Monday, May 06, 2019

The Daily, Part 1 of 3, 5-6-19

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5/6/2019 Investment House Daily
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Targets hit: None issued
Entry alerts: AMZN
Trailing stops: None issued
Stop alerts: AAPL; QCOM; VMC

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- Trade returns as an issue, this time to the downside.
- Stocks gap lower, but hit the lows on the open, recovering quite decently.
- Stock indices continue butting at resistance, continue to come up just short.
- Volatility increases at the resistance with back and forth action. Indices trying to consolidate but still jumpy.
- Impressive recovery, but afterhours more pressure as Lighthizer says tariffs will go into effect Friday. Administration ramping up the pressure.
- Market still needs some kind of consolidation and the trade issues could be the trigger if no deal is struck.

Trade issues were back center stage Monday after President Trump stated trade progress was taking too long and he would be upping the 10% tariffs to 25% Friday and also covering even more goods with those increased tariffs.

Of course the stock market did not like this development. Over the past two weeks we heard the trade deal would happen this Friday, that the sides were really working well at addressing key issues. We also heard the deal would 'happen or not' on Friday. Okay, somewhat varying views, but the market mostly priced in a trade deal as a done deal.

Monday that was not so certain and stocks gapped sharply lower with DJ30 close to 500 points lower, NASDAQ down over 140 points. The open, however, was the low. From the bell stocks started their recovery. A rally to midmorning, a 3 hour lateral pause, then a rally to the last hour.

That move recovered the indices well off the lows as noted, though only RUTX managed a positive close. As more domestically centered, the small caps would be expected to perform better.

SP500 -13.17, -0.45%
NASDAQ -40.71, -0.50%
DJ30 -66.47, -0.25%
SP400 -0.20%
RUTX 0.06%
SOX -1.72%
NASDAQ 100 -0.66%

VOLUME: NYSE +1%, NASDAQ -5%. I guess you could say there was a third day of NYSE distribution, but there was also a big recovery off the lows. So, call it a wash.

ADVANCE/DECLINE: NYSE -1.4:1, NASDAQ -1.3:1. Nothing to see here.

Impressive recoveries that keep the indices in their ranges. Still at or below key resistance, so not much of a change there.

NASDAQ and SP500 both opened at the bottom of their recent 2 week ranges but then recovered to close near the top of the range. Once more just below resistance with neither the buyers nor the seller able to win just yet.

DJ30 gapped lower to the 50 day MA then reversed to close in the top half of the range, just over the 20 day EMA.

SOX gapped below the 20 day EMA, holding about 15 points over 1500 support, rebounding to near 1550. Choppy three weeks but holding and consolidating the breakout.

RUTX showed a down and up session, managing to hold onto and add to the Friday break to a higher recovery high. Good action small caps.

SP400 midcaps gapped lower but held the 20 day EMA and recovered nicely to the top half of the range, holding most of the Friday move. These look solid as well.

NASDAQ 100 gapped below the 20 day and the prior all-time high, then recovered to close just over the 10 day EMA and in the top half of the 2+ week range. That works. GOOG helped as it recovered to the 50 day MA's, swinging 123 points from low to close.

The lack of change, the inability to break through resistance, is still a negative in our view, but again, what does not kill you makes you stronger. The indices were hammered lower on the news but they recovered very well. Buyers were again ready, willing, and able to buy, and they did so yet again on a dip. Heck, we even bought into some AMZN as we wanted to do, though that was our lone buy.

Okay, so the indices recovered to basically the same position they have traded for a few weeks. Afterhours they had to deal with MORE trade headlines. Treasury Secretary Mnuchin stated that Monday's stock trade action would have no impact on the trade negotiations. No big deal.

The real problem is Mr. Lighthizer who said that tariffs WILL go into effect at 12:01am Friday because China has reneged or backpedaled on commitments made during the negotiations. SPY and many key stocks plunged lower -- SPY dropped 2.3 points, about 23 SP500 points. That is a little bit less than half the recovery from the low. Dang. Big name stocks fell as well. A modest recovery is underway, but modest is the operative word.

China steadfastly said it would still attend the Thursday and Friday trade talks in the US. After these latest comments, we will see. I feel China will; it has to. The recovery in the Chinese stock market February to mid-April was not on some great recovery in China. It was part of a massive credit injection as well as all the positive commentary on trade. Today the Shanghai market dropped 5.73%. We will watch closely how it trades when it reopens. The US market had a chance to rebound. China will now have a chance to do the same, but with the new Lighthizer comments, perhaps not.

The point: China needs the US more than we need China. We are still a nation of consumers. If we let our economy work, stop penalizing people who are making wealth, and provide incentives for those not working to work (e.g. stop making it too easy not to work and still have a decent lifestyle), we produce a lot and we consume a lot of domestic and foreign goods. China needs our consumption to 1) sell its goods, 2) make the goods our companies invent and sell back to the US.

