The markets moved higher again on Friday but faded some into the close which would be expected following a solid move higher. Parts of the market cleared key resistance points. The major market indexes had solid gains as stocks headed higher on mixed earnings reports and economic data. Tesla jumped on earnings data and strong comments from Musk about the future with the stock jumping 33% for the week. Earnings have not been the highlight of the markets thus far, yet in spite of the news, stocks have managed to climb higher since January 6th. This leaves the question of how high does it go from here? The answer is as high as it wants to. Irrational moves are the norm for markets regardless of what we think which is why we look at charts versus listening to the talking heads of analysts, media, and friends.
There have been nine of the presidents out talking about their position on inflation over the last two weeks. They don’t want markets to be surprised by their continued hikes in rates. The challenge looking forward is the underlying belief the Fed will stop hiking rates soon based on improving data relative to inflation… remember inflation is only part of the equation. Fighting inflation is slowing the economy and in turn that will slow earnings… which translates into lower stock prices. All said patience is what we have to have for now as we take it one day at a time. The FOMC meeting concludes on Wednesday next week and will be watched by everyone with hopes a softer and gentler Fed.
The volume was above average, the VIX closed the week at 18.5 as the sentiment continues to be positive. The S&P 500 index closed up 0.25% for the day and +2.47% for the week. The NASDAQ was up 0.95% on the day and 4.32% for the week. Small Caps (Russell 2000) were up 0.45% on Friday and 2.45% for the week. The ten-year treasury yield closed at 3.51% up 2 bps as TLT remains in an uptrend consolidation pattern. Important to note the dip near the 3.4% support level for the bond… if the yield breaks and holds this gets interesting for stocks. Crude (USO) was down 2% and testing the first level of support after hitting resistance just above the $82 level on crude. Gasoline (UGA) was down 1.3% and testing near the November highs. Natural gas (UNG) was down 1.9% and back near the April 2021 lows. The dollar was flat trying to find near-term support. The goal is to see how this plays out as we move forward. We are taking what the market gives and managing the risk.
Things to Watch This Week: 1) IGV – Software broke above the 50 DMA and resistance offering an entry signal for the sector… worth watching near term. 2) QQQ broke above key resistance leading the markets higher… adjust stops and let it run. 3) SOXX broke higher and is the leader for now… adjusted stops and watching. 4) Watch resistance 4086 SPX… if we get through resistance the August highs are the target.
Key Data: 1) FOMC meeting with Fed 2) Earnings from AAPL, GOOG, AMZN, META… will key for the large caps sector. 3) ARKK was up nearly 11% on the week… technology is key to the upside move. 4) Consumer Confidence Index Jan. (108.4 previous. 109 expected). 5) ADP Employment Jan. (235k previous. 175k expected). 6) ISM Manufacturing Jan. (48.4% previous. 48% expected). 7) Motor Vehicle Sales Jan. (13.3 million previous). 8) Nonfarm Payroll Jan. (223k previous. 190k expected). Unemployment Rate Jan (3.5% previous. 3.6% expected). Average Hourly Earnings Jan. (0.3% previous. 0.3% expected). Labor Participation Jan. (82.4 previous). 8) ISM Services Index Jan. (49.6% previous. 50.8% expected).
Charts to Watch:
Previous List Updated: SPY $399.50 resistance (broke higher adjusted stops), QQQ $282.80 resistances (broke higher adjusted stops), SOXX $390.40 resistance (broke higher adjusted stops), IWM $186.60 resistance (broke higher adjusted stops). All tested lower… All bounced… thus, be aware of the upside bias still in play. Watching how investors respond to news and earnings going forward.
SOXX/XLK offering leadership is another positive for the indices.
FXB the British pound is in an interesting pattern. The cup and handle pattern over the last six months is in a position to break higher. The dollar has been weakening of late and thus the move above the August highs.
Metals & Mining: XME (hit entry), SLX (hit entry), GDX, SCCO, PAAS testing but holding up well. JJM shows the trend.
Energy: XLE, IEO holding up well along with individual stocks FANG, COP. (all moving higher).
