A strange thing happened when the Fed spoke on Thursday. Atlanta Fed President Bostic stated he favored a 25 bps rate hike in March. That comment went viral through the financial networks and was spun into a positive about the outlook for the economy and a soft landing. Say what? Yes, he said it, but just 24 hours prior he was quoted as stating the Fed needed to take rates to the 5-5.5% mark on rates… The market rallied on the news bouncing off the lows and posting a positive gain. Surging labor costs and lagging productivity data had taken the markets lower early in the day as the data continues to show weakness and inflation are alive and well. A scan of the charts shows some positives on the day in XLU, XLP, and XLK all making solid moves on the day. Economic data was interesting with initial jobless claims in line with expectations with 190k versus 192k previously. Productivity fell to 1.7% versus 3% previously and labor costs rose 3.2% versus 1.1% previously… both data points were negative. Volume remained below average and the money supply remains below 50. The speculation about the future of rate hikes from the Fed versus the economic data is at the core of the current debate about the economy and interest rates are reflecting the thoughts of investors about bonds. We are starting to believe the Fed is miss reading the tea leaves about disinflation versus inflation…. it sounds a little like the comments from Mr. Powell about inflation being “transitory”. This leaves us with a speculation game at its best and void of any additional data from the Fed, investors are set to wrestle over who is right. The S&P 500 index closed higher and 3930 remains the next support level. The NASDAQ was higher on the day closing just below the 11,474 key support level at 11,462 and trying to hold support. How this unfolds going forward will be of interest as we manage our positions accordingly. No matter what our beliefs the chart is the ultimate decision maker.
The volume remains below average giving some questions about the current market environment, the VIX closed at 19.5 receding slightly on the Fed’s comments. The S&P 500 index closed up 0.7% for the day. The NASDAQ was up 0.7%. Small Caps (Russell 2000) were up 0.2%. The leadership in technology and industrials on the day helped push the indexes higher overall. The ten-year treasury yield closed at 4.07% up 8 bps for the day. Bonds have priced in the Fed and future rate hikes with the move above 4% on the ten-year bond… which would is another negative for stocks. TLT broke support at the $99.60 level and added to the downside move. Crude (USO) was up 0.4% as uncertainty remains. Gasoline (UGA) was up 0.6% and moved back above the 50 DMA. Natural gas (UNG) was down 1.4% after breaking below the April 2021 lows and putting in a bottom reversal. The dollar was up 0.5% as the bottom reversal remains showing the belief the Fed will continue hiking rates. We are focused on managing the risk and watching how this all unfolds. The negative sentiment is building for stocks as investors focus on the Fed and interest rates.
Charts to Watch:
Thursday: UAL (break from trading range). TECS (break of support XLK). MSFT (broke support, puts). Watching the Mega Caps… downside set up… GOOG, AMZN, AAPL, MSFT, NFLX
Previous Charts of Interest Still in Play: TMV @ 200 DMA (hit entry and moved higher ). TMV (cup pattern followed through upside. Added to position). GBTC (cup & handle pattern). Nice upside move testing near term. UNG hit entry, UGA hit entry, USO hit entry, bottom reversals. LSCC (testing uptrend). Added upside move. UAL (trading range) added upside move. COIN (triangle pattern) added upside move. ARKK (double top short setup) Watching. ZIM (cup and handle pattern) broke higher and tested. DHT (J-Hook pattern). Added to the upside move. BDRY (bottom reversal) remains bullish. Gapped higher and raised stop. RUN (descending triangle break lower short signal). Bounced back… added upside move. BOAT (break higher in an uptrend). Added to the upside move. Tested. STLD (trading range) Added upside move. FCX (bottom reversal) Added to positions upside move.
Stops Hit: None
Quote of the Day: “Originality is the fine art of remembering what you hear but forgetting where you heard it.” – Laurence J. Peter
The S&P 500 index closed 29.9 points to 3981 the index was up 0.76% with below-average volume. The index manage to post a gain on comments from the Fed… hope springs eternal. The challenge remains the data points are negative. Data does matter until it does. The downside bias is still in play and we will see how Friday unfolds. The patterns are still in play relative to a bottom reversal on the test. I stated, “it is going to need some news or a shift in sentiment.” Watching to see if Thursday’s comments were the shift. Nine of the eleven sectors closed higher on the day with utilities as the leader up 1.9%. The worst performer of the day was financials down 0.5%. The VIX index closed at 19.5 as anxiety moves slightly lower on the Fed comments. The downside is in play… the bounce on Thursday on news… what will be the reality near term?
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials broke the uptrend line from the October lows… negative. Closed below the 50 DMA and established a short-term downtrend. The sector was down 0.6% for the week. Watching how it unfolds near term. Bounced off the lows as hard materials lead.
XLU – Utilities remain in the down-trending channel… looking for a break higher, but the downside remains in control. Bounced Friday off the 61.2% Fibonacci retracement line? The sector was down 1.7% for the week. Remains in a downtrend. Bounced Thursday… watching.
