Will We Hold it Wednesday – Markets Forced Over Strong Bounce Lines, Now What?
by phil - October 17th, 2018 8:21 am
Crazy!
The Dow finished up 547 points yesterday and that was AMAZING – almost as AMAZING as that day we fell 843 points, way back on…. Wednesday of last week. But hey, 547 points is only 296 points short of catching up to a one-day drop so – RALLY TIME!!! Right? No, not right at all – especially when last Wednesday's down volume on the S&P was 275M shares and yesterday's up volume was 118M shares. If the stocks were really so attractive – what happened to the other 157M shares worth of buyers?
The thing is – those sellers took their money OUT of the market and yesterday's buyers decided to build things up with a MUCH WEAKER foundation than the one that collapsed last week. So, while a bounce like we had yesterday is good progress on the way to a hopeful correction – it don't mean a thing unless we can spend two full days over the strong bounce lines which are: Dow 25,700, S&P 2,800, Nasdaq 7,250, AAPL $226 and Russell 1,630.
We're already having a bit of a pullback in the Futures and the Dow is below, S&P barely holding, Nasdaq way above, AAPL below and Russell way below – not exactly the stellar performance you would think we are having if you listen to the talking heads on CNBC and Bloomberg, who are paid by the investment banks that advertise on their show to tell you what a great idea it is to put your money in the market.
We balanced our Member Portfolios to ride out the storm so we really don't care whether the market goes up or down from here – but we do care that we give it enough time to make a decision – not just based on a one-day move that gets us back to less than 50% of where we started. As usual, even when we don't like the equity plays, we find something to do and our long play on Gasoline (/RB) Futures above the $1.95 line paid off yesterday to the tune of $1,000 per contract!
Being balanced with plenty of CASH!!! on the sidelines gives you the buying power to make quick plays…
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The Trade Deficit Isn’t the Boogeyman
by ilene - October 17th, 2018 2:12 am
The Trade Deficit Isn’t the Boogeyman
Courtesy of John Mauldin, Thoughts from the Frontline
I have to confess something: I run a huge trade deficit. It’s not with China or Mexico, but with Amazon. I buy all sorts of goods from them and Jeff Bezos has yet to spend a penny with me. It’s just not fair.
Sound ridiculous? That’s exactly what it is. Totally absurd. I like Amazon. I’m happy with the items the company ships to me and (I presume) Amazon is happy to receive my money. We both win.
The same kind of relationship exists between the US and China, although with a few twists we’ll discuss below. That’s not to say China is a trade policy choirboy, but the trade deficit is not the key problem. Trying to “fix” it won’t accomplish what we want and could have serious side effects.
Trade deficits or surpluses aren’t bad. Nor are they good. They are a natural characteristic of post-barter economies that have achieved division of labor… a sign of success, in other words. For certain countries, there are times when trade deficits simply don’t make a difference. And then there are times when they can be devastating. It all depends on the current account surplus, a concept we will deal with below, and/or whether the country’s currency has reserve status. It’s not hard to understand, so let’s dive in.
Nothing to Fear
President Trump seems to think the country with a trade deficit automatically “loses” to the one with a surplus. I suspect that comes from how he ran his businesses and his understanding of debt, but the two don’t equate, and until he understands that we are going to be talking about silly concepts like trade wars and tariffs. I wish his advisors would educate him on this.
One thing readers seem to appreciate in my writings is that I try to make complex information simple. Today, I will try to make an already-simple thing even simpler.
First, simply using the word “deficit” in conjunction with trade sounds bad to the vast majority of people. We all know that a deficit in our personal finances, meaning we spend more than we make, is bad. And…
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Tempting Tuesday – Nothing has Changed but Markets Move Higher
by phil - October 16th, 2018 8:29 am
Looking good this morning.
As of 8am, the Dow Futures (/YM) are at 25,386 – almost to our weak bounce line and the S&P Futures (/ES) are at 2,768, not at 2,775 but the Russell (/RTY) is back over the DOOM!!! line at 1,552, now 1,561 and the Nasdaq (/NQ) is actually over the weak bounce line (7,100) at 7,150 but AAPL is still warning us to be cautious at $219, still shy of it's weak bounce at $223.50.
