Sunday, May 12, 2019

The Daily, Part 1 of 3, 5-11-19

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5/11/2019 Investment House Daily
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- More trade angst sends stocks lower, but stocks then rebound to close the week positive.
- More encouraging trade quotes from the administration turn stocks, or was it just that the indices made the technical tests of support we have discussed?
- So there is no trade deal with China. Anyone really going to lose sleep over it?
- CPI remains low-ish, and Powell may have to start wondering just how 'transitory' those prices are.
- Chips rebound but not as convincing as other leadership areas.
- Indices make the tests, leaders hold up quite well, will they now bounce to try the highs again?

Friday came and went and all that the market got was more Chinese tariffs and a dud UBER IPO. No trade deal, lots of market volatility, market selling -- that was the week. On top of that, Saturday Trump proposed tariffs on ALL Chinese goods entering the US. Hey, if you are going to do it as a weapon, the do it. No half measures.

Okay, it was not all tariffs. After the President said there was 'no need to rush' on any trade deal, setting off more market weakness, he later noted that there could still be a deal. Then trade cheerleader Mnuchin chimed in that the Friday discussions, while just 2 hours, went very well.

After diving from the open to midmorning, that was enough -- along with the prior market selloff to key support before -- to rebound the market. Like the Thursday rebound the indices and leading stocks rebounded off the lows to hold key support with nice doji with tail. Unlike the Thursday reversal off the lows, Friday the indices upped the ante, closing positive on the session.

SP500 10.60, 0.37%
NASDAQ 9.65, 0.08%
Dj30 114.01, 0.44%
SP400 0.30%
RUTX 0.19%
SOX 0.14%
NASDAQ 100 0.05%

VOLUME: NYSE -6%, NASDAQ -5%. NYSE trade was lower and still below average Friday, not a big shot of reversal-style volume. NASDAQ trade was also lower, though still nicely above average similar to Thursday's higher volume when the index reached lower and reversed to close higher than the open. Not a clear signal from NASDAQ the buyers were swarming, but a good shot of volume on the reversal.

ADVANCE/DECLINE: NYSE +1.9:1, NASDAQ +1.2:1. Nothing major here, but then again, on reversal sessions breadth does lag the reversal.

Trade deal not the real deal?

Perhaps it was na ve for the market to believe a trade deal would gel. China is still communist, after all. When push came to shove it realized it could not commit to not steal technology. Sure, the large US multinationals scream that they MUST be able to manufacture in China given they chose to manufacture there and decided not to use the last year to move production elsewhere. That was their choice, both to move there and then not to move. MOREOVER, many will be allowed to file for exemptions -- it won't be a horrendous ordeal for most and for the US and US consumers.

You already know my feelings about importing cheap products from China -- using cheap Chinese-made screws are enough to turn anyone against Chinese imports. Not to mention lead in paint on toys (something the US dealt with 50+ years ago), poisonous dog food -- all the things the US went through with US manufacturing in the 1950's to 1980's and resolved we are now importing once again from China. And don't get me started on the return of measles, polio, diphtheria, resistant TB and other diseases we eradicated from the US at the cost of billions of dollars but are now letting walk back in on an unchecked border. Argh!!

But, I digress. The point: we will survive the lack of a trade deal with China. Nothing can be worse than the one-sided theft that has taken place the past 40 years. Having no trade deal is not the horror that it is made out to be. Predictions of massive jobs losses, higher prices, etc. are -- as ALWAYS -- grotesquely exaggerated. Hell, I ALREADY am willing and do pay more for US made screws that actually work after throwing those from China into the metal recycling bin, or US made 3/8" aluminum that can be bent without cracking as does Chinese aluminum -- the time and labor saved from using quality materials, even at a higher price, is at worst a wash.

As US businesses and the economy survive without cheap Chinese crap, so will the market.

Indeed, the market, as noted above, did an admirable job of holding up at support even with all the angst experienced at the lack of a trade deal. Same as Thursday, the indices undercut the 50 day MA or 200 day MA as the case may be, then rebounded nicely to hold that support, this time turning positive. Many leaders did the same.

