Wednesday, May 29, 2019

The Daily, Part 1 of 3, 5-2j9-19

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5/29/2019 Investment House Daily
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Targets hit: DXD; QID; TECD
Entry alerts: None issued
Trailing stops: WDAY
Stop alerts: DRI; TREX

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- Bond inversion fever still present, still pegged as the reason for the selling. Sure.
- A gap to lower selloff lows, but SP500, NASDAQ show doji at the 200 day SMA.
- Some stocks are so oversold they are ready to bounce, but not in great numbers.
- Upside leaders are thin, so are the stocks set to bounce.
- Doji at support suggests a bounce, but not expecting anything big. VIX has yet to move.
- Upside plays are there but best not to let expectations overshoot reality.

Stocks continue to distribute with a downside gap on top of the Tuesday reversal selloff. Ugly session yet again, but there was a modest move off the lows. Indeed, SP500 and NASDAQ managed to show doji with tail, closing just over the 200 day SMA. After a pretty salty selloff those patterns suggest a possible bounce.

SP500 -19.37, -0.69%
NASDAQ -60.04, -0.79%
DJ30 -221.36, -0.87%
SP400 -0.62%
RUTX -0.94%
SOX 0.41%
NASDAQ 100 -0.85%

VOLUME: NYSE -43%, NASDAQ -7%. Still very strong, above average NASDAQ trade while NYSE trade backed off significantly.


Bond inversion fever has again struck the stock market. After ignoring the 3 month and 10 year treasury yield inversions starting over 2 weeks back, suddenly they are important. Is it the yield curve inversions causing the selling, or were investors and traders looking for a reason why there was selling and realized the 3 month/10 year had inverted as it did in March (the first time since 2007)? Ignored for two weeks then after some ugly selling it is suddenly the main reason cited.

Perhaps. Economic slowing worries, trade talks breaking down, Fed still viewing price declines as 'transitory,' stock leaders such as semiconductors selling off hard, oil prices making an important break lower. There are a lot of negative issues out there and the bond curve starting to invert is another stick added to the pile of economic worries.

It is still not accepted across the board that a 3 month/10 year inversion is a recession indicator. One Fed district said it did some research and believes that pair is a reliable recession indicator, as reliable as the accepted 2 year/10 year curve inversion. It has become accepted in the media because it happened in 2007 and a Fed district said so. I wish I was smart enough to know for certain, but I do know that the short end yields are above the 2 year, 5 year and 10 year and that is not a good development. The Fed is being way too cavalier about prices and could find itself in the same situation as Greenspan.

Indeed, one scholar today said it was the 10 year dropping versus the 3 month rising and that makes this different than the kind of inversion indicating recession. In other words, it is not worry that is making money today more valuable versus 2, 5, or 10 years from now, just demand for the 10 year from others such as foreign governments and individuals in countries where economies are in trouble.

Heard this before . . .

That is EXACTLY what Greenspan said was happening during his 'conundrum' period where the 10 year yield fell below the 2 year yield, indicating recession. Greenspan's Fed was hiking rates and he was questions about that given the short end (more controlled by the Fed) was rising but the long end was not. Greenspan said that was indeed something to ponder, but his great intellect told him that the only reason the inversion appeared was because of foreign buying and thus there was nothing to worry about.

Well, there is ALWAYS foreign buying of US treasuries as a safe haven in any times of worry. More importantly, Greenspan was simply wrong. Whether foreign entities were buying as a safe haven or not, the curve inverted, and as that 2 year/10 year inversion has always indicated, a recession followed. Didn't matter that great minds thought otherwise, that the 'Maestro' explained why it was different this time. It simply was not different this time.

Again, I wish I was smart enough to know that THIS 3 month/10 year inversion was a recession indicator as some are saying. Yes, it certainly inverted ahead of the 2007 crash and recession, but it does not have the same track record as the 2 year/10 year inversion. Indeed, CNBC commented on that after the close.

There is a big top in place.

What I do know is the market rallied from March 2009 to January 2018, then started the current sideways move. Huge rallies don't just roll over in a month or two. A top to a nine year rally takes time. It is currently 16 months in and is just now looking as if it is rolling over: double top, the second top a head and shoulders. Breaking lower now with SP500 gapping below the neckline at 2800. It looks ugly.

Nearer term, it may be so ugly it is good for the upside. An oversold condition can lead to a rebound. The chip slaughter with its 20% drop has some trying to bounce. SP500, NASDAQ undercut the 200 day SMA on the lows then rebounded to show doji. Okay, the stage is set for a possible oversold bounce.

Longer term the downside has not been sated. VIX has yet to bounce - it moved to 19 on the high of the session with the early selling, closing at a meager 17.90. There is no fear at all in this selling. Some say that means the selling has about run its course. If so, it is near term only. If so many are not that concerned about a decline, there are too many holders of stocks in the market in a time of concern. They are not heading for the door, they are just buying puts.

16 month topping action, not a lot of concern for the selling thus far, Fed in neutral but neutral leaning more hawkish, yield curve flashing warning signs, many leadership groups under fire, market still facing distribution sessions. The probabilities the do not favor an end of the selling. After a bounce off the current oversold condition, selling could really intensify.