The bounce lines of our 5% Rule™ prevent us from running in and buying dips prematurely. While we do love making bottom calls at PSW, it's best not to do that when the entire market is down – as there tends to be no safe haven in a major sell-off. While the S&P hourly chart looks like it might be moving higher, it's really just a matter of having low expectations as the index has barly moved off the bottom and, since last Thursday, we've been making lower and lower highs – that's more likely to be consolidation for a move down than up!
The bounce lines tell us whether or not a move is real and, for the S&P, 2,775 is weak and 2,750 is strong (see Thursday's Morning Report for how we got there) and, although we use a chart to illustrate it, it has nothing to do with those squiggly lines – it's just math! Math tells us 2,775 is the first inflection point and, other than a brief spike over on Thursday – we've failed at that line Friday and yesterday. That's NOT a sign of strength – especially when it's the weak bounce line that's failing…
When and if we take back 2,775, we'll begin looking for the strong bounce line at 2,800, which has obviously been significant during the downturn and should be again if we begin to recover. Once we are over the strong bounce, we can make bullish plays using that as a stop line but, until we are – it's best to just watch and wait and gather more data.
Earnings Data is good this morning with Morgan Stanley (MS) and Goldman Sachs (GS) both turning in very good reports and…
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Nordea “Underweight US Stocks” – Welcome Back, Mr Volatility; This Story Is Not Over
by Zero Hedge - October 15th, 2018 3:36 pm
Courtesy of Zero Hedge
"Slower growth, higher wage costs, rising interest rates, a negative liquidity trend, record-high margin expectations and stretched valuations leaves little to no room for negative surprises. We see further downside for equities the coming 6-9 months."
Higher US interest rates spurred by new signals from the Federal Reserve have triggered a sell-off in equity markets over the past two weeks.
Most of our global macro and market predictions for 2018 have proven correct, even though it has been a rocky road until the recent market sell-off. We once again reiterate our negative stance on risky assets, which we first formulated in mid-May. The forward-looking business cycle has passed its peak and leading indicators suggest to us that the lost momentum should continue well into 2019. A weaker trend in real economic indicators is therefore imminent, some of which have already started to contract.
The rise in underlying inflation pressure, stemming from tight labour markets, is showing no signs of easing. We believe quite the contrary – and therefore that monetary policy risks being behind the curve. Rising real rates are another factor we need to add to our cocktail of a failing business cycle with too-lofty profit expectations. Even after the recent sell-off, we believe that the stock market still expects much too rosy a future – disappointments lie ahead.
We have been surprised by the very strong US stock market and that the global growth slowdown has not leaked back to US growth numbers. Until last week, it has been costly to underestimate Trump and his pro-cyclical fiscal policy, not to mention the effects of the huge equity buyback programmes (a double-edged sword that has prolonged the bull market, but historically has also been a late-cyclical sign of a stock market top in the making). Over the last 20 years there has basically never been such a long period with the US stock market powering ahead so strongly at the same time as the rest of the world is trending down, the way it has since late January 2018. It cannot continue forever. Something…
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Monday Market Movement – Looking to Regain Some Upside Momentum
by phil - October 15th, 2018 8:28 am
The turmoil continues.
Already this morning the Futures were down 100 points but back to flat into 8am. Of course, nothing that happens on a Monday has any meaning for the Markets as it's generally a low-volume affair with little news or data driving things towards real change. We laid our our bounce lines for the major indexes last Thursday and congratulation to those of you who followed us into those longs and caught that nice rally into the weekend. The summary of our bounce levels is:
- Dow (/YM): 25,450 (weak) and 25,700 (strong) – now 25,317
- S&P (/ES): 2,775 (weak) and 2,800 (strong) – now 2,766
- Nasdaq (/NQ): 7,100 (weak) and 7,250 (strong) – now 7,157
- Apple (AAPL): $223.50 (weak) and $226 (strong) – now $222
- Russell (/RTY): Anything below 1,552 is catastrophic – now 1,545
That's right, I forgot about the Russell. It was the small caps index that gave us the early indication the rally was breaking down and now they are going to give us an early indication as to whether this is the end of a small correction or just the beginning of a larger one.
As you can see from the daily chart of the index, there's no recovery here at all in the broadly measured 2,000-stock index and these are the companies that are least able to adjust to the damage caused by Trade Wars and slowing US Consumer Spending so they do give us an early glimps of the things that will begin showing up in the S&P 500 over time.
