Wednesday, October 03, 2018

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

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10/3/2018 Investment House Daily
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Investment House Daily Subscribers:


Targets hit: BA; ROKU; TJX
Entry alerts: CAT; WOW
Trailing stops: None issued
Stop alerts: None issued

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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.

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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.


- All indices are higher but there is no change in their positions.
- Jobs beat, Services beat, and the Fed chairman is full of crap.
- Bond fear spreads with rates -- oh my -- too high. BS. The yield curve is healing itself and that is GOOD.
- Doom, doom, doom. Good. Their guesses are typically wrong, and guesses are not what makes money in the market.
- All things said, NASDAQ's big volume deserves watching.
- After some more testing many will be in good position. Then those predicting doom will have to reenter the market and make us lots of money.

The stock indices all closed higher, but just looking at that fact would perhaps give a false impression of the session. Up, but well off the intraday highs for the indices and for most stocks. DJ30, the large cap leader, closed 122 points off the high. RUTX, the session upside leader (0.92%) closed near the high, but it left itself so buried after its selling it did little to change its position.

SP500 2.08, 0.07%
NASDAQ 25.54, 0.32%
DJ30 54.45, 0.32%
SP400 0.38%
RUTX 0.92%
SOX 0.11%
NASDAQ 100 0.12%

VOLUME: NYSE +8%, NASDAQ +27%. Okay, upside sessions on the indices so the pat answer is accumulation. Considering the intraday action, i.e. the high to low, there was some selling at the highs. If, however, the indices can work out the sellers and hold position/support, that ultimately is good for the upside. Big volume on NASDAQ; given that level it deserves a close watch as SOMETHING was going on Wednesday.

ADVANCE/DECLINE: NYSE -1.1:1, NASDAQ +1.6:1. Even with the small caps rising almost 1%, still negative NYSE breadth.


What drove the action up, then down?

ADP jobs: 230K versus 184K expected versus 168K prior (from 163K). Impressive beat, at a 7 month high. Great news! But not!

The report was panned as creating a 'worker shortage' and that leads to higher wages that lead to more demand that leads to inflation. Or so the Keynesian crapola goes. Thank goodness an economist from Chicago was on Fox Business today and noted that the expansion was led by the supply side thanks to the supply side tax cuts and regulation reduction, and thus while demand is up, supply is easily meeting demand.

If the Fed sops up the rest of the easy money, which it has, if we don't raise taxes back up and start writing more regulations, if the administration continues reducing regulation and can pass more tax cuts, then we can grow and grow with no inflation. Proof: look at the 1980's and 1990's though the Clinton policies of tax hikes and paying off the debt ultimately bled too much money out of the economy and caused the recession in 2000.

ISM Services, September came in at 61.6% the highest ever, topping 61.3 from 8/2005 (the survey has been out for 20 years now).

Those are not bad stories to tell.

The Fed giveth, and the Fed taketh.

Mr. Evans of the Fed stated that it was time for the Fed to return to a 'supporting role' for the economy, i.e. get out of the business of actively intervening upside or downside. He sees things as 'just right' at the moment. Market positive.

Then Powell spoke out, stating the Fed is 'a long way' from neutral on interest rates, again throwing more water on the market. "We may go past neutral. But we're a long way from neutral at this point . . . PROBABLY (emphasis added). I have chronicled Powell's worrisome statements that started cropping up just over a month ago, starting to talk similarly to the Greenspan Fed about the US getting too far ahead of other economies, claiming assets are excessively priced, and now drumming for more hikes than initially called for.

This is part of a disturbing pattern seen before by Fed chairs. They start fearing shadows created by the flawed economic theories to which they dogmatically adhere. Some supply side theory with plenty of empirical evidence to back it up (as discussed above) would shine the light on those shadows and reveal nothing there, but Keynesians are smarter than markets so they ignore facts and plod on. As one pundit today noted, again on Fox Business, that they end up going too far. Always.

That is what will kill this bull market. Not the fact of rate hikes -- rates should rise as a result of economic growth and the demand for money -- but the notion that drives more and more hikes and a smaller and smaller money supply, i.e. that growth equals inflation. Untrue. Growth in demand with a constrained supply side (through unavailable capital thanks to excess rate hikes and too small a money supply and/or regulation and taxation) will have more dollars chasing the same or less goods and spark inflation. If you do not understand the cause, you would be lucky to take the right actions. Unfortunately, history shows the Fed is never lucky because its theories cause it to take the wrong actions again and again and again and again.

