Trading Outlook for the Week of August 15-19

Markets are still showing strength as we head into mid-August.  The Nasdaq shows amazing strength, riding its 7-day moving average as a very strong support line.  The Nasdaq composite has not closed below it's 7-day since June 28th, and has only dipped below it intraday four times in that period.

Surprisingly, given the strength of the Nasdaq, the Technology sector has rotated into neutral territory.  The leaders last week were Energy, Consumer Staples, and Consumer Discretionary.  Utilities rotated up to neutral, and that coincides with a slight drop in the 10-year Treasury yield. 

The probability of an interest rate hike on September 21 has declined to just 9%.  A December 14 rate hike, however, is still at 40.6%.  With the CPI being announced Tuesday, however, those probabilities could change dramatically.  The current consensus is for CPI to be unchanged for July.  That would be the weakest result in 3-years, and it's the primary reason expectations for a September hike are near zero.  Excluding food and energy, the index is expected to rise 0.2%, which is a healthy rate, however it's likely not enough to move the Fed.

All market capitalizations are still indicating long positions, so that's the way we'll play it this week.  Earnings season is winding down, and we only have Home Depot and Deere on our watch list for this week.  We'll also be paying attention to Wednesday's release of the FOMC minutes.  That release does have a tendency to move the market, however please keep in mind that it's month old data.  Market reactions to the minutes tend to be short lived.  Still, for those of us that swing trade, it's important to be aware of the potential for movement Wednesday afternoon.

Finally, this is Options Expiration week, so watch for some volatility on high volume this Friday.

Here's a summary of the week ahead.

Trading Bias 

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

Sectors

Showing strength
XLE - Energy
XLP - Consumer Staples
XLY - Consumer Discretionary

Showing weakness
XLB - Materials
XLF - Financials
XLV - Health Care

Neutral
XLK - Technology
XLU - Utilities
XLI -  Industrials

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

Monday, 8/15/16

• 08:30 - Empire State Manufacturing Survey
• 10:00 - Housing Market Index
• 16:00 - Treasury International Capital
  

Tuesday, 8/16/16

• 08:30 - Consumer Price Index
• 08:30 - Housing Starts
• 09:15 - Industrial Production

Wednesday, 8/17/16

• 10:30 - EIA Petroleum Status Report
• 14:00 - FOMC Minutes

Thursday, 8/18/16

• 08:30 - Jobless Claims
• 08:30 - Philadelphia Fed Business Outlook

Friday, 8/19/16

• 16:00  - August Monthly Options Expiration

Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/16/16

• Before Market Open - Home Depot (NYSE:HD)

Friday, 8/19/16

•  Before Market Open - Deer (NYSE:DE)

Summary

Our bias remains long, and we will pay closer attention to Nasdaq stocks.  I'm still wary of Energy, however if there's a promising setup with a short-term (1-3 day) projected move, I'll take it.  Given the volatility of that sector over the last 18-months, though, I'm reluctant to play anything with a longer forecast.  Watch for continued signs of consolidation in the Tech sector, and watch sector rotation carefully for some hidden gems that may be on the upswing.  Sectors across the board are staying firmly above their 7-day moving averages, and the Slow Stochastic indicator remains above 50 in all capitalizations, so we are only considering long positions at this time.

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.

Trading Outlook for the Week of August 8-12

A jobs report that far exceeded expectations saved what had promised to be a down week in all indexes.  Instead, all sectors except Utilities finished higher, with technology leading an extremely robust surge.  The flight from utilities matched a similar flight from the 10-Year Treasury which saw a 5.3% increase in yield on Friday.  Both of these moves signal a renewed confidence in the health of the US economy, although it's prudent to remember that nothing is more whimsical than the confidence level of the average equities trader.

The Technologies sector - and with it, the Nasdaq - continues to shine.  A note of caution is in order there, since it is now trading well above its 20-day moving average.  Be aware that a consolidation will likely follow such a strong upward charge that is now over 6-weeks running.

We're seeing some healthy sector rotation playing out with Financials joining Technology at the head of the class while Health Care and Industrials have slid into neutral territory.  We'll keep an eye on Consumer Staples late in the week since the all-important Retail Sales number will be released on Friday.  Energy, of course, continues to show weakness in the face of continued depressed oil prices.

Thursday and Friday are the big days when it comes to economic news.  We'll be especially interested in the Import/Export numbers in light of the growing strength of the dollar against the British Pound and the Euro.  The Retail Sales and Consumer Confidence numbers will shape our strategy heading into the weekend.

Here's a summary of the week ahead.