Perhaps the market needed this test -- as discussed here on many occasions -- and the trade failure was an excuse to take it. At this juncture the market action the past two weeks certainly looks like a good, ordinary test of the next important support. Perhaps there is more there, but the indices and leaders look quite good after this pullback.

The Fed

What is forgotten in the near term angst is the Fed, fading from the headlines but still the force. Friday was more reason the Fed remains the real issue, not a trade deal or lack thereof with China.

Friday the April CPI issues. The overall and core were less than expected month/month (0.3 vs 0.4, 0.1 vs 0.2%, respectively) and still 'tame' year/year (2.0% and 2.1%).

Real hourly earnings year/year rose 1.2%. Real weekly earnings year/year rose 0.9%. Hardly leading the so-called 'wage push' inflation the Fed buys into.

These figures keep the Fed in play. Not in terms of raising rates, but in terms of Powell living up to his prior words. The PPI and CPI show the lower prices are not 'transitory,' but are holding. More and more companies are automating tasks, further driving down the cost of goods and services. Disinflationary trends in industry offsetting inflation in other areas. We won't go into the specifics, how some inflation in certain key areas (e.g. Shelters +3.8%, food, education) are the ones that really bite. Why not? Because the Fed looks at the aggregate, not parsing areas where say the lower income brackets really feel the hit because they don't go buy new computers, TV's, software, etc. on a weekly basis. Hard to feel lower prices when the stuff you buy is rising in price.

In any event, the Fed may have to conclude in 2 to 3 months that the prices are not transitory, putting pressure on Powell to do as the President bids, i.e. cut rates. Oh, it won't cut 1% as the President suggests, but a token rate cut if prices remain low would appear necessary for Powell to keep his reputation of making adjustments when he sees the Fed off course. The Fed holds the currency's value in its hands. The Fed is still very much in play. That makes the Fed MUCH more important than these worries about trade. When you look at the index pullbacks, thus far they indicate this as well.



For a second session the indices sold to or below a key level, then rebounded to hold that level. The positive close Friday was a nice upside touch. Volume disappointing. Basically, the indices again tested key levels and recovered. Another session of good shakeout action that sets up a bounce.

The bounce is set up. First, will it happen or will the indices just roll over again and break the near support? Second, if they do bounce, will the bounce be more than just a relief move that again fails, e.g. DJ30 at the late February high, a potential left shoulder to a head and shoulders pattern?

Those are questions that are answered as the indices make the moves and the leaders make their moves. The prior highs of course have many fearful this is the top of at least this part of the rally and will trigger even more selling. Again, the leaders will tell this party of the market story as they move higher, and after Thursday and Friday, many held on and several started higher. It would appear they will show us soon enough their intentions.

SP500: Reached to a lower pullback low below the 50 day MA's then reversed to a gain in an 'outside day' that was lower on the low and higher on the high than Thursday. Moreover, it was a reversal session at a key level after four moves up the 10 and 20 day EMA led to a 50 day MA test. Pretty classic action in an uptrend, testing a bit deeper after a good move. Again, the proximity of the old highs makes the test a bit more frightening to many.

NASDAQ: Also an outside day with a reach lower below the 50 day MA and recovery to positive. NASDAQ also made four moves up the 20 and 10 day EMA and then tested the 50 day MA with good shakeout sessions. That is normal: 4 rotations up the 10 and 20 day after a 50 day MA test, then another 50 day MA test. That said, this weekend Nidec cut its guidance for demand for hard drives 13%.

NASDAQ 100: Reached much lower below the 50 day MA, reversed to positive. Same setup as NASDAQ though the large cap techs have been spotty day to day with their leadership abilities.

SOX: Gapped lower Thursday to a doji at the 50 day MA. Friday a duplicate doji. Holding support on big volume, but not that convincing for the upside. An ABCD pattern on both SOX and SMH, but as noted Thursday, not the cleanest, and with these patterns, cleaner is better. Definitely will show if it has the chops to move back up. Of course, what SOX shows means a lot for the rest of the market.

SP400: A second session testing the 200 day SMA on the low, rebounding this time to close above the 50 day MA's. Not bad action to end the week, but a bit of a rounded top the past 5 weeks with lower MACD on the higher recovery highs. That indicates momentum is waning. If the small caps are to hold, this is where they should do so.