Meanwhile, we're skeptical about recoveries that occur on low-volume and without actual reasons – we much prefer to see the market move on upside reports or at least upside earnings surprises and not from single companies or even single sectors – like Friday's bank-driven rally. For example, one of the recent hedges we added to our Short-Term Portfolio was featured in the 9/27 PSW Report, which was:
As I noted on Tuesday, we are already getting swamped by companies who are issuing negative guidance for
…
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Weekend Reading: We Are All In…Again!
by Zero Hedge - October 12th, 2018 11:25 pm
Courtesy of Lance Roberts, RealInvestmentAdvice.com
Despite the recent angst in the market over increasing interest rates, there has been little evidence of concern by investors overall. A recent report showed that investors have the LEAST amount of cash in their investment accounts…EVER.
“Individual investors drew down cash balances at brokerage accounts to record lows as the S&P 500 surged 7.2 percent in the three months ended Friday.
Cash as a percentage of assets among Charles Schwab Corp. clients in August fell to 10.4 percent, matching the level in January that marked the lowest since at least 2004.”
Of course, eight months ago the markets suffered a 10.4% decline just as investors scrambled to “get in.”
The monthly survey from the American Association of Individual Investors shows the same. Individuals are carrying some of the highest levels in history of equities, are reducing their exposure to bonds, and carrying very low levels of cash.
As Dana Lyons recently noted:
” From the Federal Reserve’s Z.1 release, we find that U.S. Households had a reported 34.3% of their financial assets invested in the equity market as of the 2nd quarter. Outside of a slightly higher reading in the 4th quarter of 2017, that is the highest level of stock investment in the 70-plus year history of the series, other than the 1999-2000 bubble top.”
Investors are once again….“all in.”
And the market once again tumbled.
The one thing we know for sure is that individual investors do exactly the opposite of what they should when it comes to investing – “buy high” and “sell low.”
Households have repeatedly learned, and then subsequently forgotten, this lesson repeatedly over the entirety of the financial market history.
The challenge, of course, it understanding that the next major impact event, market reversion, will NOT HAVE the identical characteristics of the previous events. This is why comparing today’s market to that of 2000 or 2007 is pointless. Only the outcome will be the same.
The reality is that the majority of investors are ill-prepared for an impact event to occur. This is particularly the case in late-stage…
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What a week.
by ilene - October 12th, 2018 8:49 pm
What a week.
Courtesy of Joshua M Brown
This past February, investors were amazed by the return of volatility to US stocks, as roughly one trillion dollars in market value had been wiped out in the span of just a few weeks. It took the entire year to recover through the end of September, as the major averages all made fresh highs.
And then we did it again.
There’s no reason for what just went on – a fast 6% sell-off for the S&P 500 – there are only fragments of reasons for us to fit together and hope we’ve got a handle on the why’s. As Barry explains, everyone is free to pick their pet cause: Tariff wars, interest rates, valuations, the Federal Reserve, elections, etc.
Here’s a really interesting take in the New York Times saying that corporations took a pre-earnings season break from doing stock buybacks and therefore the leading buyers of equities were on the sidelines. Their buying might have kept the drop from becoming a rout. Or merely forestalled the rout that so many have been saying we were overdue for.
Today we’re getting a snapback, but the technicians won’t like it. They see failed breakouts for all the indices and continued downtrends in international stocks confirming the weakness here. Fundamentals people will look to the coming earnings reports next week and the following week to make themselves feel better for hanging tight.
Either way, what’s absolutely true is that this year is very different from last year. Ben Carlson ran the numbers for me: Using rolling 30-day standard deviation, it turns out that the S&P 500 has double the volatility in 2018 vs 2017. Michael Batnick points out that last year we had only four days during which the S&P 500 dropped 1%. This year it’s already happened 18 times including yesterday. It’s reasonable to expect even more. If it’s messing with your head, your portfolio may be too heavily invested in equities or you merely need a reality check: Returns require risk, they’re earned not gifted to you.
Here’s some stuff you should be reading today…
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Flip Flop Friday – Bank Earnings Boost Confidence
by phil - October 12th, 2018 8:29 am
Don't be fooled by weak bounces.
