Traditionally Hawkish Loretta Mester Signals "Stay the Course"

Cleveland Fed President Loretta Mester, in speaking to the Dayton Area Chamber of Commerce this morning, signaled a "stay the course" attitude regarding the Fed's current interest rate policy.  Her speech follows a week of extremely turbulent price action in the markets, raising speculation that volatility in the DOW would influence the Fed's pace of interest rate hikes through the remainder of the year.

The market has currently priced in three interest rate hikes for 2018, and sentiment shows a 77.5% chance of a 25 bps increase following the March 21 FOMC meeting.  Mester, one of the hawkish members of FOMC, said today that she supports a rate increase pace similar to what the Fed pursued in 2017 when they raised interest rates three times over the course of the year. 

Mester dismissed the current market action as little more than the normal correction one would expect after the explosive run-up in stock prices experienced over the past year.  “For now," she said,  "I expect the economy will work through this episode of market turbulence and I have not changed my outlook. In my view, the underlying fundamentals supporting the economy are very sound.”

 Historically, Mester has supported an aggressive interest rate policy, citing fears of a run-up of inflation should the Fed not raise rates quickly enough.  While she expects inflation to rise at an increasing rate, she does not foresee a need to increase the rate at which the Fed raises rates.  It's noteworthy that her remarks come a day before the February release of the closely watched CPI numbers.  Tomorrow's numbers should be a strong signal both for inflation's rate of change and for the aggressiveness the Fed is likely to take for the remainder of 2018.

The consensus for tomorrow's CPI release, according to Econoday is as follows:

	Prior	Consensus	Consensus Range
CPI - M/M change	0.1 %	0.3 %	0.3 % to 0.4 %
CPI - Y/Y change	2.1 %	2.0 %	1.9 % to 2.3 %
CPI less food & energy- M/M change	0.3 %	0.2 %	0.1 % to 0.3 %
CPI less food & energy - Y/Y change	1.8 %	1.7 %	1.7 % to 2.0 %

Numbers that come in stronger that the consensus will add pressure to an already jittery market since it will increase speculation that the Fed will add a fourth rate increase into 2018.  That fourth increase is not currently factored into prices.

Mester also addressed the impact the 2018 tax cuts may have on the economy as a whole.  In her view, she expects the cuts to add between a quarter and a half of a percent to economic growth.  This, she expects, will support an inflationary rate just above the Fed's target of 2.0%.  It should also, in her view, support continued hiring in the private sector.  That will spur an increase in wage growth, the primary factor driving inflation.  (Wage growth in January increase 0.3% over December, and is showing an already strong annual 2.9% hourly rate.)

Scott Anderson, chief economist at Bank of the West in San Francisco, doesn't share the view that inflationary growth is under control.  “The acceleration in average hourly earnings growth punches a hole in the narrative that wage growth remains lackluster.  The Goldilocks view of inflation is being sorely challenged right now.”

Wednesday and Thursday provide a series of economic releases that will signal Fed's direction.  Definitely watch tomorrow's CPI release.  If there's surprise to the upside, expect the market to react negatively in anticipation of a more aggressive interest rate schedule.  But it doesn't end with the CPI.  Watch these releases tomorrow and Thursday for a more complete picture:

• Wed - 8:30 AM - CPI
• Wed - 8:30 AM - Retail Sales
• Thu - 8:30 AM - Jobless Claims
• Thu - 8:30 AM - Philadelphia Fed Business Outlook Survey
• Thu - 8:30 AM - PPI FD
• Thu - 9:15 AM - Industrial Production

 We share Mester's view that the fundamentals of the economy remain strong.  The question, however, is "how strong."  By market open on Thursday, we should have a good idea as to whether the economy is too strong or if it's proceeding at a healthy pace.

Happy Trading.

ADP Employment Report Will Set Stage for Friday's Job's Report

The Automatic Data Processing / Moody's Analytics Employment Report will be released at 08:15 EST tomorrow, 4 January 2017.  Following today's exceptional ISM Manufacturing report, tomorrow's ADP report coupled with Friday's Employment Situation report take on added significance.  The ISM report raised the probability of an early interest rate hike, thus increasing the significance of the monthly jobs data.

