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10/10/2018 Investment House Daily
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The REPORT SCHEDULE is as follows:
Market Summary Video, Plays and Play Videos, and Play Table with play annotations will issue Wednesday, Weekend.
Monday a Market Summary video, new plays, play table annotations.
Tuesday and Thursday reports will contain the market summary, chart links to view the index charts, and updated play table.
Access to all current videos will remain assessable each day using the play links in the reports.
If any market circumstances arise where we see additional plays we want to prepare for the next session, we will of course issue those plays regardless of the day of the week.
MARKET SUMMARY
- Stocks sell more and then even more on the sharpest day yet.
- Internals getting to extreme levels but VIX may have quite a way to go.
- Why the market is so worried about the Fed.
- Very few stocks left unsold, and that is a good thing.
- Indices all pretty much shattered support though NASDAQ 100 makes a plunge straight to the 200 day SMA.
- Is a bounce tradeable, long-term, or just to sell?
- Futures down sharply afterhours, ready to perhaps provide a flush out.
Stocks continued lower to start the session, but that was just a warmup. A pair of selloffs in the morning session had DJ30 down 400 and at the 50 day MA. That bounced stocks modestly and they moved laterally for almost 3 hours into the afternoon session.
Then things got 'interesting,' as stocks really started to sell. DJ30 doubled its largest loss from the morning session, closing off 830+ points (-3.15%). DJ30 smashed the 50 day MA, closing at the halfway mark to the 200 day SMA.
SP500 -94.66, -3.29%
NASDAQ -315.97, -4.08%
DJ30 -831.83, -3.15%
SP400 -2.63%
RUTX -2.86%
SOX -4.46%
NASDAQ 100 -4.44%
ADVANCE/DECLINE: NYSE -7.9:1, NASDAQ -7:1, both on the close. That is getting close to extreme.
NEW LOWS: NYSE 502, NASDAQ 330. NYSE is close to extreme. Would have liked to see 600+ on NYSE.
DOWNSIDE VOLUME: NYSE 90.2%, NASDAQ 87.5%. Plenty of downside trade, getting extreme.
These internals are getting toward extreme points. Another downside open and selloff in the morning leaves a pretty good setup from the standpoint of internals as well as the SP500 holding near some support at 2,800.
Historically, down 800+ and 3.15% on the Dow is not the worst session any of us have seen in our careers, not by a long shot. 1,000 Dow points would have been interesting to see, but that would still not be the worst session seen. Not making light of the impressive selloff, but it is all a matter of where they are in their patterns.
SP500 is over 2/3 of the way to the 200 day SMA. NASDAQ cracked below that level, while NASDAQ 100 is there. SOX, SP400, RUTX have to look in the rearview mirror to see the 200 day, and even with images appearing closer than they are in that mirror, the 200 day still looks a long way away. Gee, DJ30 is still the relative leader. Much rejoicing. Yeah . . .
Not many areas were refuges as many of the upside holdouts were lower, e.g. big drugs, energy, WMT. DLTR, KSS, BIG, DG -- discount retailers -- were higher; WMT did not really hurt itself at all. A very narrow list of positive stocks.
Now it is a point of the market feeling the Fed mindset it too aggressive given the trade issues that are not going to resolve with China for a long while as well as other issues. Hence the selloff. To us, this does not appear to be a point where the Fed has gone beyond no return; its hikes have been modest and not great in number. It is also reducing its balance sheet, however, and that has the effect of tightening money supply. Some say do the latter but not the former. Perhaps not a bad idea, but it is the TOTAL effect that is the key. The Fed is getting a warning shot that it needs to tread carefully. It is our view, however, that it is not at the point where it has baked in a bear market and subsequent economic slowdown. Of course, it is doing this and threatening to accomplish that in order to 'save' the economy from itself. Just like the 1929 Fed discussed below. Hey, it can't help itself; as the President said today, the Fed has gone crazy. No Mr. President, the Fed is just crazy as always.
Futures are lower afterhours as well and Europe will dive bomb on the open. Indeed, a dive lower Thursday another 200 or 300 Dow points could very well get VIX up to the February/March levels (26+), hopefully higher, and clean out the sellers in what could be a serious rebound. With SP500 at an important level, most stocks getting taken out and shot, extreme leaning internals, and an impressive selloff straight down, the market would be primed to put in an impressive rebound in what is in our view a bull market correction: fast down, fast back up. We will see.
Is the current economic softening a serious slowdown? Not yet, but then there is the Fed.
The recent economic weakness is bothering investors, particularly with the Fed on a hiking campaign. That is ALWAYS a problem for investors. As noted, it is not our belief the Fed has moved so far, YET, to precipitate its usual market selloff and economic recession. Here is one factor to consider.
