Weekend Profit Navigator June 7

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Tickers discussed: SPY QQQ IWM $NYMO $NAMO TLT GLD

The Weekend Profit Navigator provides a big picture stock market analysis for the week just past with a look ahead. Key levels and trading locations for the indexes are provided, along with trading plans and timely commentary to keep you on the right side of the trade.

Trader’s Couch

Over the past months, we’ve talked about maintaining flexibility of thought and positioning as we navigate markets. This fits in well with the adaptability Steenbarger talks about. As we head into the summer promises lots of cross-currents and turbulence.  Remaining flexible will be paramount over the summer. Don’t get tied to a particular mantra or thesis. It can and likely will turn on a dime.

Earnings

Earnings season continues to wind down, but still some notable names report this week. COUP, SFIX, CHWY, ADBE, LULU, PVH

Cross Currents

I see many complicated cross currents in front of us as we enter the summer months. Here are some of the ones I see.

  • Summer trading Volumes: Slow or higher than normal? Typically summer brings lower trading volumes, but conversely online brokers have signed up over 3M new, eager retail traders in the past couple of months. If true FOMO sets in we could have a more active summer trading season than normal. Then again the new Robinhooders have not had a scare yet. Are these guys weak handed longs?  FOMO works in reverse too.
  • Bond Yields higher or lower?   Bonds have sold off the past week or so. Coupled with that, the Treasury is coming to market with massive supply this week. Will yields continue to spike and drive bonds lower ( equity bullish ) or will bids come back as Q2 GDP is set to plunge to Great Depression levels.
  • Employment. Fake data or real deal?  Friday’s employment data was a shocker and the market took it at face value. But did the BLS data accurately reflect millions of people on the PPP program that is set to roll off in early July? Are we set up for a wicked double dip in unemployment as the service economy realizes it is not profitable at 25-50% capacity?
  • Big FOMC Meeting this week. Does Project Zimbabwe roll on or does fiscal / monetary stimulus dry up?   If employment is getting better and with markets rockin, will there be an incentive to extend PPP, add new fiscal stimulus, or have the FOMC continue to rapidly expand the FOMC balance sheet that has essentially doubled in 1 year?  If stimulus dries up or even slows down can the market and / or real economy withstand the reduction in liquidity?
  • Political Season ramp.   There will be an election in Nov 2020. The political season will ramp over the summer.  President Trump has always used the market like a poker player with a mountain of chips.  Plenty of opportunity to turn the screws on China / Hong Kong to cement his position as toughest on China. If the market drops 5-10% so what, we’re at the highs.
  • George Floyd Protests.  Ramp or Fade?   As bad as it was, I think the passing of Mr. Floyd was just the spark. Lots of political, racial, and economic discontent out there. We could be in for a 1968 type summer of discontent as we head toward the election and with Covid fall out still bubbling. Fun Fact: The top 0.1% of people have more wealth than the bottom 90% combined.  That has got to piss a lot of people off. Once the tables turn and the masses feel the game is rigged to the point they cannot participate or benefit in the economy, the pitchforks and guns come out.  Not a prediction, just observing that there are a lot of catalysts out there that are creating a toxic brew.
  • Re-opening. Smooth sailing or set-up for a double dip?   Yes, re-openings will continue, but will there be a re-infection spike or an economic realization that the demand just isnt there to support a 100% V-recovery? 
  • Cyclicals, Defensives, or Technology?     You want to go FAAMG, ride the dash for trash wave, or get defensive?  I mean $HTZ has filed for BK and went from 60c to $2.75 in 2 days. Disgraced fraud company $LK went from $2 to $6. Other cyclicals are rocking.  Could FAAMG fade while folks pile into the junk or does FAAMG re-emerge?

That should be enough to keep you thinking. But here’s a strategy to handle this hopelessly tangled ball of yarn.  Trade like a 5th grader. Buy support, sell resistance. If a 5th grader can’t understand or execute the strategy, it’s too complicated.  If price takes out an all-time high, you’ve got the whole world of support below. Buy strength where ever it may be. Set a stop below and honor it.  Many cyclical names are heading into the teeth of resistance. If they break through, the rotation rolls on, if they are rejected then there may be consolidation or reversal emerging.  Watch price, trust price.  FOMO can run this market much higher than we think possible.

The Oscillators – Is it different this time?

NYMO is running very hot at 99 and NAMO  is quickly catching up at 55 and pushing toward overbought 60 level.  Past experiences color our views. Through my years of trading I have fought both oversold and overbought NYMO / NAMO readings. I have never won.  This is a physics rubber band problem. How far can we pull the rubber band before it either unwinds or breaks?  One or the other WILL HAPPEN. Yes, I still have some longs but I cut about 1/2 or more of my exposure Friday and raised stops / spread strikes  on the positions I still have on.  IMO this is not the time to blindly be at MAX long exposure.  Participate with a high degree of caution.

PUT – CALL Ratio at Extremes

Although my extreme-o-meter seems to call bottoms better than tops, the FOMO call buying has gotten extreme and obscene. No respect for risk at all. Another yellow flag waving atthe top of the flag pole.

Stocks over 50 dma peaking

The chart shows percentage of stocks over their 50 day moving average. We’ve gone from historic lows 8 weeks ago to historic highs. Unless you think we are going to 100%, history tells us this is coming down. May not be this week, but its coming down.

Pulling it together

Collectively, these indicators are flashing caution.  Given a little time, I can find bullish indicators such as broadening participation as the rotation into cyclicals takes hold. The point here is to be cautious. It’s not different this time. These over-extended indicators will drop back. It may be gradual or violent. Don’t be caught wrong-footed with max long exposure. If you’re an active trader, get caught wrong-footed with a modest amount of longs w/ defined risk and tight stops. We can re-assess and / or re-load on a pull back after these hot indicators relax. If FOMO persists, we can still participate with  a modest long book while continuing to ratchet up stops and strikes

Charts in Focus

$WTIC  approaching an inflection point

So 3 weeks ago the turmoil led the oil market forward contracts to negative territory. Now we’re at $39.50. So where do we go from here? From the chart we’ve got a confluence of 3 resistance levels. There’s a gap to fill, the 200ema and lateral resistance all converging at / near $42. This has big implications as the energy sector has been a big beneficiary of this recent run and rotation into cyclicals. I can’t predict the future but I do know resistance is resistance until / unless broken. Watch closely this week for a flash to $42 where I’d expect at least a hesitation or consolidation. If you see a big rejection, be careful with energy longs. If price blasts through $42 and holds above, it will be a nice tailwind to the energy trade.

Bonds break down

So disappointed in myself here. Was watching, watching, watching; had my alarms set, saw the alarm on the breakdown, but did not take the trade. As they say, he who hesitates is lost.  Anyways, what’s done is done. Where do we go from here. As mentioned earlier, there is a massive bond auction this week. That may drive yields higher and prices lower if traders see inflation coming.  $153 looks like a key level. Below $153 sets up a 200ema test at $149 and possibly $146 if that does not hold. Could be setting up for a good buy-the dip opportunity.

$GLD  Gold breaks down as well

Gold is in a bull market but again, my track record on this asset class has not been very good. I was looking for a breakout, but the equity ramp killed the rally. Now price is testing the low side of its consolidation box. A break below $158 gets the ball rolling downhill toward the targets shown.  The indicators are bearish and favor lower prices. Bulls need to step in here to “save it” at key support.

Index Charts

$SPX Broadening Top

The annotations capture the main points. The one thing I did not point out is the NYMO in the bottom panel …pushing 100.

$SPY Daily

$QQQ Daily

$IWM Daily

 

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