The Dow may be up 370 points at the open and that seems like a lot but we closed near 25,000 and, as noted in yesterday's PSW Report, we were expecting a bounce off 25,175 back to 25,450 just to complete a WEAK bounce off the 5% correction (which we also predicted) and yesterday's failure at the bounce line does not make a second attempt today more impressive. As we discussed in Wednesday's Live Trading Webinar, it's not just making the bounce lines that matter but making them in the same time period that we fell.
It took rwo days to hit 25,175 and yes, we did bounce back in one day yesterday but that failed and got worse and now it's day 2 and all we're doing this morning is making another run at 25,450 and that is not going to be enough to flip us bullish – now we need to see the strong bounce level at 25,700 taken and held – along with the levels we set for our other indexes as well. We called this in yesterday's report, of course and I'll repeat it again because we're looking for the same factors in play:
Nothing has happened to support the markets so far but here are some of the things that can turn things around – at least to create a dip-buying rally but whether or not that's enough to crack the strong bounce lines remains to be seen:
- Trump could stop calling the Fed "crazy" (not likely, he needs someone to blame for the market sell-off since he's been using the market rally to measure his success)
- The Fed could capitulate to Trump and say they won't raise rates anymore (not likely as yesterday's 10-year auction was not pretty – even at 3.25%.
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The PhilStockWorld com LIVE Weekly Trading Webinar – 10-10-18
by clarisezoleta - October 11th, 2018 6:27 pm
For LIVE access on Wednesday afternoons, join us at Phil's Stock World – click here.
Major Topics:
00:01:46 – Checking the Markets
00:03:57 – 5 Minute Chart
00:15:08 – Gold
00:16:28 – Gasoline & Oil Trade Ideas
00:22:31 – OOP
00:23:19 – Butterfly Portfolio
00:24:32 – Self Hedging Portfolios
00:24:40 – Money Talk Portfolio
00:24:57 – LTP & STP
00:48:40 – BJO
00:50:01 – CDE
00:50:48 – F
00:51:20 – GE
00:52:09 – IMAX
00:57:43 – MT
00:58:38 – PZZA
01:05:29 – More Trade Ideas & Techniques
01:12:34 – S&P 500 (Accelerating & Decelarating Moves)
Phil's Weekly Trading Webinars provide a great opportunity to learn what we do at PSW. Subscribe to our YouTube channel and view past webinars here. For LIVE access to PSW's Weekly Webinars – demonstrating trading strategies in real time – click here to join us at PSW!
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$5,000 Thursday – Cashing in Our Shorts and Looking for the Bounce Lines
by phil - October 11th, 2018 8:35 am
Wheeeee!
I love a good correction, especially when we call it. Yesterday, in the Morning Report (which you could have in your hands every day, pre-market for just $3/day), when the Futures were UP, I said:
We also have a potential 1,000-point drop in the Dow (/YM) to look forward to if it fails at 26,250 so yes to Futures shorts below that line if it fails, with tight stops above. If the S&P is below 2,860 and the NYSE is still below 13,000 and the Nasdaq fails 7,275 and the Russell is below 1,620 – that's going to confirm a bearish market and we'll get more aggressive on our shorts but, so far, we're pretty well-balanced in our 5 Member Portfolios and we will review them today in our Live Trading Webinar.
The Dow (/YM) Futures did indeed bottom out this morning at 25,174, past our 1,000-point goal and this morning, in our Live Member Chat Room (which you can also subscribe to) I sent out a Trading Alert to our Members at 7:49 saying:
I think 2,750 on /ES is the best long line with tight stops below and 6,780 on /NQ should be fun if dip buyers come in with a stop below 6,775 (Nasdaq loves those 25-point lines) and then we'll watch the rest of our bounce lines to see if we're going to add more hedges or take profits on the ones we have.
Things are already off to a good start with the S&P flying back up to test the 2,800 line and S&P (/ES) Futures contracts pay $50 per point so a 50-point move would be good for gains of $2,500 per contract on the bounce but, now that we're testing 2,785, we need to keep a stop at 2,780 and settle for a $1,500 per contract gain if the market is simply weakly bouncing pre-market.
I don't usually do this but I put a lot of work into the morning Alert for our Members and there's nothing more important this morning than discussing the bounce lines so I'm going to…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site