The Daily, Part 1 of 3, 10-13-18

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10/13/2018 Investment House Daily
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Investment House Daily Subscribers:

MARKET ALERTS:

Targets hit: None issued
Entry alerts: NFLX; ROKU; UIS; ULTA; VMW
Trailing stops: None issued
Stop alerts: CAT; CPRX; WOW. Did not participate in the bounce.

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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

- Relief bounce -- or more -- starts
- Even with the upside the move shows its fragility when Kudlow questions a Trump/Xi meeting
- Thus far showing indications of a relief bounce -- but they all usually do
- Three possibilities off this bounce
- Some good moves, some not very good moves, small caps lag
- Playing this move, planning now for the next move.

Friday finally brought a bounce and some impressive percentage advances -- at least on some indices -- but it was not a sure bet.

Stocks gapped upside in relief. Each financial station or website gave credit to its pundit for calling the bounce. Massively oversold, down/up volume ratios, percentage down volume -- all were pretty extreme and it was just a matter of when the bounce triggered.

Even so, it was no done deal. Stocks gapped nicely with NASDAQ gapping to the 200 day MA, SP500 gapping just over, while DJ30 and NASDAQ 100 gapped nicely above that key level. RUTX, SP400, and SOX? Ha ha ha. They gapped upside for sure but they are so far over the hill from the 200 day they can barely see the hump.

Further, the bounce showed fragility. The prior day or two the talk was the Trump and Xi would meet at an upcoming gathering of many world leaders. Friday right around 11:00ET, Larry Kudlow said it was not '100% decided' that Trump and Xi will meet. The market did a Peter Pan over the next 1.5 hours, the Dow wiping away a 400 point gain and even turning negative, RUTX and SP400 turning red as well. The other indices did not hit red, but they gave up huge chunks of their gap gains, indeed the majority of the gains.

Stocks caught a bid on that selloff, however. Apparently still as oversold as of the Thursday close (and indeed most were), stocks bounced, tested into 2:30ET, then rallied straight up into the close. Sighs of relief, back slapping on the financial stations as their pundits were not to be humiliated -- at least not that day. All's well that ends well in the prepackaged media world I guess.

SP500 38.76, 1.42%
NASDAQ 167.83, 2.29%
DJ30 287.16, 1.15%
SP400 0.24%
RUTX 0.08%
SOX 1.97%
NASDAQ 100 2.77%. Definitely buy the 'names.'

VOLUME: NYSE -18%, NASDAQ -15%. Still strong, above average trade but also significantly lower than the selling. Selling still stronger than the buying, but that is not unusual in an initial bounce or a short covering bounce.

ADVANCE/DECLINE: NYSE 1.4:1, NASDAQ 1.5:1. Quite blah, also indicative of a short covering bounce. You would expect this in the first phase of a bounce, looking for strong upside breadth AFTER a test that holds and starts back up. THAT is the time you tell if there is real longer term buying versus the covering rally, where the baton is passed from the shorts covering to longer term buyers. It is disconcerting, however, that the small caps were so weak. I know, it is likely just the time in the expansion where they fade, but I was hoping for a lengthier expansion. Not that it cannot happen still.

So the financial stations and media were breathing sighs of relief Friday that the market bounced, fought off a selloff, then managed to recover much of the gains.

If only all was well. Nice bounce, one we are participating in with new positions, but it was not a rocket launch upside, and it will have to show if it can sustain the moves. Enough to certainly play the bounce, but then it has to show its mettle: a continued rally that never looks back, a test of the prior low and a new rebound, or a relief move that runs out of gas and then delves to lower lows.

No way any scenario was answered Friday. It was a strong day, then not, then was. Up, down, then up. If a dog found its way onto the NYSE trading floor and barked, half the traders would have passed out in fear.

I don't want to be mistaken. There were some very good moves on the day, moves that will make us money. That is wholly different from the market having put in a bottom and building off that. The market's life over the next 2 months is still a huge question mark.

