Bond auction sends stocks lower

Moving the markets on Thursday was the thirty-year bond auction. Dealers ended up with 24.7% of the issuance, which was twice the recent average. That sent the yield higher with the ten-year bond moving back up to 4.63%. That in turn impacted stocks and the psyche of the investor. Remember the last eight days the market bounce started with the Fed is done drum beating, and interest rates moving lower. Thus what started the day as a modest upside move ended with stocks in negative territory and questions renewed about the government’s ability to control spending. For the first time since the downgrade to US Treasury Bonds, there seems to be a liquidity issue in the treasury market. Mr. Powell was speaking again and this time the markets listened thanks to the thirty-year bond auction mess. He got back on his soap box about not having rates high enough to take inflation out… no real change in his stance, just combined with the liquidity issue facing bonds, people listened. All eleven sectors closed in negative territory and what was a party for stocks looked like someone closed the bar. Damage was minimal overall, but notice was given… the bounce is a bounce until it renews the uptrend that reversed in July. The downside was led by consumer discretionary and healthcare. TLT fell 2.3% giving up some of the recent gains. The end-of-the-year rally remains the focus of the talking heads and we will see what the song is on Friday. Technically the NASDAQ moved above the down trendline from July, but tested the move on Thursday. The SP500 index tried to clear resistance at the October highs but also closed lower. Time will tell, as we manage our stops and take what the market offers. The economic data remains questionable at best but optimism springs eternal. Just look at the headlines and listen to the financial talking heads. Solid day on the charts as the major indexes started higher, tested lower, and closed flat on the day. Oil, precious metals, and oil stocks head lower on the day again as speculation about demand remains. The volatility index dipped lower as markets bounced pushing SVXY higher. Overall positive day as buyers remained hopefully engaged with stocks. Taking what the market gives and managing the risk.

Thursday was a negative day for the markets overall as the Treasury auction in conjunction with Mr. Powerll raises questions again. As I have stated the last week, the charts are not a picture of strength but the bounce is in play and we will take the good with the bad. Thursday offered some bad to the previous eight days of good… stops are a must, watching the charts essential, letting the talking head pontificate with the television on mute, we take what is offered. Earnings continue to be good and bad turning it into a stock picker market. The complexity of the outlook for global economics, domestic economics, and uncertainty remains in the background. Money has been chasing the belief the Fed is done with interest rates, that song changed with the treasury auction and Mr. Powell’s comments. The major indexes were lower on the day and it confirmed the emotional trade that has been in play for the last nine days. The S&P 500 index closed up 0.8%. The NASDAQ was up 0.9%. The SOXX was down 0.5%. Small Caps (Russell 2000) were down 1.5%. The ten-year treasury yield was 4.63% up 11 bps for the day. Crude (USO) was up 0.1%. (UGA) was up 0.9%. Natural gas (UNG) was down 3%. The dollar was up 0.4%. We are focused on managing the risk in the current environment.

Charts to Watch: See Notes on “Reality of the Markets” & “Jim’s Beliefs About the Market” pages…

Quote of the Day: “If love is the answer, then could you rephrase the question?” — Lily Tomlin

Additional Charts To Watch

KBE/KRE – The banking sector is being challenged by higher rates. Despite the solid earnings from the sector the overhang of rates pushed both the money center banks and the regional banks below the October lows and renewed the concerns over balance sheets. As seen in the reversal in rates relative to the Fed’s statements following the FOMC meeting has reversed the trend in banks… both KRE and KBE were up nearly 5%. All is good for banks… no more financial issues with balance sheets… 🙂 The last few days show a test of the gap higher from last week… Thursday moved below $42 on KRE… negative if it follows through on the downside… higher interest rates are the issue.

1) Interest rates are back in play relative to the Fed and the financial markets. TLT, KRE, KBE are all worthy of attention. 2) Big names from Thursday all showed resilience. AAPL, GOOG, AMZN, MSFT, NFLX. 3) IGV tested $355. 4) GLD held support. 5) The market is not done digesting the effects of the treasury auction and Powell/Fed. The ripple effect of this could be more downside risk… watching for how markets react on Friday.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed down 35 points to 4337 moving the index down 0.81% with above-average volume on the selling. The index moved to resistance at the 4386 level and the October high and tested lower on Thursday. None of the eleven sectors closed higher on the day with industrials as the leader down 0.2%. The worst performer of the day was healthcare down 2%. The VIX index closed at 15.2 moving higher on the day. Plenty to ponder between the headlines and facts. The index needs to clear the resistance and then the down trendline from the July highs.

