Sunday, July 31, 2016

Trading Outlook for the Week of August 1-5

The last week of trading in July saw continued strength in the Technology sector, and that carried through to the Nasdaq as a whole.  There's some signs of life coming back into the mid-cap stocks, however across the board the S&P large cap, mid cap, and small cap indexes continue to be flat.  A bit of demand came into the markets on Thursday and Friday, following the dovish Fed announcement that suggests interest rates will remain at their current level well into 2017.

We are still maintaining a long bias into the week ahead, however with the extremely tight range being experienced in all market capitalizations for the last two weeks, be aware that a breakout in either direction is possible.  Only the higher volume on the last two up-days suggests that the breakout could be to the upside.  In the meantime, we'll be keeping our stops close.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - Long
Small Caps - Long
Nasdaq - Long


Showing strength
XLK - Technology
XLV - Health Care

Showing weakness
XLE - Energy
XLI -  Industrials
XLP - Consumer Staples
XLU - Utilities

XLF - Financials
XLY - Consumer Discretionary
XLB - Materials

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 8/1/16

  • 09:45 - PMI Manufacturing Index
  • 10:00 - ISM Manufacturing Index
  • 10:00 - Construction Spending
Tuesday, 8/2/16
  • 08:30 - Personal Income & Outlays
Wednesday, 8/3/16
  • 08:15 - ADP Employment Report
  • 10:00 - ISM Non-Manufacturing Index
  • 10:30 - EIA Petroleum Status Report
Thursday, 8/4/16
  • 08:30 - Jobless Claims
  • 10:00 - Factory Orders
Friday, 8/5/16
  • 08:30 - Employment Situation
  • 08:30 - International Trade
Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/2/16
  • Before Market Open - Proctor & Gambel (NYSE:PG)
Wednesday, 8/3/16
  •  Before Market Open - Avnet (NYSE:AVT)

Our bias remains long, and we will pay closer attention to Nasdaq stocks and Health Care stocks.  We'll keep our stops very close for several reasons:
  • All three market capitalizations continue to show an extremely tight trading range.  Until we see the direction of the breakout, we'll need to remain cautious for a move to the downside.
  • The 10-year yield is still trending down, indicating a continued flight to safety.  Weakness in the Utilities sector suggests this flight may be ending however we'd like to see confirmation in the treasury yield before reaching that conclusion.
  • This is Employment Situation week, and that adds a measure of uncertainty to Friday's behavior. 
  • The Bank of England has their announcement on August 4th, and there will be uncertainty leading into Thursday based on the view they will take regarding Brexit risks.
As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Saturday, July 30, 2016

Showing Only 1.2% Growth, GDP Is Still Anemic

Is there truly an economic recovery in progress?  You'd never know it from the GDP which increased by a mere 1.2% in the quarter ending June 30th.  It continues a very sluggish trend that started in 2014 following what had looked to be a promising post-Great Recession recovery.

Quarterly GDP Growth 2012 to Present
Economists generally consider a range of 2.5% to 3.5% GDP growth to be healthy for the economy.  Lower than 2.5% and corporate profits suffer and with them, job growth also suffers.  Higher than 3.5% and the economy starts to experience inflationary pressures.  Now, that last point is significant in this case since we've been in an extended period of under-inflation.  The Fed mandate to maintain inflation at 2% needs a boost in GDP well above what we're currently experiencing before that target grows within reach.

Low inflation, in this case, translates to lower interest rates.  Following Friday's GDP report, the Fed Funds Futures market reacted sharply, reducing the probability of a September Fed interest rate hike to only 12%, and a December probability dropped to 30%.  As we discussed two days ago, interest rates will be depressed likely right through 2017.

Yesterday's announcement made mention of a slight increase in trade, saying it added about 0.2 percentage points to overall growth.  I've read some analysts point to that figure as evidence that the impact of the strong US dollar has stabilized, however I don't believe that to be the case.  Rather, what's driving the trade growth is a drop in US imports, not an increase in exports.  (Imports are subtracted from the figure, so if imports decline, it has a net positive effect on the trade number.)  Given the strength of the dollar, a reduction in imports is a very bearish signal, indicating a decrease in demand for materials and finished products.

Along those same lines, a major factor in yesterday's anemic announcement was continued reduction in inventory restocking by businesses in the US.  This is the fifth consecutive quarter in which inventory levels have dropped, and it's a further indication that there are strong downward pressures on consumer demand and on corporate sales.  Unlike analysts that are predicting a rapid end to that trend, I see just the opposite.  Until there is a healthy increase in the hourly wage statistics and a healthy increase in the Labor Force Participation Rate, I don't see any major driver for a change in inventory stocking behavior that would add anything of significance to the GDP.

When I consider the economic warnings hidden in the Schlumberger and Union Pacific earnings calls earlier this month, I begin to see a general underlying pattern of slowing growth, slowing demand for commodities and raw materials, and a potential crack in the expected rate of consumer spending over the second half of the year.  For that pattern to reverse, we need to see a weakening of the US Dollar, a dramatic reduction in the number of Americans that are out of work, and a return to a price of oil that provides healthy growth across a wide range of industries.  None of those appear to be on the short-term horizon, which leaves me pessimistic about future growth prospects in 2016 and into the first half of 2017.

Thursday, July 28, 2016

FOMC Holds Rates Steady; Details Economic Progress

As expected yesterday, the US Federal Opens Market Committee (FOMC) held interest rates steady with the target range between 0.25% and 0.50%.  One sign of the weakening of the Fed's resolve at maintaining the status quo, however, came with Esther L. George's dissenting vote.  As noted in the formal announcement, the traditionally hawkish George preferred to increase the federal funds rate to 0.50% to 0.75%.  She was outvoted 9-1.

The language and tone of the announcement demonstrated a subtle shift towards a tightening policy, however. Respective to the Fed mandate of maintaining full employment, they said, "Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May."  

Given the very robust jobs report in June, that position is not surprising.  Indeed, the standard unemployment level has been sustained below 5% for several months, although it's equally important to note that over 94 million Americans are now unemployed - the highest number since the Labor Force Participation Rate has been maintained. 

If the job market were the only factor under consideration, there's little doubt that the Fed would be moving to raise interest rates.  The stumbling block continues to be inflation.  The all-items CPI for urban consumers is 1%.  The FOMC target, however, is 2%, and there's little indication that inflation will reach that target in the short term.  They acknowledged that yesterday, saying, "Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further." 

They did not define "medium term" in this context, however Janet Yellen defined it in 2009, saying, "From macroanalysis, I consider short term as referring to less than, say, a year or two, medium term as ranging from around two to six years, and long term as anything beyond around six."  Read into that what you will, since the ultimate question will be whether or not the Fed will raise interest rates before inflation reaches the 2% target.  If that target is not anticipated for at least another two years, then we've a long ways to go before we see any monetary tightening.

The June announcements were rife with caution, citing potentially permanent "headwinds" and some rather dire forecasts regarding the global economy. This month's announcement shows a complete reversal of those ominous undertones.  "Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments."

What they classified as "near-term risks" was not expounded upon, however it's reasonable to assume that they are referencing the unknown impacts of Brexit, a strong US dollar, and the prospect of recession in Europe.  While the Brexit impact is certainly moved out into the distant future - at least 2019 or beyond, even if the UK invokes Article 50 next year - and Europe appears to have inched ever so slightly away from recession, I find it hard to dismiss the impact the strong US dollar is having and will continue to have for the foreseeable future.  It's doubtful, however, that the dollar alone will be enough to stay the Fed's hand.

Interestingly, the markets appeared to treat the FOMC release with a yawn.  The Nasdaq Composite was up both yesterday and today, and the S&P 500, while down a hair yesterday, recovered it today to continue it's horizontal correction without giving or gaining any ground. 

Equally interesting, the Fed Fund Futures still show only an 18% chance of a rate hike in September, and the chance of a December hike dropped to 36.8%.  In fact, you have to go all the way out to June 2017 before the chance of an increase even reaches 40%.  Clearly, the market is factoring in very low interest rates for at least the next year.  The 10-year Treasury Yield is still declining, dropping to 1.52% today, which would be another possible indication that rates will continue low for some time.  (It's also a further indication of a flight to safety, which is a warning of potentially troubled times ahead in the equities markets.)

The Fed summed up a very dovish posture once again, stating, "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."  That view, however, is not consistent with the "dot plot," an estimation of where FOMC members view interest rates over the next several years.  A solid base of participants forecast one additional rate hike in 2016, however the strongest dot concentration shows two rate hikes, presumably in September and December with the average rate falling between 0.75% and 1% by year end.

The next FOMC meeting is September 21st, so we have almost 8-weeks before the next rate decision is expected.  A lot can happen in 8-weeks, and there will be two more major economic data points available to the Fed before that decision is warranted.  What we as traders need to watch, however, is the potential for good economic news to become bad for the market.  A very strong jobs report, or a healthy uptick in inflation could signal that there is a greater potential for a September rate hike.  That would send stocks tumbling once again, hence the good news is bad phenomenon.  Exercise caution around major data releases since the reaction will be somewhat unpredictable for the time being.

With regards to monetary policy, we now turn our attention to the Bank of England and next Thursday's Monetary Policy Committee announcement.  Stay tuned.

Happy Trading.

