Monday, May 29, 2017

Weekly Stock Market Outlook 5/29/2017

U.S. stocks were mixed Friday as technology companies, which have led the market’s recent rally, began seeing minor selling pressure.  Video game companies are slipping as Wall Street was disappointed by forecasts from GameStop. Banks are down and consumer-focused companies are rising. Stocks are still near record highs following a six-day winning streak.

Global Economy – European stocks are down to a 1-week low as German automakers slide after comments from President Trump.  Volkswagen AG, Daimler-Benz and BMW are all down 1% after Der Spiegel reported that President Trump in a closed-door meeting with EU officials chided German automakers for selling too many vehicles in the U.S. saying that contributes to a huge German trade surplus that is hurting the U.S. economy and that “we are going to stop that.”

China’s Shanghai Composite erased early losses and climbed to a 3-week high on reports of state-sponsored buying of stocks. The yuan rose to a 4-month high against the dollar after at least two Chinese banks sold dollars in the offshore market.  Speculation the PBOC is intervening in the forex market to prop up the yuan has led to short-covering after Moody’s earlier this week cut China’s sovereign debt rating.

U.S. Economy – The U.S. economy started 2017 out with a whimper, but it wasn’t quite as weak as first thought. The government revised up its January-March growth reading to a rate of 1.2 percent — better than an earlier estimate of 0.7 percent but well below President Donald Trump’s ambitious growth targets.  Growth in the gross domestic product, the broadest measure of economic health, is down from a 2.1 percent annual growth rate in the fourth quarter and marks the weakest result in a year, the Commerce Department reported Friday.  The upgrade to 1.2 percent reflected new-found strength in consumer spending, business investment and state and local government spending.  Many economists believe growth in the current April-June quarter will rebound sharply to above 3 percent, helped by stronger consumer spending that reflects solid employment gains and an unemployment rate that has fallen to a decade low of 4.4 percent.

U.S. orders for long-lasting manufactured goods dropped in April for the first time in five months, and a key category that tracks business investment went nowhere for the second straight month.
The Commerce Department said Friday that durable goods orders fell 0.7 percent in April after rising 2.3 percent in March. The April downturn was the first since durable goods orders fell 4.6 percent in November.  Despite the April drop, American manufacturing has bounced back in recent months from a slump early last year.  Overall, American manufacturing has regained momentum after being hurt early last year and in late 2015 by cutbacks in the energy industry and a strong dollar that makes U.S. products pricier overseas.

Market Sentiment – Jun 10-year T-note prices are up +5.5 ticks on dovish comments from St. Louis Fed President Bullard who said the Fed is “very close” to where it needs to be on policy rate.  St. Louis Fed President Bullard said the Fed is “very close” to where it needs to be on policy rate. He said he could be persuaded to do another rate increase at some point, but objects to the idea that the U.S. needs 200 bps of more normalization to get inflation near the Fed’s 2% target.

Technically, bonds could not take out the last swing high, even though GDP data was better than expected and volatility remains below historic high levels.  One of the main reasons why the upside will be limited is because of the type of transparency we are seeing from the FED and because historically, bonds are near all time lows and pressure is building to increase rates in the near term.

                        may26bonds

I’m expecting price to revert back down to the 50 day line, unless there’s a major Global set back in the coming weeks.

Stock Market Analysis – Stocks are showing very little reaction to quarterly GDP data, since the numbers are not far out of line with estimates.  VIX Index which measures market volatility remains near historic lows, which tells me that investors are not expecting major volatility or global turmoil in coming days.  Expect to see VIX rise in the coming days, due to stocks reaching overbought levels, which usually cause VIX levels to rise. One factor helps volatility remain lower is lack of volatility or institutional sponsorship during summer months.

                         may26vix

However, Global uncertainty remains the biggest cause of volume spikes in the stock market and if negative Geo political tension increases in coming weeks, which is more than likely, we will see VIX levels spike once again.

