The markets ended the day lower again as Fed Chair Mr. Powell’s comments created more fear relative to inflation and interest rates. He stated that we would see more inflation as the economy reopens putting pressure on prices. His prediction is for inflation to run above 2%. On those and other comments, bonds fell as interest rates on the ten-year bond hit 1.55%. That in turn, pushed the markets lower as investor fear rose. It was a seller’s day and not much is on the horizon to change the outlook currently. The jobs report is due on Friday morning, but there is not much optimism on the jobs front for the February data. Now is a good time to be patient with what happens and focus on what you know along with a defined strategy for managing money. We continue to have a high level of cash as we let the opportunities unfold.
Short news notes of interest…
- Initial jobless claims were up 9,000 to 745,000. Continuing claims fell 124,000 to 4.295 million. The claims are still running high… one year ago the numbers were 217,000… a big difference.
- Why is the inflation factor have such an impact on stocks? Simply put the cost of goods rises and it impacts net spending from the consumer… all of that equals slower growth. Thus, it is not the market for weak stomachs. The downside trades are in play… goes against the psyche of investors. Manage your money on your terms, not others. Define your strategy and manage it accordingly.
- Senate voted to begin the debate on the stimulus package of 1.9 trillion dollars… they had to add some fat projects to it like free broadband, infrastructure money, small state aid, and other things that have nothing to do with Covid relief. $400 per week federal unemployment… explains the jobless claims above… no insensitive to work. Even at the $15 minimum wage rates that many want and many have… after-tax income is still lower than the $400 they get for staying home… throw the state unemployment on top and you see why no one wants to work.
- Crude oil is on the rise again as the OPEC+ agreement leaves production levels the same through April. Some are now saying this could push prices towards the $75 level per barrel. Translate that to the pump and you can see a major impact on consumer spending.
- The SEC (Securities and Exchange Commission) has deployed a 22-person team to focus on disclosures from public companies related to issues such as climate change. What does this have to do with the primary role of this agency? How much money will be spent on this issue? Not really sure how you push a climate agenda through a securities-focused agency. Nor does this make sense of how the filings of this information make a determination relative to the risk of the asset? Very interesting times.
Sector Rotation and the S&P 500 Index:
The S&P 500 index closed down 51.2 points to 3768. It was down 1.34% on the day. The index closed below the 50 DMA and is back to testing support of 3749. Money flow was negative and volume was above average on the selling. One of the eleven sectors closed in positive territory for the day as sellers were firmly in control. The VIX index closed at 28.5 for the day and higher as anxiety levels rise. The sellers are making their attempt at pushing stocks lower near term.
Thursday: Technology led the downside move along with the consumer-related stocks. Money is looking for a new home and we are definitely seeing cash levels rise again. Short term the rotation and exit from large-cap growth are obvious… where the money is going are becoming less obvious and more safety-driven. The put/call ratio is still below one at 0.89 despite the recent selling showing optimism is still in place. Yields jumped to 1.55% adding some issues for investors. The dollar was higher on the day again and overall the goal is risk management. Stay focused.
- 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. Nice bounce to start the week. Followed by some giveback and test of support.
- 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. Nice bounce to start the week. Followed by some giveback and testing the previous lows.
- 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. Nice bounce to start the week. Followed by some giveback and break of support showing sell signals.
- 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. Back below the 200 DMA.
- 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. Back to the previous highs… then pulled back on fear trading.
- 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). Nice bounce to start the week and holding near the highs. Thursday the sector was the lone bright spot climbing 2.4% on OPEC agreement to leave current production levels in place.
- 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. Breaks support and solidify the downtrend. Short side trade available.
- 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. Solid upside move on Monday. Followed by some giveback and move below the 50 DMA to test support at $125.
- 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. Nice bounce to start the week. Followed by some giveback and testing.
- XLY – Consumer Discretionary posted a double top… sold below the 50 DMA as negative had testing support at the $158 level. Nice bounce to start the week. Selling in play and the short side signals are given near term.
- 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. Broke support at the 50 DMA and not looking healthy as interest rates rise.
