The markets head lower on Friday in the face of the jobs report and missed earnings in the mega caps. The indexes opened lower but 90 minutes into the trading day were in positive territory and all was good. Then after lunch, the selling gradually set in and the indexes closed where they started the day… down. There was some talk about the markets being overbought at this point and thus some profit-taking to end the week. There is definitely room for some consolidation following the run higher since January 6th. The labor market was the focus premarket as the jobs report was much hotter than expected adding 517k new jobs while the expected move was 190k jobs… this is a number that supports the Fed’s desire to continue to raise rates… something to watch looking forward. Earnings from APPL, AMZN and GOOG did help matters. AAPL proved that you can miss earnings and revenue but still move higher as it gained 2.4% on the day despite the disappointing data. Their forward guidance was positive and investors bought into the hope. The leaders still look good in the current trend higher as technology, semiconductors, Nasdaq 100, and others show solid moves for the week. The consensus is for a test and some consolidation of the move higher. We will let it all unfold, adjust our stops, and follow the trend.
ISM Services data was the surprise of the day but was lost in all the noise. The reading at 55.2% quickly bounced back from the contraction number of 49.6% posted in December. The expected read was 50.6%. This showed the consumer was spending again. Again the good news may be seen as a negative by the Fed.
Is this a new bull market? I would like to say no, but the talking heads are wanting everyone to believe it is different this time… the Fed is going to engineer a soft landing, growth will return and we will all live happily ever after. The greatest challenge is the charts. They don’t lie. The move off the October low has been solid. It tested the first stage in December and resumed the uptrend. It is in a position to test the second stage from the January lows. The August highs are in sight. Volume has been above average and the golden cross (50 moved above the 200 DMA) showed up on the S&P 500 index on Thursday… All said the charts are in good shape. Thus, you take what is offered and wait for the other shoe to drop… if it doesn’t, you are in the right positions and enjoying the gains. If it does, you are out as you have stops in place to protect your money. This is why we follow the charts and keep it simple. Overthinking gets you into trouble.
The volume was above average, the VIX closed at 18.3 falling slightly despite the selling overall. The S&P 500 index closed down 1.04% for the day. The NASDAQ was down 1.59%. Small Caps (Russell 2000) were down 2.38%… all tested the move higher. The ten-year treasury yield closed at 3.53% up 14 bps for the day as TLT reversed on the rise moving to the bottom of the current range. Important to note as treasury yields dip to the 3.4% support level for the bond… if the yield breaks and holds this gets interesting for stocks. Crude (USO) was down 3.2% showing the uncertainty of late. Gasoline (UGA) was down 5.2% and broke the 200 DMA level of support. Natural gas (UNG) was down 2.2% and breaking the April 2021 lows. The dollar gapped higher as the economic data pointed to the Fed staying in a hiking mode for interest rates. We adjusted our stops and will focus on managing the risk as we hit targets on the upside position.
Things to Watch This Week:
Key Data: 1)New York Fed inflation expectation (5% previous). 2) Wholesale Inventories ($28 billion previous. $27 billion expected). 3) Jobless Claims (183k previous. 192k expected). 4) University of Michigan Consumer Sentiment Index (64.9 previous. 65.1 expected). 5) Powell speaks on Tuesday… all ears want to hear if he has truly changed his tone inflation.
Previous Data: 1) FOMC meeting with Fed. Powell was optimistic but cautious and stocks moved higher on the announcement. 2) Earnings from AAPL, GOOG, AMZN, META… will key for the large caps sector. META news received as positive… big jump higher. 3) ARKK was up nearly 11% on the week… technology is key to the upside move. Adding to the upside again this week. 4) Consumer Confidence Index Jan. (107.1 versus 108.4 previous. 109 expected). Home Price Index Nov. (-3.1% versus -2.8% previous). 5) ADP Employment Jan. (106k versus 235k previous. 175k expected). Received as a positive following Powell’s comments at FOMC. 6) ISM Manufacturing Jan. (47.4% versus 48.4% previous. 48% expected). More slowing in the manufacturing sector as expected. Rental Vacancy Rate (5.8% versus 6% previous). 7) Motor Vehicle Sales Jan. (13.3 million previous). Construction Spending Dec. (-0.4% versus 0.5% previous. 0% expected.) 8) Initial Jobless Claims (183k versus 186k previous. 195k expected). Continuing Claims (1.66 million versus 1.67 million previous). Nonfarm Payroll Jan. (517k versus 223k previous. 190k expected). Much higher than expected and could keep the Fed engaged longer. Unemployment Rate Jan (3.4% versus 3.5% previous. 3.6% expected). Average Hourly Earnings Jan. (0.3% versus 0.3% previous. 0.3% expected). Labor Participation Jan. (82.7 versus 82.4 previous). 8) ISM Services Index Jan. (55.2% versus 49.6% previous. 50.8% expected). Much better than expected and another data point that keeps the Fed in play.