Tuesday, July 26, 2016

Apple Beats on Earnings and Revenue, But Is It Enough?

Apple (Nasdaq: AAPL) posted their 3rd quarter earnings after the bell this afternoon, and on the surface, at least, the news sounded good.  They beat earnings by $0.04, and they also beat on revenue by $310 million.  In after-hours trading, shares of AAPL surged as high as 8% before settling back to $103.60.  They also held their quarterly dividend steady at $0.57 per share.

The underlying picture, though, is not quite so rosy.  Their sales were down 14.5% year over year, and their gross margin dropped to 38%.  In fact, their forward guidance for the next quarter includes a gross margin range of only 37.5% to 38%, and their forecast for revenue is up slightly from this quarter, but still well below last year.

International sales contributed to 63% of their revenue this quarter, but sales in China were down 33% from last year.  The Apple troubles in China continue, in fact, not only due to the slowing economy in Asia but also resulting from difficulties with Chinese regulators.  The iBooks and iTunes services were shut down by regulators last April, and in June the Chinese government ordered a halt to iPhone 6 sales due to a patent dispute.  (We'll skip the editorial about the hypocrisy of China arguing about a patent infringement.)  The point is, China was once seen as the major growth market for Apple, but at least for now that market has run dry.

The Services business, including iTunes and Apple Pay, were up 19% year over year, however on a quarter-to-quarter basis, it was essentially flat.  Despite Credit Suisse's forecast of the services business providing over 30% of Apple's revenue by 2020, the reality is that the current growth trends are not supporting that prediction.  With Google and Samsung both entering the payment market with comparable products, the competition faced by Apple Pay is becoming formidable. 

Demand for iPhones, iPads, and Macs appears to have peaked.  The iPhone market is already saturated, and the tablet and personal computer markets are crumbling, at least as far as the average consumer is concerned.  The iPad is still doing fairly well in certain business applications, but when it comes to the average consumer, the phablet is rapidly replacing them.  To that end, with the extremely popular Samsung Galaxy S7 and S7 edge out for 6 months, now, the iPhone 7 (with an expected larger screen offering) is a bit late to the dance.

The question that Apple must seriously entertain is whether or not a change at the top is in order.  CEO Tim Cook has yet to prove that he's capable of driving the innovation needed to keep Apple at the top of the industry.  I've seen an increasing number of analysts state that, in their view, Apple's best days are behind them, and thus far I've seen nothing to contradict that opinion.  There has certainly been no innovation coming from the company since the passing of Steve Jobs.  It may well be that the "next new thing" to come out of Apple will be a new CEO.

Monday, July 25, 2016

A Pause in the Rally Across All Capitalizations

For the entire month of July, we've been treated to extremely encouraging news in the face of the first major stock market rally we've experienced in well over a year.  For over a week, both the Dow Jones Industrials and the S&P 500 posted new all-time highs day after day.  Now that we're well into Q2 earnings season, however, the markets have turned flat and the exuberance is starting to subside.  Let's take a look at the anatomy of the rally separated by large-cap, mid-cap, and small-cap stocks.

Daily Chart of Small, Mid, Large Cap Indexes for July, 2016
These three charts show the month of July in the S&P 600 Small Cap Index ($SML), the S&P 400 Mid Cap Index ($MID), and the S&P 500 Large Cap Index ($SPX).  For those not familiar with the capitalizations, a Small Cap stock is considered one with under $2 Billion in market capitalization, a Mid Cap stock has between $2 Billion and $10 Billion in market capitalization, and a Large Cap stock has over $10 Billion in market capitalization.

At first glance, it appears that all three indexes benefited from the rally.  Each of them started their rally immediately following the Brexit sell-off in late June, and each of them have plateaued over the last two weeks.

From an Elliott Wave perspective, we have completed three very obvious waves in all three indexes.  Wave 1 lasted 4 days in each, Wave 2 lasted 2 days, and Wave 3 lasted 4 days in $SML, 5 days in $MID, and 6 days in $SPX.  From that point to the present, each index has traded flat.

Of the three indexes, though, in only $SML was Wave 3 longer than Wave 1.  Under Elliott Wave theory, we know that Wave 3 cannot be the shortest of the impulse waves.  This means that, assuming this is a true 5-wave impulse sequence, only the Small Cap stocks remain unconstrained to the upside.  Both the Mid Caps and Large Caps, however, are faced with a ceiling, which is the actual height of Wave 3 beginning at the bottom of Wave 4 when that wave completes.  As it stands now, the Large Caps have an upward limit of around 2250 and the Mid Caps around 1615.  We'll need to keep these potential limits in mind once the uptrend resumes and we plan exit strategies for long positions.

All this, of course, assumes that we are in a 5-wave impulse, and not a continuation of the correction that's been ongoing for over a year.  So far, the pattern has not violated any impulse rules.  In fact, it's conforming to them rather nicely.  Wave 2 retraced between 38.2% and 50% of Wave 1 in all 3 indexes, Wave 4 has not (yet) violated the territory of Wave 1, and we're experiencing well-defined alternation between Waves 2 and 4.  As long as Wave 5 doesn't exceed the length of Wave 3 in the Mid and Large Caps, the impulse pattern will be valid.

The caveat, of course, is that we're in the middle of earnings season, and anything can happen here.  We also have a presidential election coming up, and that should add a bit of volatility into the mix as the summer draws to a close.  What could easily invalidate the entire impulse pattern would be a price decline that creates overlap with prior waves, signalling a consolidation pattern, not an impulse pattern.  I would be very concerned if we dropped below the high set on June 8, causing overlap with the prior A-B-C corrective wave pattern, and I would consider the impulse pattern definitively invalidated if we drop below the high set on June 23, just prior to the Brexit vote.  Some purists may argue that the pattern's valid unless we dip into the Wave 1 high in the current sequence, however when analyzing Elliott Waves I find it important to consider the pattern or patterns that completed as we enter the current one.  Continuation patterns can be confusing since they can take so many different forms, and for those of us that change strategies based on whether or not a market is trending, knowing where we are in the cycle is extremely important.

As to the current situation, we have clearly been in a flat corrective pattern for the last two weeks, and the most obvious wave count structure would place this corrective pattern in Wave 4.  Take a look at it yourself, and plan your strategies accordingly.  Remember to include the weekly and hourly charts in your analysis if you're a short-term trader using the daily chart for your primary analysis.

Happy Trading.

Sunday, July 24, 2016

GE Offers Promising Outlook for Aviation

General Electric (NYSE:GE) released earnings on Friday, beating EPS forecasts by $0.05 and revenue by $1.74 Billion.  That didn't prevent their stock from taking a 1.8% hit pre-market, however, due primarily to a 2% decline in orders and what they described as a "volatile and slow-growth economy."

The news, however, appears rather bright for the Aviation industries.  GE reported a strong first half of the year in that industry, and is forecasting the remainder of 2016 to remain strong as well.  There were a couple of items that bode well for the airlines, at least according to GE.  They saw commercial traffic growth of over 6% this year, down a bit from last year, but still experiencing a healthy growth pattern.  Additionally, the airplane load factor remains at 80% for the second year in a row, and GE reports over 2 million departures added in the past year.

GE reports, not surprisingly, that jet fuel continues to be deflationary, and is down over 50% over a three-year period.  When you combine the lower fuel costs, increased passenger demand, and a very strong load factor, it's reasonable to expect a healthy year for what has been an oddly depressed airline industry that has been in an Elliott Wave zig-zag and flat pair of corrective patterns for the past 18-months.  (Do keep in mind the Schlumberger warnings of an impending oil supply deficit, however.  If that manifests, it will put an end to depressed jet fuel costs.)

You can see the overall pattern for the airline index in this weekly chart:

Airline Index Weekly Chart
We can see on the chart that the index started a steep uptrend in October, 2011.  It then traced out a very distinctive 5-wave impulse pattern that completed in January, 2015.  Since then, however, it completed a classic A-B-C Zig-Zag pattern, retracing almost 50% of the prior impulse pattern, and it looks like it's starting a possible flat correction now.  This overall pattern appears to be Wave 2 of a larger overall 5-wave Impulse, so once this corrective pattern completes, we can look forward to a very healthy third wave impulse.  Long-term traders should enjoy a very nice 3 or 4 year bull trend in airlines once that wave kicks off.  The way this pattern is trending, though, that may not happen until 2017.

Returning to GE, there were some additional interesting comments related to defense spending.  They forecast it to be flat in 2017 here in the US.  Given the number of industries here dependent upon defense spending, that's a cautionary note that we'll have to carefully watch.  Now, this flat projection may well be due to the number of sizeable contracts that were awarded in 2015 and early '16, so a pause in new contracts is to be expected, but it will be important to watch other companies in the industry to see how this matches their own forecasts and revenue plans.

Interestingly, GE forecasts international defense spending to be up 4% globally (excluding the US.)  That comes at a time when Europe is teetering on recession and facing the unknown threat of Brexit, so that 4% value is likely depressed due to the state of the global economy.  Should the economy heat up, it's reasonable to expect a similar increase in global defense spending, especially at a time when the terror threat appears to be spreading to parts of Western Europe.

