Sunday, March 24, 2019

The Daily, Part 1 of 3, 3-23-19

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3/23/2019 Investment House Daily
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The flu hit the office late week so to spare you from a coughing, hacking video we decided to upload index charts for the summary and for the new plays. Hopefully the Tamiflu will work.

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- Weak German PMI reports, weak Japanese output, yield curve inversion fears bring out the first serious sellers in a long time.
- After a solid break upside Thursday, SP500 and NASDAQ are sold back into the range.
- Small and midcaps threaten to break their uptrends.
- Friday was likely inversion panic, but was it even warranted?
- The market never peaks the first day of an inversion, so even if Friday was an yield curve inversion with meaning, the top is still a lot of upside moves away.
- Even if this wasn't an inversion to worry about, the move itself deserves respect, and some areas look very ready to sell.

Thursday night I said it looked as if the NASDAQ and SP500 test of the breakout over the top of the range was over. It was not. After a Thursday that saw stocks jump back up after a modest fade into the FOMC decision Wednesday that LOOKED like a successful NASDAQ and SP500 test of the trading range, stocks made a second rather important move: back down.

NASDAQ and SP500 reversed the Thursday gains and more, falling back into the upper reaches of the range. Not a horrible finish for those two indices, but NYSE volume jumped higher and breadth was impressive to the downside.

SP500 -54.17, -1.90%
NASDAQ -196.29, -2.50%
DJ30 -460.19, -2.50%
SP400 -2.81%
RUTX -3.62%
SOX -2.88%
NASDAQ 100 -2.23%

VOLUME: NYSE +21%, NASDAQ flat but above average. NYSE trade ramped as NYSE stocks sold across the board. Many times I have discussed the lack of sellers. Friday they showed up as fear of being late to get out on an inverted yield curve sparked selling. First, there is not that much evidence a 3 month/10 year inversion presages recession, and second, it is never the case the market peaks on the very day (Friday) the inversion occurs. Indeed, you can get smacked around pretty good playing it that way. Nonetheless, you have to respect the selling if nothing more than near term issues for stocks.

ADVANCE/DECLINE: NYSE -4.1:1, NASDAQ -4.9:1. Impressive downside as SP400 and RUTX broke below the 50 day MA's with RUTX closing below the early March low.

As the headline numbers and the internals show, it was a shellacking across the board with very few places unscathed.

Worse, it could be the old reversal of a breakout attempt. Both NASDAQ and SP500 had tested the initial breakout then rallied very nicely Thursday with the chips, old school tech, and FAANG providing a lot of firepower. Then whammo. Or Bang (from Col. Henry Blake in MASH).

The cause? Blame it on the yield curve. But it wasn't the yield curve, it was a deluge of headlines on website after website and the financial stations about a bond yield curve inversion. The New York Fed conducted its own study and said a 3 month treasury/10 year treasury inversion is a reliable recession indicator. To be fair, in 2007 that pair inverted first -- that is often the sequence of events -- before the 2 year/10 year or the 3 month/30 year inversion. The latter two are typically the signals that foretell a recession to come and thus a stock market selloff.

The timeline of such events is usually a 2 year/10 year or 3 month/30 year inversion occurs for more than just an intraday or short period, then a minimum of a few months passes before the market actually tops. In some smaller number of cases, it can be almost a year before the top. That is a REALLY wide spread, right?

So, what was Friday about? The inevitable result of a yield curve 'inversion?' First, as noted, 2 yr/10 yr or 3 month/30 year inversion is the typical historical measure. Is it different this time? Has the New York Fed discovered another never fail cornbread recipe to predict a recession? Dubious. Second, the day of an inversion, even if you consider this one a reliable indicator, is not the day the market rolls over.

No, what Friday appeared to be was a lot of people and more particularly headline reading algorithms that saw the plethora of stories on an inverted curve and their programming was such that they were to sell if that many negative headlines hit.

Thus, while Friday was not good by any stretch, not good at all, and while Friday can certainly lead to some more near term downside given the reversals, It is highly, highly unlikely Friday marked the start of a recession that warrants an immediate stock market selloff into a bear market.

