The markets were mixed as they closed near the flatline on the day. There were growth concerns about the economy keeping the mega-caps front and center. GOOG was a standout again on the day. The economic data didn’t help as Consumer Sentiment dropped to 57.7 versus 63.5 previous. The data caught investor’s attention as the Fed pays attention to the number. The key takeaway from economic data this week is the inflation rate is heading into what some economists are calling the sticky zone. Meaning stagflation for the economy as a result of sticky inflation remaining, the result of too much demand for too few goods. The supply lines remain an issue. To get inflation to fall further there will need to be some type of economic decline. This is where we have to watch how the Fed reacts as well as what they do going forward. Technology stocks are the favored darlings currently as investors believe they are still making money and growing despite the economy. What about all the warnings from companies about the future outlook? Reality is still on the horizon. For now, investors are willing to buy on hope. The White House meeting with Congressional leaders gave little hope in terms of an agreement on the debt ceiling. The Fed presidents continued their mantra of being tough on inflation speeches but the reality is supply remains strained at best and too much money remains in the system, and demand is higher than supply… simple economics of supply and demand. Until demand declines by excess supply inflation will remain an issue for the US economy. Too many half-truths running around in the headlines for clarity among investors. Thus, we focus on what we see short term and allow the storylines to unfold.
The S&P 500 held above the 4086 support and closed lower on Friday to end the week down 0.2%. QQQ held above the $320.92 level and was up 0.6% for the week. The NASDAQ composite index closed above the resistance of 12,246 adding to the uptrend closing up 0.4% for the week. It was an interesting week with fewer sectors leading and the majority drifting lower. Volume was below average on the day showing narrow leadership. six of the eleven sectors closed in positive territory. The S&P 500 index closed down 0.1%. The NASDAQ was up 1% with SOXX down 0.4%. Small Caps (Russell 2000) were down 0.3% showing little interest in the sector. The ten-year treasury yield closed at 3.44% up 6 bps on the day. Crude (USO) was down 0.7%… watching how it plays out against the background of economic data. Gasoline (UGA) was down 1.8%. Natural gas (UNG) was up 3.9% bouncing back from Thursday. The dollar was up 0.6% and broke higher from the trading range. We are focused on managing the risk and watching how this all unfolds.
ONE Chart to Watch: QQQ – 1) Continued the move above the $320.92 resistance and followed through on the upside break. 2) Short-term trend is UP… starting from the January low. 3) Uptrend line held along with the $312.78 support. 4) Solid bounce higher with positive follow through finally. 5) Note the declining trend in volume since the March lows… money supply same thing, not a confidence builder for the uptrend. 6) Breakout confirmed the entry. 7) TQQQ entry $27.45. stop $28.10.
Additional Charts to Watch: SPY – reversed back above support at $407.19. Needs to follow through to break higher. IWM – retested the previous lows and bounced without conviction… favoring the downside technically. SOXX – retested lows with a downtrend from the March highs… bounced Wednesday… needs to follow through with some leadership. USO – oversold… gap bounces off the lows. Retesting currently.
Leadership – NASDAQ, NASDAQ 100, SP500, DBP, Dow… QQQ breaks higher along with the NASDAQ. Others trying to resume upside momentum. DIA closed lower and didn’t participate again on Friday testing the 50-day MA. Volume was below average on the moves… need more breadth in the move overall. Taking what is offered but playing very cautious near term.
Laggards – SOXX, SP400, RUTX, USO, XLF… struggling as growth stocks are still not showing the needed leadership. If the markets are to run higher we need to see them participate. IWM and IJH both failed to improve on Thursday. Energy reversed Thursday retesting the lows. KBE keeping financials in check and testing the downside again.
Interesting Charts: TJX (trading channel). MSFT (break from flag pattern). WFC (testing lows) Jun 23 37 Puts $1.45.
ON TAP THIS WEEK: 1) Empire State Manufacturing Expected -5. Philly Fed Factory Survey -20 expected. 2) Retail Sales +0.8% expected. 3) Industrial Production 0.1% expected. Capacity Utilization 79.7% expected. 4) Housing Starts 1.4 million expected. Building Permits 1.43 million expected. Existing Home Sales 4.26 million are expected. 5) US leading economic indicators -0.6% expected. 6) Fed presidents are out all week beating the drum against inflation. 7) Resistance needs to be broken if the uptrend is to continue.
Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Earnings 5/4 after-hours beat estimates. Holding. AMZN (bottom reversal) Holding (continued upside on Thursday… raised stop). MCD breakout. Holding. WMT ‘V’ bottom breakout. Holding. TSLS. Holding. SPXL breakout. Holding. SOXX reversal. Holding. TQQQ breakout. Holding. SRS Holding. SJB Holding. TGT (descending triangle short setup with Jun Puts). Holding. UGL (breaking higher from range). Holding. LABU (break up from bottoming range). Holding. ARKK (bottom reversal). Holding. SIL (bottom reversal). Holding. EMTY (breakout confirmation). Added Tuesday. FNGU (breaking out). Added Tuesday. BNKD (running higher… look for test and entry near $15.25) Added Tuesday. GOOG (Channel breakout – raised stop). Added Wednesday. DLTR (Consolidation breakout). Added on Friday. CL (Flag pattern). Added Friday.
Stops Hit: None.
Quote of the Day: “You want a friend in Washington? Get a dog.” – Harry S. Truman.
The S&P 500 index closed down 7 points to 4124 the index was down 0.16% with below-average volume on the day. The index held above the 4086 support. 4173 is the next key resistance for the index. Plenty of issues facing the markets and letting this unfold. Two of the eleven sectors closed higher on the week with consumer discretionary as the leader up 0.4%. The worst performer of the week was energy down 2.1%. The VIX index closed at 17 flat for the week. The uptrend from the October low remains in play. Plenty to watch next week to see if anything new sparks the index up or down.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials downtrend off the January highs with some volatility along the way. Flirting with the 200-day MA as support. The sector was down 2% for the week.
XLU – Utilities trending lower from the December highs. 200-day MA is resistance on the chart. $68 is the support. The sector was flat for the week. Entry $68. Stop $67.80.
IYZ – Telecom downtrend from the February highs. No momentum to speak of and looking for a break lower. The sector was down 1.6% for the week. Bear flag on chart.
XLP – Consumer Staples upside trend with flag pattern last few weeks showing a pause. The sector was down 0.1% for the week. The trend is up from the March lows. Rolling top.
XLI – Industrials triangle pattern of consolidation on the chart. Looking for a trend to break up or down. The sector was down 1% for the week.
XLV – Healthcare drifting lower with support at $130.68. Topping pattern on the chart. The sector was down 1% for the week. XBI solid upside trend.
XLE – Energy broke the $82.74 support… attempted to bounce but resumed the downside. The sector was down 2.1% for the week. The downtrend is in play from the November highs. Crude is down on global demand speculation relative to slowing economics. Short-side trade entry hit $82.70 (XLE). ERY entry $30.50. Stop $33. Retested lows.
XLK – Technology The sector remains in a trading range. Closed at the top of the range… need to clear $151.53. The sector was down 0.2% for the week. Need some leadership from the sector if markets are going higher. SOXX lagging. GOOG running on AI news.
XLF – Financials broke below the $32.36 level… banks are still a challenge for the sector overall. The sector was down 1.3% for the week. The trend is down from the February highs.
XLY – Consumer Discretionary consolidation pattern in play on the chart with an attempted break higher during the week. Retail got a boost on reports that the consumer is spending. They learned from the government. The sector was up 0.4% for the week. Broke from the trading range… need to follow through.
IYR – REITs remain in a trading range within the downtrend from the February highs. The sector was down 1.1% for the week. The negative influence of interest rates and reports of vacancies in commercial rents are rising. Tracking SRS for an opportunity. Residential moving up… commercial moving down.
Summary: The index was lower on the day. It is still holding the move back above the 4086 level. It is narrow in breadth and definitely a sector-driven market. XLK and XLY breaking higher and drifting to end the week… others are flat to down. XLE on the short side as the downside resumed. The uptrend from the October low remains intact with three higher lows keeping the trend in place. Earnings pushed the index up and the Fed is getting the blame for the move lower… however, we have not reversed the trend… yet. CPI offered hope on Wednesday but failed to change the current environment as volume was weak… banks (KRE) are getting the blame for the current environment… what about the debt ceiling chatter… it hasn’t helped either. 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 43 points to 12,284 as the index was down 0.36% for the day. The index moved above resistance and followed through in the uptrend. Mega-caps leading along with technology. SOXX still lagging. 11,800 is the level of support to hold.
NASDAQ 100 (QQQ) was down 0.36% with the mega caps holding near the highs. Held above the $320.92 resistance again… followed through on the uptrend. The support is $312.78 and watching as we break from the trading range. The sector had a positive bias with 51 of the 100 stocks closing in positive territory for the day. Added TQQQ entry $27.45 (raised stop $27.30).
