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6/1/2019 Investment House Daily
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Targets hit: None issued
Entry alerts: DOCU
Trailing stops: ZS
Stop alerts: FB; PG
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Market Summary Video, Plays and Play Videos, and Play Table with play annotations will issue Wednesday, Weekend.
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- Trump proposes tariffs on Mexico, perhaps breaks the market's back.
- Economic data still mixed in US, bad elsewhere.
- SP500, NASDAQ fail the attempt to hold the 200 day SMA
- Leadership as thin as tissue paper, but those leading are solid.
- One pair of bonds inverted, oil in freefall, gold jumping, stocks down for another week.
- Bias remains downside but remember oversold bounces start when things look worst.
Friday was a case of piling on. Even though there was some decent news (Chicago PMI, Incomes) there was also less than good news. Trump ready to assess 5% tariffs on Mexican goods in a bid to force Mexico to crack down on illegal immigration to the US. China PMI manufacturing fell back to contraction at 49.4. China said it is ready to 'blacklist' certain US companies. Personal spending fell to 0.3% from 1.1% with real spending flat after a surge in March. Yen and yang.
The economic data for the most part did not help - core PCE rose to 1.6% from 1.5%, though the 1.5 was a downward revision. Nonetheless, that data was seen as anti-FOMC rate cut although various contracts are pricing in a 75BP, yes 75, rate cut with 50BP as early as September.
What was the killer was what killed futures Thursday evening: the proposed 5% tariffs on all Mexican goods with the added insult that the rate could rise if Mexico does not quell the illegal immigration into the US.
This threat by the Administration may be the thing that broke the market's back. Already weak from the head and shoulders patterns the past 3 months; the double tops on SP500, NASDAQ and DJ30; the 17 months of lateral movement since January 2018; worries about China trade, European economics, a yield curve inversion . . . this news was more than the market could bear.
The indices gapped lower. SP500, NASDAQ and NASDAQ 100 all gapped below the 200 day SMA where they had shown doji Wednesday and tried to bounce Thursday. SP400 and RUTX gapped lower. SOX was actually not that bad, gapping lower but holding its recent range. DJ30 gapped lower and sold to the close, determined to fill the last January upside gap.
SP500 -36.80, -1.32%
NASDAQ -114.57, -1.51%
DJ30 354.84, -1.41%
NASDAQ 100 -1.62%
VOLUME: NYSE +42%, NASDAQ +21%. Of course volume surged on a downside session, surging back above average on both exchanges. NASDAQ trade was the highest since March 21 when the market sold on the 3 month/2 year inversion.
ADVANCE/DECLINE: NYSE -2.2:1, NASDAQ -2.9:1. And once again, breadth expanded on a market downside session.
At the same time, VIX remains remarkably tame, rising to 18.71 on the close. Up, but not even near the early May level that crossed to 23 on this initial selloff from the highs.
To sum up. The index patterns remain bearish overall and near term breaking lower. Internals remain weak upside, stronger downside. The stock indices continue to distribute, i.e. selling in high volume, rising on weak volume. Sentiment remains remarkably calm as measured by the VIX. Day to day volatility, however, remains strong, and that often accompanies trend changes. The news ticker continues to feed the bearish bias as the market focuses on the negatives - yield curve, the weaker economic data, the lack of trade progress. Once again it acted as a trigger for the next move lower with the proposed 5% tariff on Mexico products.
What about stocks and leadership?
The overall picture is bearish, but not all stocks are being torn down at this juncture. They are the last upside outposts for the market, trying to hold back the drop. They will either be successful or the market will ultimately tear them down.
Leadership groups saw breakdowns on the week, retail a very notable sector. After the Mexico tariff announcement, other areas were weak.
Automakers, OM parts and components makers took it hard as a LOT of these are manufactured in Mexico.
Some beverage purveyors sold off as their Mexican beer labels face price increases: STZ. Better stock up on the Carta Blanca, Pacifico, Sol, Dos Equis, Modelo - heck, they were probably marked up last night after the news hit.
Interest rates rallied hard yet again - they have rallied so much the past week they are now short term overbought. As a result of the bond surge and corresponding yield decline, banks and other financials sold off.
Transports were pounded from rails to airlines. Usually airlines like weaker oil prices (pounded lower again -5.46%), but they gapped sharply downside. Truckers were decent enough, but DJ20 gapped lower to cap a very nasty week in its 6 week selloff.
A key factor Friday was the performance of those stocks that had held up well during the selling thus far.
Social has been solid. SNAP, MTCH, TWTR remain so, but FB gapped below the 50 day MA.
Software has seen some of its clan sell, e.g. VMW (DELL earnings), ZS Friday, but many are holding up very well: NOW (low volume 50 day MA test), WDAY, MSFT, COUP. OKTA gapped to a new high. They keep hanging in when they look bad.
Drugs/Biotech/Healthcare: Still holding up well, e.g. ARNA, PTCT, BSX, DGX, HIIQ.
Most other areas were hit.
Big tech sold off: HPE, CSCO, ORCL (down to the 200 day SMA).