Bonds anyone?

As you can surmise from above, the fact the 10 year bond hit 3.183%, a multiyear high, is being blamed as a cause for stocks to struggle. True, there is some pull from higher yields for those preferring interest income to the stock market, but then there is history once again that shows this argument is a theory only with the proof showing the opposite. Historically the economy has grown just fine without inflation and bond yields naturally rise during economic expansions. As I said in an alert today, the history of world economics shows bonds and stocks coexisting in investor portfolios as the stock market works higher and higher.

The real problem is this: for so long the bond market has been controlled it is anything BUT a market. Experts, many of whom have never seen a bond market NOT controlled, fear what would happen if the Fed was not actively setting rates. They fear what they don't understand, and instead of looking at a history book about economics and seeing how it has worked in the past, they panic and say that bond yields will kill the stock market and economy. Baloney.

Still plenty of doom, gloom and swoon predicted.

There is a flood of 'the end is here or near' commentary on financial blogs, websites, and stations. As a market trader I have to say they could be correct. I also have to say they could be absolutely wrong. I know for certain their opinions ONLY matter with respect to how much relative negativity there is regarding the financial markets. That is it. They have no special knowledge and are ultimately guessing.

In 40 years of investing I have only seen a handful of people accurately and consistently call tops and then catch the entire move. That means they hit it just right, and did not see their downside positions suffer from further upside, successfully playing nearly all of the downside. They were right and played it right. Rarely happens.

Investing and trading successfully is not an office pool. In other words, it is not enough, for instance, to accurately call a market top. You have to make money off that call. If you are wrong you get slammed, burning up profits previously won.

Investing is about assigning probabilities and using the right tools to make money if those probabilities turn into reality. I can look at SP500 bumping at the trendline for six weeks and say the probabilities of it testing are higher now than they were 3 weeks ago. All things considered, however, I can also say the probabilities favor an overall modest test, if it occurs, versus a sharp rollover and plunge. So, while I can play some downside on a fall, the probabilities say play a move and take profits because it likely bottoms at support and tries to bounce.

I prepare plays based upon those probabilities, some downside, many anticipating holding support and rebounding. I don't know anything for certain about the moves, but I want to be ready to play the moves at are 1) probable, and 2) have the potential to make me enough money in return for the amount of risk I am taking.

In that way I make money in the market without having to be right anywhere near 100% of the time. The greatest traders I have ever known could be correct just 50% of the time and still make more money than anyone else because they understood the market, assigning probabilities, and developing trades accordingly. Again, it is not about calling a top, it is about making money on that possibility.

The point: NONE of these experts knows anything for certain, yet they say it with certainty. That is where you can be trapped by them. They are talking their book and need you to participate.

Thus, when I hear professor Shiller say that the current situation is like the 1929 boom leading to the correction, I have to consider a lot. He studies history but he also espouses the wrong economic theories. Thus he assigns the wrong reasons for the results. What made the 1929 crash was 1) the central bank believed inflation had to emerge from such explosive growth. It did not, but the Fed fought the dragon anyway, hiking rates again and again, ultimately hiking rates 100BP at one time! That killed the market. 2) Government policies and Fed policies thereafter prolonged the crash and turned a fast drop and what should have been an equally fast recovery into the Great Depression. Oh, and THEN inflation finally showed up. Gee, I guess the 1929 central bank was right . . . not.



No relative change in index position: that was the takeaway for the session whether an index held onto gains of blew them. Tuesday was similar, unable to hold onto gains. That session was panned for it but this one not because . . . the green arrows.

To us this is part of the pullback/fade/test discussed before. Will it be a short test of the recent moves or a bigger test taking SP500 and NASDAQ to the 50 day MA's?

SP500 is still bumping at the upper trendline, unable to break through but also insufficient selling pressure to take it down. An index or stock can bump up against a trendline for quite some time before it stumbles. Six weeks bobbing and weaving at the upper trendline is in the range of 'quite some time,' and you would expect a more definitive move sooner than later.

NASDAQ continues working along the 20 day EMA in the upper half of the channel where the 50 day MA more or less marks mid-channel. Tested the August all-time high Monday and reversed. It is making that test I referenced at the time, and the question, as noted, is whether it tests the 50 day EMA again and if so, whether that level holds again.

While we anticipate a continued test, neither of these patterns, neither of these scenarios are anywhere near horrible. Just a matter of degrees. If they hold the tests, there will be plenty of good buys in good stocks.