Charts to Watch:
Metals & Mining: XME (hit entry), SLX (hit entry), GDX, SCCO, PAAS testing but holding up well. JJM shows the trend. Trend is being challenged as money flow drops. Watching how it unfolds as some stops hit in the sector.
Energy: XLE, IEO moving lower of late with some stocks breaking key support. (COP)… watching how this unfolds with the downside trade setting up. Crude has moved lower along with other commodities in the sector.
Previous Charts of Interest Still in Play: FCX (test support, raised stop as hit resistance), KWEB (breaking higher “V” bottom, hitting resistance). RIG (cup and handle breakout, big move adjusted stop). SPY (reversal, reentered). QQQ (reversal, adjusted stop). SOXX (back above $380=added to position). XME (trending higher. Break to the upside.) IGV – (broke out offering an entry signal.) Ran higher and tested on Friday. QQQ (broke above resistance hit entry). Ran higher and tested on Friday. SOXX broke higher hit entry. Ran higher and tested on Friday. Metals & Mining XME, SLX hard metals broke through resistance. Watch resistance 4086 SPX… Broke and continued higher with a test on Friday.
Stops Hit: None
Quote of the Day: “On my income tax 1040 it says “Check this box if you are blind.” I wanted to put a check-mark about three inches away.” – Tom Lehrer
The S&P 500 index closed down 43.2 points to 4136 the index was down 1.04% with above-average volume. The index moved above the 4086 resistance and tested to end the week. None of the eleven sectors closed higher on the day with financials as the leader down 0.2%. The worst performer of the day was consumer discretionary down 3.1%. The VIX index closed at 18.3 as sentiment dropped slightly on the day despite some selling. Managing the risk.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials bounced off support and back to the previous highs and testing the move. The sector was up 0.01% for the week. Entry $79. Reverse head and shoulder pattern on the chart. Broke above resistance…
XLU – Utilities broke support and tested lower. There is a downward stairstep on the chart and the breakdown on Friday was negative. The sector was down 1.4% for the week.
IYZ – Telecom cup and handle with a break higher. Moved above the 200 DMA as well. The sector was up 1.5% for the week. Watching how it unfolds. Entry $22.50. Broke above resistance and added to the gains.
XLP – Consumer Staples found support and bounced modestly near the 200 DMA. The sector was up 0.7% for the week. Looking for a decision on direction as the downtrend remains in play.
XLI – Industrials moved back to the previous highs and attempted to break higher. The sector was up 1.7% for the week. Need to hold above $102.50.
XLV – Healthcare Struggling to find direction $131.40 support is level to hold. The sector was down 0.1% for the week. The weakest sector currently.
XLE – Energy Moved to resistance and is testing lower showing weakness currently. The sector was down 5.7% for the week. Commodities are moving lower in the sector as well… setting up downside trade.
XLK – Technology The sector broke higher from a cup and handle pattern. This is the key component in the current bounce off the previous lows. The sector was up 3.7% for the week. Entry at $127.50. $143.45 resistance in play – remains the leader.
XLF – Financials cup and handle pattern broke higher. The sector was up 0.9% for the week. Entry $34.50. Watching interest rates and impact near term.
XLY – Consumer Discretionary made the break above key resistance at $146.50 adding to the upside move. The sector was up 2.3% for the week. In a leadership role currently. Entry $132. AMZN ($98 resistance cleared hit entry).
IYR – REITs bottom reversal is in play with a break above the $90 level resistance. The sector was up 1.5% for the week. Lower interest rates could offer some upside to the sector near term. 12/30/22 10-year treasury yield peaked… IYR +6.2% since then. Moved above resistance and added to the gains.