With US defense spending flat but international defense spending up, we'll need to watch for companies that have a strong global stake.  These would include Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), and Raytheon (NYSE:RTN).  Fire Support, a defense marketing website includes an excellent list of the top 100 global defense companies for 2015.  While the list is a year old, the major players in this space have not changed.  If you're looking for companies that will benefit from growth in international defense spending, this is an excellent place to start.

From a trading perspective, it looks like there will be some short-term potential plays in the airlines, but be aware that there should be at least one more downward wave in the correction.  Longer term players can look forward to growth of a bit over 200% in the airline index from 2017 to 2021 if the Elliott Wave pattern holds true. For defense contractors, look more for trades in companies servicing overseas orders.  Just be aware of the impact the strong US dollar will have on their exchange rate and earnings forecasts. 

Happy Trading.

Saturday, July 23, 2016

Trading Outlook for the Week of July 25-29

We close out the month of July in the coming week, following four solid weeks of strong performance.  The week ahead sees the July FOMC meeting, the GDP report, and another week of key earnings reports.

We're starting to see a bit of a pause in the upward movement across all capitalizations, and from an Elliott Wave perspective, all but the Nasdaq Composite appear to be in a fourth-wave consolidation.  The strongest plays for the week appear to be in either the Nasdaq or in the Large Cap stocks.  Both Mid and Small Cap stocks remained in a horizontal consolidation pattern, so we'll avoid those until their trends resume.

The three strongest sectors closing out the week are Technology, Utilities, and Health Care, so for long trades we'll be looking primarily in those sectors.  That the Utilities sector surged on Thursday and Friday is an area of concern since that indicates a renewed flight to safety.  The 10-Year Treasury Yield declined 1.87% this week after a large spike up last week.  We'll keep an eye on this throughout the week as well, since a decline in yield will further support the concept of a flight to safety.

Here's a summary of the week ahead.

Trading Bias 

Large Caps - Long
Mid Caps - No Trades
Small Caps - No Trades
Nasdaq - Long


Showing strength
XLK - Technology

XLU - Utilities
XLV - Health Care

Showing weakness
XLB - Materials
XLE - Energy
XLI -  Industrials
XLP - Consumer Staples

XLF - FinancialsXLY - Consumer Discretionary

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 7/25/16
  • 10:30 - Dallas Fed Manufacturing Survey
Tuesday, 7/26/16
  • 09:00 - S&P Case-Shiller HPI
  • 10:00 - New Home Sales
  • 10:00 - Consumer Confidence
Wednesday, 7/27/16
  • 08:30 - Durable Goods Orders
  • 10:00 - Pending Home Sales Index
  • 10:30 - EIA Petroleum Status Report
  • 14:00 - FOMC Meeting Announcement
Thursday, 7/28/16
  • 08:30 - International Trade in Goods
  • 08:30 - Jobless Claims
Friday, 7/29/16
  • 08:30 - GDP
  • 08:30 - Employment Cost Index
  • 09:45 - Chicago PMI
  • 10:00 - Consumer Sentiment
Earnings Reports Watched for Sector or Market Significance

Tuesday, 7/26/16
  • Before Market Open - Caterpillar (NYSE:CAT)
  • Before Market Open - 3M (NYSE:MMM)
  • Before Market Open - United Technologies (NYSE:UTX)
Wednesday, 7/27/16
  •  Before Market Open - Boeing (NYSE:BA)
Thursday, 7/28/16
  •  Before Market Open - Ford (NYSE:F)
Friday, 7/29/16
  • Before Market Open - UPS (NYSE:UPS)

Our long positions this week will be limited to large caps and Nasdaq stocks, primarily in Technology, Utilities, and Health Care.  We'll keep our stops very close for several reasons:
  • Both UNP and SLB provided strong evidence of potential problems in several key industries.  This may take the wind out of the strong bullish sails we've experienced for four weeks.
  • Strength in the Utilities sector and a slight decline in the 10-year yield are showing signs of a renewed flight to safety.
  • There are major companies reporting earnings throughout the week.  This will add a measure of unpredictability to the markets.
  • FOMC reports on Wednesday.  While we don't anticipate any major announcements, just the tone and language of the announcement can generate unforeseen shifts in market behavior.
  • Mid-caps and Small-caps are experiencing consolidation, and both Large-caps and Nasdaq are showing signs that they, too, will enter a similar phase.
As always, trade the market you see, not the market you want.  Remain nimble, stick to your trading plan, and always know your exit strategy before entering the trade.

Happy Trading.

Friday, July 22, 2016

Schlumberger Warns of Impending Severe Oil Supply Deficit

Schlumberger (NYSE:SLB) announced earnings after the bell yesterday, beating EPS estimates by $0.02 and revenue by $70 million.  That's the good news.  Everything else about the release points to a serious energy crisis looming in the not-too-distant future. 

Demand in the oil industry continues to grow at a steady and aggressive pace.  As the economies in the US, Europe, and China recover, that demand will increase.  The supply side, however, has taken a horrendous hit over the past two years.  CEO Paal Kibsgaard summed it up, "We are heading towards a significant global supply deficit as the E&P [exploration and production] spend rate now is down by more than 50%."

There has been a significant cost efficiency problem within the industry for some time, and that inefficiency in cash flow has been exacerbated by the dramatic plunge in oil prices worldwide over the past seven quarters.  Rig operators have reacted to this price crisis with a massive reduction in oil field activity.  Active rigs are now down to 25% of their original level, and the appetite to start new wells has reached a critical low.  This has caused a ripple effect through the entire oil supply-chain industry, and it's about to reach critical mass.

Non-OPEC production is set to drop an additional 900,000 barrels per day.  Similar weakness is being forecast in the non-Gulf OPEC nations, and as short-term high production activities run their course, the expectation is for an accelerated decline in overall oil production worldwide.

Kibsgaard went on to say, "The market is also underestimating the potential reaction from the supplier industry, which has temporarily accepted financially unviable contracts to support the operators and to keep their options open as the downturn has deepened and extended into uncharted territory."

Cash flow from the rig operators is becoming strained, and they are delaying payments to creditors in an attempt to improve that flow.  This, too, has a ripple effect through the supply-chain industry.  What the entire environment demonstrates, though, is that as the service industry pricing inevitably improves - supply and demand will naturally force it - much of the capital that would normally be spent on exploration and production will instead be spent on debt reduction.  That will put added pressure on the oil supply deficit, extending the duration of the pending crisis.

What all this means is that there will be continued negative pressure on the various industries that support all aspects of the oil business.  Expect the metals industries to take a hit as both repairs to existing rigs and the development of new rigs are put on hold or canceled outright.  Expect shipping to take a hit as the flow of supplies, raw materials, and energy resources to and from suppliers and operators continues to decline.  Expect the chemicals industries to take a hit as there is less demand for the materials that are used in drilling and refining.

This is not good news for the consumer, either.  We currently still have an oil glut, which, coupled with an uncharacteristically strong US dollar,  is holding prices down for the moment.  As that glut transitions to a supply shortfall over the coming year, however, we can anticipate a rapid rise in oil prices world-wide.  That will dramatically impact the price at the pump, likely forcing gas prices to record highs around the world. 

It will take some time for all of this to play out, but it does appear that the piper that played the tune of ridiculously low oil prices is poised to deliver the bill.  Paying that bill will be painful at best. 

Happy Trading.

UNP Reports Negative Economic Impact Due to Low Oil Prices and Strong US Dollar

One of the companies we closely follow for their insight into the overall health of several sectors is Union Pacific Corporation (NYSE:UNP), headquartered in Omaha, Nebraska.  As one of the larger transportation companies in the US, their revenue is directly dependent up the health of other industries, and they provide extensive candid detail into each of those areas in their quarterly earnings calls. 

UNP reported earnings before the open on July 21, and their ensuing earnings call painted a less than optimistic picture of the overall health in a variety of sectors.  There are two driving factors associated with declines and pressures they are reporting: low oil prices and the strong US dollar.  Said CEO Lance Fritz, "A soft global economy, the negative impact of the strong U.S. dollar on exports, and relatively weak demand for consumer goods will continue to pressure volumes through the second half of the year."

For UNP, the only area of growth experienced this year was in Agriculture shipments (up 2%), however that growth was primarily driven by severe harvest delays in South America and by a high demand for corn in Mexico.  Had South America not experienced agriculture problems, even grain shipments would have been down for the year.

The remaining segments were all doom and gloom.
  • Total volume was down 11%.
  • Carload volume declined by double digits in coal, intermodal, and industrial products.  (Intermodal refers to shipments of the large containers typically carried by rail but then transferred to ship or truck.)
  • Automotive was down with finished vehicle shipments declining 10%.
The strong US dollar continued to hurt exports with chemicals, plastics, and fertilizer all down for the year.  With inflation at or near zero in Europe and with the US likely to raise interest rates either at the end of 2016 and most certainly several times in 2017 and 2018, there is little likelihood of any weakening of the dollar for the foreseeable future.

Low oil prices continue to have a significant negative impact.  Rail shipments in that industry were down 23% due to low natural gas prices coupled with high inventory levels.  Lower international coal prices (due to the strong dollar) also contributed to that decline.

The other impact low oil prices continues to have is in the chemical and metals industries.  Mineral volume declined 32% and Frac Sand declined 43%.  Metal (aluminum, steel, etc.) declined 11% due to reduced shale drilling.  Expect to see this ripple through other industries as earnings continue to report through the quarter.