Trading Bias 

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

Sectors

Showing strength
XLK - Technology
XLF - Financials

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

Neutral

XLV - Health Care
XLI -  Industrials

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

Monday, 8/8/16

• No reports of market significance
  

Tuesday, 8/9/16

• 08:30 - Productivity and Costs

Wednesday, 8/10/16

• 10:00 - JOLTS
• 10:30 - EIA Petroleum Status Report
• 14:00 - Treasury Budget

Thursday, 8/11/16

• 08:30 - Jobless Claims
• 08:30 - Import and Export Prices

Friday, 8/12/16

• 08:30 - Retail Sales
• 08:30 - PPI-FD
• 10:00 - Business Inventories 
• 10:00 - Consumer Sentiment

Earnings Reports Watched for Sector or Market Significance

Tuesday, 8/9/16

• After Market Close - Disney (NYSE:DIS)

Summary

Our bias remains long, and we will pay closer attention to Nasdaq stocks and Financial stocks.  With the sector strengthening, there may be some good dividend plays that also show short-term growth.  Watch for signs of consolidation in the Tech sector, and watch sector rotation carefully for some hidden gems that may be on the upswing.  Sectors across the board are staying firmly above their 7-day moving averages, and the Slow Stochastic indicator remains above 50 in all capitalizations, so we are only considering long positions at this time.

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.

BoE Cuts Rates, Adds to QE

The UK's Monetary Policy Committee today announced their first interest rate cut in seven years, lowering the benchmark rate to a record low of 0.25%.  The rate cut came as no surprise to markets worldwide, and the MPC vote was 9-0 in favor of the cuts.  What did surprise some, however, was a £170 Billion stimulus that will be introduced via the purchase of Gilts (UK government backed bonds similar to US Treasury Bonds), the purchase of corporate bonds, and a new bank lending program.  That portion of the stimulus package was not expected to coincide with the interest rate cuts.

The FTSE responded positively to the news, finishing the day up 1.56% although the Pound dropped 1.5% versus the US Dollar and 1.3% versus the Euro.  US markets responded with a yawn, finishing the day flat.  The US 10-Year Treasury Yield, however, dropped 2.58% to 1.51.

BoE Governor Mark Carney sounded a pessimistic note in his presentation, stating, “We took these steps because the economic outlook has changed markedly.  Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows."  That's a bit troubling, given the lengthy duration anticipated for the actual Brexit events to unfold.  With the benchmark rate now down to an extreme low, there is very little additional room for the BoE to maneuver should the British economy slow further.

Surprisingly, the MPC signaled the potential for a further rate cut, although Carney assured reporters that the central bank had no intention of bringing rates into negative territory.  That they would consider - and even signal - that rates could drop to near zero, however, indicates the level of concern the committee has over the economic prospects during the Brexit transition.

The fallout from the Brexit vote has manifested more slowly than critics had forecast, but - at least in the UK - it is starting to be felt.  Consumer Confidence is dropping dramatically, and the industrial outlook is starting to decline as well.  The forecast for the UK GDP is now down to 0.8% for 2017, and the Central Bank foresees a strong decline in corporate investment and in the housing markets.  The Pound's weakness is certainly hurting UK imports, and that is having a marked effect on growth potential over the next 18 months.  That import price pressure is expected to have an impact on inflation in 2017, with the central bank forecasting inflation to hit their 2% target in the fourth quarter of 2017 and exceed it throughout 2018.

What all this signals is a period of weakness, uncertainty, and potential market instability in the UK that will likely last through 2018.  With the ECB taking a bit of a "wait and see" attitude mingled with a healthy dose of skepticism a couple of weeks ago, the likelihood of continental fallout is extremely high.  US 10-Year Treasury yields have declined steadily since December, 2015, and are now sitting at the lows last seen in August, 2012.  That represents a significant flight to safety, and with US equities sitting near all-time highs, it's reasonable to conclude that the heavy demand on US treasury bonds is coming from overseas.

There is a limit to how long the US can remain immune to economic weakness in the UK and the EU.  The strong US dollar is having a severe impact on US exports, and that, in turn has a serious impact on US companies that are heavily exposed to Europe.  This is evident in the behavior of the S&P 500 where demand has fallen off over the past few weeks, and the market has gone essentially flat since it reached a record high in mid-July.  With GDP growth down dramatically in Europe, the UK, and the US, prospects for a global recession are mounting as we transition from a tumultuous US presidential election to the uncertainty of a prolonged Brexit negotiation and execution.

Earnings season in the US is almost over, and there is not another FOMC announcement before September 21.  So now we turn our attention to tomorrow's jobs report.  The pattern in the market right now is not encouraging, so the key economic reports over the next few business days may well set the tone for the remainder of August. 

Happy Trading