There are two mandates under which the Federal Open Markets Committee (FOMC) must operate.  First, they must strive to maintain a rate of inflation at the 2% level, and second, they must maintain the U-3 unemployment percentage below 5%.  The primary lever used by the FOMC to influence inflation and unemployment is the target range for the Fed Funds interest rate, currently set to a range of 0.50% to 0.75%.

One of the principle drivers of inflation is wage growth.  Since inflation currently sits at 1.7% and sloping upward, FOMC will scrutinize the rate of wage growth that is reported in the two employment reports issues this week.  Wages are directly impacted by the employment situation (they are, after all, a classic supply and demand function,) which is another reason the Jobs Report is so closely monitored. 

The key statistic being watched in tomorrow's release is ADP's employment estimate for December, 2016.  The consensus estimate is for 172,000 jobs being added in December, down from the 216,000 added in November, and well off the 306,000 added a year ago.

ADP Employment Change through November 2016

This is another situation where good news (i.e. a stronger than consensus release) may be bad news (i.e. the market declines on the news.)  A strong number would signal that Friday's Employment Situation report will come in stronger than expected.  That puts added upward pressure on wages, and as a result, it increases the potential rate of inflation. 

US Inflation Rate through November 2016

We'll have to wait until Wednesday, January 18 for the December 2016 inflation rate to be announced.  As we can see from the chart through November, however, inflation is definitely on the upswing, and given the current rate of growth, we'll be knocking on that 2.0% rate by the end of the first quarter of 2017.

It normally takes about six months for a change in monetary policy to be reflected in the key economic indicators.  When FOMC raised rates in December, they did so anticipating the rate of inflation and unemployment in the June 2017 time-frame.  The challenge before the committee now is to anticipate what impact that rate increase is having, if any, and then determine when the next increase is best served such that economic growth is maintained, but is not allowed to accelerate out of control.  It's a bit of a balancing act, since moving to much too soon will force the economy into a contraction, and that's not at all the objective.

Pay attention to tomorrow's number, but realize that the more meaningful report is issued Friday.  We're using tomorrow's number as the gauge to determine how close the current consensus estimates for Friday will be to the actual release. What matters to us as traders is how the market may adjust to these numbers in the short term.  Multiple strong releases will pull the next interest rate hike closer to the March or May FOMC meetings, and that will require market adjustment.  That adjustment, of course, creates prime trading opportunities since we'll want to catch those short-term moves.

Happy Trading.

ISM Report Shows Accellerating Growth

The US economy experienced its 91st consecutive month of growth according to the Institute for Supply Management (ISM.)  The Manufacturing Index surged to 54.74 as compared to the consensus expectations of 53.8.  The report also indicated that 11 of the 18 manufacturing industries are experiencing growth.  Listed in order, they are:

1. Petroleum and Coal Products
2. Primary Metals
3. Miscellaneous Manufacturing
4. Food, Beverage, and Tobacco Products
5. Apparel, Leather, and Allied Products
6. Paper Products
7. Machinery
8. Electrical Equipment
9. Appliances and Components
10. Computer and Electronic Products
11. Fabricated Metal Products 

The 6 manufacturing industries that reported a decline are:

1. Plastics and Rubber Products
2. Furniture and Related Products
3. Printing and Related Support Activities
4. Textile Mills
5. Nonmetalic Mineral Products
6. Transportation Equipment

The following chart published by the Institute for Supply Management details the status of each area covered by their monthly survey.

December 2016 ISM Report on Business

What is specifically notable is the rate of change listed for prices as well as the rate of change listed for the overall economy.  The ISM's observation that both are growing at a faster will increase the pressure on FOMC to raise interest rates earlier in 2017 than previously anticipated.  Indeed, the Fed Funds Futures are now factoring in the following probabilities that interest rates will be above the current .50% to .75% range:

• 15 March 2017 = 29.5%
• 03 May 2017 = 39.8%
• 14 June 2017 = 74.5%

Given the exceptionally strong report issued today, Thursday's Jobless Claims and Friday's Employment Situation reports will be closely monitored by FOMC.  Traders will need to monitor this as well, since the probability of interest rate hikes will be factored into equity and bond prices well in advance of each Fed meeting.