There could be more selling given the weak close, BUT this is very likely a near term overreaction to everyone and their brother reading headlines about an inverted curve and subsequent recession and quite frankly panicking to get out ahead of the weekend, fearing something worse over the weekend -- like what? The bond market is closed over the weekend. If it inverts more then there is something strange going on.

After the panic selling runs its course we see where the indices are and what stocks held support. While Friday was not pretty, stocks were due a pullback after a solid 1.5 to 2 week move. This was a bit more than most wanted and it was not pleasant seeing NASDAQ and SP500 reverse on volume a Thursday break higher, but even so the indices have a bit more room to give for this to run its course and find some decent support.

Now, you cannot ignore Friday. Reversals of breaks higher -- accompanied by volume -- are serious matters. It is just this one was too pat, too much right on the heels of 'inverted curve!' proclamations. It was panic fire, a kneejerk response to the sudden onslaught of inverted curve stories that are not looking at the indicators that are considered an inverted curve. Even so you cannot ignore it.

Thus, we were taking positions off the table that even remotely played with the stop point. It was disappointing to see the solid Thursday moves in stocks such as AMAT, AMKR, WDC, NFLX come under immediate fire -- never great.

Early week it is then a question of watching if stocks can hold near support after the Friday yield curve paranoia, if they can. GOOG, CMG, AMZN, AAPL, MSFT, INTC, V and more all enjoyed solid advances and can withstand a session of somewhat reckless fear selling. Saner heads will have to prevail Monday after a chance to digest just what a 3 month/10 year inversion on Friday post-FOMC meant.



To view, click on the following links:

The big news was in NASDAQ and SP500 with their reversals of the Thursday new break upside after a short test of prior resistance.

Equally important, however, are the travails of the small and midcap indices. Travails at the resistance highs, yes, but when you take a look at the RUTX chart, if it tests to logical support that puts it at the middle level of testing I discussed several weeks back: either a short test to form a right shoulder to inverted head and shoulders patterns, or a dip to the bottom of the resistance range, or, gulp, a test all the way back to the December low.

SP400, RUTX: Tied to the domestic economy, after that fade in early March where SP400 gave up the breakout over the top of the resistance range, these two indices never caught back up to the large cap indices. At first it was just some rotation into the large cap indices from the leading midcaps. As more data hit and showed a weaker economy, however, they struggled. When the Fed came out in full dove plumage, money started to flee, and flee it did Friday.

RUTX broke below the March low, closing at the session low. Perhaps it puts together an ABDC consolidation of the December/February run, coming back to the bottom of the Oct/Dec trading range. That is about another 35 points for RUTX. Down 56 points Friday, so just a casual drop, right? Not really, but it is a logical test to very near the 38% Fibonacci retracement.

For SP400, it bounced early March off the 61% Fibonacci retracement of the rally from late January to February. Friday it closed just over that level, so that may not be in the cards. It perhaps wants a 78% retracement near 1821.

NASDAQ: Broke to a higher recovery high Friday on quite good volume. Friday it was sold and volume remained strong, well above average, but at least at levels hit Thursday on the upside -- suggesting that the selling was somewhat kneejerk with the inversion fears, BUT a strong move higher was met immediately with a strong move right back down. Monday we see if the big names that have performed so well pick right back up after a one-day issue.

SP500: Similar price action to NASDAQ though NSYE volume did not ramp higher Thursday. It did ram higher Friday, moving above average as the large caps and smaller caps sold. Definitely some distribution, i.e. dumping of shares where the sellers finally showed up. Now that it is back in the range, the immediate future is whether it shakes off Friday and rebounds out of the range OR it needs to test back farther, to the 200 day SMA (a very minor test) or deeper toward the bottom of the trading range (2635ish) similar to what was discussed with RUTX.

SOX: A break higher Thursday as well, moving to a new recovery high and into the resistance range from earlier 2018, but Friday the chips were down as well, giving up much of the move, holding up decently over the 10 day EMA. As with NASDAQ, from here it depends upon if it can move right back up.

DJ30: Could be a bit of a double top taking shape from the late February high as easily as a right shoulder to an inverted head and shoulders. Higher volume, again above average volume, as the Dow fell away from the bottom of the Oct/Dec trading range. Very important test this week as the 50 day MA's and 200 day SMA are converging just over 25,000. If that doesn't hold, then you rea looking at 24,500 to 24.000ish.