XLB – Basic Materials broke support at the $77 level reversed and back to resistance at $79.50. Needs to clear resistance to maintain the bounce. The sector was up 5% for the week. No Positions. Moved back below the $77… previous support.

XLU – Utilities found support at the $56 level… bounced and broke resistance at the $60.15 level. The sector was up 5.3% for the week. Entry point offered on the break above resistance. Tested the move last few days. $60.15 support.

IYZ – Telecom bottom reversal along with most sectors and cleared the $21.30 resistance. The sector was up 9.2% for the week. No Positions. Tested the move back to $21.30 and broke lower on Thursday.

XLP – Consumer Staples Moved higher from the consolidation pattern to resistance at $69.30. Need to break above the resistance near term. The sector was up 3.2% for the week. No Positions. Moved to resistance and testing.

XLI – Industrials bottom reversal in play $102.41 level to clear. The sector was up 5.3% for the week. No Positions. Testing the move higher.

XLV – Healthcare bottom reversal in play. $129 level to clear near term as it moved above the October lows. The sector was up 3.4% for the week. No Positions. Moved to resistance at $129 reversed on Thursday.

XLE – Energy moved back to $84.33 support bounced… $87.50 next hurdle and not looking great on the chart. Earnings were the downside catalyst. The sector was up 2.1% for the week. Moved below the $84.33 level of support offering a short signal. Added to the downside testing $81.97 support… relief bounce in the downtrend would be normal.

XLK – Technology bottom reversal and solid upside move to lead for the week. The sector was up 6.6% for the week. Entry XLK $166. Stop $171. Solid follow-through upside breaking above the downtrend line and facing the August highs. Tested on Thursday.

XLF – Financials relief in interest rates moving lower sparks rally off the bottom. Gapped higher with a move above the $33.64 level a positive. The sector was up 7.4% for the week. Tested and holding near $33.65. Higher interest rates would be a negativce to the sector… see KRE on Thursday.

XLY – Consumer Discretionary bottom reversal needs to clear resistance at the $163 level. The sector was up 7.1% for the week. No Positions. Tested the move higher.

IYR – REITs bottom reversal gains momentum on interest rate decline favoring the sector. Cleared $79.50 resistance eat the October high. The sector was up 8.7% for the week. No Positions. Testing the move higher… higher rates on Thursday a big negative for the sector.

Summary: The investor has been buying into the rhetoric of the Fed being done… all is well scenario being played out in the media. Thursday was a wake-up call from the treasury market and Mr. Powell. Watching how this unfolds near terms with some consolidation and testing in play. On the positive side, the dollar was higher on the day. The index moved back to the 4386 resistance level and tested. I continue to state this is a relief bounce and could turn into the year-end rally many analysts are hoping and asking for… Patience is key as every move has a test or two. Managing the risk of our trades as stated earlier in the week we have been banking some gains and lessening the risk where the markets have moved the most. The near-term move extended and watching how it unfolds with our stops in place. Remember two things; first, the trend is your friend, and second, don’t fight the Fed.

(The notes above are posted at the end of each week based on activity from the previous week’s trading. The BOLD/ITALIC comments are the current-day changes worthy of note.)

Key Indicators/Sectors & Leaders To Watch

The NASDAQ index closed down 129 points to 13,521 as the index was down 0.94% for the day. The index tested lower following the treasury auction. 13,618 level cleared and reversed on Thursday. A test is a test until it breaks support. Patience and stops in play.

NASDAQ 100 (QQQ) was down 0.77% for the day as the mega-caps were lower showing some consolidation on the day. The sector tested the break higher with an outside day on the chart. Cleared $366.15 resistance and followed through and now a test. The sector had a negative bias for the day with 32 of the 100 stocks closing in positive territory for the day. Adjust stops and let it play out. Entry $354.20. Stop $366.

Semiconductors (SOXX) The sector moved $473 on a bottom reversal. The sector was up 84% for the week. SOXL entry $448. Stop $468. Holding above the resistance line and looking for follow-through. Modest test on Thursday.