The flooding in Texas had a severe impact on construction shipments, down 4%.  Intermodal shipments (also impacted by that flooding) were down 16%.  We can expect to see that ripple through the trucking and shipping industries as well. 

The forecast for the remainder of the year was not very encouraging, either.  UNP forecasts agriculture to remain strong since there are expectations for a strong US crop harvest and there is continued weakness in South America.  Automotive shipments should also see a boost as the 2017 models come out, and the industry is currently trending well below the projected 17.5 million vehicles for the year.  There are also expectations of a boost in construction and in the housing market as the year progresses. The rest of the industries, however, are still expected to experience headwinds.
  • UNP still expects the pressures due to low oil prices and low natural gas prices to continue. 
  •  They expect drilling to continue to decline, and with it the demand for metals and chemicals will also decline.
  • Intermodal shipment is also expected to experience pressure due to the impact the strong dollar is having on US exports.
  • The economy in Europe and China remains weak, adding to global pressures on prices and demand for goods.
This is the first major earnings transcript we've seen this quarter that paints such a gloomy picture of the first half of 2016, however UNP is typically right on the mark in their assessment.  Consider the impacts they are citing in related industries when reading their report, since the effects will be readily apparent as other prominent names report earnings over the next two quarters.

Happy Trading

Thursday, July 21, 2016

ECB Holds Rates Steady; Leaves Door Open for Stimulus Later This Year

The European Central Bank announced this morning that they were holding rates steady, meeting market and analyst expectations for their July meeting.  The main refinancing rate remains at 0%, the deposit rate is steady at minus 0.4%, the marginal lending facility rate at 0.25% and the ECB held their Quantitative Easing position at a monthly €80 Billion.  None of this came as a surprise to world markets which have thus far stabilized since the surprising Brexit vote in June.

Caution was the order of the day as the Central Bank adopted a "wait and see" attitude, postponing any decisions until their September 8th meeting.  There's growing speculation that an increase in Quantitative Easing could be announced then, however in his post-announcement speech Mario Draghi stated, "We confirm that the monthly asset purchases of 80 billion euros are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim." 

Haven't we heard that before?  It sounds very similar to the tune sung by the US Federal Open Markets Committee throughout the final year of QE3 here in the States. Essentially, yes they have an end-date, yes there's a fixed amount planned into the process, but oh by the way, that end date will ultimately be data dependent based upon the prospects for normalized inflation, defined both in Europe and in the US as 2%.  With the current rate of inflation in the Eurozone sitting at 0.1% following a year of deflation, that March 2017 target looks like a pipe-dream.

Draghi briefly addressed Brexit in his speech, saying "All we can say is that it is a risk that has materialized and it is a downside risk." This, too, is inline with the wait-and-see attitude that permeated the speech, and it's consistent with the approach being taken in the UK and US.  With the pending start of UK separation delayed until some time in 2017, fears of immediate turmoil have abated and none of the Central Banks are eager to take any action that might upset the tentative stability world economies have experienced over the last 3 weeks.  The word from all of them is that additional data is needed before any action (if action is warranted) can be considered.

With no major policy changes coming out of the ECB this month, the focus will now shift to Janet Yellen and the FOMC announcement on July 27th.  As with the ECB, no policy changes are anticipated in the US either, although the robust reaction of the stock market this month, combined with good corporate earnings and relatively good economic data have analysts anticipating a softening of the extreme dovish tone in their guidance on interest rates.  At this point, the market has factored in a 19.5% probability of a rate hike on September 21, up from 12% a week ago.  A December 14th rate hike probability has jumped to 40%, up from 30% last week.  It will be interesting to check these numbers following Yellen's announcement next week.

For now, it looks like the remainder of the summer will be uneventful from a Central Bank perspective.  That leaves only earnings and economic data to drive the markets, and both have been trending positive for much of July.

Happy Trading.

Wednesday, July 20, 2016

GOP Platform Embraces Glass-Steagall Reinstatement - But Does It Really?

In perhaps the most bazaar twist in an already surreal election cycle, the 2016 Republican Party Platform  states, "We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment."  But wait.  Is the Republican platform truly endorsing a reinstatement of an act that would allegedly force the break-up of the largest banks in the nation?  Not necessarily. 

Perhaps some background is in order first, since "Glass-Steagall" is often bandied about rather callously.  The Banking Act of 1933 was clarified for consistency in 1935, and it's that  '35 version that we affectionately mean when we refer to Glass-Steagall.  The Act had four major restrictions that prevented commercial Federal Reserve Member Banks from:
  1. dealing in non-governmental securities for customers
  2. investing in non-investment grade securities for themselves
  3. underwriting or distributing non-governmental securities
  4. affiliating (or sharing employees) with companies involved in such activities
Similarly, it prevented securities firms and investment banks from taking deposits. Effected banks had to declare in 1934 whether they were commercial banks or investment banks.

Note, however, that the Act only applied to Federal Reserve Member banks.  It did not apply to savings and loan banks, nor did it apply to state-chartered banks that did not belong to the Federal Reserve system.  Furthermore, numerous loopholes were widely exploited through the formation of holding companies that owned various components all isolated from each other via Glass-Steagall.  (Note that this was ultimately tested and upheld when Citigroup, the holding company parent of Citibank acquired Salomon Smith Barney via their merger with Travelers Group in 1998.)

Remember, Glass-Steagall only applied to commercial and investment banks, and it did not impact the overwhelming majority of banks that existed in the US.

The Act itself fell into serious decline, not at the hands of Congress, but rather at the hands of bank regulators and the courts throughout the 1960s and '70s. Bank regulators increasingly interpreted the Act to permit more and more aggressive activities related to securities, and these interpretations were upheld by the courts. The debate to repeal Glass-Steagall began in the 1980s, and it culminated in the Gramm-Leach-Bliley Act (GLBA), passed by Congress in 1999.  It was signed into law by Bill Clinton on November 12, 1999.  Given that it passed the House 343-86 and the Senate 54-44 (although the Senate passed the conference committee version 90-8,) Clinton believed it to be veto proof and signed it despite being skeptical about the implications.

So that brings us full circle back to the Republican Party Platform of 2016.  Here's what they actually said about the reinstatement of Glass-Steagall:

"Sensible regulations can be compatible with a vibrant economy. They can prevent the strong from exploiting the weak. Right now, the regulators are exploiting everyone. We are determined to make regulations minimally intrusive, confined to their legal mandate, and respectful toward the creation of new and small businesses. We will revisit existing laws that delegate too much authority to regulatory agencies and review all current regulations for possible reform or repeal. We endorse Republican legislation, already passed by the House, to require approval by both houses of Congress for any rule or regulation that would impose significant costs on the American people. Further, Congress should work towards legislation that requires removal of a regulation of equal or greater economic burden when a new regulation is enacted.  Because regulations are just another tax on the consumers, Congress should consider a regulatory budget that would cap the costs federal agencies could impose on the economy in any given year."

The target of the platform is not any implied breakup of banks as they exist today, and as some of the press is implying.  Rather, the target is to rein in excessive regulation of the banking industry.  "We are determined to make regulations minimally intrusive, confined to their legal mandate, and respectful toward the creation of new and small businesses." 

It's a passage that could easily have been written by Jamie Dimon, CEO of J.P. Morgan Chase (NYSE:JPM) who, in his earnings call on January 14, 2015 said, “Banks are under assault [by regulators.]  In the old days, you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is, how fair that is.”

Whether or not a reinstatement of the restrictions on commercial and investment banks would help or hurt the economy is a discussion for another day.  For now, however, as we listen to two weeks of intense hype surrounding the conventions of both major parties, please understand the reality about what is listed in the Republican platform.  It has nothing to do with reimposing the restrictions implied by Glass-Steagall and has everything to do with reducing the bureaucratic red-tape being imposed on the banking industry in the post-2008 crash ecosystem.  That, in and of itself, is a good thing, both for the banks and for the consumer.  Complying with the regulations as they are currently being imposed is costing banks in the billions annually.  With interest rates near zero, that drain on the expense side of the ledger means that banks must recoup that cost through fees.  That's a direct impact on the consumer.  So that plank in the Republican platform, if properly and carefully implemented, would be a major benefit to the consumer.  It just has absolutely nothing to do with Glass-Steagall.

Tuesday, July 19, 2016

Factor Market Action, Sector and Industry Performance, and Time of Day Into Your Trade Entries

When listening to the pundits describe what happened today in "The Market," it's easy to come away with a misconception that there is such a single entity that can be so easily categorized.  That, unfortunately, is a very dangerous trap, especially for a beginning swing trader.  There are numerous factors that influence a stock price at any given time, and for those of us that are attempting to capitalize on short-term (typically less than a week) swings in prices, understanding those forces is most beneficial to the health of our trading accounts.

The Market

Dow Jones Industrial Average

When the evening news armchair pundits refer to "The Market," quite often they are simply talking about the Dow Jones Industrial Average.  What's misleading about this, however, is that it represents only 30 large-cap stocks, the performance of which result in a price-weighted composite value tracked in just about every daily newspaper in the nation.  At its inception in 1885, it was intended to represent Industrial stocks, however in recent years the stocks that make up the average now span a wide variety of industries including fast food (McDonalds,) consumer electronics (Apple,) or retail (Wal*Mart.)  While widely tracked, it's not the best indicator of market health for the swing trader.  Rather, there are several others that I watch much more closely:

S&P 500 Composite Index

As the name implies, the S&P 500 is a market-weighted index of 500 large-cap stocks that was designed to be a much better gauge of the risk/return characteristics of the large-cap universe as a whole. The movement of this index is typically far more indicative of the health and performance of the large cap stocks than is the Dow Industrial Average.