So, China will be here this week to talk trade, but I am STILL very doubtful a deal that addresses the real concerns of the US can be reached. As I have said before, China would have to agree to adopt changes that would undercut the very essence of how it improves its technology -- by theft. It would either have to actually adopt a form of capitalism or just not follow any deal made. If it does agree to a deal on IP and other similar areas, it likely just cheats. But that will only lead to a full-blown trade war. Interesting times.

The near future

Of course that makes the upside future of stocks more problematic. You have the technical resistance of the old highs still blocking NASDAQ, SP500, DJ30. You also have the news cycle now not working so much for stocks. Earnings announcements are pretty much a known quantity at this point. Trade was a tailwind and now a headwind.

Thus, there are more potholes in the road to higher highs than there were. Nonetheless, the indices STILL had rallied well and needed a test/rest. This back and forth chop the past two weeks is doing that. It can also be interpreted as the START of a testing period as volatility equates to a change. This needs to be resolved, and right now there is a lot of volatility. Sure the news cycle is attributing to that, but the market is SUSCEPTIBLE to that news where before it was not. That tells you the bids are not as strong, and we have also seen some sellers enter -- still relatively thin, but still showing up for the first time in a long time. There are some cracks in the move that have to heal themselves one way (some modest testing) or another (a more serious selloff).

Sure there is the third alternative, i.e. stocks just say to hell with it and continue higher from here once the market feels it has a bead on the trade issues. As I noted earlier in a market alert, what doesn't kill you makes you stronger. The market surely is not dead yet.

Accordingly, you cannot forget about those solid patterns that held up well. VRSN, AMZN, NFLX, COUP, WDAY, HUBS, FTCH, CSX, ADBE, CRM, DIS -- plenty of quality stocks in quality patterns. This list represents plenty of different sectors as well -- tech, retail, software, transports, leisure/entertainment. Of course you keep watching them in the event they produce solid upside breaks, indicating the market is attempting to resolve the chop and volatility to the upside. Leaders by definition lead.


Stats: -66.47 points (-0.25%) to close at 26438.48

Stats: -40.71 points (-0.50%) to close at 8123.29
Volume: 1.96B (-5.31%)

Up Volume: 817.78M (-722.22M)
Down Volume: 1.13B (+656.09M)

A/D and Hi/Lo: Decliners led 1.28 to 1
Previous Session: Advancers led 3.87 to 1

New Highs: 77 (-41)
New Lows: 28 (-6)

Stats: -13.17 points (-0.45%) to close at 2932.47
NYSE Volume: 794.736M (+0.73%)

Up Volume: 271.873M (-384.522M)
Down Volume: 506.96M (+381.615M)

A/D and Hi/Lo: Decliners led 1.38 to 1
Previous Session: Advancers led 3.49 to 1

New Highs: 112 (-42)
New Lows: 26 (+17)


VIX: 15.44; +2.57
VXN: 18.70; +2.72
VXO: 14.79; +2.14

Put/Call Ratio (CBOE): 1.05; +0.28. Twice over 1.0 on the close in the past week. If the indices were selling that would be an indicator that could suggest a bottom approaching -- though it takes a lot more than two closes over 1.0 and the other indicators need to fall into place. At this juncture it is another indication of the volatility, the back and forth in the market, that is a caution signal that more uncertainty is likely near term.

Bulls and Bears:

Bears continue to fall, and rather precipitously. After stubbornly holding for weeks on end, they are giving up, throwing in the towel. That is not a bullish indication after the initial money is thrown into the market.

Bulls are rising as well but are still below the 60 level that has presaged corrections.

There are still no extremes in this indicator, but with bears breaking lower, if bulls hit 60+ then near term there is an increased chance of a steeper pullback.

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: green toward yellow (all is well), but rising toward the 60's that would start to represent a threat (a yellow indicator).

Bulls: 56.4 versus 53.4

Bears: 17.8 versus 18.4

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.



Threat level: Yellow. No current inversion. 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 fell 2BP to 8BP. This is getting worrisomely close again.

The 2 year versus the 10 year: Spread holds at 19BP

10 year: 2.50% versus 2.530%. Ten year bond yields fell as bonds rallied on the uncertainty from the China trade talks.

3 month: 2.426% versus 2.434%
2 year: 2.309% versus 2.339%

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: 1.11984 versus 1.12023. Euro still just below the 20 day EMA as hangs on to its 6- month range -- at the very bottom.

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: 110.755 versus 111.097. Modest bounce after the plunge Sunday to 110.574.

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: 62.25, +0.31. Big doji with tail at the 200 day SMA/50 day MA convergence. Nice shakeout and hold. Looks good for a bounce.

Gold: 1283.90, +2.50.

End part 1
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