Previous Charts of Interest Still in Play: FCX (test support, raised stop as hit resistance), KWEB (breaking higher “V” bottom, hitting resistance). UGA (double bottom, broke above the 50 DMA). Adjusted stops as necessary. RIG (cup and handle breakout, big move adjusted stop). SPY (reversal, reentered). QQQ (reversal, adjusted stop). SOXX (back above $380=added to position).
Stops Hit: None
Quote of the Day: “What is an astronaut’s favorite part on the computer? The space bar!” — Anonymous.
The S&P 500 index closed up 10.1 points to 4070 the index was up 0.25% with above-average volume. The index broke above near-term resistance and watching 4086 as the level to clear. Five of the eleven sectors closed higher on the day with consumer discretionary as the leader up 2.2%. The worst performer of the day was energy down 2%. The VIX index closed at 18.5 as sentiment shifted toward positive. 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 0.1% for the week. Entry $79. Reverse head and shoulder pattern on the chart.
XLU – Utilities broke support and tested lower. Watching for support and direction near term. The sector was down 0.5% for the week.
IYZ – Telecom cup and handle with a break higher. 200 DMA just overhead as well. The sector was up 2% for the week. Watching how it unfolds. Entry $22.50.
XLP – Consumer Staples broke lower adding to the weakness of the sector. The sector was down 2.8% for the week. Looking for a decision on direction.
XLI – Industrials sold back to support giving up all the gains from last week. The sector was up 0.3% for the week. Need to hold $72.35 support.
XLV – Healthcare Struggling to find direction $131.40 support is level to hold. The sector was down 0.8% for the week. Weakest sector currently.
XLE – Energy established a trading range and broke higher and hit resistance at $93. The sector was up 0.8% for the week. Entry hit $89. USO and UGA are in play currently.
XLK – Technology The sector reversed off the lows finally breaking through the $127 level. This is the key component in the current bounce off the previous lows. The sector was up 4.1% for the week. Entry at $127.50. $137 resistance in play – remains the leader.
XLF – Financials established a bottom reversal and tested the move. Positive moves to end the week breaking above the $35.85 resistance. The sector was up 2.2% for the week. Entry $34.50. C (break above resistance adjusted stop).
XLY – Consumer Discretionary bottom reversal in play and break above key resistance at $146.50. The sector was up 6.4% for the week. After leading the downside solid upside bounce. Entry $132. AMZN ($98 resistance clear hit entry). Upside breakout from cup and handle pattern.
IYR – REITs bottom reversal in play. The sector was down 0.6% 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.
Summary: The index was up 0.25% for the day. It has established a bottom reversal that tested and added to the upside move. 4086 level to watch for upside resistance. Trading what the market gives as positive bias remains resilient in the face of data, earnings, and the Fed. Remember two things; first, the trend is your friend, and second, don’t fight the Fed (FOMC meeting on Wednesday).
(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 109 points to 11,621 as the index was up 0.95% for the day. The bounce off the October lows resumed and broke above the December highs. The positive momentum remains with investors willing to buy. 11,475 break confirms on Friday… need to hold and advance. Technology and semiconductors are the keys…. watching how they play out.
NASDAQ 100 (QQQ) was up 1% with the large caps adding to the upside move. Broke above $284.35 resistance… $293.35 resistance… $303.85 next resistance. Buyers remain in control for now. The sector had a positive bias with 53 of the 100 stocks closing in positive territory for the day. The chart shows a test of the positive momentum and continuation. AAPL ($137.20 level to clear/hit entry/adjusted stop). AMZN (hitting resistance/breakout). GOOG (bottoming pattern/hit entry). MSFT (bottom reversal/hit entry).
Semiconductors (SOXX) made a move higher to break from the bottoming range and added nicely to the upside then tested the move and bounced back to end the week higher. The sector was up 5.6% for the week. $390.40 resistance cleared and added to position… $422.45 next. 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).
Software (IGV) Finally found some upside momentum. The sector was up 4.5% for the week. $288.40 next resistance. CRM (sup and handle/hit entry/adjusted stop). August highs next target.