Looking at the overall stock market, the SPY and the Dow Jones are coming off overbought price levels in the short term, but more importantly, price is making higher highs, while 10 day RSI is making lower highs.  Divergence between RSI and price tells me that price is rising too quickly in the short term and is overdue for a pullback.

                        may26spy

I’m expecting the major indices to back away from all time highs and move down to the 50 day line in the short term time period. Market internals are pointing to overbought price and narrowing of momentum.  Aside from overbought indices, weakness in several key blue chip sectors and narrowing of momentum, we are also seeing a slump in the small cap index.

Keep in mind, small cap stocks are more speculative than blue chips or even tech stocks and typically lead the market ahead of larger, institutional grade stocks. There’s much less market cap in Russell stocks which makes the index more reactive to aggressive buying as well as selling pressure.

                     may26small

Usually, when markets are near all time highs, small caps are leading ahead, but in the present case scenario the small caps failed to trade higher during the last upside in the stock market and that’s causing me to become increasingly bearish in the short term.

There’s very little upside catalyst in the U.S. markets at this time and I’m expecting corrective pressure to develop in the short term. Expect to see major indices near the 50 day line and few blue chip sectors move down below the 50 day line and head towards the 200 day average.

Keep your eye on retail and industrial stocks ans well as tech over the near term.



Courtesy of Market Geeks

Sunday, May 21, 2017

Weekly Stock Market Outlook 5/21/2017

Stocks were edging higher Friday on Wall Street as traders look over a mixed bag of earnings reports.
Heavy equipment maker Deere & Co. jumped 6.6 percent in early trading Friday after reporting solid results for its latest quarter.  Foot Locker plunged 15 percent after its profits fell short of analysts’ forecasts. Campbell Soup also lost 1.6 percent after turning in disappointing results. Technology and energy companies rose more than the rest of the market.

Global Economy –  European stocks are up as global equity market stabilize following big losses earlier this week.

Energy producing stocks are stronger and are leading the overall market higher with Jun WTI crude oil up at a 3-week high on expectations that OPEC and non-OPEC oil producers will extend their production cuts until March of 2018.

North Korean geopolitical risks remain as CNN reported that the U.S. Navy is moving the USS Ronald Reagan aircraft carrier to join the USS Carl Vinson in dual-carrier training exercises near the Korean Peninsula.

ECB Governing Council member Vasiliauskas said that the risks to the Eurozone are now “broadly balanced” and the ECB should use its Jun meeting to start building a case for unwinding of QE before making an announcement in the fall.

German Apr PPI rose +0.4% m/m and +3.4% y/y, stronger than expectations of +0.2% m/m and +3.2% y/y with the +3.4% y/y gain the largest year-on-year increase in 5-1/3 years.

U.S. Economy – There were no major FED reports released on Friday. With the positive Wal-Mart report now in, we have Q1 results from 71.4% of the retailers in the S&P 500 index.

Total Q1 earnings for the Retail sector are up +1.4% from the same period last year on +2.9% higher revenues, with 63.3% beating EPS estimates and 53.3% beating revenue estimates. The sector’s Q1 results are tracking below what we have been seeing in other recent periods and are also among the weakest this reporting cycle.  For Q1 as a whole, combining the actual results from the 463 S&P 500 members that have reported with estimates from the still-to-come 37 companies, total earnings are expected to be up +12.9% on +6.2% higher revenues, the highest growth pace in over five years.

The Finance, Technology, Industrial Products, Consumer Discretionary, Basic Materials, and Business Services sectors stand out with double-digit earnings growth.

Market Sentiment – The probability of a rate hike at the June 14 Federal Open Market Committee meeting is 54% today, which compares to 69% yesterday.  Once the domestic political and global geopolitical issues settle down, the dominant influences of a stronger global economy and rising global inflation will ultimately take bonds lower, especially at the long end of the curve.

