You can read the blog and see the charts here: https://www.brtechnicals.com/preparing-for-all-scenarios-the-technical-portfolio-november-2018/
The Investment Climate
It has been a wild ride in the stock market these past couple of months. While history usually points to a wild October, a wild November is surprising many investors. The challenge for me is trying to determine if this is the top, or if this is another correction.
I have been looking for a top since the peak in January. When stocks corrected earlier this year, my prediction was that we have basically seen the top, and if prices were to make new highs, they wouldn’t be much higher. So far, that prediction has remained accurate.
The challenge now is determining whether the stock market is predicting a recession, or if it is just being jumpy because the economy is not as strong as many thought it would be, heading into 2019. The downward guidance from company earnings and outlooks has been a problem for the markets.
This quarter we are seeing stocks drop after releasing earnings, even if they beat investor expectations. The trouble comes from future expectations. Many companies are predicting slower growth over the next few quarters, causing the stock to sell off.
This is an interesting situation for the markets. Investors are beginning to wonder if weaker growth is an early sign of a recession. After 10 years, we are getting late into this economic cycle and 2019 is going to be a tough year for the economy.
The trade war with China is going to ramp up with increased tariffs, and the effect from the tax cuts is going to wear off. In addition, international stock market performance is pointing to a global economic slowdown.
Investors have largely brushed off the trade war, because the effects have not hit the U.S. yet. In fact, the trade deficit has increased this year because Chinese importers are front-running tariffs by importing as many goods as they can, before the 25% tariffs go into affect. The U.S. has benefited from this, and tax cuts, but these economic booms are going to stop in 2019.
In fact, the trade war may grow to more countries and goods. President Trump is still looking to put autos on the tariff list, as he continues to look for a “national security” reason that will allow him to impose tariffs on vehicles and auto parts. The economy is going to struggle as these downward pressures weigh on growth.
When you look at the economy in this context, it really isn’t a mystery why the stock market is struggling. We haven’t even mentioned rising interest rates and lower liquidity in the economy.
The risks are starting to swing to the downside. I still believe the best case scenario is that the major indices stay in a range, while the worse case scenario is a bear market.
November's Stocks to Watch
In this environment, we are looking for opportunities in ETFs. These are diversified investment vehicles, and in theory, they should be less volatile than individual stocks.
There are three entry trades I am looking for. First, my gut tells me there is another drop before stocks find a bottom, if they do. So, I am looking for ETFs that can hit a bottom, and rally off of it.
However, it is possible stocks move up for a last ditch rally, without falling to supports. In this case, I am looking for strong breakouts.
Lastly, I want to prepared in case the indices look like they are going to enter a bear market. If key supports are broken, I will look to buy positions in inverse ETFs. These are designed to go up when the underlying index goes down.
QQQ - PowerShares QQQ Trust
If stocks are going to recover, this index will likely need to lead the market higher. This tech heavy index looks like it is in a symmetrical triangle, which is normally a continuation pattern. This means it is more likely to fall towards $152.50 than go to $177.50.
If stocks are going to have one more spike higher, it is likely to start at $152.50. However, if we see QQQ meaningfully fall below $152.50, we will buy PSQ, an ETF that bets QQQ will keep falling.
KBE - SPDR KBW Bank
This bank ETF has not had a great year, but it does have two solid trend lines we can try to take advantage of. I think the index is more likely to fall to $40, so if it hits it, we will enter with a target to $45.50.
Of course, it is possible that the index hits $47 first, so we want to be prepared in the event that it does. This ETF is more value oriented, which could give it an edge in this environment.
XPH - SPDR S&P Pharmaceuticals
If we see a downturn in the economy, pharmaceuticals may be a good play. These companies have the benefit of being needed regardless of economic conditions. People still need medicine in a recession. We will be looking to enter at the $36.85 support, or a breakout above the $46.50 resistance.
XLV - Health Care SPDR
Like pharmaceuticals, healthcare is a sector that does not necessarily rely on the economy. People still need a doctor when they are sick or hurt, and they still need insurance. The 200-day moving average acted as a support in the prior drop, but if it fails, we would look to enter at the $79.50 support.
XLK - Technology Select Sector SPDR
If technology is going to make a comeback, the $60 support is where it will likely start. By the time the ETF hits this level, valuations would have become very cheap, and if investors believe the economy can persist a little longer, then this is a great spot to enter. However, this would be a 20% drop from the highs, so it may be risky to try and enter right at the cusp of a bear market.
SH - PROSHARES TR/SHORT S&P 500
This is an inverse ETF of the S&P 500. If the ETF can hit our entry point past $31, then the stock market is likely to enter into a bear market. This is a resistance caused by the February lows. Past that, there doesn’t seem to be many options for another support for the S&P 500, or resistance for SH.
Conclusion
I am very skeptical of the current market environment. U.S. stocks remain volatile, and have wild intraday swings. Trade is big issue, and its really a toss up on whether Trump and China can come up with a deal before Trump increases tariffs to 25%.
At the same time, company forecasts are showing slower growth than investors originally expected. At best, stocks are likely to remain within a range. At worst, we could see a bear market.
Because of this our watch list consists of ETFs, with multiple entry points. In addition, we have added inverse ETFs to our watch list, in case stocks enter a bear market. We are prepared for three different scenarios.
First, if stocks continue higher from here. Second, if stocks fall, but find a support and rebound. And third, if stocks enter a bear market.
Submitted November 20, 2018 at 10:04AM by BR-Technicals https://ift.tt/2QbqTDh
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