Indeed, we saw the doji on SP500 and NASDAQ and took some gain on the DXD, QID, TECD positions. Perhaps the doji on those two large cap indices was a continuation doji, i.e. the selling continues off this Wednesday action. Throw in the 200 day SMA, however, then the doji after undercutting that support makes sense. Short covering occurred at that point, bouncing it back up. With some oversold areas trying to bounce, that leads to the oversold bounce before another drop. That of course presents another good entry point downside.

Who wants to bounce? A few for sure, but the list is thin.

Semiconductor big names for one. INTC, XLNX, AMAT. They led lower, they are set to bounce. DELL is interesting though other big techs are not that great (CSCO, ORCL, HPE).

Other areas are not so positive, indeed, playing catch down to the chips: retail is being gutted. Apparel, eateries hammered. Software is trying to break down, e.g. HUBS, WDAY, VMW - though NOW and COUP are not bad.

To be clear, there are more negative patterns than positive patterns. Good patterns are showing up in: social, biotech, some software. Not a lot more.

The list of potential bounce stocks and those in still good patterns is thin. Thus, any bounce is likely just a bounce, a relief move that sets up the next drop lower. With the high volume selling ongoing it is clear the market has not shifted to buying from selling. Just another reason any bounce is highly likely just a bounce.


While some stocks are really oversold and are ready to bounce after showing indications for the past several sessions (INTC, XLNX, DE), any move higher is highly likely just a relief move.

Why? Even with some oversold stocks prepping to bounce, the market overall continues distributing, i.e. selling on high volume. That means stocks are still being liquidated from portfolios, something we said would be the case after a bounce just as was the case with the 4 to 5 day bounce into mid-May. After that bounce fizzled, sellers started dumping stocks in earnest once more with high volume downside sessions. Tuesday was a nasty distribution session and Wednesday another one - volume a bit lower Wednesday but still much stronger than recent trade.

Can an upside bounce make any money? It can with XLNX and INTC perhaps, DE is a bit tight. Good patterns in biotech are alluring, but one thing you have to consider in a harshly selling market: good patterns can yield good breaks higher, but they tend to run out of gas faster. The goal is to capture a reasonable number of points then exit because so often good upside is sold by the sellers for the audacity of rallying. Those breaks higher just don't hold as long in a market that is overall selling.

Have a great evening!


Stats: -221.36 points (-0.87%) to close at 25126.41

Stats: -60.04 points (-0.79%) to close at 7547.31
Volume: 2.39B (-6.64%)

Up Volume: 958.25M (+62.06M)
Down Volume: 1.4B (-230M)

A/D and Hi/Lo: Decliners led 2.23 to 1
Previous Session: Decliners led 1.72 to 1

New Highs: 60 (-19)
New Lows: 219 (+88)

Stats: -19.37 points (-0.69%) to close at 2783.02
NYSE Volume: 810.971M (-42.93%)

Up Volume: 260.994M (-70.012M)
Down Volume: 537.337M (-528.22M)

A/D and Hi/Lo: Decliners led 2.04 to 1
Previous Session: Decliners led 2.06 to 1

New Highs: 71 (-56)
New Lows: 211 (+103)


VIX: 17.90; +0.40
VXN: 22.23; +0.40
VXO: 19.71; +0.46

Put/Call Ratio (CBOE): 1.41; +0.34, 16 of 19 sessions over 1.0. Definitely in the status of providing upside momentum, but the other indicators need to be there. New lows are still low, no mega-negative internals and sentiment.

Bulls and Bears:

Bulls faded farther, falling below 50 with a pretty solid 6 point drop over 3 weeks. Bears fell yet again. Bears lower on selling, VIX not spiking on selling. Appears there are more issues to resolve that this range trading action at the head and shoulders neckline has not been able to rectify.

At this juncture there are still no extremes. Bulls faded from 60 without ever hitting that level. 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: 49.5 versus 51.4 versus 55.5

Bears: 17.2 versus 17.5 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: Red-ish. 3 month/10 year spread inverts a third time. 5 year, and 2 year are below the 3 month treasury. Third 10 year/3 month inversion this year. The positive: the 2 year/10 year is not inverted.

The 3 month yield versus the 10 year: Spread climbs 1BP to -10BP.

The 2 year versus the 10 year: Spread rises 1BP to 15BP

10 year: 2.262% versus 2.268%

3 month: 2.362% versus 2.356%
2 year: 2.109% versus 2.127%

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: 1.11362 versus 1.11624. Germany's unemployed jumped and that scared the euros. Euro lower for third session, falling to the support.

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: 109.573 versus 109.377. Bouncing off the 109 support - a bit.

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: 58.81, -0.33. Dropped hard then rebounded to near flat, trying to fight off the bear flag after the sharp drop the prior Thursday.

Gold: 1286.30, +9.20. Gold trying to move up off its lows. It is trying to form a cup, trying to come up off the lows of the base.

End part 1
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