Semiconductors (SOXX) Tested the $400 level of support and struggling to find any upside momentum. Still trading below the 50-day MA. A downtrend is in play from the March highs. Added SOXL $13.60. Stop $13.10. The sector was down 1% for the week. Watching how it plays out next week.
Software (IGV) Tested to the $289 support level and bounced. Added IGV $291. Stop $291 (adjusted). The sector was up 1.3% for the week. Mega caps leading the sector.
Biotech (IBB) The sector tested back to the $128.35 level and consolidating. The sector was down 1.3% for the week. Large caps are outperforming small and mid-cap stocks. Added IBB $129.50. Added XBI $82.80. Consolidation pattern in a downtrend.
Small-Cap Index (IWM) lagging overall as investors move away from growth to safety. Established a bottoming range. The sector was down 1% for the week. Letting it unfold.
Transports (IYT) negative earnings created a big test lower to support at the $213 level. Established a trading range. The sector was down 1.6% for the week. If the markets are to move higher overall they need transport to be positive.
The Dollar (UUP) The dollar remains volatile but did break higher to end the week. What is on the horizon? If the dollar gets stronger watch the ripple effect… but, needs to follow through first. The dollar was up 1.6% for the week.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.46% up from 3.44% last week. Mixed reactions all week reacting to the news. Consolidation range for yields & TLT. TLT was down 0.6% for the week.
Crude oil (USO) Bounced and then sold lower… the news states China and US are consuming less on weaker economic data. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. USO was down 1.5% for the week.
Gold (GLD) The commodity is consolidating near the highs and testing this week. The stronger dollar is weighing on the metal… for now. The metal was down 0.3% for the week. Watching for the upside to resume.
Questions to Ponder: Navigating Uncertainty
Stagflation – persistent inflation combined with stagnant consumer demand and relatively high unemployment. Do we have this situation currently in the US economy? If it doesn’t exist in a purely technically defined way, it is creating the same economic environment currently in the US, and the current administration is in denial. Thus, we will continue to feel the effects of this until we change course.
Money Supply – Falling at the fastest rate since 1930. M2 fell 2.2% in February and fell 2.4% in March… Contraction in supply should contract liquidity in the system and stifle inflation. Watch bank deposits they are still declining. See the above definition of stagflation… the pressure on the economy is building.
Banking Facts: banks borrowed $8 billion last week down from the $32.6 billion the previous week. 9% decline reported by regional banks in deposits… outflows remain… “sound and resilient”. The Fed is giving just enough money through the BTFP (Bank Term Funding Program) facility to keep from a collapse ($305.4 billion, up $8 billion on the week) but not enough to eliminate the pain. “Sound and resilient” are the words uttered by many… not even close.
Week ending 5/3 – Money Market Funds showed an $18.3 billion increase in deposits. Bank deposits fell $13.8 billion. Doesn’t include the PACW announcement fo 10% decline in deposits… “sound & resilient”!
FINAL NOTES:
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. A look at the daily chart from the October lows validates exactly that premise. We have to remain focused on short-term trades until there is longer-term directional clarity. Sector-driven activity is in play short term with narrow leadership. News is in the driver’s seat as we take positions that are technically moving and offering opportunities. 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 your money.
Friday: Stocks were again mixed on below-average volume. NASDAQ mega-caps closed the week near new highs. Defensive stocks moving higher are stalling. Banks (KBE) and energy (XLE) are in a position to break lower. The balance of the sectors are moving sideways and bucking resistance. Overall the signals are mixed with QQQ, XLK, XLY, IGV showing leadership, but hitting some resistance to end the week. CPI & PPI data was flat from April to May offering some hope looking forward. Are we at a level where inflation gets ‘sticky’? If so, that leads to stagflation. Two of the eleven sectors closed higher on the week with below-average volume. We see the overall trend is still up from the October lows. Testing of the move is in play and we continue to see opportunities setting up both on the downside and the upside on the charts. I am willing to be more patient than anxious currently as the trend unfolds.
What I am watching on Monday: Large-cap biotech XBI upside resumption after test… KBE/KRE downside continuation… (BAC, PACW, WFC) blame the banks for stocks not running higher on inflation data… a run higher in GOOG… SOXX struggling… up or down from here? This market has to be evaluated sector by sector as the overall trend is bifurcated.
“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.