                          may19tlt

Technically, it appears that bonds are almost ready to trade lower and revert back to the long term trend. The only caveat is Trump and whether more negative news or uncertainty comes out over the next few trading sessions. That would cause Global equity markets to respond negatively and keep bonds near the current price level.

Stock Market Analysis – While the overall market is rising once again vulnerability remains in several major sectors.  The small caps, which are speculative and tend to lead the market during bull market cycles is now trading below the 50 day line, which tells me that investor sentiment is becoming increasingly bearish in the short term.

                            

Speculative small caps and tech is accumulated aggressively during bullish market cycles and tends to lag during bearish market cycles the most.  While the larger cap tech remains above the 50 day line, there’s increased Geo Political tension in the stock market at this time, which more likely than not will push the overall tech sector lower and cause either congestion or corrective pressure from the large caps in coming weeks.

Below you can see the SP 500 along with every major sector within the index. Notice that roughly half of the major sectors are trading below the 50 day moving average, which inevitably pushed the SP 500 itself below the 50 day line.

                               

Typically, when there’s so much imbalance between the various key sectors, the overall market finds it increasingly difficult to trade higher, especially when there’s increased Global tension and volatility, which is starting to make it’s way into the various sectors, especially financial and retail.

Lastly, take a look at the long term momentum chart for overall NASDAQ, which remains the strongest index at this time and is helping the SP 500 remain some degree of balance.  If you look carefully at the chart below, you will see 10 years of market internals. Notice that every time over 80% of stocks in the tech reach above the 200 day moving average, we begin seeing increased selling pressure, till there’s balance in the market once again.


                            


Typically, when over 80% of stocks trade above the 200 day moving average, we begin seeing slow but deliberate selling pressure, till the percentage of stocks trading above the 200 day line is either balanced or oversold, which is the scenario we anticipate will play out over the next few months.  This will cause increased pressure to the overall market structure and will increase vulnerability in the SP 500, since the QQQ and the SP 500 share great deal of large cap stocks.  Expect more congestion and downside, with very little directional bias, till markets regain some degree of balance once again.



Courtesy of Market Geeks

Tuesday, May 16, 2017

When I Make a Wrong Turn


At different points in our day trading career, we will take a wrong turn.  One time it may be on accident, another may be on purpose.  But, one thing is for sure, we will end up going down the wrong path several times in our career.  It doesn’t matter whether we have been trading 2 weeks, 2 months 2 years, or 20 years.  The only difference is that the longer we trade, the fewer and farther between these incidents will occur.  The one thing that stays constant, no matter our experience level, we will need to have a process for getting through it and back on the right path.

If you have followed me for some time, you know that I am all about simplicity.  The fewer steps in the process, the less moving parts I have, the more precise and consistent I can be working my way through a crisis.  In this blog, I will share the simple process I use to help me find my way back to the straight and narrow path to success in this industry.  There are several key principles that I employ to help me achieve this.

The first principle is to realize that you are having a problem and have taken a wrong turn somewhere.  It is important that you develop this skill of understanding who you are as a trader and when something is just not quite right.  Understanding who you are and being able to self-assess is a very important component in your development as a trader.

The next principle is to take responsibility for your actions.  We cannot play the “blame game” at this stage, regardless of what caused us to veer off course.  Blaming others is admitting you don't control your own trading, and if that is the case, why are you trading? If you control your trading, then you can fix it. If others control your trading, you can't fix anything.

The fact is, the ultimate decision was made by us.   It would be so easy to take the pressure and responsibility off us and place it on something else.  But the reality is that if we do this, we have suspended any chance we have of growth.  We will not learn anything by blaming something else and we are setting ourselves up to repeat the same action.

It doesn’t matter if there were surprise events, or technological equipment failures, or trading platform issues.  There is always an excuse for a string of losses or bad trades.  Some are actually good excuses, but as traders, we ultimately must accept all the risks. Until we are willing to do that, history will likely repeat and the same thing will happen again and again.  The bottom line is that we are responsible for whatever happens with our trading and we must accept that.