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 down 274.28 points to 12,732 as the index was down 2.1% on the day closing well below the 50 DMA again. 12,977 support broke as the sellers take control. Money flow has turned negative. Volume remains high on the sell-side. The challenges remain in growth stocks and thus with the index. The NASDAQ 100 index (QQQ) was down 1.73% for the day as money heads to the exits. The $312 support was broken as a short signal near term. Watching the downside (QID) trade near term and adjusted our stops. Semiconductors (SOXX) closed down 4.8% accelerating the downside with a push to support at $382.60. Adjust stops on SOXS. Technology (XLK) moved down 2.21% and holding breaking the $128.57 level of support. The reverse head and shoulders pattern on the chart breaks lower confirming the downside trend. Watching how this unfolds and managing the 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. Added 3.2% upside to the Friday gains… Erased 3% of the gains on Tuesday and 3% on Wednesday. Down 4.8% on Thursday adding to the downside move. Adjust stops on SOXS.
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. Solid upside Monday with 3% gain. Down 1.95% on Tuesday and down 4.1% on Wednesday, and down 2.7% on Thursday… broke support and short side trade stops adjusted.
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. No bottom reversal as the downside of 2% on Tuesday and 3.5% on Wednesday and 2.4% on Thursday keeps the downside alive and well. LABD hit entry at $18.26 and stops are raised.
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. Positive upside on Monday. Selling on Tuesday and Wednesday and Thursday… Support is in play at $212.55.
MidCap (IJH) The sector turned higher along with small caps. Solid move and holding near the highs. Solid upside on Monday. Selling on Tuesday and Wednesday and Thursday as we test support at the $244.93 mark. Holding above the 50 DMA for now.
Retail (XRT) The retail sector volatility was back as GME was back on the volatility drive. Still moving sideways and watching. Selling in the sector remains an issue for big-box stores… online still holding steady watching how it unfolds near term. Inflation is not a good thing for the sector.
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. Testing the $53.30 level of support and not looking promising near term.
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. Pushed back to the previous highs and then rolled over with the broad markets. Testing $232 support range.
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. Holding the gains from Friday and watching as the global calm builds on vaccines. Some downside on Tuesday with the Aussie dollar gaining ground, but bounced back on Wednesday and Thursday.
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 the broad market sector. Moved down to 23.3 and back in the previous range. Watching as closed at 26.61 Wednesday and Thursday topped at 31.8 and closed at 28.7. Not good for stocks near term.
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). 1.55% and climbing again. This is pushing stocks lower on inflation fears rising.
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). The commodity fell nearly 2% to start the week and down 1.2% Tuesday and up 1.5% on Wednesday… back above the $60 level. NOTE… OPEC meeting on Thursday sent the price of crude higher as the group agreed to keep the current quotas the same through April. Prices jumped 4.1% to $63.83 highest since April 2019.
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). Tried to bounce but failed to hold the gains. Wednesday broke support… Thursday adding to the downside on the stronger dollar all confirming the continuation of the downtrend.
(The notes above are posted every weekend and updated daily in Bold Print)
DAILY SCANS FOR OPPORTUNITIES AND RISK MANAGEMENTT
THURSDAY’s Scans for March 4th: Not a great day for stocks. The inflation fears were stoked by Mr. Powell’s comments. Interest rates rose, bonds fell, the dollar rallied, and cash levels rose. Overall the sellers were in control and we benefitted in short side trades. More stops hit. More cash raised. Overall the goal is patience as it all unfolds. The acceleration in anxiety showed in the VIX but it has not reached excess yet, which could lead to more selling. The jobs report due on Friday… not expecting much help heading into the weekend. Don’t let your emotions play games with your money… stay focused and manage with discipline.
- SQQQ, SPXS, SOXS, LABD, TECS, WEBS, RXD, TMV all benefitted on the day and adjusted stops.
- REITs (IYR/SRS) downside is playing out in the sector as well with higher interest rates creating selling.
- Commodities (DBA, DBC, DBP) pausing at current levels with some uncertainty in the air.
- Crude Oil (USO) OPEC+ decides to keep production levels steady and that puts buyers in control again near term. Speculation is Saudi Arabia will not add to production pushing prices higher. The wildcard is if Russia and others will increase production? What impact does it have moving forward? Follow the trend for now. Hit entry on USO/UCO and hit stops on SCO.