September and October are, year after year, decade after decade, slower periods for the economy. I first noted this in junior high when my father would complain every year in the second half of September and for sure in October that he had 'never seen business so slow.' Of course, he was a chronic worrier and the issues of the day were always worse than anything before. One year in high school I pointed this out to him -- a recurring pattern that did not really reflect his business, but ALL business at the time of year: people just got kids off to school after vacations (vacation spending, back to school spending) and the holidays were just ahead, another major outlay. They held back on bigger actions because of that approaching cash drain as well as just not wanting any big projects starting heading into the holidays.
My father never did really believe me, but over the decades I have kept records of this and it is very consistent. Thus, the slowing in the economic data, what I have called an ebb in a still expanding economy, is normal.
What is NOT normal is the Fed changing its game plan at the last FOMC rate hike meeting. It is no longer a set number and done, but now the same old 'fight' to 'prevent' inflation. The 1929 Fed fought nonexistent inflation that it felt HAD to appear given the roaring economy (the 'roaring twenties') that enjoyed a new technology and all the new jobs and economic synergies it created (radio: new jobs for infrastructure, personalities, advertising, etc.). The central bank (not a Fed at that point) hiked and hiked rates, drained the money supply fearing 'wage led' inflation. TOTALLY WRONG! The supply side was roaring, meeting all demand and more. Indeed, the invention of radio on the supply side CREATED demand that was not there before. Just as the PC in the 1980's created demand and met it in another period of dramatic growth with no inflation.
But . . . the central bank knew better. It finally hiked rates 100BP at once and broke the market. This was also a big part of breaking the economy (markets lead economies), and helped tumble the US into a depression, one that was then made the Great Depression through terrible economic policies (seen again in the 1970's and 2004 to 2016) and terrible Fed actions that prolonged and exacerbated the downturn and eventually led to that inflation the central bank so feared. Ironic, eh? It took the central bank to take the action that ultimately created the inflation it feared.
Thus, as I have noted before, there is reason for investors to be gun shy of a Fed that suddenly moves from a controlled, contained policy to one where it feels it must act repeatedly to stave off calamity . . . in a healthy economy. These Keynesian monetary manipulators we appoint to define our wealth: when wealth is created, better pare it back as that gives the proletariat power. With hundreds of years and modern times PROOF that the Austrian/Chicago supply side economic theories are the ones that truly reflect economic performance, our government still opts for the Keynesians and their absurd and disproved Phillips Curve. Why? Control. A theory that says governments should intervene to manipulate markets is one the governments can use and abuse. I can understand that in Europe and other socialist/oligarchy leaning countries, but the US? Yes, the US. Not the same constitutional republic we used to be.
CHARTS
SP500: What a selloff, falling through the April 2018 trendline that marks the bottom of the uptrend channel formed at that time. SP500 is 20 points from the 200 day MA and closed near the support at 2800. 2700 is also some good support. A further blow down Thursday to undercut the 200 day MA and test near 2700 (closed at 2785) potentially sets up the initial rebound move.
NASDAQ 100: The big leaders dove lower, more than NASDAQ overall as the big names 'catch down' to overall NASDAQ. The 100 is now at the 200 day SMA where it touched in the February and March selling, landing square on that level Thursday. Not sure it is going to hold, but it is at the June low, the early May high and the January high. As with SP500, this is some significant support.
DJ30: Held the 50 day MA on the initial selloff of the day, but the afternoon session broke it and then doubled the losses. There is a lot of minor support between the close and the 200 day MA (460 points from the close) but whether any holds is problematic at this point.
NASDAQ: Broke the trendline from early 2016 and the 200 day SMA. Closed at some support from the late June low, May consolidation, March gap points, but NASDAQ closed on the low in full selloff mode. It can bounce anywhere here as NASDAQ, along with the other indices, are way oversold.
SP400: SP400 gave up the 200 day SMA as fast as a snitch gives up his accomplices. It then broke the June low and other support points from the climb higher, including the early December 2017 peak. Massively oversold.
RUTX: Gapped below the 200 day and sold into the highs from the triangle formed from January through April. As with SP400, massively oversold, and that is about all you can say.
SOX: Gapped lower and sold to the April, February, December lows. Just another index breaking down yet again.
LEADERSHIP
Most of the holdouts were eventually sold as the weight from techs, industrials et al dragged them down. Drugs were lower but quite modestly. Some discount retailers were up, e.g. DG, DLTR, BIG. Even KSS was higher. Utilities were up; always an exciting sector to invest. Not much outside of that.