That said, stocks such as AAPL, VMW, ULTA, NFLX, ADBE, AMZN, CRM, WBA posted very solid moves. At the same time, stocks such as CAT, UTX, ETN, C, JPM, SQ, NVDA did not. Many just did nothing as the lackluster breadth indicates.

Weak breadth, lower volume on the upside, up to down volume positive but not strong, small caps still very weak, volatile intraday action (not just all buyers). Defensive stocks did no harm to themselves (gold, utilities), just testing prior strong upside breaks. Not an upside endorsement. Then again, the market was sold and bounced back for nice gains. At least the relief bounce held, and afterhours futures were moving up very late.

The takeaway: it is a bounce from some very oversold conditions following very sharp, high volume selling. For now it is a bounce. We play it as a bounce and if it shows more, so be it.


What Rate for Rates?

The most interesting and important market news for the week was not a Trump/Xi meet and greet. Fed policy is THE issue. It is what drove much of the selling. Friday cleared up nothing, but then again, nothing really needs to be cleared up: the chairman has stated his stance and the President, in securing his position he is not to be blamed for any economic problems in the future, cut off the chairman's retreat from his stance.

Friday Mnuchin put a bit finer spin on the President's 'the Fed is crazy' label (one many very sage people believe though are loath to publicly admit OR don't want out because the status quo ensures their wealth), stating the Fed should not hike rates when inflation is under control. Kind of a play on the Larry Summers' 'don't hike until you see the whites of inflation's eyes' saying.

The Fed's Evans appeared on CNBC Friday morning, talking with the Fed's boy, CNBC's Steve Liesmann. Liesmann is one of those 'experts' who feigns to listen to the other side and weighs its arguments, but is really so died in the wool Keynesian and Phillips Curve that it is all an affront to anyone who has read a book on economic history.

Liesmann (how is that pronounced 'leaseman' when it is spelled 'liesman?') lobbed softballs to Evans, acting surprised when Evans said the Fed should get restrictive though as a true Phillips Curve apostle, Liesmann could barely contain the mirth he felt at Evans' words.

All of this begs the questions: Why does the Fed need to be restrictive at all (versus letting the economy determine neutral) and why do we need the parent Fed involved at all?

How does the Fed know what is right and not? Evans admitted the Fed did not know what is neutral or not. Indeed, all of the pundits and experts on Bloomberg, CNBC, Fox Business guffaw whenever the Fed prognosticates about neutral rates and how much money should be in the system -- the history of the Fed's actions so clearly shows how grotesquely wrong the Fed's theories and actions are. Yet, it is all accepted as if this is just how things are done -- in a supposedly free enterprise system. You CANNOT GET MORE centrally controlled than the Fed. Hell, the Fed was the ENVY of the USSR and China in its ability to dictate wealth levels and thus its ability to control the masses.

So the question: why restrictive policy at all? Why not let the market, when times are good, work? The Fed was created primarily to assist in times of crisis using twin goals of a stable currency and stable inflation (both are the same really) as its guide in resolving crises. Those goals have been twisted into what is now called its 'mandate.' By that very label alone the Fed's power was elevated to continual manipulation versus being present to assist when crises developed. Now every minor move in the markets and economy is in the Fed's purview. This even as the Fed says it is not concerned with or worried about day to day market events.

Who is the Fed trying to hoodwink? The entire history of the Fed shows that it is EXTREMELY worried about market events. Greenspan cut because of market worries. Bernanke put together policies that were the essence of central control -- in the name of crisis of course. Yellen showed she was her own 'man' early in her career as chair, the markets revolted, and she capitulated, becoming the best friend Goldman Sachs and company has ever had.

Reality has left the building.

Listening to all of this discussion -- apparently being held in Wonderland -- makes pragmatic, rational entrepreneurs and investors contemplate insanity. Who are they kidding? History proves the Fed has acted as the antithesis of one of its primary goals set forth buy Congress: a stable currency. The dollar has lost 97% of its value since the Fed's inception. An abject failure in meeting that goal. In so doing, the Fed has unequivocally failed in its second goal/mandate: preventing inflation. By devaluing the dollar to 3% of its pre-Fed value, the Fed has, by definition, increased inflation by thousands and thousands of percent.