Nasdaq Composite Index

This index is a great one to watch if the stock you are trading is listed on that exchange.  The characteristics and performance of Nasdaq listed stocks are subtly different from those listed on the NYSE, and when you're engaged in short-term trading, subtle differences are often the edge you're looking for.

S&P 1500 Composite Index

This is an often overlooked Index, but I do follow it.  It includes all of the stocks in the S&P 500, 400, and 600 indices, and it covers 90% of the market capitalization of stocks.  If your stock is not one of the S&P 500, this index will provide a better view of the pressures influencing price than will that specific index.

NYSE Composite Index

For broad market depth, this one's the grand-daddy of them all.  It includes all of the stocks listed on the New York Stock Exchange, and is perhaps the best indicator of overall broad market performance.  If the stock you're trading is listed on the NYSE and is not a large-cap stock, this index will give you a much better feel for market pressures than will any of the other indices listed above.

Sectors and Industries

Stocks are categorized into 9 broad S&P sectors.  (Well, originally 10, but when the S&P created their SPDRs, they combined two of them.)  These sectors are
  • Materials (XLB)
  • Energy (XLE)
  • Financials (XLF)
  • Industrials (XLI)
  • Technology (XLK)
  • Consumer Staples (XLP)
  • Utilities (XLU)
  • Health Care (XLV)
  • Consumer Discretionary (XLY)
Each of those sectors is then sub-divided into industries.  For instance, there are 10 industries in the Materials sector, including such groups as "Paper", "Gold Mining", and "Aluminum."

Knowing which sector and industry to which your stock belongs is essential.  Alcoa, for instance, is in the Aluminum industry within the Materials sector.  This is important information since on a day-to-day basis, the performance of the industry and sector has a far greater impact on the price movement of the stock than does anything going on with the company itself, barring a major news release.  

Time of Day

Believe it or not, the time of day in which you enter a trade can have a significant influence on your prospects.  This is especially true for those of us that work full-time jobs and cannot watch the market unfold, carefully selecting our exact point of entry.  The trading day follows a rather natural rhythm, however, and you can plan for it.

9:30 to 10:00 - The half-hour following market open is extremely volatile and often chaotic.  There's no sense, yet, of the direction the market will take, and it's not uncommon for the market to reverse direction approaching that 10:00 hour before settling into where it wants to trade for the day.  I avoid opening new trades in the first half-hour of trading since it's been my experience that it increases my overall risk of a bad trade.

11:30 - The European market close occurs at 11:30 Eastern Time.  If there are major events going on in Europe, I'll keep an eye on market behavior starting around 11:15.  Quite often it can give you a feel for how the US markets will behave as we approach our own close.  I only avoid trading in this time-frame, though, if it's extremely hectic in Europe based on major news events.

12:00 to 14:00 - Many traders are taking lunch in this time-frame, and trade volumes tend to drop.  Since I'm not trading based on intraday patters, however, I tend to ignore that fact.  A day-trader needs to be aware of it, but since I'm holding positions for 1 to 5 days on average, I don't do anything special here.

15:30 to 16:00 - Volatility will start to increase again in this period as we approach the close.  I tend not to open new positions in this time-frame, both because of that volatility (although most of the volume occurs in the final five minutes) and because, if the trade didn't trigger earlier in the day, then the signal that generated that setup did not have the momentum I want to move it quickly enough and far enough to be profitable.  The longer I go without a fill, the more likely I am to cancel the trade, and my experience is that, for the strategies I trade, a fill this late in the day will likely result in a loss.

Putting it All Together

For the strategies I follow, and indeed for the strategies that comprise successful swing trading in general, we want the most factors moving in our favor as possible.  That means that, if I'm opening a new position, I want the following:
  • A strong setup signal with multiple confirming signals on the chart.  (The type setups I look for will be covered in another post.)
  • The broader market moving in the direction of our trade.  Which index I'll use for this when setting up the entry order will be one of the indices listed at the start of this post, based on the index in which this stock best fits.
  • The sector moving in the direction of our trade.
  • The industry moving in the direction of our trade.
  • The time of day being between 10:01 AM and 15:29 PM Eastern Time.
The trading platform I use allows me to setup all of those conditions when creating my order ticket, which is ideal since I work a full time job and can't manage the trade in real-time.  Quite often, this combination does not come together in time for an entry at the price specified.  That's fine.  There will always be another opportunity for another trade tomorrow.  Protecting capital is paramount, so there's no reason to enter a trade unless you've lined up as much as possible in your favor.  Give yourself that edge.  You can be certain that the person or computer on the other side of your trade is doing the same.

Happy Trading.

Monday, July 18, 2016

Home Builder Confidence Weaker; Supply Side Still an Issue

The National Association of Home Builders/Wells Fargo Housing Market Index missed consensus expectations by two points, slipping to 59 against the Bloomberg projection of 61.  The index had held steady at 58 for several months before leaping to 60 in June.  While an index above 50 shows that builders are optimistic about single-family housing, there are still some underlying issues in the industry that are keeping that optimism in check.

The ratio of new homes to resold homes has dropped to 1.2:1 from a high of 2:1 in the 1970s.  There are numerous factors involved, however as more and more homeowners exit an inverted status that resulted from the real estate crash, that ratio will likely drop even further.  Home sales and housing prices have increased dramatically in recent months due to the continued low interest rates.  This will increase pressure on the industry when rates finally start to normalize, although at this point we're likely looking at mid-2017 before there's any change of significance to the 30-year.

According to Ed Brady, chairman of the housing market trade group, “We are still hearing reports from our members of scattered softness in some markets, due largely to regulatory constraints and shortages of lots and labor.”

Supply side problems have been a consistent theme throughout 2016.  Fannie Mae Chief Economist Doug Duncan lamented in February, "The supply from the builder perspective is just not back to normal. It's up from last year, but it's still below what long-term demographics would suggest, particularly in the lower price points of housing."

Not all regions have fully recovered from the housing crisis, and underwater mortgages coupled with long foreclosure timelines continue to add pressure to the overall supply side of the equation.  With demand continuing to rise, housing prices will also continue to experience a steady increase.  That will aid homeowners still struggling from upside down mortgages, but it certainly will not assist new home builders.  Add the prospect of interest rate hikes in 2017 to the mix, and my expectation is a weakening of the overall Home Builders Index as 2016 progresses.

All of this is good news for the home improvement industry, of course.  Companies like Home Depot (NYSE:HD) and Lowes (NYSE:LOW) will continue to benefit as homeowners choose to maintain and refurbish their properties rather than trade up to new properties.

Housing Starts are released tomorrow at 8:30 AM EDT.  That report should paint a more complete picture since it deals with the actual start of construction as well as the actual number of new permits in flight.  Consensus estimates for Housing Starts is 1.170 million, up from 1.164 million, and for Housing Permits it's 1.150 million, up from 1.138 million.  It's important to note, though, that the rate of new permits has been weakening year over year, adding to the overall struggles in this industry.

Keep an eye on the performance of these three numbers (Housing Market Index, Housing Starts, Permits) over time.  They each have a direct impact on the overall performance of the stocks in the Home Improvement Retailers Industry.  While we, as short term traders, do not focus on the fundamentals, knowing the overall pressures on the stocks in a particular industry does give us that slight edge we need over the competition.

Happy Trading

Sunday, July 17, 2016

NASCAR's Attendance Wanes as Baton Is Passed to New Generation

Watching a NASCAR Sprint Cup race on TV paints a very grim picture.  The stands, even in the most hardcore raceways, are typically at least half-empty.  Races at Bristol (a track that once boasted 55-consecutive sell-outs) now struggle to fill half of the 160,000 capacity stadium.  Today's race at Loudon, NH was another prime example where it appeared that two out of every three seats was empty.  Faced with the negative publicity of declining attendance, NASCAR stopped publishing attendance records in 2012, so we'll never know the official totals.

Analysts have been searching for answers since the decline started in the 2008 recession, and when it comes to TV viewership and in-person track attendance, there's a lot of credence to what they are claiming.