Down: techs, chips, software, machinery, manufacturing, energy. Just about everything. That, in the market's usual perverse ways, is good. You want to see everything have to take some lumps, to suggest to the crowd there is no safe place to be. That gets them to sell and get out. As is always the case, when the sellers are gone, whether for a short term bounce or a long term bottom, stocks can then move higher.
MARKET STATS
DJ30
Stats: -831.83 points (-3.15%) to close at 25598.74
Nasdaq
Stats: -315.97 points (-4.08%) to close at 7422.05
Volume: 3.09B (+25.61%)
Up Volume: 370.5M (-799.5M)
Down Volume: 2.7B (+1.43B)
A/D and Hi/Lo: Decliners led 7.04 to 1
Previous Session: Decliners led 1.51 to 1
New Highs: 17 (-9)
New Lows: 329 (+170)
S&P
Stats: -94.66 points (-3.29%) to close at 2785.68
NYSE Volume: 1.064B (+32.47%)
Up Volume: 90.24M
Down Volume: 969.29M
A/D and Hi/Lo: Decliners led 7.85 to 1
Previous Session: Decliners led 1.11 to 1
New Highs: 34 (-13)
New Lows: 502 (+254)
SENTIMENT
Cramer was more pessimistic today and others were saying any bounce was not one to buy, if it occurred at all. Okay, that is getting there; not buying a bounce pretty much tells it all.
VIX surged toward the March and April highs at 26ish. Is that enough? In February, after the January to February selloff, VIX spiked to 50 intraday. In that light, VIX is just getting started.
VIX: 22.96; +7.01
VXN: 27.53; +5.91
VXO: 22.53; +7.17
Put/Call Ratio (CBOE): 1.22; +0.28
Bulls and Bears:
Second week above 60 for bulls. Got to 60, market started to falter. Bears finally broke over 18.3 after back and forth at that level for a month.
Bulls: 61.8 versus 60.6
Bears: 18.6 versus 18.3
Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.
Bulls: 61.8 versus 60.6 prior
60.6 versus 59.0 versus 57.7 versus 60.1 versus 59.6 versus 57.7 versus 57.3 versus 54.9 versus 54.5 versus 54.9 versus 55.3 versus 52.4 versus 47.1 versus 47.6 versus 52.0 versus 55.5 versus 52.9 versus 50.0 versus 49.1 versus 46.6 versus 43.1 versus 43.6 versus 48.0 versus 43.6 versus 42.2 versus 49.5 versus 55.5 versus 54.9 versus 48.6 versus 48.1 versus 48.5 versus 41.9 versus 54.4 versus 66.00 versus 64.7 versus 66.7 versus 64.4 versus 61.9 versus 64.1 versus 64.2 versus 62.3 versus 61.5 versus 63.5 versus 64.4 versus 63.5 versus 62.3 versus 60.6 versus 60.4 versus 57.5 versus 54.3 versus 50.5 versus 47.1
Bears: 18.6 versus 18.3
18.3 versus 18.1 versus 18.3 versus 18.1 versus 18.3 versus 18.3 versus 18.6 versus 18.8 versus 18.6 versus 18.5 versus 18.5 versus 18.6 versus 18.4 versus 17.6 versus 17.8 versus 17.7 versus 19.2 versus 19.2 versus 19.4 versus 19.4 versus 20.6 versus 20.8 versus 19.6 versus 19.8 versus 18.6 versus 17.5 versus 16.8 versus 15.7 versus 15.5 versus 14.4 versus 14.6 versus 14.4 versus 15.5 versus 12.6 versus 12.8 versus 12.7 versus 13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1 versus 15.1 versus 15.4 versus 15.4 versus 14.4 versus 14.4 versus 15.1 versus 15.2 versus 15.1 versus 17.0 versus 17.1 versus 19.0 versus 20.2
OTHER MARKETS
Bonds: 3.169% versus 3.206%. CNBC headline states that bonds sold as stocks sold, citing how unusual that was. But at least the 10 year did not sell.