DJ30 surged to yet another new high but gave up twice the points it closed up, though still held a new high. No issues with the Dow as it breaks higher, but it did show a doji, and after a solid break higher it could test a bit, but it is showing good strength.

SOX was up, down, then closed flat. Still at the 50 day MA, still trying to hold key support in the middle of the triangle. Still some big chip names improving, e.g. INTC, AVGO, and SOX hangs in, trying to build a breakout, as they do so.

RUTX rebounded with the sharpest upside index move, this after a week of hard downside, accentuated by 3 very sharp downside sessions. The harder they fall, the harder the bounce? Way oversold, a solid bounce, but still not a great pattern. RUTX is holding at the July and August lows and bouncing; it could set up a right shoulder to a head and shoulders off this and that bears watching as RUTX continues to try and improve.

SP400 rallied off the Monday and Tuesday drop, moving up to the June to early August highs but fading much of that move. Trouble holding the move, not changing its selling over the past two weeks, but it is oversold, at a support range.

Again, for DJ30 things look good as money has rotated its way and is still moving its direction. SP500 and NASDAQ are testing a bit and could come back more (50 day MA?), but even so, that is not a bad upside scenario.


FAANG: FB again held 160 and bounced. Looks as if it will try to move higher but figuring out how far is difficult given all the price and moving average resistance. GOOG showing a hangman doji at the 50 day SMA from below. Up for almost 2 weeks, this is the lick log for this move.

SCAANN: SQ is making a 'delightful' test, waiting for the 10 day EMA to catch up to the last move. After this test we will look at new positions. CRM tested near the 20 day EMA, bounced upside over 1%. Still trending up the 20 day. AAPL up again, surpassing the August all-time high. AMZN sold below the 20 day MA to support at 1950. Do not like the higher volume the past 2 sessions and the weak MACD. A 50 day EMA test is possible. NFLX showing a tight doji over the 10 day EMA; still like this pattern a lot. NVDA holding its ground, moving laterally to test the nice, strong surge. Another 2 to 3 sessions of this and it is ready to move higher and for a new play.

Energy: APC added 1.6%. SPN surged 3.5% and even then closed well off the high. HAL much more modest. APA up, XOM off a bit, CVX added a bit more. A solid group.

Software: CRM remains solid, MSFT hit a new high intraday, TTWO bounced up off the 20 day EMA. ADBE testing the 10 day EMA, UIS bounced off the 20 day MA. DATA struggling big time. FEYE, NOW not bad.

Chips: INTC rallied to tap the 200 day SMA and then ran lower like a scalded dog. AMAT is trying to set up a bounce but KLAC looks better to do so. AVGO still looks good, NVDA tested, rebounded. LSCC added a bit more upside. BRKS looks pretty good here.

Financial: Some upside, but it was a gap to a doji that went nowhere, e.g. C, JPM. Ditto GS.

Machinery/Manufacturing: DE added another 2%. CAT 2.3%. CMI 1.1%. UTX . . . -0.30%. Hmmm. EMR +0.85%, BA another 1.5% (and a 110% on the October options -- sweet), ETN surged and purged back to the 10 day EMA. The groups still getting money.

Drugs: PFE 1.3%. Wow, volume too. LLY gapped and held. BMY, MRK gave up gains. Big biotechs are trying but just so-so. VCEL blasted upside 6.5%. INFI lost 4%. What a volatile group.

Retail: TJX faded to the 20 day MA and we banked the rest of the 177% on the October options. ROST a doji below the 20 day. COST sold to the bottom of the range. HD down to the 50 day EMA. UTLA doji at the 20 day EMA -- it may be ready.

MISC: MTCH not bad, and if it continues, entry. GRUB still looks solid if it can bounce. MNST has rolled over. PYPL is in a fight for its life just below the 50 day MA. TSL is struggling below the 200 day SMA.


Stats: +54.45 points (+0.20%) to close at 26828.39

Stats: +25.54 points (+0.32%) to close at 8025.09
Volume: 3.06B (+26.97%)

Up Volume: 2.18B (+1.222B)
Down Volume: 868.47M (-551.53M)

A/D and Hi/Lo: Advancers led 1.63 to 1
Previous Session: Decliners led 2.16 to 1

New Highs: 49 (+7)
New Lows: 111 (-24)

Stats: +2.08 points (+0.07%) to close at 2925.51
NYSE Volume: 871.667M (+8.16%)

A/D and Hi/Lo: Decliners led 1.04 to 1
Previous Session: Decliners led 1.53 to 1

New Highs: 73 (+30)
New Lows: 262 (+114)


VIX: 11.61; -0.44
VXN: 17.50; -0.05
VXO: 11.55; +0.37

Put/Call Ratio (CBOE): 0.86; +0.06

Bulls and Bears:

Bulls continue bumping at 60.0, a historically high level that leads to declines. Bears remain elevated, but not moving higher right now.