DJ30: A second test of the 200 day SMA and a second rebound from the test. Moved to positive Friday but closed just below the 50 day MA. This hold of the 200 day SMA was necessary, but also does nothing to change the possibility of a right shoulder setting up to a head and shoulders top from mid-February. The failure below the prior all-time highs at the 'head' is what makes this action very much worth watching.

RUTX: A second bug doji with tail, touching down to the same level then rebounding to a modest gain over the 200 day MA and 50 day MA's. Held where it needs to, but the pattern is not healthy: Broke out 2 Fridays back but was rejected two sessions later. Not good action overall. Again, the holds at the 200 day SMA are what it had to do but did not change the character to positive.


Software: Remains very solid. WDAY, COUP, TEAM, NOW, TWLO rose on Friday. Those are just a few. MSFT moved on volume up from the 20 day EMA. VMW held the 20 day and started upside. FFIV had a big shakeout and reversal at the bottom of its range; may be ready to rebound.

Semiconductors: Mixed and concerning. AMD bounced from the 50 day MA on a solid volume shot. AVGO showing a doji at the 50 day and trendline. Okay, that is good, but the double top from late April is something of a concern. UCTT tested the 10 day EMA and is trying to bounce. RMBS still in a lateral consolidation at the 20 day. LRCX trying to hang on at some price support at 195. BRKS similar to UCTT in nice test of its surge higher. INTC . . . is still in the depts of its gap lower.

FAANG: Still set up well . . . FB a very nice doji at the 20 day EMA Friday in a downward pointing wedge. AAPL a big doji tap at the 200 day MA Friday. Okay, this is the time to move upside. AMZN struggled Friday, reaching near 1850 before reversing but still showing a loss on the session. At the lick log. NFLX a second doji below the 50 day MA. Lick log here as well. GOOG plunged to test the 200 day SMA on the low, the reversed to positive on the day. Perhaps that was the shakeout GOOG needs to start bouncing it after that earnings gap lower.

Financials: Tested more and then bounced Friday. C tested the 50 day EMA then rebounded positive in decent action. JPM made the same low and rebounded to the same close. It looks as if it needs to test lower before it is done. TCBI regional bank hanging in at the 20 day EMA. MS holding over the 50 day MA in nondescript trade. V attempting a bounce off the 50 day MA after a second intraday tap at that level.

Retail: Some are still testing the 50 day, some are moving. COST jumped 1.5% Friday off the 50 day. ROST showed good volume as it started higher. TJX still at the 50 day. BBY reached to the 200 day SMA then rebounded to hold the 50 day -- questionable pattern. DLTR slipped below the 50 day MA on the close for the first time since late December.

Machinery/Manufacturing: As a group, still struggling in a tough 3 weeks. CMI still in a nice 50 day MA test. CAT with another doji at support but well below the 200 day SMA. DE a second doji at the 200 day SMA, but a big selloff and gap lower on the week. UTX tapped at the 50 day MA on the low for a second session. Not bad looking, just had that weak Tuesday.


Stats: +114.01 points (+0.44%) to close at 25942.37

Stats: +6.35 points (+0.08%) to close at 7916.94
Volume: 2.41B (-4.74%)

Up Volume: 1.22B (+180M)
Down Volume: 1.14B (-320M)

A/D and Hi/Lo: Advancers led 1.22 to 1
Previous Session: Decliners led 1.47 to 1

New Highs: 70 (+17)
New Lows: 105 (+9)

Stats: +10.68 points (+0.37%) to close at 2881.40
NYSE Volume: 781.73M (-5.46%)

Up Volume: 457.557M (+160.899M)
Down Volume: 309.821M (-205.672M)

A/D and Hi/Lo: Advancers led 1.89 to 1
Previous Session: Decliners led 1.37 to 1

New Highs: 70 (+5)
New Lows: 60 (-26)


VIX: 16.04; -3.06. Deflated rapidly after the Thursday spike to 23.38 that then reversed intraday. Back below the 200 day SMA and into the lateral range from February.
VXN: 19.10; -2.93
VXO: 18.00; -3.87

Put/Call Ratio (CBOE): 1.24; -0.04. Four of five sessions over 1.0 as the extreme sessions are stacking up. The more they do so, the better chance of a rebound IF the other indications line up as well.