FAANG is losing its bite. FB gapped below the 50 day MA as noted, AAPL continued lower - no big drops but the daily bleed lower is having its effect. AMZN gapped lower to near the 200 day SMA. NFLX did the same, but at least NFLX is still inside its range. GOOG gapped lower to a doji, but a doji at a lower selloff low.
Retail was slaughtered on the week. Some bounced Friday, e.g. ULTA, WSM as earnings gave them life. YUM posted a very strong reversal; if it can hold it, perhaps it is a buy this coming week. Others more or less held on (TJX) or continued lower (ZUMZ, BIG).
Manufacturing/Machinery: CMI (engines) was of course sold. DE paused, still looks decent for a bounce. ETN gapped lower, EMR continued trending lower as well. MMM is down so much it has to bounce at some point - - but it is not after 60 points of losses.
Consumer products: PG broke sharply below the 50 day MA. CL dropped back o the 50 day MA.
Thus, the index patterns are bearish, they gapped through support again Friday, the news feed is considered bearish, and leadership is thin. We look at probabilities for our plays, and for much of the market the probabilities favor continued moves lower. Bounces upside in between, but lower overall.
At the same time the market has not pitched everything into the trash can, and there are some stocks still rising, e.g. AMT today where we banked some solid gain. Unfortunately, the market is taking even some good movers and throwing them back down. That is a sign of a weaker market, i.e. when breakouts are reversed as sellers swarm the move. Thus, even with great patterns you have to be ready to get out if the move reverses.
For now we will still look at some upside as well as continuing to put downside plays on. The opening gaps have made entries more challenging, but with tests of gaps down we will continue to get entries, perhaps not on the first time the play moves through the entry point.
Stats: -354.84 points (-1.41%) to close at 24815.04
Stats: -114.57 points (-1.51%) to close at 7453.15
Volume: 2.33B (+20.73%)
Up Volume: 638.49M (-411.51M)
Down Volume: 1.67B (+820.97M)
A/D and Hi/Lo: Decliners led 2.86 to 1
Previous Session: Decliners led 1.03 to 1
New Highs: 64 (+5)
New Lows: 235 (+94)
Stats: -36.80 points (-1.32%) to close at 2752.06
NYSE Volume: 972M (+41.71%)
Up Volume: 248.67M (-55.116M)
Down Volume: 711.653M (+337.162M)
A/D and Hi/Lo: Decliners led 2.23 to 1
Previous Session: Advancers led 1.12 to 1
New Highs: 82 (+22)
New Lows: 252 (+130)
VIX: 18.71; +1.41. Seriously? These kind of losses on the week and barely moving higher?
VXN: 23.23; +1.55
VXO: 20.98; +1.56
Put/Call Ratio (CBOE): 1.19; +0.09. 18 of 21 sessions closing at 1.0 or better. Definitely one indicator at an extreme. The others, alas, are not.
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.
Bulls surprisingly resilient, falling but not much. Bears actually rose. Still no extremes though bulls were close to the 60's that has marked tops. Apparently this was close enough for stock market work.
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: 49.0 versus 49.5 versus
Bears: 17.3 versus 17.2
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 6BP to -22BP. Widest by far of this bout of inversion.
The 2 year versus the 10 year: Spread climbs 6BP to 21BP. This is healing itself.
10 year: 2.133 versus 2.217%. Bonds continue surging. TLT is up over 5 points this week with a breakout and rally from its short cup with handle. A bit overbought so bonds likely come back some this week.
3 month: 2.354% versus 2.378%
2 year: 1.924% versus 2.067%
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: 1.11685 versus 1.11391. As anticipated, the euro bounced off support just over 1.10. The key test is the 50 day MA at 1.121.
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: 108.291 versus 109.262. Dollar crashed lower; so much for an attempted short double bottom. 108 is next support.
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: 53.50, -3.09. Second straight harsh drop as oil is in full retreat after giving up the 200 day SMA the prior week. Some support near 52.50 and likely tries to hold there given the strength of the selling.
Gold: 1311.10, +18.70. Exploding higher, breaking the downtrend from the February peak. Gold is breaking out from the handle of the 13 month cup with handle base.
Friday saw SP500 and NASDAQ break. Already bearish in the rollovers, Friday they gapped below the 200 day SMA. Broke the neckline in the head and shoulders Wednesday, held the 200 day SMA that session and Thursday, ready to bounce. Then the next bad news and the 200 day SMA went.
Now it is a matter of time as to when the indices are oversold enough again after this news is digested to try and relief bounce. A 200 day SMA test would be a nice setup for more downside entries and we will watch for that at the start of next week.
Money is still finding the upside as it rotates through the market. The healthcare and drug side is receiving some money along with the other familiar leaders in social, software, insurance. We will still look at some plays on those - if the money is moving that way we will try some hookups for relatively quick moves.
The focus, however, has to skew toward the downside now, and thus, this weekend and as next week progresses we will look at more of these. Ideally a bit of an oversold bounce early week is best, but often after this kind of spanking on a Friday leads to more selling early week. We will see what kind of entries the market gives us.
Have a great weekend!
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