Interest rates continue to test investor psyche

Markets started higher on Friday but struggled t close in positive territory as only two sectors in the S&P 500 index closed in the green. We continue to see volatility intraday as buyers and sellers duke it out over direction. There are arguments from both sides as to who is right relative to the direction. The media is in the middle stirring the pot as they dish out news of the good, the bad, and the ugly. The bond yields finally held steady on the day closing out the week at 1.46% on the ten-year bond. The spike to 1.6% early Thursday caused a response from the stock markets, but the fear subsided some on Friday. Not a great week for stocks as the markets did see a net outflow of money. Time for homework as we dig to see what opportunities are arising from the news-driven week.

Short news notes of interest…

  • House Democrats passed the Biden $1.9 trillion dollar inflation bill. There are too many issues to mention with the bill. The minimum wage portion failed to pass which would have required a federal $15 per hour minimum wage. Watching how the Senate deals with the bill as it is expected to pass based on some political juggling to get around the 60% majority usually needed.
  • February is in the books for the market and next week starts the economic parade. The jobs report will be closely watched. The data will be the last without the current stimulus in place and give a good benchmark for future reports.
  • Plenty of action, activity, and speculation in the bond market. With yields spiking to a high of 1.614% on the ten-year bond investors felt how important a control interest rate market is to stocks. The bigger concern is if investors start to believe the Fed is losing control of the bond market or more importantly interest rates. That could send a fear factor into stocks which would in turn push stocks lower. Definitely on our watch list going forward.
  • Johnson and Johnson got unanimous approval from the FDA for the emergency distribution of their Covid vaccine. 20 million could be delivered by the end of March. Interesting that the stock dropped 2.6% on the news.
  • SEC suspended trading in multiple securities because of questionable trading and social media activity. The halt is part of an ongoing effort to protect the investor from the pump and dump scams. This has all been building from the recent Reddit social media site and others over GameStop. This could get interesting moving forward. Buyer beware is a big issue with the internet.

Sector Rotation and the S&P 500 Index:

The S&P 500 index closed down 18.2 points to 3811. It was down 0.48% on the day. The index closed at the 50 DMA and erased the gains from earlier in the week. Money flow was negative as we see money rotating as well as being held in cash. Two of the eleven sectors closed in positive territory for the day showing distribution still at work. The VIX index closed at 27.9 closing the week at elevated levels. It could run higher and allow for more selling based on the current sentiment… watching.

Friday: buyers gave it a good shot at the start of trading attempting to buy on the dip, but by the close nine of the eleven sectos closed in negative territory. The leaders on the downside were energy and financials for the second day. Technology and consumer stocks closed positive, but they gave up most of their daily gains prior to the close. We did see some selling into the buying which is not a good sign for a bounce to occur. The moves this week produced stops being hit and higher cash levels as we do our homework of where the opporunities are arrising currently.

  • XLB – Basic Materials bounced off the lows with money flow bottoming on the reversal. $70.80 support held and the upside has returned. Some selling to end the week hitting our stops on positions.
  • XLU – Utilities don’t like rising interest rates… thus the downside pressure on the sector near term. Texas is putting pressure on the sector as the need for upgrades becomes more apparent. SDP in play on the move.
  • IYZ – Telecom now shows a double top on the chart with a break below the 50 DMA on the close Friday. All negative, watching for the downside opportunities is this follows through.
  • XLP – Consumer Staples moving lower to establish a near-term downtrend. Accelerated selling on the week breaks below the 200 DMA as a big negative for the sector.
  • XLI – Industrials broke from the trading range and pushing to new highs. The test lower to end the week is on our watch list looking forward. Stops in place.
  • XLE – Energy surged higher the last month and is testing those moves the last few days. Watching how this unfolds with stops in place on the elevated gains. Entry $41. Stop $44.75 (adjusted).
  • XLV – Healthcare moved below the 50 DMA currently as the downtrend from the January highs establishes itself. Biotech is lagging overall putting pressure on the sector.
  • XLK – Technology remains in an uptrend but tested the upside and has struggled along with other growth sectors of late. Letting this unfold for now. We have hit stops on many of our positions.
  • XLF – Financials bounced at the support of $28.95 and bounce back to the previous highs creating a ‘V’ bottom on the chart and a break higher. The upside in play near term with some testing the last two days. Entry $29.75. Stop $31.53.
  • XLY – Consumer Discretionary posted a double top… sold below the 50 DMA as negative had testing support at the $158 level.
  • IYR – REITs made a run to new highs and is testing the move. Higher rates don’t help and money flow is declining on a rising share price… that is a discrepancy that will balance out… watching with stops in place.

Using the six-month charts as an indicator for the short-term view… Eight sectors are in confirmed uptrends with renewed upside. Three are in consolidation patterns showing indecision from investors, and none are in a downtrend. The result for S&P 500 index is an uptrend short term with a reversal bias building on the charts short term. Taking a defensive and cautious bias on the broad index.

(The notes above are posted at the end of each week based on the activity of the previous week’s trading. The BOLD/ITALIC comments are the current day changes worthy of note.)