  • Many of the familiar big-name drivers are no longer racing.  Certainly the semi-retirement of Wild Bill Elliott - a 16-time winner of the Most Popular Driver award - hurt viewership, as did last year's retirement of Jeff Gordon, another fan favorite.   Still, with the popularity of some of this year's rookies and the extremely high popularity of fan-favorite Danica Patrick, the changing of the racing guard is a minor part of the overall story.
  • Cost is often cited as the primary reason attendance is down, although the price of tickets isn't the actual problem.  The cost of travel to the oftentimes very remote track locations, and lodging in and around the tracks have skyrocketed.  Even the most die-hard fans have had enough and have significantly cut back on the number of races they attend.  That's not conjecture, it's based on fan surveys that reveal a consistent downward trend.
  • TV coverage has increasingly become three-hours of commercials interspersed with a few laps of racing.  In today's coverage on NBC, as a prime example, 3 of the cautions occurred while on a commercial.  The picture-in-picture NBC uses during commercials late in the race mitigates it some, however without audio you've really no idea why the caution came out or what drama is occurring on the track to cause it.  Commercial TV is rapidly becoming the bane of all sports, not just NASCAR, and the media that once vaulted professional sports to coveted positions will ultimately cause their downfall.
  • The average NASCAR fan is aging, and the Millennials are not embracing the sport in a traditional fashion.  By "traditional," we mean they are not interested in attending in person, nor are they interested in watching the sport on TV.  More on that later, however, as it doesn't tell the full story.
  • Ever-changing rules and equipment packages are driving away many of the hard-core fans.  Most - if not all - of the changes are coming via consultation with the drivers, but it would behoove NASCAR to remember that it's the fans, not the drivers, that pay for the sport.  If the fans don't like the changes, how thrilled the drivers may be with them is irrelevant.  A great example of that is the fiasco that was this year's All-Star race.  The format was designed primarily by Brad Keselowski, but required a degree in advanced statistical analysis to understand what was going to happen next.  The fans hated it, and the never bashful Tony Stewart vented his frustration with the format on national TV.
  • The at-track experience was changed to the detriment of the fans.  A single merchandise tent has replaced entire midways of souvenir haulers, and much of the pre-race entertainment such as the popular Sprint Experience and Fox's NASCAR Raceday TV stage have likewise been eliminated.
Clearly, NASCAR has some soul-searching to do, and with the contract with Sprint expiring this year, that soul-searching had best occur quickly.  NASCAR is hoping to make a sponsorship announcement this fall, although they've started circulating the thought that there might be multiple sponsors for 2017, not just one.  Attendance and TV ratings cannot be helping the negotiations any.

This brings us back to the Millennials.  Certainly, they are the future of any sport, not just NASCAR, which means a different form of engagement as well as different measurements for success are required.  As an example, Fox Sports 1 reported a 2.27 rating for adults over 50, beating even "Game of Thrones" for that demographic.  On the flip side, however, they only experienced a 0.71 rating for adults 18 to 49, which turns out to be a fourth place tie with "Keeping up with the Kardashians." 

That doesn't mean, however, that Millennials are not following the sport.  Thus far this year, they've had over 92 million fan engagements on sites like Twitter and Facebook.  They've also had over 2 billion social impressions, a measure of how many times specific content has been viewed.  NASCAR is also expanding the amount of streaming content live during a race, including options to dynamically switch to various in-car cameras throughout the race.  Options to stream content on mobile devices are now available and becoming widely accepted.

NASCAR is also trying to increase fan participation.  At a couple of events, for instance, they held a red carpet introduction for the drivers with fans - including a lot of kids - packed along the runway.  Drivers shook hands with the fans and tossed out souvenirs (typically hats or t-shirts) as they walked the carpet.  It's a great idea, and does wonders for promoting the sport with the younger generation.

The question remains, will it be enough?  Those empty seats are depressing for even the most ardent fan, and at the end of the day, sponsors want to know how much exposure they are getting for their rather expensive advertising dollars.  As the sport transitions from live attendance and TV viewership to a dynamic streaming experience, they also need to figure out how to do so in a manner that satisfies the sponsors.  Let's face it, without fans or sponsors, there is no sport.  NASCAR's day of reckoning may well be approaching.

Saturday, July 16, 2016

Consumer Staples Sector Continues Slow and Steady Growth Through 2016

There are four consistent destinations whenever the economy degrades and investors seek a "flight to safety."  Bonds typically lead the charge, and you can clearly see investor sentiment by watching the fluctuations in the 10-year bond yield.  When the yield drops, you know investors are fleeing stocks and heading for safety.

Gold is another commodity that tends to benefit from a downturn in the economy, although using it as a flight to safety is a bit precarious.  Despite some very misleading TV commercials by a former presidential candidate, gold is not the safe-haven that urban legend would lead us to believe, yet there is still some correlation to gold prices and overall investor sentiment.  It's not one I watch, however, since gold is influenced by numerous other factors beyond just investor sentiment.

Within the equity market, the Utilities Sector is a traditional safe-haven as well.  Known for higher than average dividend yields coupled with consumer demand regardless of the state of the economy (after all, you still need water, gas, and electricity even in a recession,) investor sentiment clearly drives the overall performance of this sector.  When investor sentiment declines, the Utilities Sector rises, and vice versa.

The fourth safe-haven is the subject of tonight's study, and that's the Consumer Staples sector.  The stocks that comprise this sector are those that produce and sell the products we use on a daily basis. Products such as tooth-paste, toilet paper, soft drinks, snacks, etc.  They're considered the items we cannot do without, and thus are not impacted to a great extent by a downturn in the economy.  The sector includes ten industries: Tobacco, Food Products, Nondurable Household Products, Personal Products, Distillers and Vintners, Soft Drinks, Brewers, Tires, Food Retailers and Wholesalers, and Drug Retailers.  Some of the stocks include big names like Wal*Mart (WMT), Altria (MO), and Philip Morris (PM).  Even when the economy turns south, they are names that do relatively well compared to the market as a whole.

What we have seen thus far in 2016 is a slow-and steady gain in the sector as a whole.  Here's the daily annotated chart, unadjusted for dividends.

Consumer Staples Unadjusted Daily Chart
Through all of 2016, the entire progress of the sector has been a slow and steady upward climb.  Even in the brief pullbacks in April and May, XLP (the S&P Consumer Staples SPDR) continued to make higher highs and higher lows.  The Great Brexit Panic on June 24th and 27th took the sector down a bit - still to a higher low - while the rest of the market sought the highest bridge from which to leap.  It's interesting to note that the low reached on June 27th found support at the lower boundary of the Andrews Pitchfork that has defined all of 2016.

Also of note is that, on June 30th with the market as a whole rebounding, XLP soared through the overhead resistance formed by the prior quarter's triple top.  Since then, despite growing consumer and investor confidence, the sector has continued to rise at a steady pace, neatly following the center line of that same Andrews Pitchfork.

The strong retail sales numbers released last week will provide an added stimulus to many of the stocks in this sector.  Industrial Production and Manufacturing also got a boost on Friday, rising to the highest level in 2016 (although it's been in negative territory since August 2015.)  When you consider both reports, the outlook is very positive for both Consumer Staples (which we must buy no matter what) and Consumer Discretionary (which only really benefits when the economy is doing very well and consumer sentiment is high.)

With the exuberance of the last week, XLP under-performed the S&P 500, which is to be expected.  Remember, it's a safe haven, not an aggressive growth sector, so as investor confidence grows, XLP begins to lag the market as a whole.  That lag, however, still provides excellent opportunities.  The sector as a whole shows a modest 2.86% dividend yield, and the Food, Beverage, and Tobacco industries have a 3.11% yield. (Tobacco leads that charge with a 4.0% dividend yield.) With the sector showing consistent steady growth, even when it is being ignored, the steady income and steady growth is a nice combination.

Keep an eye on both Consumer Staples and Utilities.  For those that wish to remain in equities during economic downturns, they typically provide the safest havens among the S&P sectors.  For traders, they often provide good, short-term swings, while for the longer term investor, they provide steady income with modest growth. 

You will find the details of each of the industries in the sector and all companies in each of the industries on's Consumer Staples Sector page.

Trading Outlook for the Week of July 18-22

Before we get into the week ahead, let me provide a brief overview of how my preparation progresses over each weekend.
  1. I start with an overview of the major indices.  These charts contain a 7-period Simple Moving Average, a 30-period Exponential Moving Average, and the 14-period Slow Stochastic %K line.  That's it.  The trading bias is based on this:
    • Long Only if SMA(7) > EMA(30) AND %K > 50.
    • Short Only if SMA(7) < EMA(30) AND %K < 50.
    • Any other combination, I'll either stay out of the market or stick to one or two day duration trades based on the direction the SMA(7) is headed.
  2. I maintain a chart in Excel that shows the weekly percentage change for the S&P 500 and each of the S&P sectors.  That chart is updated Saturday morning, and if my trading bias is long, I'll pick the 3 best performing sectors for the week.  If the trading bias is short, I'll pick the 3 worst performing sectors for the week.
  3. I will then run my various trading setup scans focusing on the sectors found in #2.  My scans primarily look for pullbacks of stocks that have been trending, or they look for stocks that are range-bound and nearing one of the range extremes.
  4. I then annotate the charts found in #3 and save them in my watch list.  The stocks I'll trade on Monday are selected Sunday night, although the actual orders will be placed before I leave for work on Monday after I've seen the movement of stocks in Asia and Europe and have also seen the direction US Market Futures are taking.  Since all of my trading is short-term, I want to be trading with the trend, and I want the market setting up to move in that same direction for the day. 
  5. #3 and #4 is repeated nightly, searching for the stocks to trade the following day.
 So with that in mind, let's take a look at the trading outlook for the week of July 18 to July 22.

Trading Bias

Dow Jones Industrial Average - LONG.
S&P 500 - LONG.
Russell 2000 - LONG.
NYSE All Issues - LONG.

In all four cases, however, the %K is at an extreme high position and as of Friday began trending down.  While the bias is long, due to the risk being called out by the %K, we'll keep our stops very tight.  Risk of a pullback in all four indices this week is near extreme.