Also, as we head into the first earnings season of the new year, be aware of those industries that are reporting expansion versus contraction.  This level of growth (or decline) will manifest in both the earnings releases and the forward guidance for impacted companies.  Watch for potential price reactions as the market digests today's in anticipation of those earnings releases. 

Happy Trading.

ISM Index Release Will Provide First Glimpse into Earnings Season

The major economic data releases are relatively light in the first week of the new year.  Of the major releases that we follow, only six of them are on tap this week:

• Tuesday 10:00 - ISM Manufacturing Index
• Wednesday 14:00 - FOMC Minutes
• Thursday 08:30 - Jobless Claims
• Thursday 11:00 - EIA Petroleum Status Report
• Friday 08:30 - Employment Situation (AKA the "Jobs Report")
• Friday 08:30 - International Trade

Heading into the next round of earnings releases, starting on Monday, 9 January when Alcoa (NYSE: AA) reports before the open, we'll pay special attention to Tuesday's ISM Manufacturing Index.  This key release offers insight into whether manufacturing (and the economy as a whole) is growing or declining. To interpret the index, keep in mind these key levels:

Readings above 50 indicate that manufacturing and the overall economy are expanding.  It also indicates that the GDP (Gross Domestic Product) is also growing at a steady pace.

Readings below 50 but above 42.5 indicate that manufacturing is declining, however the GDP is continuing to grow, albeit slowly.

Readings below 42.5 indicate that both manufacturing and the GDP are in decline.  (Remember that the definition of a recession is two consecutive quarters of negative GDP growth.)

The ISM data being released tomorrow is for the month of December, 2016.  Consensus estimates for tomorrow's release is a reading of 53.8.  That follows a prior release of 53.2, so the consensus is for modest growth in both manufacturing and the economy as a whole.

ISM Manufacturing Index Histogram

The index is well off it's Third-Quarter 2014 highs, however since bottoming in January 2016 manufacturing and the GDP have demonstrated modest growth.  This trend is expected to continue in tomorrow's release.

The implications of a surprise away from the consensus estimates may well be in play through the entire earnings season this quarter.  Since it shows the health of manufacturing, a weaker than expected report will imply that earnings in general, especially for the industrial and transportation related industries may similarly disappoint.  Equities in general could retreat following a weak announcement.  On the flip side, the bond market will rally on the indication that the economy is weaker than perceived, and bond yields will retreat.

If, on the other hand, the index reports higher than consensus estimates, we may see some mixed results. The market is currently anticipating a June 2017 interest rate increase. March only shows a 20% chance of an increase, and May only shows a 29% chance. June, on the other hand, is at 47% - nearly 50:50, and the dates beyond June start to reflect the interest rate that will follow the next move.

If the Manufacturing Index is higher than the consensus estimate, this may incent the FOMC to increase interest rates in either the March or May meeting, and in anticipation of that, we may see equities retreat despite the positive economic data.  That will be especially true for companies with a high reliance on debt in their operating model, and will also be true for lower-yielding dividend stocks since the higher interest rates go, the more attractive bonds become for that level of income.  Bonds, on the other hand, will decline and their yields will increase.

Of course, the size of an Index surprise to the upside will determine whether equities advance or retreat.  Coming in at or just a point above consensus will not be taken as bad news for equities.  Several points above, however, the the support that provides to the more hawkish FOMC members will almost certainly be factored into market pricing.

When the Index is released at 10:00 AM EST (15:00 GMT) tomorrow, consider what it signals for corporate earnings, most of which are already in the books and awaiting release, and what it signals for potential shifts in the FOMC monetary policy posture.  This is one of the indicators that may generate tradeable setups, so pay close attention to what it portends.

Happy Trading.

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.

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

Sectors

Showing strength
XLK - Technology
XLV - Health Care

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

Neutral
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)

Summary

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.

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

Sectors

Showing strength
XLK - Technology

XLU - Utilities
XLV - Health Care

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

Neutral
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)

Summary

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.

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)

Summary

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.