Historical: the last sub-2% rate was in November 2016 (1.867%). 3.206% versus 3.233% versus 3.189% versus 3.183% versus 3.061% versus 3.087% versus 3.061% versus 3.052% versus 3.048% versus 3.048% versus 3.085% versus 3.066% versus 3.068% versus 3.076% versus 3.057% versus 2.99% versus 3.00% versus 2.972% versus 2.963% versus 2.977% versus 2.937% versus 2.941% versus 2.879% versus 2.904% versus 2.897% versus 2.86% versus 2.857% versus 2.882% versus 2.882% versus 2.846% versus 2.813% versus 2.828% versus 2.821% versus 2.819% versus 2.819% versus 2.864% versus 2.871% versus 2.879% versus 2.882% versus 2.873% versus 2.928% versus 2.963% versus 2.977% versus 2.977% versus 2.945% versus 2.95% versus 2.986% versus 3.005% versus 2.962% versus 2.975% versus 2.958% versus 2.982% versus 2.965%
EUR/USD: 1.15324 versus 1.14966
Historical: 1.4966 versus 1.4916 versus 1.1598 versus 1.15164 versus 1.14762 versus 1.15517 versus 1.15774 versus 1.16038 versus 1.16357 versus 1.17501 versus 1.17658 versus 1.17476 versus 1.17486 versus 1.17772 vs 1.16833 versus 1.16692 versus 1.16858 versus 1.16226 versus 1.16900 versus 1.15863 versus 1.16016 versus 1.15946 versus 1.15534 versus 1.16243 versus 1.16341 versus 1.15832 versus 1.16029 versus 1.1664 versus 1.17035 versus 1.1691 versus 1.16802 versus 1.16216 versus 1.15390 versus 1.15709 versus 1.158 versus 1.1487 versus 1.1437 versus 1.13765 versus 1.13731 versus 1.13479 versus 1.14052 versus 1.1413 versus 1.1526 versus 1.16186 versus 1.16001 versus 1.15572
USD/JPY: 112.158 versus 113.01
Historical: Last below 109 four months back. 113.01 versus 113.12 versus 113.706 versus 113.894 versus 114.383 versus 113.642 versus 113.690 versus 112.734 versus 112.981 versus 112.811 versus 112.575 versus 112.448 versus 112.247 versus 112.369 versus 111.849 versus 112.06 versus 111.81 versus 111.491 versus 111.608 versus 111.192 versus 111.064 versus 110.680 versus 111.448 versus 111.468 versus 111.082 versus 110.962 versus 111.734 versus 111.19 versus 111.081 versus 111.249 versus 111.351 versus 110.766 versus 109.92 versus 110.49 versus 110.935 versus 110.818 versus 111.229
Oil: 73.17, -1.79. Sold to the 20 day EMA, still testing after that higher high to start October.
Gold: 1193.40, +1.90. Not any kind of huge spike.
THURSDAY
Futures continued lower after the closing bell with Dow futures off 135 points, NASDAQ QQQ -0.7%, and SP500 -0.5%. Another downside start helps get the sellers flushed out, and a selloff in the morning can lead to a reversal. That is often a good indication that at least a bounce is on the way.
A big downside then intraday rebound does not always have to happen, and this market has shown selloffs never coming back for that test. Given this kind of drop, however, you would expect the low would need testing unless the initial move is initiated or augmented by Powell coming out and saying upon reflection the Fed was moving too fast for the economy. That would launch with no looking back. The odds of that? History would suggest the Fed is highly unlikely to do that, and after the President's comments kind of force Powell to be 'independent,' you could likely flap your arms and fly to the moon as easily.
Relief bounce, tradeable move, or something more?
Pretty much everyone agrees that the market is oversold, but of course there are many variant positions on whether a bounce is one to sell, one to buy and trade, or one to buy as a hold.
For a longer term, more sustainable bounce you get the initial move, a reflex bounce, then a drop to test the prior low. If that holds and bounces sharply, you can buy.
What about a short term one? Look at February's selloff. A sharp drop very similar to the one currently in progress, about 300 points from high to intraday reversal low. It gapped lower after a week's selling and reversed only to roll back over and sell into the third following session. There it put in the classic doji with tail. That launched a 250 point SP500 move. Very tradeable.
It still rolled over into late March/early April, testing the prior low, bounced, then tested again before breaking upside and starting the May through September rally to new highs.
The point: if there is more sharp selling to and preferably through the 200 day SMA on SP500 that reverses intraday, typically you get a tradeable rally. It still likely tests lower again, but you get a tradeable rally. We would look to play that rally and use it make some upside trade gains and to unload existing positions when it stalls.
Bigger picture: MACD was lower on the new highs in August and September. In January MACD put in a higher high and then rolled over. While I believe the Fed has not moved too far as of yet to cause the end of the stock market advance (i.e. the Fed has not started a bear market, yet), you have to note the lack of energy on those prior highs. Not saying that means they roll over, but I am saying it warrants caution that the market may not be able to sustain another significant rally. That is always a possibility you have to consider.
That said, we are going to watch for a selloff again that gives way to a reversal. We want to use that to pick up some stocks that have sold to support -- and many may not do that UNTIL a further selloff occurs -- and start to rebound.
Have a great evening!
End part 1
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