The third principle is to reflect on how you ended up where you are.  Reflection, or thinking about our experiences, is the key to learning. Reflection allows us to analyze our experiences, make changes based on our mistakes, keep doing what is successful, and build upon or modify past knowledge based on new knowledge.  I have a simple six step process that I use.  Below is an illustration of it and how I use it.


The fourth and final principle is, Make the adjustments.  Address issues as to what is causing the problem and make any necessary trading plan changes. Get back to the basics.  Return to your core trading strategies.  Get back to really knowing your strategy. Knowing what market conditions it works best in, and what the profit and risk expectations are. Get back to what attracted you to trading in the first place: building or learning a strategy that made money consistently. Trading is hard, so get back to loving and embracing the challenge.

By going back to the basics, you will be taking things slow.  You will trade with smaller size and slowly increase.  You may even want to trade a few days in the simulator while you just observe the market.  Even if you hit the ground running and string a few winning days together in a row, increase your position size incrementally, so it takes about a month to get back to your full position size.

I know it's annoying to start back with a small position size, but it's for the best. Bouncing back from a losing streak or a bad trading streak is about getting back to basics and implementing your core strategy well. Bouncing back is not actually about making money. Money comes from implementing a strategy well and re-establishing the skill that you developed. Trading small position sizes gets you refocused on what's important, so you can start building your confidence again. Then the money will come, naturally, without being forced.

Sunday, May 14, 2017

Weekly Stock Market Outlook 5/15/2017

Markets lacked directional bias and exhibited very little volatility as tech and retail sector increase pressure on the overall stock market. Tech momentum levels are improving but remain overbought, while blue chips are increasingly vulnerable as result of weaker than expected retail sales.

Global Economy –  Gains in European stocks were limited after Eurozone Mar industrial production unexpectedly declined.

Chinese stocks rallied after details of the new trade pact with the U.S were announced. The new trade deal would allow U.S. companies to ship liquefied natural gas to China and ends a ban on imports of U.S. beef.  Stronger-than-expected China Mar aggregate financing also eased Chinese credit concerns and gave stocks a boost.  Eurozone Mar industrial production unexpectedly fell -0.1% m/m, weaker than expectations of +0.3% m/m.  China Apr new yuan loans rose 1.1 trillion yuan, stronger than expectations of 815 billion yuan. Apr aggregate financing rose 1.39 trillion yuan, stronger than expectations of 1.15 trillion yuan.

U.S. Economy – Americans stepped up their spending at auto dealers, hardware stores and e-commerce outlets as retail sales rebounded from two sluggish months.  The Commerce Department said Friday that retail sales increased 0.4 percent in April from March. Sales ticked up just 0.1 percent in March and fell in February.  The increase suggests that consumers are poised to spur faster growth in the April-June quarter after the economy barely expanded in the first three months of the year. Consumer spending — which also includes spending on services such as utilities — rose at its slowest pace in more than seven years in the first quarter.

Consumer prices rebounded moderately in April as energy prices climbed back up after a sharp decline in March.  The Labor Department says consumer prices rose 0.2 percent after a 0.3 percent drop in March, which was the biggest fall in more than two years. Energy prices rose 1.1 percent after tumbling 3.2 percent the previous month.  Core inflation, which excludes the volatile food and energy categories, rose 0.1 percent. Over the past 12 months, inflation is up 2.2 percent. Core prices have risen 1.9 percent.

The Federal Reserve tries to manage the economy so that annual increases in inflation are around 2 percent. After mostly lagging below that target since the 2007-2009 recession, inflation has accelerated recently with the unemployment rate falling to 4.4 percent and energy prices rebounding.

