The markets closed on an upbeat note, but the activity was somewhat lackluster on below-average volume. The major indexes all closed near their respective highs of the day, with only modest gains. SOXX was a standout on the day posting solid gains. The economic data didn’t help as Empire State Manufacturing bombed at -31.8 for May versus +10.8 in April. A one-month recovery… Debt Ceiling was all the talk on Monday as well with rumors of a resolution. Biden said they were meeting Tuesday… McCarthy said the discussions “were nowhere near close”. Sounds like a Washington resolution to me. Two Fed presidents stated it was unlikely the Fed would cut rates prior to the end of the year considering the inflation rate. Finally, someone makes sense of how inflation works. Meaning stagflation for the economy is 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. Mega cap stocks looked soft on Monday but managed to post a solid gain thanks to META and NVDA. That said, the technology, semiconductors, and materials show some positive setups for a move higher. Regional banks (KRE) posted a solid rally on the day up 3.2% despite the drawdown of deposits… worth watching how they unfold.
The S&P 500 held above the 4086 support and closed higher to start the week. QQQ held above the $320.92 level helped keep the upside trend alive. The NASDAQ composite index closed higher led by semiconductors. Breadth didn’t increase but the shift in the SOXX was a positive overall. The close above the $418.50 level breaks the downtrend from the March highs… needs to follow though, but more importantly would be the shift in leadership for the broader index. Volume was below average on the day with seven of the eleven sectors closed in positive territory. The S&P 500 index closed up 10.3%. The NASDAQ was up 0.6% with SOXX up 2.7%. Small Caps (Russell 2000) were up 1.2% showing some positive activity towards growth stocks. The ten-year treasury yield closed at 3.51% up 7 bps on the day. Crude (USO) was up 1.8%… watching how it plays out against the background of economic data. Gasoline (UGA) was up 1.5%. Natural gas (UNG) was up 4.5% sporting a positive reversal on the chart. The dollar was down 0.3% still struggling overall. We are focused on managing the risk and watching how this all unfolds.
ONE Chart to Watch: QQQ – 1) Remains above the $320.92 resistance and followed through on the upside break adding to the uptrend. 2) Short-term trend is UP… starting from the January low. 3) Uptrend line held along with the $312.78 support. 4) Note the declining trend in volume since the March lows… money supply same thing, not a confidence builder for the uptrend. 5) Breakout confirmed and trend established for now. 6) TQQQ entry $27.45. stop $28.10. target $32.28.
Additional Charts to Watch: SPY – reversed back above support at $407.19. Followed through to break higher. IWM – retested the previous lows and bounced without conviction… favoring the downside technically… positive move on Monday needs to follow through. SOXX – retested lows with a downtrend from the March highs… bounced Wednesday… got some follow-through with some leadership on Monday… watching how it plays out on Tuesday. Added SOXL @ $14.65. USO – oversold… gap bounces off the lows watching for an opportunity.
Leadership – NASDAQ, NASDAQ 100, SP500, DBP, Dow… QQQ breaks higher along with the NASDAQ. Others trying to resume upside momentum. DIA struggling with three doji candle closes in a row. Volume was below average on the moves… need more breadth in the move overall. The positive takeaway Monday was SOXX.
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. SOXX posted positive move. IWM added some upside but needs to follow through. IJH modest move not impressive. XLE holding near the lows. KBE bounced on Monday… watching.
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. (absolutely ugly report at -31.8…) 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. (Bostic stated he didn’t see a rate cut prior to year end). 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: “Any idiot can face a crisis: it’s this day-to-day living that wears you out.” – Anton Chekhov.
The S&P 500 index closed up 12 points to 4136 the index was up 0.3% 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. Seven of the eleven sectors closed higher on the week with materials as the leader up 0.8%. The worst performer of the week was utilities down 1.2%. The VIX index closed at 17.1 up barely on the day. The uptrend from the October low remains in play. Plenty to watch as this all unfolds.
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. Led the day.
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. Led the downside on the day.
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. Cleared the $151.53 resistance.
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. KBE & KRE rallied on the day.
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. Cleared $147.11 resistance.
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 higher on the day. It is still holding the move above the 4086 level. It is narrow in breadth and definitely a sector-driven market. XLK and XLY breaking higher and leading. KBE bounced despite the negative deposit data for banks. XLE is still on the short side of the chart. The index remains in an uptrend from the October low. 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 last week but failed to change the current environment as volume was weak… banks (KRE) are getting the blame for the negative 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 up 80 points to 12,365 as the index was up 0.66% for the day. The index moved above resistance and followed through in the uptrend. Mega-caps leading along with technology. SOXX made a positive contribution up 2.7%. 11,800 is the level of support to hold.
NASDAQ 100 (QQQ) was up 0.54% with the mega caps pushing to new 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 74 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. Positive boost on the day… showing some leadership? Watching for the follow-through.
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. Nice bounce back from Friday.
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. Nice bounce.
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. Finally showed upside move… watching.
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. 3.51% up 7 basis points. TLT lower on the day.
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. Bounced again…
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”!
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.
Monday: Stocks were higher on below-average volume. NASDAQ mega-caps closed positive with some intraday volatility. Defensive stocks moving higher with materials (XLB) leading the day. Banks (KBE) bounced off the lows showing some signs of life. Energy (XLE) is 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 with SOXX trying to play along on Monday. Seven of the eleven sectors closed higher on the day with below-average volume. We see the overall trend is still up from the October lows. NASDAQ leading, S&P 500 drifting, Small caps lagging. Looking for some breadth in the move higher to gain confidence in the move. I am willing to be more patient than anxious currently as the trend unfolds.
What I am watching on Tuesday: Large-cap biotech XBI upside resumption after test… KBE/KRE bounce follow-through or just a short squeeze? Materials (XLB) follow through… a run higher in GOOG… SOXX follow through… broader leadership coming? This market has to be evaluated sector by sector to define the leadership near term. Positive setups are in place on the close Monday. Upside: QQQ, SOXX, XRT (if data is good for retail sales). Downside: XLE, KBE, KRE.
“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.