Bulls and Bears:

Bears stopped the decline but did not bounce, holding 17.8 for a second week. Bears finally broke their semi-negativity and dropped the past few weeks. As noted, that was a negative indication for the rally as they had remained more bearish in a relative sense than bulls. The decline suggested a selloff and that occurred, more or less.

Bulls backed off a point after rising steadily. Just as they got within 5 points of that 60% range where the upside moves have stalled, bulls lost their nerve a bit.

At this juncture there are still no extremes. Bulls are close to 60, but not there. Bears have overall been more complacent of late.

It did its work in the late 2018 selling with a crossover of the bulls and bears, and when that occurs you expect a recovery. That has been the case. Now with the indices bumping resistance you look for extremes, but bulls are not hitting that 60ish level that has prompted selling/corrections in this long rally from 2009.

Indicator level: Shading to yellow for this week even as bulls backed off. Not in the 60's, but not much fear from the selling.

Bulls: 55.5 versus 56.4

Bears: 17.8 versus 17.8

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.



Threat level: FLASHING Yellow. No current inversion but close. One prior inversion of 3 month/10 year but it was just 2 days. Curve is flat at the short end but still upward sloping.

The 3 month yield versus the 10 year: Spread rises 1BP to 3BP. Still too damn close.

The 2 year versus the 10 year: Spread rises 1BP to 20BP

10 year: 2.473% versus 2.451%

3 month: 2.431% versus 2.432%
2 year: 2.272% versus 2.262%

Historical: the last sub-2% rate was in November 2016 (1.867%). Last trade over 3% was November 2018. 2.6% for quite some time, then yields started higher, first run from November to January, then mid-March.

The Dollar: There are two schools of thought. First, those who believe a strong dollar is in the interest of the US. Reagan (though not all of his advisors) and Clinton were strong dollar Presidents. Second, there are those who believe a strong dollar prevents the US from selling US goods abroad. The Bushes (1 and 2) and Obama were in this category. The thing is, the US is always its economic strength peak when its consumers are consuming, and that is when there is a strong economy and a strong dollar: they consume both US and foreign goods. History shows this again and again, and thus it is worth watching the dollar as a gauge of how the US economy is performing.

EUR/USD: 1.1234 versus 1.12187. A second session tapping the 50 day MA's after rebounding off the lower low from late April.

Historical: Back into the 6-month range formed after the euro sold off from the early 2018 peaks after a week below it.

USD/JPY: 109.957 versus 109.706. Dollar found support at 109.50, and after 3 weeks of weakness is trying to make a stand for at least a bounce from the selling.

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

Oil: 61.66, -0.04. Flat lined still at the 200 day SMA.

Gold: 1287.40, +2.20.


The trade news is old news. It is sinking in there will not be a deal. What needs to sink in next is that it won't make much difference, that the Fed is still the primary game for stocks, AND without a trade deal the fear of a slowdown will at the LEAST keep the Fed on a pause. The President, of course, wants Powell to admit lower prices are not transitory and cut rates.

Either way, the Fed is compliant. Still. That is still a market positive.

Also a positive: indices holding at support with doji. Leaders holding at support in good patterns. That bodes well for a rebound to take on the old highs.

Negatives include the action of the chips. Some look great. Some are trying to hold. Some are problematic, and some are downright bad (e.g. INTC, XLNX, NVDA). If the chips go, the market will follow at some point.

Trade is also a negative on the stray headline or tweet. It can add upside if a deal is struck. As for more downside, not sure how much is remaining given the reality is sinking in that a deal is less than likely.

The bounce is the thing that shows the conscience of the . . . rally. Could not think of a rhyme to fit the Shakespeare line. The leaders and indices are set up to make the move. Will they make the bounce? If so, will the bounce have strength and this time take out those prior highs? We will be playing the quality leaders that held up during the selling as they are the strongest in the market. Hopefully the leading chips will have the strength to pull the rest of that sector with them in a rally.

Have a great weekend and Mother's Day!

End part 1
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