Strongest Sectors

The three strongest sectors beating the S&P 500 for the week were:
  1. Materials Sector (XLB)
  2. Financial Sector (XLF)
  3. Industrial Sector (XLI)
Two other sectors beat the S&P 500 and we'd consider a trade there if the setup is strong.  Those are the Energy (XLE) and Technology (XLK) sectors.

Economic Reports of Significance (all times are EDT - GMT-4)

Monday, 7/18
  • 10:00 - Housing Market Index
  • 16:00 - Treasury International Capital
Tuesday, 7/19
  • 8:30 - Housing Starts
Wednesday, 7/20
  • 10:30 - EIA Petroleum Status Report
Thursday, 7/21
  • 8:30 - Jobless Claims
  • 8:30 - Philadelphia Fed Business Outlook Survey
  • 10:00 - Existing Home Sales
Friday, 7/22
  • 9:45 - PMI Manufacturing Index Flash
  • 13:00 - Baker Hughes Rig Count
Earnings Reports Watched for Sector or Market Significance

Thursday, 7/21
  • Before Market Open - Union Pacific (NYSE:UNP)
  • After Market Close - Schlumberger (NYSE:SLB)
Friday, 7/22
  • Before Market Open - General Electric (NYSE:GE)
  • Before Market Open - Honeywell (NYSE:HON)
  • Before Market Open - VF Corp (NYSE:VFC)

We'll start the week with a long bias, trading stocks in the Materials, Financial, and Industrial sectors primarily.  We'll keep our stops tight due to the extreme level of the Slow Stochastic indicator and will shift to a very short-term (one or two day) strategy if it drops below 50.  While there's interesting economic news at the beginning of the week, we'll be especially focused on Thursday and Friday with major market indicators being released and earnings releases from five of the key companies we follow for overall market and sector analysis.

Friday, July 15, 2016

June Retail Sales Add to Constently Good News This Month

The Commerce Department released the Retail Sales Report for June, and the estimate-beating increase continues to add to the increasingly good news coming out in each of this month's economic reports.  The combination of strong economic data, strong corporate earnings, and a lower forecast on interest rate hikes continues to drive the market indices to record highs.  Finally, it appears that the market is reacting to data, not hype.

Today's report underscored significant strength in each of the key areas:
  • Sales at retailers and restaurants rose 0.6%.
  • Sales year over year were up 2.7%, although when you subtract out automotive sales and auto parts, that year over year number becomes 0.7%.
  • Sales of building materials and gardening supplies were up 3.9%.
With the current earnings season ending its first week, the retail sales report is very good news as we await some of the major players to report over the next few weeks.  Yum Brands already lead the way in the restaurant industry, although their report was somewhat lackluster.  They beat on earnings by only $0.01 and missed on revenue by $90 million.  As we saw for the first five months of the year, though, the growth rate across the industry was extremely sluggish, only surging in the June numbers.  Underscoring that trend, Yum Brands increased their guidance for 2016 forecasting full-year core operating profit growth to be at least 14%, up from last year's 12%.  The retail numbers released this morning support that guidance.

In the Automotive industry, we use Ford (NYSE:F) as the bellwether.  They report before the open on the 28th.  We'll be watching the seasonably adjusted annual percentage rate of cars sold, which, if  the retail sales report is any indication, should be a decent quarter for the industry.  Also keep an eye on Magna International, (NYSE:MGA) a Canadian automotive parts supplier that does business worldwide.  Their earnings report typically provides a fantastic overview of the health of the industry across the globe.  Their earnings date has not yet been announced, but we expect it to be before the bell either August 5th or 8th.

The surge in building materials and gardening supplies should be excellent news for the large home improvement retailers like Lowes (NYSE:LOW) and Home Depot (NYSE:HD).  They report August 17th pre-market and August 16th pre-market respectively. 

In addition to the specific stock projections we can glean from these numbers, there is also the signal that consumer confidence is on the rise.  That boost in spending should translate into a healthy nudge for the GDP, and with interest rates remaining low, we should also see an increase in corporate capital expenses and a corresponding increase in hiring.  All-in-all, it was a very positive report, and it bodes well for the overall health of the current rally. 

Thursday, July 14, 2016

MOS Breaks Upward Out of Descending Triangle But Warning Signs Abound

We started tracking Mosaic Co. (NYSE:MOS) for a potential breakout on June 19th.  The stock finally pierced the pattern with an upward breakout yesterday (7/13) that continued with strength today.  You'll note from the chart that there were two other false starts (also upward) on June 7th and again on June 23rd.  Neither of them were a valid signal, however, since both immediately fell back into the pattern the following day.  Yesterday was the third penetration of the trend-line and, since there was strong follow-through today, this appears to be the valid break-out.

MOS Breaks Upward From Descending Triangle
Despite having followed this pattern for close to a month, I'm going to sit this one out.  There are some warning signs on the chart that suggest that there's possibly very little room to the upside.  Here's why:

  • The standard "measure rule" in a descending triangle offers a profit target of the height of the triangle measured from the breakout point.  That would give us a target of $33.38 with a stop at $24.39 (just below the bottom of the pattern.)  Our entry would be $28.68, just above today's high.  Now, an aggressive trader could place a stop around $26.99, which lowers the risk, but when I count 6 unique touches of that bottom trend-line, I'd be concerned that a pullback would easily take out that aggressive stop. 
  • That brings us to the reward vs risk ratio.  The conservative stop only gives us a ratio of 1.08:1. The aggressive stop is much better with a ratio of 2.76:1, however as I said, I'm very concerned about the probability of that stop being taken out prematurely.  The 1.08:1 ratio is a non-starter.  The number of winning trades needed at that level are much higher than even a professional trader can consistently achieve.
  • The profit target assumes we hit 100% of the estimate.  That only occurs about 60% of the time, however, for a descending triangle breakout.  A more realistic target would be $31.17 which is the 61.8% Fibonacci extension of the height of the triangle.  That brings our ratio down to 0.57:1.  There's also a weak resistance line at that level based on the high of the triangle.  That increases the probability that we'd never hit the 100% estimate.
  • Today's candle forms a double-top with an almost identical candle that formed June 23rd.  In both cases, the price stalled at the 23.6% Fibonacci extension.  A double top is a bearish pattern that, in this case, has a price target of $20.53.  That, coincidentally enough, meets the 61.8% Fibonacci extension of a downward breakout from the triangle.
  • The real killer for this trade, however, is an extremely strong resistance line at $26.91.  That coincides with the 38.2% extension, and it's formed by a low on October 2, 2015, passes through the highs of the triangle pattern, and halted an advance on April 21, 2016 as well as June 7, 2016.  It's a very strong area of resistance and, in all likelihood, the current breakout will stall at that level.
We'll keep MOS on our watch list, despite the fact that we're not taking the trade that setup yesterday.  The reason is that, if it does reverse and fall back into the pattern, there's a much higher probability that it will penetrate the support line at the base of the triangle and then resume the down-trend that has plagued this stock in stages since early 2011.

The other potential short that we will watch for is a break back into the pattern.  At that point, if the market is similarly retracing, we can enter short and ride it at least to the bottom of the pattern, if not beyond.  The way the overall stock market is surging this week, however, we'd only enter that play if the market itself pulls back and begins a downward retrace.

Remember, always stalk your trade.  We're under no pressure to enter a position ahead of its time, and when we do commit capital we always want to do so when the odds are stacked in our favor.  The moment those odds turn against us, the smart play is to revert to cash.  When it comes to MOS, that's precisely what we will do.  Cash is a position, and in this case, we believe it's the right one.

Bank of England Holds Rates Steady; Signals August Stimulus

Despite market estimates of an 80% chance for a rate cut today, the Bank of England held rates steady at 0.5%.  With new Prime Minister Theresa May signaling a slow and cautious path towards Brexit and also signaling an invocation of Article 50 no earlier than 2017, the central bank's delay in lowering interest rates makes sense. 

Only 2 1/2 weeks have passed since the Brexit vote, and that is an insufficient amount of time to gather enough data to make an informed projection on the economic climate for the next six to twelve months.  The MPC (Monetary Policy Committee) next meets on August 4th, giving them additional time to gauge the reaction and potential impact.

Additionally, despite the immediate reaction worldwide on June 24 and 27, markets in the UK and around the world have since stabilized and, in fact, rebounded significantly.  In the Forex market, the British Pound did indeed take a significant hit against both the Euro and the US Dollar, however the currencies have since stabilized albeit at the lower levels experienced immediately following the vote.

Given the slight trade imbalance the UK currently experiences, that overall drop in the Pound is actually very good for their exports.  It provides an immediate boost to UK-based corporations and, in that context, is a nice stimulus without the Central Bank taking any actions at all.  Coupled with that, initial fears that companies would seek to relocate out of the UK have since abated.  To that point, JP Morgan Chase CEO Jamie Dimon specified in today's earnings call that he had no intention of leaving the UK despite rumors to that effect on June 24th.  Following the initial shock of the vote, we now see other companies taking a step away from the ledge, realizing that the new dynamic offers tremendous opportunity, not peril.

