling impact of the Fed action on interest rates. Held the $51.10 level of support. Watching interest rates and opportunities here. NRG and AES are worth attention. 
  • Healthcare (XLV) continues to push higher as biotech (IBB) leads the way. 
  • Natural Gas (UNG/UGAZ) upside making a positive move. Followed through on the break above resistance at $24.24 breaking from a longer-term trading range. 
  • Brazil (EWZ/BRZU) adding to the upside break from the bottoming pattern. Entry $17.75 follows through with solid upside… manage the risk of the trade. 

Interesting day for stocks as some bounce, some flounder, some move lower… looking at the rotation, the leadership, and the flight to safety… which will take on the leadership of the broader indexes? 

(The Scan Notes are posted daily. The trailing five days remain on the 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:

One big change of note concerning sectors… The Global Industry Classification Standard is making a change to the Telecommunications Services Sector. It will become the Communications Services Sector which sounds minimal but could have a significant impact going forward. They are adding NFLX, DIS, CSMSA, FB, and GOOGL. The new structure will be enforced by the end of September. This will make it more of a growth sector overall but could dampen some of the volatility the sector has experienced over the last two years. This took place last week… note that it will impact the sectors and the stocks being moved on a forward-looking basis. Keeping track of the impact on the sectors.

  • XLB – Materials moved lower on the tariffs added last week with China. More selling to add to the downside impact. More selling in response to the Fed actions… $58.44 fails to hold as the chart challenges the next support at $57.80. Modest bounce on the trade agreement. Selling resumes on Wednesday. 
  • XLU – The utility sector uptrend was disrupted by the move higher in interest rates. The bounce higher to end the week was in reaction to bonds bouncing as rates drop slightly… the cause is more rotation to safety on fear the Fed will move too far. Watching how this unfolds and where support will be. $51.10 next level to watch.  Added to the bounce as rates calm. Lower on Wednesday as rates spike higher. 
  • IYZ – Telecom moved above the $29.51 resistance with some momentum in the sector. Entry $27.80. Stop $29.15 (adjusted). Sold back to the $29.50 support. Watching how the week unfolds.   
  • XLP – Consumer Staples has been in a gradual uptrend from the May lows, but they have faced resistance at the $54.92 mark. Entry $50.50. Stop $53.25. Stops in place and let this unfold. Bounced at the 200 DMA. Downside back on Wednesday with Fed talk.
  • XLI – Industrials made a move above the 76.80 level again and cleared the highs of February. Entry $72.50. Stop $78.20 (adjusted). Working higher steady and slowly. Bounced on the trade agreement. 
  • XLE – The stocks bounced off support at $72 and back to the resistance. The bounce in crude was helped by the supply data and the stocks have followed the bounce. Break higher as crude climbs and stocks follow.  
  • XLV –  In June the sector bounced off $83.24 support. Then moved above the $86.74 resistance in July. Stalled at the $90.50 level and accelerated higher. Solid uptrend for the sector as we let trend run and manage our risk. Hit new highs again. Entry $83.25. Stop $92.75 (adjusted). Added upside as biotech stocks move. Solid bounce on Monday. Holding near the highs since.
  • XLK – Technology remains a sector of volatility as seen in the consolidation pattern. Entry $72. Stop $73.80. Letting this unfold and managing the risk and volatility. Tested lower, but closed higher and holding in the range. A nice move above resistance for the week. 
  • XLF – Sector drove lower all week as the negative impacts of European debt, interest rates, and Fed comments keep the sector in check. Watching how the week unfolds. Bounced? Followed through on Wednesday. We will see what happens from here. 
  • XLY – Consumer remains a leader despite all the rumblings and worries. The sector broke higher adding to the upside trend. 50 DMA is the level of support and stops for long-term positions.  Selling on Fed comments… breaking support and watching the 50 DMA and how this unfolds with stops in place. 
  • RWR – REITs have been in a clear uptrend since the February lows. Then comments from the Fed about interest rates and down goes the sector. Ended with a positive bounce on Friday and watching how the week unfolds. Rates are higher again and the sector declines. $91.19 support in play. 

(The notes above are posted on the weekend and updates are added in red daily as they change or develop.)

FINAL NOTES:

News remains a key driver for the markets short term. Tariffs, Fed, interest rates, geopolitics, White House banter, and economic data all remain in the headlines and in the minds of investors. They influence the day-to-day activity, but the real driver at the end of the day is fundamentals. With the third quarter ending there will be plenty of fundamental data to digest in the coming weeks. The economic growth, earnings growth, and positive sales growth are the keys. There is the speculation around the Federal Reserve and interest rates even after the hike last week. The usual reasoning of things are too good and inflation will be the result. False, False, False!!! But, they aren’t going to listen to me or any other believer is supply-side economics. We have to focus on our own strategy and ignore the news/speculation game. We have booked positive gains on positions as the volatility in some sectors rose last week. We still hold short positions on sectors that are in downtrends. We continue to find investable strategies and opportunities by ignoring the rumors and trading the trends. All of the economic data remains on track for growth. There is always something to worry about, but at the end of the day it is about the trend and we continue to see a positive uptrend for stocks despite the below-average volume. The S&P 500 index produced a negative week dropping 0.6% with four of the eleven sectors moving higher for the week. The NASDAQ struggled with stocks picking up some volatility and warnings. Bonds reacted to rates moving up to 3.06%. Utilities moved lower but bounced off the lows for the week. Crude moved higher as the supply rumors continue to drive the near-term direction. The dollar gained on the Fed activity and debt worries in Italy. We will keep our focus on our strategy in the current market environment. We continue to manage all positions as trades until we gain some clarity on the longer term views. The long-term uptrends remain in place and we will manage our longer-term holdings in light of that trendline. The goal remains money management, not market speculation…

ONE DAY at a time is the key for now. Take a longer-term view of your overall portfolio and manage the risk of your short-term trades accordingly.

“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.