Summary: The index added to the upside gains posting a solid week despite the test on Friday. It now begs the question of how high we go from here. There is room for some consolidation and testing of the run higher. I remain cautious as optimism versus reality is a bitch. The reality is the data released has been flat-out bad overall with some bright spots. ISM Services and the jobs report are two that could keep the Fed engaged longer than some hoped on Wednesday. The break above the 4086 level resistance is a positive and we will take what is offered, but remain focused on the risk that is. Remember two things; first, the trend is your friend, and second, don’t fight the Fed.
(The notes above are posted at the end of each week based on activity from 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 193.8 points to 12,006 as the index was down 1.59% for the day. The break above 11,474 resistance was positive as we let it all unfold. We expect some consolidation and testing relative to the move higher. Watching how money flow reacts. Technology and semiconductors are the keys…. watching how they play out.
NASDAQ 100 (QQQ) was down 1.78% with the mega caps leading the broader index lower. Earnings in the sector were the storyline on Friday. AAPL, AMZN, and GOOG took some air out of the hope balloon as they reported negative earnings. The sector had a negative bias with 11 of the 100 stocks closing in positive territory for the day. The chart remains in a positive trend off the December lows. AAPL ($137.20 level to clear/hit entry/adjusted stop). Watching the response next week.
Semiconductors (SOXX) broke higher for a cup and handle pattern to lead the upside. The sector was up 4.6% for the week. $390.40 resistance cleared and moved to $432.255 resistance. Entry $355/adjusted stop. NVDA entry $171.95. Stop $193.35. AVGO (cup & handle/adjusted stop). RMBS (broke above previous highs/adjusted stop). SWKS solid break higher/adjusted stop). Managing the risk.
Software (IGV) Upside momentum remains with a break above resistance at $276. The sector was up 2.4% for the week. Target is the August highs. $275 entry. CRM (sup and handle/hit entry/adjusted stop).
Biotech (IBB) The sector remains in a trading range with a positive bias of late. The sector was down 0.4% for the week. Entry $134.10. Back to the top of the trading range… looking for a break higher.
Small-Cap Index (IWM) bottom reversal showed leadership breaking through resistance $188.25. Tested the move on Friday as we manage the risk. The sector was up 5.1% for the week. Entry $177.
Transports (IYT) reverse head and shoulder pattern broke higher on the week offering upside opportunity. The sector was up 5.9% for the week. Need to clear $234 resistance. Entry $218/adjusted stop. Consolidation pattern. Solid recovery on Tuesday. Broke from the trading range on Wednesday and added to it on Thursday.
The Dollar (UUP) The dollar moved lower on FOMC news but bounced to end the week as economic data was positive. The dollar was up 1.1% for the week. The outlook remains negative. Watching how this unfolds going forward.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.53% up from 3.51% last week. The yields reversed the last month adding to the upside trade in bonds. TLT was down 0.01% for the week. Entry TLT $102.35. Stop $105.50. Consolidating.
Crude oil (USO) Reversal in trend for crude after hitting resistance at $80 and now testing support at $73. Supply-demand speculation as China opens its economy and borders. USO was down 7.3% for the week. Seeing weakness in the commodities and stocks of late… short side trade setting up.
Gold (GLD) The commodity has been trading higher as the dollar declines. The spike higher the buck gapped the metal lower hitting our stops… solid gain. The metal was down 3.2% for the week. GLD entry $154.90. Stop $176 (Stop Hit).
Put/Call ratio was 0.91 Friday… Positive bias gets a test.
Questions to Ponder: Navigating Uncertainty
Did the Fed shift in bias relative to inflation? In theory no, but in action yes. The FOMC meeting was a big shift in what the Fed said relative to future rate hikes and their outlook for inflation. It is something to watch in the coming weeks. Will the Fed presidents come out and reinforce the fight on inflation or parrot much of what Powell said following the meeting? Interest rates are showing a belief by investors that they believe Powell and the Fed are done… that said, rates jumped 14 bps Friday as economic data was positive enough to shift the belief (at least for the day) the Fed may not be done. The real sign will come from banks, interest rates, earnings, and more importantly a recession pending.