Retail Earnings – The earnings focus lately has been on the Retail sector, with J.C. Penney becoming the latest department store to follow the lead set by Macy’s, Kohl’s, and Nordstrom. These reports reconfirm what we have known for a while – that these operators needed literally to reinvent their businesses to effectively operate in an environment where consumers are steadily shifting their spending dollars to the online medium instead of visiting the physical store.

As of Friday, May 12th, we now have Q1 results from 24 of the 42 retailers in the S&P 500 index.
Total earnings for these 24 retailers are up +2.2% from the same period last year on +4.6% higher revenues, with 58.3% beating EPS estimates and 54.2% beating revenue estimates.

As of Friday, May 12th, we have Q1 results from 454 S&P 500 members that combined account for 92.5% of the index’s total market capitalization.  Total earnings for these companies are up +13.9% from the same period last year on +7.9% higher revenues,with 72.2% beating EPS estimates and 66.1% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 51.8%.

Market Sentiment – Bonds are higher due to increased uncertainty around President Trumps decision to fire FBI director Comey. Furthermore, large retails earnings are lower than expected.
This is causing stocks to weaken and increase accumulation in bonds, which typically rise during stock market uncertainties.

                        may11bonds

Technically, bonds are not above the 50 day line and I’m expecting slightly more upside, till the main trend comes into play and pushes interest rates higher, which will cause BONDS to trade lower since bonds and interest rates trade inverse to each other.  Expect slightly more upside, before the main trend begins to control the long bond and price reverts back lower.

Stock Market Analysis – As we expected over the past few sessions, the retail sector is becoming weaker once again. Keep in mind that consumer spending is responsible for over 70% of the GDP and when retail trades lower it impacts the overall market extensively.  Price is now at the 50 day line and I’m expecting more downside over the near term, especially in light of continued negative numbers coming out of large chain store retailers in recent days.

                         

Major retailers such as Macy’s, Nordroms and Kohls all came out with numbers below expectations. This is causing investors to increase selling  pressure in the retail and consumer sector and creates more vulnerability in the overall stock market.  Lastly and of major importance is the financial sector, which is now trading below the 50 day line for several days.

                         

This tells us that economy is not growing at the expected rate over the past few months and with the U.S. dollar sinking further, the odds of seeing more downside in the near term is highly probable.

Financial stocks sagging will also impact the long bond and cause further trading action against the main trend.

Overall, tech is becoming weaker as we expected in the short term due to long term momentum levels becoming overbought over the last few weeks. With increased vulnerability in the overall market, the odds are strong that stocks will increase downside further, especially in light of retail and financial sector breaking lower.  Tech was offsetting some of the loss to the overall market in recent weeks, but I believe that cycle is now over and unless blue chips come to the rescue over the next few sessions or a new catalyst develops, the odds of seeing increased downside pressure across most stocks is highly probable in the short term.

Volatility level remains low and global markets are stable once again. Don't expect major correction, but do expect minor downside to begin balancing individual sectors, which is desperately needed before the overall market trades higher once again.




Courtesy of  Market Geeks

Sunday, May 7, 2017

Weekly Stock Market Outlook 5/7/2017

U.S. stocks were mixed after the government said hiring bounced back in April. That suggests the economy should start growing faster in the next few months after a sluggish start to the year.  IBM is slumping after billionaire investor Warren Buffett said he sold a large part of his stake in the company.

Global Economy – Global equities remain on edge as the markets ponder whether there is some macro-level significance to Thursday’s plunge in commodity prices such as weakening global economic growth, or whether the sell-off was simply driven by specific factors in each commodity market.

The markets are confident that centrist Emmanuel Macron will win Sunday’s French presidential against far-right Marine Le Pen since the polls are holding steady at a wide margin of about 60%-40%.  That spread is much wider than the 1-3 point poll spreads for the Brexit and Trump votes, meaning that an upset by Ms. Le Pen would be far more difficult than it was in the case of Brexit and Trump. The latest betting odds at Oddchecker are 91%-14% in favor of Mr. Macron.