100 years of destroying the dollar equals a 'stable currency.'

The 'experts' are lulled into their false beliefs by the frog in the saucepan analogy: over 100 years the Fed has let inflation run by devaluing the dollar, hiding behind the creation of massive vaults of debt as large as the Yellowstone volcano caldera and with the same eruptive capacity. They thus believe inflation is a normal occurrence, that the slow destruction of our currency is inevitable. If that is the case, why does an ounce of gold hold the same purchasing power as the time the Fed was created? That is value that the Fed cannot alter, and therein lies the proof the Fed has failed in its mandate.

Yet they pundits claim the Fed has succeeded in its mandate as there are no major disruptions in the markets and economy. Seriously? On top of the utter destruction of the dollar's value we still have market crashes, crises, massive economic upheaval. All with a dollar worth less and less, and all the while building more vaults to store debt.

Life without a Fed.

What about the alternative? What about letting markets figure it out? Markets always get back to equilibrium when there are imbalances, and they do it quickly as opposed to say the 1930's, the 1970's, and the 2000's. Moreover, there is no accumulated debt; the excesses are cleared and there is a start a neutral.

Moreover, there is no inflation. Inflation is an element of controlled economies. If you have free markets, money will move where it is needed. No bottlenecks in supply, and if any do occur they are temporary because money flows that way to quickly alleviate it. Makes sense: money cannot be made efficiently if there are bottlenecks. If those in the business do not do it, other entrants will.

I know, I know. I talked about Wonderland earlier, and the pundits and experts would say that is where I am deriving my argument. But of course they would: they are products of the very system that employs them. Educated in schools that teach government manipulation of markets -- in a free market system mind you -- is status quo and perfectly consistent with the theory of free markets. History does show that markets do reach extremes on their own but they also correct very quickly. The depression before the 1930's depression was over in a year. When the 'experts' got involved in the next one -- using a crisis to implement their government control beliefs -- it turned a quick down and up into a quick down and a decade-long depression. Who is in Wonderland?

You have to be willing to let markets work. Monarchies were horrid at it as are any governments that try to dictate markets. That is why the US is struggling so much of the time in the past 50 years, seeing flashes of flourishing when we back away from control in the form of manipulated taxation and regulation. The 1960's and 1980's are classic examples. The recent economic surge as well with its reduction in regulations and the tax cuts that are targeted to increase investment in the US. Let people keep their money, let them make the decisions on what to do with it, and it will be put to use in the most efficient ways. Instead, we allow our government to implement the ultimate control over us: controlling how much we have to invest via taxation, controlling what we can do in our lives via regulation, and controlling our wealth (and thus power) using the Federal Reserve. When we get too much wealth creation (and thus threaten the power establishment) as in the 1920's, 1980's and 1990's in the PC and internet boom, the Fed knocks back the economy and torpedoes much of the new wealth. Then, the cycle starts again until the next innovation is made. Anyone watch 'The Matrix?'

Sadly, what I hear when I talk to high school students today is a lack of understanding of our history, why we became a country and why we are different. It makes it very difficult in 45 minutes of discussion with a class to explain all of this in terms they will understand. How can you teach in 45 minutes what 12 years of school should have taught but did not? They are intrigued by keeping their money and having no one tell them what they can or cannot do, but you have to overcome the mindset that those things are provided by the government, not something they have a right to have and the government is there to make sure they are not taken away. That is an entirely divergent mindset and is why, as I said, people such as you cannot believe we hear the Fed governors say what they say, our Congress say what it says, schools say what they say, etc.


THE MARKET

CHARTS

SP500: Gapped over the 200 day SMA, sold off all but 1 point of the gain, then recovered to close right at the 200 day. Nice move, doji with tail, over key support. Okay, now we see if this was a turn back up for a bounce that started the bottoming process or just a continuation doji, i.e. continuing the selling.