IYZ – Telecom broke the head and shoulder pattern on the chart to the downside… broke below the trendline off the October lows… obvious short-side trade. The sector was down 5.4% for the week. Breaking the up trendline from the October lows. $22.35 next support.
XLP – Consumer Staples downtrend from the December highs remains in play. The sector was down 0.04% for the week. Letting it play out as it failed to break above the trendline. Consolidation pattern. Broke lower from the consolidation pattern… downside in play… Big bounce Thursday?
XLI – Industrials Sideways trend in narrow trading range remains in play. The sector was down 2% for the week. Need to hold $97 and break above the $102.40 level. Moved back to the top of the range.
XLV – Healthcare downtrend in play with a break below the $131.40 mark. Broke from the downtrend channel and accelerated the selling. Short-side trades remain in play (RXD). The sector was down 1.7% for the week. Added to downside break. Breaks $127.57 support and confirms the downside. Bounced Thursday.
XLE – Energy continued lower for the week testing support at $82.74. Broke both intermediate and short-term trendlines. The sector was down 3.3% for the week. Short entry signal in play ERY raised stops. Bounced off support again. Looking for a follow-through… up Thursday and looking at how it unfolds on Friday.
XLK – Technology The sector moved to support at $136.10. Held the 50 DEMA. Maintaining leadership but struggled all week. The sector was down 3.9% for the week. Watching for direction and opportunity near term. Bounced on Thursday needs to follow through.
XLF – Financials broke the trendline from the October lows. The sector was down 2% for the week. HIt stop posting a small gain. Watching interest rates and impact near term. Lower and closed on a doji candle.
XLY – Consumer Discretionary rolling top broke to the downside. $147.10 support broken. $141.60 next level of support. The sector was down 4.4% for the week. Stopped out of the balance of the position and watching how this unfolds. $141.68 level to hold for support.
IYR – REITs uptrend off the October lows broken. The sector was down 4.5% for the week. The negative influence of rising interest rates and reports of vacancies in commercial rents are rising. Short-side trade opportunity. Broke support $87.63 and confirmed the downside move.
Trouble is building in commercial office space as the return to the office efforts aren’t working. The headlines are steadily showing the fight between corporations and employees. Amazon is the latest showing 1/2 are willing or want to return to the office for the three days a week proposed. This is impacting commercial property owners as mortgage payments are being delayed more than two months. Banks raised their reserves in January and are likely to increase more in February. With that in mind IYR and REM bounced off the October lows but may retest those lows or beyond based on future defaults. Worth watching the downside risk with SRS.
Summary: The index flirting with the uptrend line from the October lows… Struggling to find any momentum in either direction until the Fed comes out with some strange comments on rate hikes… we will see how that plays out with more speaking on Friday. We broke the short-term trendline from the January lows. The 50 DMA broke as the index tries to find support. 3930 level of support is in play. Interest rates moved above 4% showing belief the Fed will hike further. Four of the sectors have established a short-term downtrend… watching how many follow or who leads the upside if we reverse… Thursday was utilities… not the leadership we need to reverse the negative sentiment. We will remain patient for now as investors sort out their collective thoughts about the Fed and inflation. We continue to manage our positions accordingly and look for the best opportunities near term. 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 up 83.4 points to 11,462 as the index was up 0.73% for the day. The 11,474 support failed as we watch to see how this unfolds. Money flow has turned negative with all the news and speculation creating uncertainty around the Fed. Technology and semiconductors are the keys… SOXX held support reversing off the lows of the day. We are managing our risk on short-side trades as well as the upside.
NASDAQ 100 (QQQ) was up 0.83% with the mega caps moved back above the $292 support. The sector had a positive bias with 74 of the 100 stocks closing in positive territory for the day. The chart trend broke lower from the consolidation pattern and held at support… watching how this unfolds.
Semiconductors (SOXX) trend turned down breaking support. The sector was down 3.8% for the week. $390.40 is near-term support. Banked solid gains on the move higher and looking for direction near term… watching downside opportunities. Intraday reversal pushed the sector into positive territory on Thursday… watching.
Software (IGV) broke the short-term uptrend from January lows. The sector was down 3.3% for the week. Flirting with short-side trades near term. Volatility is in play as the sector tests lower. Establishing a trend lower and bounced on CRM earnings report… watching.
Biotech (IBB) The sector broke lower from the double top pattern giving short entry. The sector was down 4.3% for the week. 200 DMA in play. Held at the lows and above the 200 DMA. $128.35 level to watch. Bottoming pattern?
MRNA – Moderna cancer vaccine results could drive the company higher longer term. Despite the tough week for the stock, it is worth keeping on our watch list. Finding support?
Small-Cap Index (IWM) uptrend into a pennant consolidation that broke lower. Exited positions with a nice gain. The sector was down 2.6% for the week. Money flow turned negative. Indecisive but held support.