Thursday saw some really solid upside moves, Friday saw many given back, not all, but it definitely was not a great session.

FAANG: After a nice move Thursday that added to other solid gains, Friday they were sold back. Some. AAPL faded to the 200 day SMA it just broke. GOOG surged to a higher recovery high on the week then faded Friday toward the 10 day EMA on some pretty solid, above average volume. AMZN is at least finally testing, heading back toward the 200 day SMA after breaking through it Monday. NFLX was disappointing after its surge Wednesday into Thursday, falling back to the 20 day EMA on slightly rising but still below average trade. FB is still trying to hang in and consolidate in a 7 week range.

Semiconductors: What was a great week tarnished a bit Friday. Some are still solid, e.g. AVGO, working in a lateral pennant. AMD, AMAT, NVDA, recent leaders, struggled. MU reported great results and surged Thursday to sell back a good chunk Friday. Important group that needs to recover quickly on the week if the rally is going to hold from here.

Software: A group that bounced Thursday, showing some life, but from patterns that had stalled out into lateral moves alone the highs. Friday they were getting sold on higher trade, threatening to break their trends: NOW, TEAM, DATA, FIVN, HUBS.

Machinery/Manufacturing: Not great moves. CAT broke lower from the 50 day EMA, unable to break the 200 day SMA. ETN broke hard toward the 200 day. UTX hanging in nicely, CMI was down but still not bad overall.

Metals: STLD broke lower from a consolidation. SCHN reversed a good Thursday move. AKS hanging in a lateral consolidation. CLF broke sharply lower.

Personal products: Of course, these stocks were fine Friday, holding patterns. CLX, CL, PG.


Stats: -460.19 points (-1.77%) to close at 25502.32

Stats: -196.29 points (-2.50%) to close at 7642.67
Volume: 2.5B (0%)

Up Volume: 391.81M (-1.328B)
Down Volume: 2.1B (+1.333B)

A/D and Hi/Lo: Decliners led 4.93 to 1
Previous Session: Advancers led 1.51 to 1

New Highs: 67 (-55)
New Lows: 89 (+48)

Stats: -54.17 points (-1.90%) to close at 2800.71
NYSE Volume: 1.047B (+20.55%)

Up Volume: 144.199M (-423.929M)
Down Volume: 899.315M (+611.112M)

A/D and Hi/Lo: Decliners led 4.13 to 1
Previous Session: Advancers led 2.52 to 1

New Highs: 149 (-18)
New Lows: 54 (+31)


VIX: 16.48; +2.85
VXN: 19.83; +3.24
VXO: 17.26; +2.86

Put/Call Ratio (CBOE): 0.89; +0.12

Bulls and Bears:

Knew there would be a bounce in bullish sentiment. Interestingly, more of a relative decline in bears then the rise in bulls. Did its jobs on the crossover though that was quite some time back.

Bulls: 53.9 versus 52.4

Bears: 20.6 versus 21.4

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: 53.9 versus 52.4
52.4 versus 52.9 versus 52.4 versus 51.9 versus 49.5 versus 48.6 versus 45.8 versus 45.4 versus 34.8 versus 29.9 versus 39.3 versus 45.4 versus 46.7 versus 38.3 versus 39.6 versus 42.9 versus 42.5 versus 50.5 versus 51.9 versus 56.3 versus 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

Bears: 20.6 versus 21.4
21.4 versus 20.6 versus 20.4 versus 20.7 versus 21.5 versus 20.6 versus 20.6 versus 21.3 versus 29.4 versus 34.6 versus 21.4 versus 20.4 versus 21.50 versus 20.6 versus 19.8 versus 19.0 versus 19.8 versus 19.8 versus 19.0 versus 18.3 versus 18.5 versus 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


Bonds: 2.538% versus 2.524% 10 year. After the surge upside Wednesday post-FOMC, TLT gapped to a doji, still just below the early January high.

3 month: 2.459%
2 year: 2.319%

Historical: the last sub-2% rate was in November 2016 (1.867%). Last trade over 3% was November 2018.