Asian stocks closed mostly lower, led by a  drop in the Shanghai Composite. Chinese stocks were hit again today by concern about the government’s crackdown on leverage and also about Thursday’s rout in commodities.  There are some geopolitical tensions this morning after an overnight claim by North Korea that the CIA and South Korean intelligence tried to assassinate Kim Jong-un with a “bio-chemical attack.” That charge was likely just paranoid propaganda but North Korea could nevertheless be planning to use the charge as a justification for another weapons test or some other type of provocation.

U.S. Economy – Employers in the United States added 211,000 jobs in April, according to the Labor Department. That was a relief to investors who were concerned about slower hiring and economic growth over the first three months of the year because. Wages grew at a slower pace, however.

We have Q1 results from 358 S&P 500 members that combined account for 78.2% of the index’s total market capitalization. Total earnings for these 358 S&P 500 members are up +12.9% from the same period last year on +7.9% higher revenues, with 74.3% beating EPS estimates and 65.9% beating revenue estimates.  For Q1 as a whole, combining the actual results from the 358 S&P 500 members that have reported with estimates from the still-to-come 142 companies, total earnings are expected to be up +11.9% on +6.2% higher revenues, with Finance, Technology, Industrial Products, Basic Materials, and Business Services on track to achieve double-digit earnings growth.

Total Q1 earnings for the 358 index members that have reported results are up +12.9% from the same period last year on +7.9% higher revenues, with 78.2% beating EPS estimates and 65.9% coming ahead of top-line expectations.  The proportion of companies beating both EPS and revenue estimates is currently 52.8%.

Market Sentiment – Bond prices were little changed. The yield on the 10-year Treasury note remained at 2.35 percent. High-dividend stocks did fairly well Friday as telecommunications company’s recovered from a hard loss the day before, and utility companies also rose. Banks traded lower.  According to financial futures markets, the probability of a rate hike at the June 14 meeting is 74%, which compares to 78% yesterday. Price began trading lower once again, as the prospect of higher rates is very likely in the near term.  The long term trend remains lower and I’m expecting either more downside or congestion near the current price level, till there’s a major catalyst such as increased Global friction or something completely unforeseeable that the markets have not assimilated into their price action.

                    may5bonds

Expect price to remain near the current price level and drift lower over the next few sessions and remain predominantly within the price range between 154 and 146 level over the near term time frame.

Stock Market Analysis – Stocks are cooling off after a strong run last few weeks. NASDAQ remains overbought and should see some selling pressure over the next few weeks, since in addition to divergence, we are seeing sharply overbought levels in the 10 day RSI.

                   

Expect price to move down to the 5900 level before rising back up, since that would move right in line with the 50 day moving average to the downside.  To confirm my analysis – if you take a look at the very long 10 year chart of momentum studies, you will see that each and every time over 80% of tech stocks rise above the 200 day moving average, the odds of seeing selling pressure is increases substantially.  The most likely scenario is mild selling pressure over the next month or longer, till the percentage of stocks trading above the 200 day line moves to 50th percentile or possibly lower.
This would coincide with QQQ trading down to the 5900 level, which is the precise point of the 50 day moving average.  Overall, I’m not expecting volatility to increase too much, since VIX levels are near historic lows, which tells us that there’s very little fear in the market sentiment at this time.

                   

Typically, when markets start to panic, VIX jumps above 20. Currently, VIX is near 10 level and unless there’s heightened sensitivity to either North Korea or Syria in coming days or weeks, we can expect VIX to remain near the current level.

The broader market is weaker than the tech sector and several key sectors such as retail, materials and energy are trading near the 50 day line, which is causing the NYSE to weaken.  If the tech begins to give in to minor selling pressure, we will see increased downside in the NYSE, which will also impact the Dow and SPY to a great extend.  Don’t expect a runaway rally, with the current market environment and overbought momentum levels.



Courtesy of Market Geeks