Software (IGV) bottom reversal moved above the $345 resistance to post a positive week. The sector was up 6.2% for the week. Tested back to the $355 level… watching. Added IGV $336. Stop $353 (adjusted).

Biotech (IBB) bottom reversal cleared $115 and $119 resistance levels. The sector was up 6.5% for the week. LABU Entry $115. Stop $118 (hit stop). Bounced… tested $119 and reversed back to $115.

Small-Cap Index (IWM) bottom reversal with gaps higher and needs to clear the $176 level. The sector was up 6.5% for the week. No Position. Watching as the sector stalls at resistance. Testing support at $169.50… sold lower on Thursday.

Transports (IYT) bottom reversal bounce… all too many reasons for this to fail. Letting it unfold and take what is given. The sector was up 7.6% for the week. No positions. Solid reversal but testing currently.

The Dollar (UUP) The dollar dumped to end the week following FOMC rhetoric. Watching for a bounce this week. The dollar was down 0.8% for the week. No Positions. Bounced Thursday on Powell’s comments.

Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.66% down from 4.84% last week. TLT was up 4.3% for the week. Watching how the Fed manages the aftermath of the FOMC announcement. Yields driving markets short term on optimism around the Fed… slippery slope as seen on Thursday.

Crude oil (USO) Crude sold lower on worries about consumption. An increase in supply for the week was a concern and crude moved back near $81 a barrel. USO was down 4.4% for the week. Up and down activity all week. Dumped lower on Tuesday and Wednesday… Started higher on Thursday but was torpedoed by the treasury auction and resulting actions… watching how this unfolds.

Gold (GLD) The commodity remains in a topping pattern… the dollar is flattening and the outlook is positive. Expect some testing of the move near term. The metal was down 0.7% for the week. Added positions at $172. Stop $182 (HIT STOP). Managing the risk. Tested with some volatility and broke lower on Wednesday… holding near the %180 level for now.


Our longer-term view remains a downside bias as the upside trend from the October lows was broken. The current bounce needs to clear 4386 first and the down trendline from the July highs second. The short-term upside move last week is good, but leaves plenty of work to be done from a longer-term perspective. If the longer-term trend is to resume the short-term downtrend needs to reverse… The activity for the week is trying to bounce but has plenty of work to do. Nothing, as we all know, goes straight down or up… there are always positive and negative swings in a longer-term trend. A look at the daily chart from the October lows validates exactly that premise with plenty of volatility along the way. With the trend broken, it puts the broad indexes in an intermediate downtrend… the last eleven weeks’ short-term trend has offered downside trades… solid gains posted… now they have reversed offering some upside trades. The current bounce off the lows is in play but challenged by uncertainty in the economy and geopolitics. Current activity raises questions relative to direction and growth. We look to charts and fundamentals for some answers. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal is to manage the risk of positions, take what is offered… short or long, and then manage your money. Listen to the market not the talking heads.

Thursday: Indexes were lower on the day as the treasury auction instilled some reality to the fantasy being lived the last eight days. The technology and large-cap stocks are in the leadership role and they held up well despite some nerves in play. Watching how this relief bounce unfolds… maybe a relief bounce and some selling? Maybe the start of the year-end rally? Maybe speculation around the Fed? Maybe a bond rally? Whatever the rationale, the fact remains to follow the charts and manage the risk while waiting for the facts to confirm the belief over time. There is no lack of issues on the table, as seen Thursday, with each taking their respective turn in the spotlight. There is a lack of leadership overall although tech made a good move along with consumer discretionary the last nine trading days… Economic data is confirming the ugly outlook. I would expect the data to remain negative with the only real caveat being how negative it will be. We have put money to work short term based on the technical moves, and we continue to manage risk with stops and profit-taking where appropriate, as we take what the markets give. Remember all upside moves at this point are relief rallies and we will treat them as such until they validate otherwise. Watching XLK, QQQ, SOXX, IGV as opportunities and leaders.

Decide what you’re doing before the market opens based on your beliefs. Entry. Exit. Target. Define the risk of the position. Nothing more… Nothing less.

“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 develops 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.

Explore the following links for new pages that dig into data both In & Outside the markets. Jim’s insights highlight potential opportunities emerging from the current market environment. The pages also discuss the Reality of closed opportunities, whether they proved profitable or fell short of our expectations.

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