Biotech (IBB) The sector remains in a trading range with a positive bias of late. The sector was up 1.3% for the week. Entry $134.10. Back to the top of the trading range… looking for break higher.
Small-Cap Index (IWM) bottom reversal showed leadership but stalled at resistance $188.25. Tested the move higher and bounced. The sector was up 2.4% for the week. Entry $177. Cup and Handle pattern in play.
Transports (IYT) Bottom reversal and positive upside with cup and handle pattern. The sector was flat 0.0% for the week. Need to clear $234 resistance. Entry $218/adjusted stop.
The Dollar (UUP) The dollar moved lower on economic data and trying to establish a near-term low. The dollar was up 0.1% for the week. The outlook remains negative. Building a bottoming range.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.51% even from 3.51% last week. The yields reversed the last month adding to the upside trade in bonds. TLT was up 0.4% for the week. Entry TLT $102.35. Stop $105.50. Consolidating.
Crude oil (USO) Reversal in trend for crude the last few weeks pushing back to the previous highs and stalling. Supply-demand speculation as China opens its economy and borders. USO was down 2.8% for the week. Entry $67. Stop $69. OIS (uptrend/hit entry/adjusted stop). XOM (at resistance/hit entry/adjusted stop). CVX (breaking higher from consolidation pattern/hit entry).
Gold (GLD) The commodity has been trading higher as the dollar declines. The metal was 0.04% for the week. GLD entry $154.90. Stop $176. Cleared resistance at $174.30 and got the break higher. Letting it run and adjusting stops. GDX entry$31.50.
Put/Call ratio was 0.84 on Friday… Bias remains positive.
Questions to Ponder: Navigating Uncertainty
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 is nowhere near its target for an economic slowdown to control inflation… yet, stocks are in rally mode. Q4 GDP gave insight that the economy isn’t slowing fast enough for the Fed. They will, and are, engineering a recession and layoffs. The yield curve is flashing recession, ISM data shows contraction, and the Fed is promising more rate hikes… either it is different this time, or the market is ahead of itself. Manage your risk.
FOMC meeting and Fed decision on rates this week. 25 basis points are priced into the market since the Fed has basically told us what they will do. Looking forward is where the challenge will be for the markets and investors. The Fed is expected to hike another 25 basis points at the next FOMC meeting and then pause. They will survey the results/damage created and then make further decisions. The big question is, does the Fed engineer a soft landing or crash the economy? I lean towards the later based on history, but we will have to be diligent in managing our risk and letting this all play out in the coming months.
With all the sanctions on Russian oil, they are still the largest provider of crude to Europe… interesting!
Remember the infrastructure spending bill that Congress passed last year? $1 trillion is to be spent on refurbishing and establishing new infrastructure… it has started impacting stocks like Caterpillar (CAT) and Freeport McMoRan (FCX)… This is a sector that will be a benefactor in years to come. We own FCX and watching others as opportunities relative to the spending unfold. URI, TEX, RIO, BHP, DE… some to track.
Friday: The market remains challenged by data versus hope. The data is weakening relative to earnings, growth, and outlook. The hope is the Fed will slow the rate of hiking interest rates… the hope is not likely to happen near term. With the FOMC meeting Feb 1st we will see how the Fed acts. In the meantime, we will take what is offered and avoid the speculation that is. Stops raised. Eyes open. Emotions removed. Mixed economic data on the week has been mostly ignored. Earning finally gets some good news from TSLA and CVX helping the upside for the week, but overall the reports are mixed. 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 remains flat. Interest rates hold near the 3.5% level on the ten-year bond. Optimism remains in play for now as we approach key resistance points on the charts. The NASDAQ is leading breaking key resistance on Friday. We could see a test of the move near term… and the FOMC meeting is next week and based on what the Fed does and more importantly what they say, will impact the direction near term. Take what is offered and manage the risk accordingly. Volatility closed at 18.5 as anxiety levels dissipate. The money supply shifted towards positive as the money remains cautious despite the headlines. Volume moved 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… technology and consumer discretionary have led the move. Financials reversed along with major indexes as earnings helped… along with lower interest rates. 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.