DJ30: Gapped back over the 200 day MA as well, sold off below it and to negative by midday, then recovered to close with 2/3 of the gain at the high of the session. Holding the 200 day SMA is good. DJ30 can still be the market's rescue crew if it can hold the 200 day SMA and resume the upside. Four tests of support after jumping off the 200 day SMA in early July, now back to that level to test, and we will see if it is a reset of the uptrend at this support.

NASDAQ 100: Gapped back over the 200 day SMA, sold off below it intraday -- filling much of the gap -- then recovering above where it opened. Similar to DJ30, NASDAQ 100 moved up the 50 day MA after leaving the 200 day in April. It tested the 50 day 4 times in its uptrend and hitting new highs, then fell to the 200 day SMA to test. If the economics remain good, NDX will hold this level, either with a rally straight up or more likely with a test similar to April, rally to recover the 50 day MA, and continue the uptrend from there.

NASDAQ: Gapped upside just over the 200 day SMA, but after the selloff midday, NASDAQ could not close over the 200 day. Similar action as NASDAQ 100 in terms of the 50 day MA rally and now at the 200 day SMA again to test as in April. Not bad, showing a doji, still can continue the bounce higher but not getting much help from chips.

SP400: Same action intraday as the other indices, just less power as has been the case. Gapped upside, faded to a big loss, recovered to a modest gain, well off the opening gap point. Still way oversold but not showing nearly the strength of the larger caps.

RUTX: If you looked at RUTX in isolation you would see a tight doji after three weeks of sharp selling. The doji would suggest a rebound. It still can happen, but the other indices fared much better than the small caps. That shows the smaller stocks are still getting the Rodney Dangerfield no respect treatment.

SOX: Chips gapped upside, sold, recovered gains, but closed below the opening gap point. Holding December, February, and April lows, in great position to bounce higher in the 11 month range, but lagging the other indices.


LEADERSHIP

Some strong recoveries in name brand stocks that were blowtorched on the way down. It was interesting to note that gold stocks and utility stocks, more defensive groups, held their own, indicating their buyers remain firm and that the rebound is just a bounce.

Gold/Precious metals: SA continued upside with another good move. HMY and ABX tested good surges. PAAS tested a good upside break.

Drugs: Blitzed in the selling Wednesday and Thursday. PFE showed life Friday. Others not really, e.g. LLY, BMY, MRK. JNJ showing a doji over the 200 day SMA after a Thursday rip lower.

Metals: FCX' one day in the limelight was rudely met Friday as it sold off all the Thursday gain. AKS, SID not bad, and NUE looks ready to roll back up in its trading range, perhaps STLD as well.

Chips: Still sloppy at best even if SOX looks ready to roll back upside in its range. AVGO held the 50 day SMA with a modest bounce. AMD gapped over the 50 day MA but on low trade. LSCC still testing the 50 day EMA, losing ground Friday. NVDA gapped up to a doji at the 200 day SMA, not the best pattern. INTC continues sitting at the September low. How exciting.

Software: NOW gapped huge to the 10 day EMA. TTWO gapped and rallied to the 50 day MA. VMW gapped and rallied off the 200 day MA; nice. UIS moved up modestly, having held well in the selling. MSFT gapped to a doji below the 50 day EMA. FFIV still hanging out at the 200 day SMA and we still like it, though not a lot of pop Friday. CRM put in a big gap up to the 50 day MA. There is life here.

SCAANN: SQ gapped but weak. CRM solid upside gap. AAPL solid all through the selling, up Friday off the 50 day. NFLX bounced nicely off the 200 day test. AMZN gapped on big volume. NVDA was up but a doji below the 200 day SMA was not impressive.

Financial: JPM beat but after an upside gap was ripped lower. WFC still holding the Spring lows. C gapped upside on earnings but off that Thursday dive lower. Massively disappointing group.

Retail: ULTA posted an excellent gap and rally on strong volume. ROST still looks interesting. RH showed a pair of gaps to end the week. Lots of high volume buying. WMT gapped higher Tuesday, faded to test the 50 day MA as of Friday, showing a doji. Still solid. LULU looks as if it is ready to fail at the 50 day MA.


