Weekend Strategy Review July 29, 2018

Posted by OMS  at July 29th, 2018

The markets had a mixed week.  The Dow was down 76 points on Friday, closing at 25,451.  It was up 393 points for the week.  The tech heavy NASDAQ was down 115 points on Friday, and down 83 points for the week.  The SPX was down 19 points on Friday, but up 17 for the week.  So, it was a mixed week. 

Last week in my WSR, I mentioned my concern about overseas markets, and how they could start to impact U.S. equities.  Nothing has changed; the patterns on in Europe, especially Germany and France continue to look weak, but the VTI-volume indicators on their ETFs are still positive. If they start to turn negative, I’ll let you know.  BTW, the ETFs for Germany (EWG), France (EWQ), Sweden (EWD), and China (FXI) are back on the Dean’s List after falling off last week.  It appears the trade agreement that was announced this past week had a positive impact on European stocks, giving them a temporary reprieve.  Let’s see how long it will last.  At the end of the day, it’s usually the negative patterns that win. 

Last week, I talked about exercising caution with your trades.  The reason was because we simply didn’t know the extent to which the tariffs that President Trump talked about would be applied.  I said “Are they for real?  Are they a tactic for negotiations? Or are they being applied for other purposes.”  So now we know.  Even calling the EU an enemy appeared to be a negotiating tactic.  Three days after President Trump said this, the Europeans caved and agreed to a deal on autos, natural gas and soybeans.  It’s a start.  But students should recognize that removing tariffs on autos and importing more soybeans is easy.  Getting natural gas to Europe is a lot harder problem.  I lived in Southern Maryland, where one of the largest natural gas ports in the country exists.  I saw these ‘floating bombs’ they call ships load gas and the security measures needed to protect each vessel. Heck, they used every Coast Guard and police boat available. They effectively closed the entire Bay!  I’m sure that our gas will eventually find its way to European ports, but a lot of things will have to happen with infrastructure and improved security before it gets there.  In the meantime, I wouldn’t bet on a lot of demand from Europe.  The chart patterns suggest the European markets are getting ready for a major decline.  And a decline in equities usually means recession /depression is around the corner.  In a recessionary environment, the infrastructure improvements required to import natural gas will have to wait, disappointing a lot of investors.  Be careful with European stocks now.  They appear to be tracing out the final stages of their Bull Market.

This past week, I talked a lot about how tech stocks on the NASDAQ appeared to be weakening, even as the Dow continues to push higher.  I first noticed this on 20 July, when the volume portion of my combination VTI-volume indicator turned negative.  Four days later, Facebook (FB) crashed.  Then yesterday, Intel (INTC) dropped 4.48 points to 47.68 from a negative Hockey Stick pattern.  Yesterday’s decline in tech caused the volume portion of the VTI-volume indicator on QQQ, the tracking ETF for the NASDAQ-100, to turn negative. The VTI portion of the indicator is still positive, so overall the indicator remains neutral.  But IF the VTI turns negative next week, it would generate a Sell Signal.  Last Wednesday, I said the NASDAQ Comp wouldn’t be going anywhere with a declining volume indicator.  Since I made the comment, the Comp has dropped 194 points!  Perhaps I should have said, the index is not going up with the volume position of my VTI-volume indicator being negative.  So, let me be clearer this time.  IF the VTI portion of my combination VTI-volume indicator on the NASDAQ turns negative, generating a Sell Signal, the NASDAQ is going down.  In other words, be careful with your tech stocks.

There were no changes to the Sector Ratio after Friday’s session.  The ratio remains at 18-6 positive.  As long as the Sector Ration remains positive, it’s likely that prices on the indexes will continue to push higher.  It’s when the ratio starts to turn negative when I’ll begin to worry.  Not now.

The Strong List continues to be dominated by defensive sectors.  Technology is noticeably lacking.  It should be leading the market higher. It’s not. The top Sectors on the Strong List are Transportation, PharmaBio, Consumer Products, Food Drugs, Retail and Insurance.  Cap Goods, Computers, Financials, and Banks are still on the Strong List near the bottom.  In other words, the market is moving higher on mostly defensive issues. Can it push higher with this kind of leadership?  Sure.  But if interest rates continue to rise and Europe starts to decline, a lot of the money in these ‘defensive’ issues will start to move elsewhere, creating opportunities in other markets.

That’s why I continue to watch for a change in market leadership.  I’m also watching bonds and gold.  Right now, with UDN on the Dean’s List, it’s telling me that the Dollar is starting to weaken.  Normally, this would be a good thing for cap equipment stocks like Boeing (BA) and Caterpillar (CAT).  But CAT has fallen below its 50 and 200 moving average and is struggling to get above the ‘Ropes’ again.  The stock will be interesting to watch next week, because the Bollinger Bands have narrowed suggesting a Big Move is coming.  IF CAT starts to move higher from its tight bands, it could cause the Cap Goods sector to move up on the Strong Sector List.  Now that would be something!  If money starts to leave the ‘defensive’ issues and starts to flow into Cap Goods, this market, especially the Dow, is going a lot higher.  I still believe the Dow will re-test the January high of 26,600+, perhaps even the 28,000 level before Major Wave 5 is complete.  IF it does, it will do it on the backs on Cap Goods, Financials, Computers, Banks and a few others.  But right now, it doesn’t appear that technology stocks, especially the large cap FANG stocks, will participate.  BTW, the volume portion of my VTI-volume indicator on Apple (AAPL) just turned negative.  If it generates a Sell Signal next week, I’ll let you know.

The Weak Sector List continues to be led by Autos, Household Products, Energy, Leisure, and Materials.  I continue to avoid these sectors.

Gold and the miners rose slightly on Friday.  My combination VTI-volume indicator for GLD and SLV remains on a Sell Signal. However, with UDN now back on the Dean’s List, we need to keep an eye on the VTI-volume indicator to see if it generates a Buy Signal.  Students should remember that whenever UDN is on the Dean’s List, the environment is EXTREMELY positive for gold.  So, with gold looking like its forming a bottoming pattern, I’m just waiting the Buy Signal.  Be patient and wait for the signal.

That’s what I’m doing,

h

Market Signals for

07-30-2018

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