Bulls: 59.0 versus 57.7

Bears: 18.1 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: 59.0 versus 57.7
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: 18.1 versus 18.3
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


Bonds: 3.183% versus 3.061%. Bonds sold, yields jumped, TLT bombing to the lowest since Q2 2015, indeed, undercutting those lows at 115. Wow. Could the yield curve heal itself? THAT would be the strongest indication of economic resilience, much better than the pundits and 'experts,' 2/3 of which say a recession by 2020 -- will they change their tune if the yield curve fully heals itself?

Historical: the last sub-2% rate was in November 2016 (1.867%). 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: 1.14762 versus 1.15517. Dollar exploding higher against the euro that is falling like a stone. Winning?

Historical: 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 versus 1.15683 versus 1.15864 versus 1.1662 versus 1.1689 versus 1.17074 versus 1.16558 versus 1.17324 versus 1.17385 versus 1.16846 versus 1.16989 versus 1.17214 versus 1.1651 versus 1.16514 versus 1.16603 versus 1.1709 versus 1.1685 versus 1.16608 versus 1.1672 versus 1.17288 versus 1.17578 versus 1.17439 versus 1.1689

USD/JPY: 114.383 versus 113.642. Ripping upside against the yen. Winning here as well?

Historical: Last below 109 four months back. 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 versus 110.737 versus 110.840 versus 111.07 versus 111.361 versus 111.344 versus 111.254 versus 111.621 versus 111.628 versus 111.744 versus 110.990 versus 110.995 versus 110.791 versus 110.871 versus 111.235 versus 111.084 versus 111.451 versus 112.732 versus 112.783 versus 112.896 versus 112.337 versus 112.631 versus 112.093 versus 110.911

Oil: 76.41, +1.18. Up to the 2011 and 2012 lows. Wow. What a move but now at resistance.

Gold: 1202.90, -4.10. Tried the 50 day EMA again on the high, faded to a loss. BUT, gold is going to try a breakout through this resistance. Why? Not sure, but it is going to try.


The day before the Jobs Report and expectations are frothy after the ADP report. Okay, so everyone gets all ginned up just in time for a Friday jobs report disappointment. Why? The hurricane. LOTS of people could not work. Lots of businesses closed down so no jobs, no hiring. BUT, that could be good news: it at least gets the Fed temporarily off the market's back.

Near term NASDAQ is testing, SP500 should test. DJ30? It could have just paused today; its stocks still look good, still getting money tossed their way.

We will look at some upside plays though some are not quite ripe and need some more time. Others such as ULTA are at support with doji. Interesting. Others look as if they could fall, TSLA being one. Hey, MUSK is still involved; as long as his mouth is not wired shut and he has use of his fingers he is a threat to the stock price. Some improbable stocks look good, e.g. KLAC. Yes, KLAC.

Anyway, some big names are still a bit away from a really nice setup so we will be patient on those and look at some other plays that can, up or down, put the probabilities of making money in our favor. That is what it is about: making money. It is not an academic study. It is about having your money in the market, live, at risk, and making sound decisions. It is not theory, it is not guessing at a top or a bottom, it is playing probabilities, stacking the odds in your favor. I won't always be right on direction; any news can hit and scuttle a good pattern. I will, however, play the patterns that present themselves when the probabilities get stacked in my favor. I make a crap ton of money doing that; anyone can.

Play good plays, allocate the right amount of money to each play, and then play the play, i.e. let it work if it is working. The economy remains solid, bonds are starting to help, not hurt, because the yield curve is healing itself. That bodes well for the future despite the 2/3 of 'expert' economists calling for recession and all of the negative billionaires and money managers. Indeed, THEY are going to make us money over the next 3 to 4 months as they have to pile back into the market and drive stocks higher because the market did not fall. It may test farther near term, but that likely just sets up quality stocks in good position for us to buy as they rebound off those tests. If not, if I am 100% wrong, then we flip and play the downside without concern, without remorse, just with the goal of taking what the market gives.

Have a great evening!

End part 1
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