MARKET STATS

DJ30
Stats: +287.16 points (+1.15%) to close at 25339.99

Nasdaq
Stats: +167.83 points (+2.29%) to close at 7496.89
Volume: 2.67B (-15.24%)

Up Volume: 1.98B (+830M)
Down Volume: 651.31M (-1.329B)

A/D and Hi/Lo: Advancers led 1.51 to 1
Previous Session: Decliners led 2.67 to 1

New Highs: 18 (+4)
New Lows: 265 (-136)

S&P
Stats: +38.76 points (+1.42%) to close at 2767.13
NYSE Volume: 958.207M (-17.63%)

Up Volume: 603.078M (+417.396M)
Down Volume: 340.879M (-632.943M)

A/D and Hi/Lo: Advancers led 1.35 to 1
Previous Session: Decliners led 3.73 to 1

New Highs: 10 (+1)
New Lows: 396 (-130)


SENTIMENT

VIX: 21.31; -3.67. Hit 28.84 on the Thursday high, just below 27 on the Friday high. That topped the March high but nowhere near the 50 in February.
VXN: 24.69; -3.07
VXO: 21.16; -5.73

Put/Call Ratio (CBOE): 1.16; -0.02


Bulls and Bears:

A somewhat precipitous plunge after a 61.8 peak on this move. Right at the range of the prior drops starts, 50ish is the lows before a bounce. Bears actually fell 0.1.

Bulls: 56.3 versus 61.8

Bears: 18.5 versus 18.6

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: 56.3 versus 61.8
61.8 versus 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

Bears: 18.5 versus 18.6
18.6 versus 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: 3.167% versus 3.146%. After a rally off the fresh low, TLT faded Friday as yields moved up. Still in a big 7 week bond decline.

Historical: the last sub-2% rate was in November 2016 (1.867%). 3.146% versus 3.169 versus 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%


EUR/USD: 1.15592 versus 1.15901

Historical: 1.15901 versus 1.15324 versus 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: 112.222 versus 112.076

Historical: Last below 109 in June 2018: 112.076 versus 112.158 versus 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: 71.34, +0.37. Oil sold to the 50 day EMA on the week, showing a doji there Friday. Still looks strong overall but it did give up its higher high hit two weeks back.


Gold: 1222.00, -5.60. Tested after finally posting a big breakout Thursday. Fear trade or inflation trade? No, it's both. Fear of the selloff, fear of the Fed, knowing if the Fed screws up yet again, inflation ultimately results.


MONDAY

Earnings get started in earnest. Many look for earnings to salvage the market. Others say the warning from PPG and the TSE actual earnings show a real slowdown in the economy and that other reports will show the same. If that is the case the earnings won't save the market, won't foster a new rally.

For now we are playing an oversold bounce. We picked up some really solid positions Friday and perhaps more will show themselves this week. The problem is that if this is just a relief move, the later you enter, the worse risk/reward. Thus, we will be selective adding more bounce plays.

At the same time look at some areas receiving money before the rebound. If they hold up in good tests, if the bounce fails they will get money their way. Gold, other precious metals, select retail.

As the bounce matures we will see if these bouncing stocks set up better patterns to play upside -- or downside. Then we play what is offered. It is best to now play the next move versus the current move: the upside gap and vigor of the rally either results in a burnout and roll over, or a test that perhaps then rebounds again. If the latter, there will be good plays on the big names. If not, there will be plays on the areas that were getting money as the big names sold off. Not as exciting upside, but there will also be some downside again.

There is not much more analysis than that. The market sells off, digs holes it has to climb out, and how it does or fails to do will tell the probable outcomes. All the prognosticating means nothing. The only one that is worth anything is the Fed's history, the change in its game plan as discussed last week, the President's comments hemming Powell in to a certain extent. The Fed is a market and economy killer, and if that holds, eventually this move stalls out, whether the one started Friday or the bigger move.

End part 1
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