What the Bank of England has done by standing pat is afforded themselves some options later in the year should the British economy weaken to the point where a stimulus in the form of a rate cut becomes necessary.  Lowering that key rate today would have left the Central Bank with no room left to move as the UK approaches what will certainly be a period of uncertainty after they invoke Article 50.  Remember, the BoE already provided a significant stimulus on July 5th when they eased capital requirements for commercial banks, effectively providing a £150 Billion short-term stimulus.

The change in capital requirements on 5 July was seen as a direct attempt to prevent a repeat of the 2008 crisis in which banks ceased lending.  Whether or not that move is sufficient only time will tell, however as of today the signal is that the MPC is thus far satisfied with the short-term results.

Today's decision underscores a strengthening in the overall financial stability of the UK and stands in stark contrast to some dire warnings issued by Governor of the Bank of England Mark Carney just a week ago: “The number of vulnerable households could increase due to a tougher economic outlook and a potential tightening of credit conditions. In particular there is growing evidence that uncertainty about the referendum has delayed major economic decisions, such as business investment, construction and housing market activity.  The UK has entered a period of uncertainty and significant economic adjustment."  The wording is particularly harsh coming from such a prominent member.

There's no word as to what measures the Committee are considering in August, however according to officials there was significant discussion of it in today's meeting: “Most members of the committee expect monetary policy to be loosened in August.  The committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee’s updated forecast, and their composition will take account of any interactions with the financial system.”

The August 4th meeting comes only a week after the US Federal Opens Markets Committee (FOMC) meets.  Fed Chair Janet Yellen typically addresses the economic environment in Europe and the UK in her post-meeting announcement, so it will be worth listening to that release for clues as to any action the Bank of England may feel necessary.  Given the interrelationships between the various central banks and the global impact each of their decisions have, it would be a mistake to focus only on the MPC for guidance as to what the future economic environment may entail.

Also of interest is the next European Central Bank (ECB) meeting, scheduled for 21 July.  Again, listening to Mario Draghi's perspective will add further insight.  It's likely that, between the ECB and FOMC, we should have a fair idea of the direction the Bank of England may take on August 4th.

Happy Trading.

Wednesday, July 13, 2016

Intuit In Strong Uptrend But Wait for Pullback

Intuit (NASDAQ:INTU), the small business financial services provider that is better known to consumers as the maker of Quicken and TurboTax has been in a protracted uptrend since August 25, 2015. The better part of 2016 has been spent in Wave 3 of the 5-wave impulse, although all signs point to the stock reaching the end of that wave in the short term.

INTU Daily Chart
When Intuit reported their Fiscal Q3 earnings on May 24th, they posted a very strong beat by $0.22 per share.  Equally important, they raised guidance for the remainder of the year.  With news that Intuit had little to no European and British exposure, however, the stock surged following the Brexit crush in late June.  Since June 27th, in fact, today's 0.36% decline is the only down day they've experienced.

Turning to the Elliott Wave analysis, the stock appears to be nearing the end of Wave 3.  There have been 5 well-defined sub-waves, and as of today Wave 3 has exceeded the height of Wave 1.  With declining volume and declining daily ranges, the stage is set for a pullback that will mark Wave 4.  Now, here it's important to remember the "alternation rule."  Wave 2 and Wave 4 must be alternates either in duration or depth.  Since Wave 2 retraced over 65% of Wave 1 in a correction that lasted 3 months, it's likely that Wave 4 will be a flat correction that is relatively short.  Wave 4 corrections tend to stall at the top of the last sub-wave iv, and in this case that would be less than the 38.2% correction line and would land around $109.  There is also a pretty strong support line at that level, which adds to the probability of a shallow reversal.

Wave 3 could have some life remaining, but it's not likely given that the stock has gone vertical in the past two weeks.  The separation between the low and the 10-day simple moving average is a major warning sign.  It's extremely likely that, as part of the next move, INTU will pull back not only to the 10-day SMA, but likely as far as the 30-day EMA (Exponential Moving Average) or even the 50-day.  A bullish reversal candle - preferably a long range day that closes near the high and leaves a lengthy shadow down to the low - near the 30 or 50-day averages would be our cue to enter a long position. 

INTU went ex-dividend on July 8, and paid $0.30 per share, so we don't expect another dividend risk until early October.  Be aware, however, that INTU releases their FQ4 earnings on August 18th after the close.  We may still be in the midst of Wave 4 at that point, so watch for the earnings release to be the potential catalyst that launches the stock into Wave 5.  The price targets for Wave 5 range from $126 to $137, assuming Wave 4 completes around $109.  With Wave 5 being a 5-wave impulse itself, there will be several opportunities to hop in and out of INTU while that wave progresses.

One note of caution is in order for those not familiar with Elliott Waves but who are reading these reviews. Wave analysis is intended to tell us where we are in either a trend or a correction.  Understanding the wave counts is a great example of 20:20 hindsight.  They are great at telling us where we have been.  In and of themselves, Elliott Waves do not give us good entry signals, however, because the waves are not necessarily predictive in nature.  They do conform rather consistently to certain Fibonacci ratios, and from there we can set price targets, however there's a huge difference between a projected target (used for analysis) and where a stock will reverse in reality.  For valid entry and exit points, we must rely on other chart analysis techniques (e.g. support and resistance lines, candle patterns, moving averages, etc.)  We use the Elliott Waves to define where the stock is in the overall accumulation and distribution life-cycle, but we use other signals to determine when to enter or exit a position. Hopefully, that concept becomes increasingly clear as we review additional trading techniques.

Happy Trading.

Fed Continues to Signal Patience on Interest Rates

Two of the Federal Reserve presidents that sit on the Federal Open Markets Committee (FOMC) had appearances scheduled this morning.  These one-off speeches are followed by traders, however it's important to bear in mind that they represent the views of the individual voting (or non-voting, in some cases) member and do not represent the FOMC as a whole.  What's more important is following any change in tone respective to the individual.

Dallas Fed President Robert Kaplan confirmed what was reported a couple of days ago related to growth, and said he expects the GDP to continue in the 2% range for the year.  He expressed the view that this growth rate is very slow, and considers boosting growth to be the most important economic issue we are currently facing.  Without going into details, he said that doing so would require some structural changes that are outside of the mandate afforded the Federal Reserve.  That would appear to be a not-so-veiled nudge to Congress related to trade and growth stimuli.

Providing a brief glimpse into the thinking of FOMC as a whole, Kaplan also stated that the Federal Reserve is "very sensitive" to the strength of the US Dollar.  Indeed, this one statement is the best signal we have that interest rates will remain low for the foreseeable future since any rise in rates would further strengthen the dollar to the detriment of US exports and to the earnings of US companies with heavy overseas exposure.  Until the entire Brexit issue is resolved and we start to understand the new dynamic in Europe, it's unlikely that the US dollar will weaken.

Meanwhile, Minneapolis Fed President Neel Kashkari spoke at a Town Hall meeting in Marquette, Michigan.  He directly addressed interest rates, saying, "We feel like we can be patient to let the economy continue to heal before we start moving aggressively to raise rates. We should take our time when we go ahead and start raising rates again. There's not a huge urgency to raise rates because inflation is coming up low."

His wording suggests that he's expressing the views of FOMC, not just his own, and it's consistent with what we've been hearing from the other Fed Presidents over the last couple of weeks.  It's interesting to note Kashkari's focus on inflation, compared to Kaplan's focus on the strength of the dollar.  By definition, a monetary "Hawk" is primarily interested in maintaining inflation at the Fed's mandated 2% target.  A "Dove" by contrast, is focused primarily on unemployment (and other non-inflationary factors) with an interest in maintaining unemployment under 5%.

Kashkari is a newcomer to FOMC, replacing the extremely dovish Narayana Kocherlakota in November, 2015. It's important to note that Minneapolis (and thus, Kashkari) will not be a FOMC voting member until 2017.  Still, hearing Kashkari take a hawkish position focused on inflation gives us some insight into where he will fall in the economic spectrum next year.  (The categorizations of hawks favoring interest rate hikes and doves favoring holding rates low are not accurate categorizations of the terms.)

While Kashkari is currently siding with the doves regarding keeping interest rates low, he also stated that he sees moderate growth ahead.  Whether that's above the 2% cited by Kaplan is unknown, but few would consider that level to be "moderate growth."  He made it a point of saying that he does not foresee a recession and does not believe the Fed will have to ease monetary policy.  (Following the dismal job numbers from May and a decline in the GDP in that period, there was some discussion of lowering interest rates or even introducing a new round of Qualitative Easing, although the June numbers have pushed those thoughts to the background again.  Kashkari clearly rejects the notion of either.)

FOMC holds their next meeting the 26th and 27th of July, with their next announcement scheduled for 2:00 PM on the 27th.  The futures market shows a 0% chance of an interest rate hike in either July or August, and only a 12% chance of a rate hike in either September, October, or November.  The odds of a rate hike jump to 30% in December, however that's more of an indication that anything can happen over the next five months.  We now have some analysts projecting the next rate hike as late as June, 2017.

For short-term traders, it does mean that we will not have artificial volatility over the next couple of months based on interest rate speculation.  It also means that dividend players will have very limited exposure going into 2017.  (Remember, higher interest rates put selling pressure on lower-yield stocks.)  We'll be interested in the FOMC release more as a gauge of what pressures the Fed sees over the next quarter both here and abroad, however at least in the July meeting we don't anticipate any signal that interest rate talk will heat up any time soon.