Jobs versus productivity: The data out on Friday, if true, showed that productivity is falling. That would mean that corporate margins are under pressure as labor costs rise. The math doesn’t lie just the numbers provided to do the math. Thus, we need to watch this data going forward because if wage inflation heats up as some believe it will… margins will decline further as seen in the earnings reports from META, GOOG, AMZN, and AAPL. Lower earnings impact stock prices. There is sooooo much wrong relative to the economy, thus we proceed with caution and take what the charts offer.
Why are stocks rallying in the face of weaker economic data? Growth stocks have led the recent bounce off the lows of December as investors gain confidence the ‘worst’ is over. The Fed announcement on Wednesday was perceived as positive… but, Powell was very cautious in his comments. The economic data on Wednesday was bad and showed the impact of the rate hikes. The Fed will, and is, engineering a recession and layoffs as Powell pointed to the labor market as being too good. (The jobs report on Friday reinforced that belief.) The yield curve is flashing recession with the ten-year dipping to 3.4% (bounced back to 3.5% on Friday, but still much lower than October, ISM Manufacturing data shows contraction for the third straight month, but ISM Services jumped back to 55.2% showing expansion/growth in consumer spending… the Fed is promising more rate hikes… Friday data would lend a hand to that promise… either it is different this time, or the market is ahead of itself. Manage your risk.
FINAL NOTES:
Friday: The market wants to believe the Fed is done hiking rates. The FOMC meeting gave them hope as Mr. Powell showed little conviction about future hikes. Friday’s jobs report and ISM Services data would lend a rationale to the Fed’s argument… thus some selling on Friday as sentiment shifts slightly from Wednesday and Thursday’s buying spree. Meta earnings fueled the hope of a soft landing and a reversal in the economic picture. The reality however is seen in the ISM manufacturing numbers, AMZN, AAPL, and GOOG earnings. This tug-o-war isn’t going away anytime soon. The euphoria of late in rising stock prices will be challenged as seen on Friday. We stated the first level of resistance would be 4086… we eclipsed that on Wednesday. The next level would be 4300 or the August highs… we are moving in that direction but I would expect some consolidation and testing prior. Hope is a beautiful thing… but, as we say many times, the data doesn’t matter until it does. That is where we find ourselves currently and we will trade the hope and the move higher. We will manage our risk of hope giving way to reality along the way. The near-term climb has offered solid gains. But, the future risk of reality is what we manage against. Stops raised on Thursday’s move higher. Eyes open. Emotions removed. Mixed economic data has been mostly ignored. Sentiment has shifted to positive despite the data. We are a far way from seeing growth… my opinion, but we trade what the market gives not what we think. Yes, we have thoughts and beliefs, but we will always follow the trend on the charts and never fight the Fed. Managing our risk as we add and subtract trading positions based on the charts. The dollar turned lower on the Fed news but bounced on Friday’s economic data. Interest rates fell to the 3.4% level on the ten-year bond but bounced on Friday’s economic data. I state this so we understand it is the data that ultimately determines the direction of stocks and the Fed. Optimism remains in play for now as we break through key resistance points on the charts technology and consumer discretionary sectors lead. Watching energy stocks as the commodities struggle of late. Volatility closed at 18.2 as some intraday anxiety shifted the index. The money supply shifted to positive and watch looking forward. Volume remains above average. Stay focused and follow the money. Follow the Fed. Don’t assume anything and manage the risk that is. Watch for the volume, direction, sentiment, and volatility levels to lead you to what takes place. There are plenty of moving parts, we have to understand that truth/reality eventually plays out in the markets. Until then we will continue to take what is offered and manage the risk that is.
As stated above we continue to watch and take what is offered. Our longer-term view is still negative, but nothing goes straight down or up… there are always positive and negative swings in a longer-term trend. Recession talks are turning towards stagflation of late which could be worse for consumers as it tends to last longer with a slow negative effect. We remain focused on short-term trades until there is directional clarity. The charts are showing a short-term trend reversal to the upside… technology and consumer discretionary have led the move. Semiconductors have performed well along with software. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal now is to manage the risk of positions, take what is offered… short or long, and then manage the risk.
“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 develops 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 our trading strategies with a disciplined approach to investing and managing the risk of our money.