- Small Caps (IWM/TZA) broke support offered short side trade. Watching s this is the previous leadership breaking down.
WEDNESDAY’s Scans for March 3rd: More selling, more worries, more caution as money moves out of stocks. The near-term trend is now lower and the selling volume is higher. Watching how it unfolds and taking what is offered. There are opportunities on the short-side trades and there is still money pushing into energy, banks, and commodities. Manage the risk and keep the focus on what is working versus speculation about what is not.
- NASDAQ 100 (SQQQ) hit entry and managing the risk. Short side of index in play near term.
- S&P 500 Index (SPXS) hit entry and managing the risk. Short side of the index in play near term.
- Biotech (LABD) adjusted our stop on the entry. Short side of sector in play near term.
- Healthcare (RXD) hit entry and managing the risk. Short side of the index in play near term.
- Treasury Bonds (TMV) adjusted our stop on the entry. Short side of sector in play near term.
TUESDAY’s Scans for March 2nd: Sellers were back on the day and but not to the demise of the trend, just a challenge to the process. The growth sectors remain challenged and the ‘recovery’ stocks show some positives. Taking what is there without be speculative about the outlook. There are opportunities on the charts as discussed above and we will continue to manage what is available relative to our strategy.
- NASDAQ 100 Index (QQQ/SQQQ) as discussed on Friday we still see a negative setup on the charts and willing to add a downside trade near term.
- Crude Oil (USO) being challenged by the OPEC production rumors. This has crude down the last four days and back below the $60 mark. Manage the short-term risk.
- Biotech (IBB/LABD) downside move on Tuesday offered a short side trade opportunity as it failed to hold the Monday bounce.
- Internet (WEBS) showing some opportunities in the downside trade setup. Watching the $23 level for entry.
- China (FXI/YANG) downside setup for the country ETF. Looking for eh entry breakout $12.35.
MONDAY’s Scans for March 1st: Positive reversal day for the broad markets as indexes and sectors alike found support and bounced at their respective lows. One day is not a trend and thus, we watch to see how this unfolds and what opportunities arise from the moves. Patience is key for now.
- Technology (XLK) solid bounce from the current lows and back to the January highs. Head shoulders pattern on the chart? Watching and looking for where the opportunities are.
- Treasury Bonds (TLT) holding support as the yields calm. Watching.
- Midcaps (IJH) solid gains on the day and the recent leadership is of interest.
- Energy (XLE/USO/UGA) commodities are holding steady despite some modest selling on the day. Watching the upside resume… possibly.
- Agriculture Commodities (DBA) solid three-day test at the highs… watching for the resumption of the trend as the profit-taking resides.
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.
(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.)
Thursday: more selling as the downside gets established. The question is how low do we go? That will be determined by how big interest rate fears play into the markets near term. The inflation factor is now in the driver’s seat with all the rest of the worries tagging along. If the market losses confidence in the Fed to control interest rates and inflation the markets will continue to react on the downside. letting it all unfold with our stops in place on all positions.
Wednesday: more downside for the previous leaders as the selling accelerated on the day. Growth stocks show their ability to accelerate lower as well as higher. Technically break support and confirming the downside move near term… the question is will the buyers show up? That is why you have stops on positions, but the key is to let it unfold. Economic data on the day didn’t help and Thursday and Friday will add to the news with unemployment and jobs reports. Promises to interesting. Remain patient and let it all unfold as you manage the risk that is.
Tuesday: downside move erased some of the gains from Monday and showed the struggle remains in the growth stocks and ‘recovery’ stocks added to their respective trends. The key, for now, is patience, discipline, and a focused strategy. The short side is setting up in several sectors and looking at the opportunities. The upside trends remain in positions we own and managing the risk accordingly. The goal is to take what is offered near term and let the balance of the move unfold. Patience is the goal.
Monday: Solid start to the week as stocks find buyers and post a positive bounce. Volume was on the weaker side offering some concerns. Interest rates calmed relative to the upside run. Commodities testing on the concerns as well. Overall the markets got a reprieve and some breathing room for now. We still need to see how the economic picture unfolds and the vaccine distribution proceeds. Confidence and sentiment are a fickle animal as we can attest between Friday and Monday’s respective trading days. Patience is key.
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.