2.524% versus 2.616% versus 2.601% versus 2.591% versus 2.628% versus 2.625% versus 2.60% versus 2.641% versus 2.632% versus 2.641% versus 2.693% versus 2.715% versus 2.724% versus 2.759% versus 2.717% versus 2.673% versus 2.636% versus 2.672% versus 2.654% versus 2.695% versus 2.641% versus 2.641% versus 2.664% versus 2.654% versus 2.706% versus 2.686%

EUR/USD: 1.13009 versus 1.13713. After tapping the 200 day SMA from below on Wednesday post-FOMC, the euro has flopped lower.

Historical: 1.13713 versus 1.14314 versus 1.13526 versus 1.13359 versus 1.13248 versus 1.13070 versus 1.13271 versus 1.12895 versus 1.12592 versus 1.12344 versus 1.1191 versus 1.13123 versus 1.13050 versus 1.13344 versus 1.13650 versus 1.13725 versus 1.13790 versus 1.1391 versus 1.13598 versus 1.13332 versus 1.13363 versus 1.14490 versus 1.13544 versus 1.12922 versus 1.12955 versus 1.12616 versus 1.3323 versus 1.12816 versus 1.13218 versus 1.13396 versus 1.13645 versus 1.1396 versus 1.14350

USD/JPY: 109.92 versus 110.720. Dollar is falling against the yen, breaking sharply below the 50 day MA. Failed at the attempt to move over the 200 day SMA.

Historical: Last below 109 in June 2018 then tumbled to 107 in early January 2019. 114.51 is the recent high from October 2018.

110.72 versus 110.673 versus 111.374 versus 111.432 versus 111.470 versus 111.715 versus 111.314 versus 111.428 versus 111.165 versus 111.482 versus 111.624 versus 111.845 versus 111.856 versus 111.921 versus 111.433 versus 110.873 versus 110.53 versus 110.979 versus 110.670 versus 110.664 versus 110.786 versus 110.848 versus 110.469 versus 110.462 versus 110.945 versus 110.523 versus 110.488 versus 109.754

Oil: 59.04, -0.94. Holding up well, closing at the 10 day EMA after a weaker Friday. Still trending slowly up the 10 day EMA and eyeing the 200 day SMA overhead.

Gold: 1312.30, +5.00. Not surging, but definitely holding over the 50 day MA's.


Monday the upside starts from scratch. Well, not quite. The large cap growth indices are still in solid enough position, it is just that Friday sellers showed up for the first time in quite a while. NASDAQ, SP500 and SOX have to find footing at near support and rebound.

As noted before, Friday could have simply been an overreaction to the multitudinous stories regarding a yield curve inversion. A run to the door because, despite the upside move, there is still quite a bit of skepticism the market cannot continue farther.

Also as noted, the first day of an inversion is not the start of the selling. The market peak comes 3, 4, 6 even longer after the signal. And as for signals, the 3 month/10 year is not the pairing most indicative despite what the NY Fed claims. The 2 yr/10 year or 3 month/30 year are the keys. That said, the 2/10 is just 22BP from each other. Not much room for maneuvering.

The large cap growth that led the recent recovery and semiconductors look to be key to a near term hold and recovery for the larger growth stocks. Software stocks have held gains but have been very quiet for a few weeks; they fell rather aggressively Friday, indicating more downside to come. If they go what group will replace them? Not financials as they tank again.

The market is at one of those gut check points for the near term. Will the indices shake off the inversion worry and continue the upside, will they test back to midpoint or the bottom of the October/December consolidation range, or will they fully correct to the December low?

Those questions always arise when the market falters on some volume and at important levels. Those questions have to be asked, and because the Friday sharp selling came with a reversal of a solid move the session before, the move takes on more significance as it not only negated the prior move, it overran it.

Therefore we have to look at both sides of the fence. Look at some of the big name leaders we were waiting to test to get some new or more positions, e.g. AMZN. We also have to look for some downside. Entered STLD Friday as it broke lower. SPY downside could deliver some gain, and we are looking at software stocks to see if we can get the entries and positions right to make some money on any drop they show. If they go, they could go big and rather fast. Then the indices show if they can hold a support level and rebound.

Have a great weekend!

End part 1
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