KEY INDICATORS/SECTORS & LEADERS TO WATCH:

The NASDAQ index closed up 72.9 points to 13,192 as The index was up 0.56% on the day closing below the 50 DMA again. 12,977 is support level to hold near term. The NASDAQ 100 index (QQQ) was up 0.42% for the day as money flow continues to decline. Broke the $315 support levels and testing $312.80. The large caps have been lagging and remain a concern as rotation affects the sector. Semiconductors (SOXX) closed up 2.28% on bounce day. Technology (XLK) moved up 0.69% watching the $128.57 level of support. Manage your risk accordingly.

Semiconductors (SOXX) The sector remains in an uptrend hit stops for the week as volatility rose along with uncertainty in the broad indexes. Watching patiently for the next opportunity in the sector near term.

Software (IGV) The sector showed volatility after hitting new highs and reverses to break below the 50 DMA. It remains on our watch list as we let the noise unfold.

Biotech (IBB) The sector broke lower from the January highs and has struggled since. The sellers are present as the outlook lacks clarity relative to vaccines and government controls. $154.60 support to watch. LABD setting up as a trade opportunity.

Small-Cap Index (IWM) The sector consolidates near the new highs. The uptrend remains in play with some testing at the highs. Watching how it unfolds moving forward. We hit stops on our positions.

MidCap (IJH) The sector turned higher along with small caps. Solid move and holding near the highs.

Retail (XRT) The retail sector volatility was back as GME was back on the volatility drive. Still moving sideways and watching.

Emerging Markets (EEM) The sector headed lower on the week led by China selling off. No positions, but the downside is setting up for a move if the data follows through.

Transports (IYT) The sector has struggled but seeing some upside recovery and interest in stocks. Hit new highs and letting the parts show the leadership. Airlines, shipping, trucking, and ports are all struggling with the logistics side of the equation of late.

The Dollar (UUP) The dollar tested lower as stimulus and inflation become a real thing for investors. The bounce of late is a safe haven move globally. The bottoming pattern on the chart is in play as we patiently watch how this unfolds near term.

The Volatility Index (VIX) Volatility closed at 27.5 up from last week’s 22 levels as anxiety rose on the inflation talk. Watching how this unfolds relative to the outcome and influence on broad market sector.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 1.46% up from 1.34% last week. Rates are rising on inflation fears… negative for bonds. TBT hit entry at $17.84. Stop $19.45 (adjusted).

Crude oil (USO) Crude moved to $61.45 from $59.15 for the week or up 3.89% for the week. Plenty of speculation remains as supply data raises questions. Taking what is offered and managing the risk. USO Entry $29. Stop $39.29 (adjusted). UCO trade position entry $25.78. Stop $50.40 (adjusted).

Gold (GLD) The commodity is struggling against the background of uncertainty relative to the dollar and inflation. The break of support at $166.50 is a short entry signal for the metal. GLL entry $36. Stop $35.50 (adjusted).

(The notes above are posted every weekend and updated daily in Bold Print)

DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENTT

FRIDAY’s Scans for February 26th: Mixed day as the early upside start gave way to more selling into the weekend. Only two sectors closed in positive territory as the large-cap growth stocks held on to close on the upside but not convincingly. There could be a test on the downside in play… we just need to let it unfold and take what is offered.

  • Gold (GLL/GLD) broke to the downside offering a short side trade. Watching how it unfolds along with the stocks (DUST).
  • NASDAQ 100 (QQQ/SQQQ) short side trade added 1/2 position and watching how the new week unfolds looking forward.
  • Treasury Bonds (TLT) rates finally held at 1.46% on the ten-year bond. Watching the new volatility and managing the risk of our positions.
  • Energy (XLE) new volatility in the sector as the worries over global growth grows. Manage the risk in both crude oil and the stocks.
  • Rotation or distribution? Some say money is rotating… which it was, but now there is some distribution, meaning, money is moving into cash or equivalents. This is a key point to watch next week as it will give an indication of who is in control currently relative to the direction.

THURSDAY’s Scans for February 25th: Selling was the song of the day… this put short side trades on the table if we follow through on the downside move. The stops have been hit in some sectors earlier in the week freeing up cash. Other stops remain in place as we watch to see how this unfolds. Today’s scans are focused on the downside opportunities if they follow through.

  • NASDAQ 100 index (QQQ/SQQQ) Broke the first level of support and watching the $312.80 level… a follow-through on the downside move would offer an opportunity. $14.17 entry. $14 stop.
  • Semiconductors (SOXX/SOXS) $405 level to hold. If we follow through on the downside looking at short side trade.
  • Volatility Index (VXX/UVXY) watching the jump in the index and it could offer upside trade. Watching.
  • Biotech (IBB/LABD) There has been selling this week in the sector. Watching for follow through and short side opportunity.
  • Internet (WEBS) the downside in the technology sector is presently alive and well. We drilled down to the internet stocks as they are under pressure from governments and sellers.

WEDNESDAY’s Scans for February 24th: More of the same with tests of the 50 DMA from the NASDAQ and the Dow pushes to new highs. The Fed is committed to keeping money flowing for the economic growth outlook. There is money pushing into cyclicals and out of growth… how long will that last? Semiconductors staged a nice bounce at support and the NASDAQ held the 50 DMA. The winners remain energy and financials with solid gains again on the day.