Transports (IYT) uptrend from the October low remains in play with plenty of volatility along the way. Trying to hold the $224 support level. The sector was down 3.2% for the week. Gapped higher on Monday, tested on Tuesday... Nice move higher on Thursday.
BDRY – Dry bulk shipping looking bullish with a bottom reversal in play. Gapped higher – adjusted stop. Tested on Wednesday watching the gap higher.
The Dollar (UUP) The dollar moved lower on the FOMC announcement but bounced as economic data may keep the Fed in play relative to interest rates. The dollar was up 1.3% for the week. The outlook ris positive with the Fed-driven move in play. Holding bottom reversal pattern.
GBTC – Grayscale Bitcoin Trust is trading at a 47% discount to the underlying asset. Something to watch moving forward. The chart is testing the rise off the January lows… watching how the news of higher regulations will impact prices going forward. Hit Entry $10.60. Consolidation pattern.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.95% up from 3.82% last week. The yields reversed the downtrend following the FOMC announcement. TLT was down 0.6% for the week. Added TMV $112.50. Raised stop. Yields advance to 4.07% and that spells trouble again for the economic picture as stagflation shows up in the data.
Crude oil (USO) trading range on the chart with a head and shoulder pattern. Economic speculation is impacting supply-demand speculation globally. USO was down 2% for the week. The weekly chart shows the downtrend building in crude. A break of support sets up short-side trade. Crude up on global production cuts. Inching higher on this week.
UNG – natural gas bounced on the outlook for colder weather in the US over the next few weeks. Projected bump in demand as a result. Trade entry $8.13 on Friday. Upside in play the last six days. Test on Thursday.
Gold (GLD) The commodity shifted lower with the bounce in the dollar. The metal was down 1.4% for the week. Watching for support at $168. Flirting with a break lower as the dollar remains stronger near term. Finding a bottom? Bounced above $170.50 for a chance.
Put/Call ratio was 1.09 Thursday… Negative bias remains in the index.
Questions to Ponder: Navigating Uncertainty
Speculation/Conspiracy Theory: The Fed is in the position of getting the market to do the dirty work for it. If the market drops 20-30% and crashes liquidity for the average American… they, the average Joe, cut spending out of fear. That allows the Fed to not raise rates above the 6% level by allowing the markets to accomplish the feat while they, in the background, dry up the money supply exacerbating the process. The market would crush inflation and throw the economy into a full-blown recession. Which in turn could and would destroy the middle class. This will all be done for the need to preserve the American way… printing money and raising debt levels while the government gains more control and take more of the freedom our forefathers fought for.
Consumer credit was up $394 billion. That is the biggest gain in 20 years, to a record $16.9 trillion. That is up $2.75 trillion from 2020. Mortgage balances were up $254 billion in Q4 2022 and up 1 trillion for 2022. Home equity credit lines were up $14 billion to $340 billion. Student loans outstanding up $21B to $1.60 trillion. Auto loan balances up $28 Q4 2022. Delinquency rates for mortgages 90 days late +0.57% (2x from 2021). Auto loans +0.6%. Credit card +0.8% (to 4%). Substantial rises across the board from Q4 2021. Younger age groups are having particular trouble with their revolving debt. Credit card balances up $61 billion to $986 billion, surpassing the pre-covid high of $927 billion.
64% of all Americans are living paycheck to paycheck.
Thursday: Stocks were higher on comments from the Fed. News that really left many scratching their collective heads. Went against everything that has been stated by the Fed in the last two weeks. Needless to say, Atlanta is void of economic data. We will see how the news plays out on Friday with time to digest stupid comments. Economic data and Fed comments keep the worries front and center and at the least they are entertaining. We take what the market offers and watch patiently and manage our money accordingly. Another interesting day as the data shows negative trends and points toward stagflation. Adjusted stops on positions moving higher in transportation and hard materials. Solid bounce on Thursday but watching to see if there are more believers. Letting this unfold and looking for opportunities in the uncertainty.
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. We look to the charts to provide the next direction near term… which is currently moved to a negative bias with consolidating patterns. We will manage our risk of hope giving way to reality along the way. Eyes open. Emotions removed. Lagging economic data has caught the attention of the talking heads if only from the perspective that it goes against the FOMC message. Watching how that twist turns out near term. The dollar turned higher on Fed worries. Interest rates are at 4.07% on the ten-year bond up from 3.4% three weeks ago reflecting Fed worries. I state this so we understand it is the data that ultimately determines the direction of stocks and the Fed is currently in play. The leaders took a turn down as sellers took control but the consolidation patterns over the last six days have everyone’s attention. Thursday’s news-driven move has to follow through to add any value to the conversation. Volatility closed at 19.5 receding on hope things will improve soon. The money supply has turned lower showing more money on the sidelines. 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.
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 trickling back into the headlines. Stagflation showing up in the ISM data. We remain focused on short-term trades until there is longer-term directional clarity. The charts are showing a short-term trend reversal from the upside… technology and consumer discretionary have led the move but broke key levels of support… 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.