Weekend Strategy Review September 9, 2018

Posted by OMS  at September 9th, 2018

Most of my signals remain mixed this weekend after Friday’s Jobs Report.

The Dow finished down 79 points, closing at 25,917.  The large cap index was only down 48 points for the week.  On the other hand, technology stocks on the NASDAQ got clobbered, losing another 20 points on Friday which caused the index to be down a whopping 207 points for the week.  The week was especially hard on the so called ‘FANG’ stocks which got hit hard again on Friday.  The decline caused the VTI-volume indicator on the NASDAQ to move from Neutral to a Sell Signal.

Students should note that ‘aggressive’ Technology Sector has been noticeably missing from the Strong Sector List for weeks as money continues to flow into the more ‘defensive’ sectors like Household Products Goods, PharmaBio, and FoodDrug.  Clorox was up another 1.02 on Friday while stocks like Google (GOOG) were down over 6 bucks.  Again, it pay$ to be in the strongest sectors.

This weekend, I want to look at the U.S. markets from a global perspective.  Last week’s currency crisis in Turkey, Argentina and India wasn’t in the headlines this week, but the declines in European and Emerging equity markets continued.  These markets are on weekly (long-term) Sell Signals from my VTI-volume indicator.  On Tuesday, EWC, the ETF for Canada, joined the weekly Sell List.  These markets all have long term chart patterns that project significantly lower prices.  For example, now that the German DAX has generated a long -term Sell Signal, we need to be concerned that it could drop from current levels near 11,960 to below the 4,000 level.  This decline could happen within the next 2-3 years.  Same for Canada’s TSX which at 16,000, could get cut in half.  And these patterns in Europe, Emerging Markets and now Canada are not alone.  I’m seeing these same patterns develop in markets all over the world.  The Ending Diagonal on the Australian SPASZ200 projects a decline from current levels near 6,150 to below the 4,000.  BTW, EWA, the ETF for Australia, is now also on a weekly Sell Signal.  The pattern on EWA suggests a decline from current levels near 21.5 to below 15.

What I’m trying to tell you with all this is that while the U.S. markets are still mostly positive, the rest of the world is in trouble.  Big trouble!  This week we continued to see money (scared money) flow from these international markets into U.S. ‘defensive’ stocks.  Students should note that this ‘scared’ money is NOT flowing into the large cap technology stocks anymore.  For the past few months, it has been moving into household stocks like Clorox, Kimberly Clark (KMB), and Proctor & Gamble (PG).  But the real question is “How much longer will this continue?”  This past week, the volume portion of the VTI-volume indicator turned negative on KMB and PG, so almost any large down move next week could turn the momentum portion of the indicator (the VTI) to turn negative, generating a Sell Signal in these two key stocks in the Household Products Sector.  BTW, Friday’s decline caused the Household Products Sector to fall out of the Top 5 Sectors where it’s been for the past three months.  So now we need to re-think where all this money will go.

Well, IF the run in Household Products is almost over, we need to look at the other top sectors on the List:  FoodDrug and PharmaBio. The VTI-volume indicator on both sectors remains EXTREMELY strong, so I would expect international money and money from the large institutions to continue to flow into stocks in these sectors.  Stocks like CVS and Costco (COST), both of which were up big on Friday.  BTW, students should look at a long term charts of these stocks, remembering that the FoodDrug Sector has been at the top of the Strong Sector List for months.  Months!!!  Once again, the list told us where to be.

Same for the PharmaBio Sector which has also been at the top of the Strong List for months.  Students should look at the charts of AMGN, BMY, MRK, JNJ and others in the PharmaBio sector from the Member’s Watch List.

Again, when I see a sector move to the top of the Strong List, I select stocks or ETFs in that sector from the Member’s Watch List or the Dean’s List.  That’s all I do.

One of the things I’m watching now, given that I’m on a VTI-volume Buy Signal for crude oil, is stocks in the Energy Sector.  Right now, the Energy Sector is still on the Weak List, and DUG is on the Dean’s List, so I’m not too excited about energy in general.  But I am interested in the refiners. The reason is because as the price of crude oil moves up, the refiners are the companies that benefit the most.  Here’s why:

U.S. drillers have been producing about 10 million barrels of crude oil every day. The U.S is now the largest crude oil producer in the world! By the end of the year, U.S. production should exceed 10.8 million barrels a day. This could grow to 11.8 million barrels a day by the end of 2019.  That’s a lot of oil!

But the pipeline system in the U.S. can’t move it fast enough.  So, while the price of Brent crude has been increasing, the price of West Texas crude has remained relatively flat.  The difference is currently about $8-9 per barrel.  Flat prices and an $8-9 difference between heavy Brent and light crude should result in significantly higher profits for the Texas refiners.

The refiners I’m currently watching are Valero (VLO), Marathon (MRO), and HollyFrontier (HFC).  As most of you know, VLO and MRO have been my go-to favorites in the past whenever I looked to trade the refiners.  But I added Holly to the Member’s Watch List recently because I like its fundamentals and the fact that it is uniquely positioned to take advantage of all that light crude coming out of the Permian Basin (West Texas).  The VTI-volume indicator on the refiners mentioned is still neutral to negative, so I’ve been holding off buying.  But IF the indicator turns positive, I’ll let you know.  I’m really looking forward to this trade. 

Given the Sell Signals in world markets, and developing Ending Diagonal Patterns in U.S. markets, we need to be extremely cautious with our trades going forward.  Right now, I’m limiting my trades to stocks in the strongest sectors.  The Top5 sectors are currently FoodDrugs, PharmaBio, Telecoms, Transportation, and Insurance.  Students should note again that the Household Products Sector has dropped out of the Top5.  The Weakest Sectors are Energy, Food, Media, Computers and Utilities.  The Sector Ratio remains at 18-6 positive, but like I said on Friday, the RS values of the strong sectors is very weak.  The Ratio could easily change if the market starts to decline early next week.

Gold remains on a Neutral Signal, but now that the Dollar (UUP) has re-appeared at the bottom of the Dean’s List, I can’t get too excited about gold.  I continue to hold my ‘trial’ positions.

Have a great weekend.

That’s what I’m doing,

h 

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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.