"There is only one sort of discipline, perfect discipline." -- Gen. George S. Patton, Jr.
In The Weeds
The question on everyone's mind this morning remains tech sector performance. Scanning foreign markets and Nasdaq futures, the space still feels a little heavy in the wee hours. And as TheStreet points out, tech giant Apple (AAPL) did catch a downgrade on Sunday evening.
Will these names reach levels where traders are comfortable reloading? Well, I doubt that Friday was a one-time event. Take a look at a chart of the Nasdaq Power Shares ETF (QQQ) . Make sure you leave the volume bars visible. See that? Especially later in the day, even mid-afternoon? The selling became more ferocious, as "buy the dip-ers" showed up. That's very interesting. This is also indicative of definitive intent. Definitive what? You'll see. My guess is that if this sector-wide selloff does not illustrate the start of a correction, it will at least illustrate the start of a period of sustained increased volatility. How do you trade around that?
Think of yourself as a sharpshooter. In the weeds, waiting. Waiting for your target (desired security) to wander into your perfectly aligned sight picture (entry point). Exhale. Squeeze slowly. Yesssss!!! "Don't break discipline just because you do not get your price". You often get more than one chance in this league.
You have done your homework. Believe in it. Stay patient. If the tech space does bounce from here, honestly that would leave many of us mildly under-exposed after last week. If you are in a similar position, you may want to line the book with bids at your levels. Do not leave yourself without protection in the event of an algorithmic spasm. Algorithms are much faster than we are. We cannot match that. We can still be smarter than they are. Know thy enemy.
Of even equal concern, I think today will be the performance of the previously unloved groups. That's right, financials, energy and the small caps. If tech prices continue to erode, does the money continue to flow into these areas, as it did late last week? Maybe the negative sentiment becomes too much? A broad correction would unleash the "Ugly Stick". We all hate that guy. This depends on several factors coming from different angles, such as the yield curve for the financials, crude prices, and the U.S. dollar for energy as much as technicals, and all of this for the small caps, not to mention held out hope for wonders such as tax reform.
Speaking of oil, crude prices took a 5% hickey last Wednesday in the wake of that surprise inventory build that broke a string of eight consecutive weekly draws. Expand the picture, and you'll quickly see that WTI crude is nearly 10% lower in less than a month, and nearly 20% lower year to date. The Energy sector ETF (XLE) is down almost 12% over the same timeframe, leaving many individual stocks trading where they were when oil was trading much lower than it is right now. OPEC, and other major producers such as Russia, may extend their cuts and freezes all they want. It just may not matter.
New technologies have allowed U.S. shale producers to pump more efficiently than ever before, and for many of them to do so profitably even as WTI trades here in the mid $40s per barrel. As proof, the number of U.S. oil rigs in operation has increased for an astounding 21 consecutive weeks. U.S. producers are something like the "honey badger". It is said that many can still break even at prices into the high $30s per barrel. Most have stuck to production plans devised prior to the start of the year. What does this mean to us? WTI has seemed to stabilize in the $46 area, at least for now. Already long some equity names, I had thought that $44 would be the place to start swinging the bat.
Price War. If nobody blinks, meaning if the crowd in the Permian keeps going, if OPEC breaks ranks, and if Rosneft defends its turf, then there could still be a major panic-driven selloff in the future of this commodity. I see the major level as $42.75, depending on dollar valuations. With a well understood ceiling on the commodity somewhere between $50 and $53 a barrel, the space becomes if not investible, then trade-able.
Gold also found itself getting smacked around last week. The yellow metal hit the weekend on a three-day losing streak. Yet, gold is still close enough to levels where this commodity likely either hits profound resistance, or accelerates to the upside. Now that the political risk of Director Comey's interview has passed and the results of the election in the U.K. have also passed into history, the primary input here will be two-fold.
First, dollar valuations will fluctuate in the near term. Not only does the FOMC get on its horse this Wednesday, but we'll also hear from the Bank of England coming off of that election and going into the Bexit negotiations. Oh, Dixie. By Friday, the Bank of Japan chimes in.
Secondly, equity markets are a little nervous as we begin this week. These two items will likely be like cross currents, as the Fed will probably end up looking something like a salmon swimming upstream. The BOE at least will have to, and the BOJ will likely choose to sound dovish. The level that gets my attention to the downside is in the $1255 area. That spot cracks and you can give up another $30. To the upside, you have some room to levels just above $1300 and then $1320. After that, you could be off to the races. For the short-term trader, this is going to be about Janet Yellen's press conference on Wednesday afternoon. For the mid-to-long-term investor, this really depends on how much you trust the Fed to be able to carry on with the trajectory of its intent on policy past this imminent rate hike.
13:00 - 10-Year Note Auction: Treasury plans to auction of $20 billion worth of 10-years this afternoon. This could be interesting, coming just two days prior to an FOMC policy decision and on the heels of some minor volatility in the yields space as last week went out. On May 10, the last similar auction, Treasury sold more ($23 billion worth of 10-year paper) of this stuff at a bid to cover of 2.33 and at an awarded yield of 2.4%. The bid to cover was the weakest in this space this year, as indirect bidders (foreign accounts) took down 60.7% of the issue, which is on the light side. This morning, the 10-year is giving up.
14:00 - Federal Budget Statement (May): Expecting a deficit of $-109 billion, April $182 billion. May is almost always a negative balance month, coming just one month after the revenue influx that results from the tax deadline. Those looking for a silver lining might note that this negative balance has printed smaller than expectations for three consecutive Junes coming into today's number. This item will not impact the markets upon its release, though it certainly does matter to all markets going forward.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500 and the Russell 2000 might either pause or turn.
SPX: 2457, 2447, 2439, 2428, 2419, 2410
RUT: 1441, 1433, 1426, 1420, 1412, 1403
Today's Earnings Highlights (Consensus EPS Expectations)
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