  • Semiconductors (SOXX) buyers put effort into rebound with the sector up more than 3% and holding the trend. Tech is still holding tough despite some recent selling.
  • Regional Banks (KRE) still showing upside leadership and letting it run as we adjust our stops.
  • Midcap (IJH) moved to new highs to take on some leadership.
  • Crude Oil (USO) moved above $63 and climbing… speculation in the commodity continues to rise as we let it run and manage the risk in the stocks as well.
  • Treasury Bonds (TLT/TBT) downside still in play as money exits bonds.

TUESDAY’s Scans for February 23rd: intraday volatility takes investors for a ride… a big downside to start the day and then and climb back to positive on the close. Inflation fears and the Federal Reserve policy were at the root of the issue on the day, but the battle has only just begun. We have to manage the risk of the rotation and the outlook for what will benefit the emerging economic picture. Inflation is definitely part of the equation and cyclicals will benefit. Growth stocks will struggle and thus, the current rotation. Taking what we are given and managing the risk.

  • Biotech (IBB/BIS) downside accelerated early on concerns within the stimulus package and more. Short-side setup with the move… watching how it plays out Wednesday.
  • Semiconductors (SOXX/SOXS) watching how the selling unfolds and what is offered relative to the trend.
  • Retail (XRT) sold and watching how the downside unfolds or if unfolds.
  • Financials (XLF/FAS) upside playing out well with higher rates in place. Raised the stop and let it run.
  • Energy (XLE) breaking higher and adjusting the stops… plenty of individual opportunities in the sector.

MONDAY’s Scan for February 22nd: Markets tale of two cities as technology and large caps head lower… but, the cyclicals head higher. The challenge on the horizon is inflation as shortages continue to show up in the manufacturing sector. Opportunities are to be had and they will be needed to be able to afford the goods we will need to consume. The bigger challenge will be price increases that will not be rescinded even if the cost of production falls in the future. Time to put on your work pants and manage your money.

  • Semiconductors (SOXX) declined enough to hit the stops and watching how this unfolds… the downside is setup currently if it follows through.
  • Software (IGV) equally declined on the day hitting stops. Watching how this opportunity unfolds.
  • NASDAQ 100 Index (QQQ) fell on the day and watching the downside. Adjusted our stops on positions and looking for signs of more selling.
  • Gold (GLD) finally moved higher on the day as the dollar falls and inflation raises its head. Hit the entry-level.
  • Treasury Bonds (TLT/TBT) heading lower as rates continue to rise. Adjusting our stops and letting it play our near term.

(The Scans are done daily and left on the page for one week to allow you to see the progression of the opportunities or warnings.)

FINAL NOTES:

Weekend Wrap & Outlook… The market’s sentiment is shifting near term as the volatility index jumped for the week. The upside hope is alive and well with stimulus as a driving factor, but the reality of inflation puts investors on edge for the week. Economic data is being aided by stimulus money, not growth. The shortages of semiconductor chips and metals are driving inflation concerns. Production capacity is the challenge. I have talked about this as a potential issue since last summer. Pandemic restrictions and closures are now showing up in the supply of products and raw goods. The result will be higher prices or inflation in the US economy. The Fed is currently good with that stating it will balance out the low inflation of the last four or five years. This all becomes a balancing act for both consumers and investors. The bond market is the larger concern as money rotates out of bonds on fear. Remember who the largest bondholders are in the world and watch what happens to their portfolios, credit ratings, and profits… therein lies some opportunities.

With that in mind, the markets closed the week lower across the major sectors. The cyclicals gave up some gains to end the week and growth stocks stepped back with money flow declining. Commodities remain a hot topic as well with the rising prices adding to the inflation talks. The long-term trends remain on the upside despite the week of selling. For the week one sector closed in positive territory as some profit-taking appeared in the markets. The VIX index closed at 27.5 and higher on the anxiety around inflation. The dollar found support as a safe haven trade… inflation and stimulus are still putting downside pressure on the buck. Crude moved higher to $61.45 after moving near $65 recently. This is the highest level since February 2020. UGA moved higher with prices at the pump elevated… hopefully you own the ETF to afford the increase. Watching the current movement in the broad markets as money continues to rotate and now head to cash.

The goal remains to manage money not the markets or the pundits in the media. Let the future unfold and manage the risk that is. Track the data. Know where the markets stand relative to the facts. Money rotates to where it will be treated the best. Watch the trend, know which side the Fed is on daily, and ultimately the data will establish the longer-term trend. We remain focused on what is working and what is failing. Therein lies the opportunities.

“Vision without action is a daydream… Action without vision is a nightmare.” Japanese proverb

The goal of these notes is to allow you, the investor, to learn how to see the market development as the progression through the sector develop based on news, speculation, and data. Data drives long-term results and develops trends… speculation and news are short-term drivers and offer higher risk trading opportunities. Through the use of both technical and fundamental data, we can have greater confidence in your trading strategies with a disciplined approach to investing and managing the risk of our money.