The markets gave way to anxiety building around the debt ceiling talks as no progress is made. I would like to say that isn’t really news but then it seems investors were banking on this being done. All said, both sides couldn’t make any concessions to lead to a deal thus we kick the can down the road for another day. There was news about a new covid moving through China and that impacted the outlook for the reopening growth of China… The VIX index moved up to 19.5 intraday showing a spike in concern from investors. All the major indexes closed lower on the day as a result of the new anxiety. As we stated, the markets are showing signs of being overextended technically and a test is in order near term. Thus we look for a retracing to the first levels of support. Regional banks (KRE) were up 1% on the day after being up more than 4% earlier in the day but held the gains from Monday. Lowe’s followed Home Depot in lowering their outlook after disappointing earnings. The home improvement sector has slowed significantly over the last two quarters. ITB fell 5.2% in the last three days. New home sales were ahead of expectations at 683k versus 656k previously. The challenge for the builders will be interest rates are back above 7% currently. PMI data was mostly lower, but the services strengthened enough to get the Fed’s attention. Overall it was a negative day but markets did show some resilience. Taking what is offered and moving towards the goal.
The charts are showing some positive setups in SOXX, mega techs, and software (IGV) watching as they test near term. Retail stocks continue their move lower as earnings and forward guidance are lowered. LVMH shares fell 5% on analyst downgrades to luxury goods purchases going forward… recession signs are starting to show up in the data for the consumer. Overall markets stepped back and we will watch how this unfolds near term. One of the eleven sectors closed in positive territory on Tuesday. The S&P 500 index closed down 1.1%. The NASDAQ was down 1.2% with SOXX down 1.2%. Small Caps (Russell 2000) were down 0.4% holding up better than other sectors. The ten-year treasury yield closed at 3.69% down 2 bps on the day with TLT lower the last eight days. Crude (USO) was up 1.5%… warnings shots fired from Saudi Arabia. Gasoline (UGA) was up 0.8%. Natural gas (UNG) was down 1.7% retracing from move higher. The dollar was up 0.2% establishing an uptrend last week. We are focused on managing the risk and watching how this all unfolds.
ONE Chart to Watch: QQQ – 1) Tested the break above $329.77 resistance. Watching that level as support near term. 2) Short-term trend is UP… starting from the January low. 3) Accelerated above the trendline showing an extended move… thus the test 4) TQQQ entry $27.45. stop $30.01. target $32.28 (hit Monday). Adjusted the stop and sold 1/2 of the position at $31.65. 5) Watch how the markets open on Wednesday relative to the balance of the position.
Additional Charts to Watch: SPY – retraced below the resistance $415.20. Trendline off the March lows comes into play. IWM – attempted to break from the range but retraced later in the day. SOXX – flag pattern on the move higher and testing at the resistance of March highs. Added SOXL @ $14.65. USO – oversold… gap bounces off the lows offered entry at $63.60. Stop $62.50. Broke higher from the bull pennant pattern.
Leadership – NASDAQ, NASDAQ 100, SP500, XLY, XLK, SOXX… QQQ testing the break higher still shows mega-cap strength. SPY testing upside momentum. Technology is the leading sector. Consumers (XLY) showing signs of slowing and testing lower. Volume was below average on the day… watching how this plays out. If the debt ceiling issue is resolved the upside has a chance of extending, but we saw what happened on Tuesday when the deal wasn’t done.
Laggards – SP400, RUTX, USO, XLF, XLI, XLE… all mixed in trading as sectors have lagged overall. If the markets are to run higher we need to see them participate. IJH finally bounced but still struggled. IWM can’t get out of the bottoming range. XLE and USO bounced, but remain in a downtrend. KRE bounced on positive news. XLI remains in a trading range.
Interesting Charts: TJX (break from trading range). UBER (break higher $39.20 level to clear). DAL (break higher follow through. $36.25 entry). USO (API shows a large drawdown in crude and gasoline). NFLX (test to $350 and bounce?).
Economic Data: 1) Fed out again lobbying prior to the June FOMC meeting. 2) New Home Sales April 665k expected. (683k better than expected). 3) GDP Q1 second reading 1.1% expected. 4) Pending Home Sales +1.1% expected. 5) Durable Goods Orders -0.9% expected. Minus Transportation -0.3% expected. 6) Personal Income 0.4% expected. Spending 0.4% expected. 7) Consumer Sentiment 57.7 expected.
ON TAP TODAY: 1) Bumbling into default. Neither side is willing to give in on what they deem are important issues… thus they bumble along. 2) Watch the testing in some of the mega-caps… AMZN, NFLX, NVDA, AMAT…
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). SOXX reversal. Holding. TQQQ breakout. Holding. SRS Holding (big break higher Tuesday). SJB Holding (break higher Tuesday). TGT (descending triangle short setup with Jun Puts). Holding. Holding. LABU (break up from bottoming range). Holding. ARKK (bottom reversal). Holding. EMTY (breakout confirmation). Added 5/8. FNGU (breaking out). Added Tuesday 5/8. GOOG (Channel breakout – raised stop). Added Wednesday 5/9. MSFT (break from flag pattern). Added 5/18. ON (breakthrough resistance. $83). Added 5/18. AI (break higher… $23 level to hold). Added 5/18. MU (break above resistance). Added 5/19. M (bottom reversal). Added 5/19. CSCO (bottom reversal… good earnings). Added 5/19. PFE (bottom reversal on a new drug). Added 5/23.
Stops Hit: SPXL hit stop. Nice gain. TQQQ sold 1/2 nice gain. DLTR hit stop and broke even.
Quote of the Day: “Either move or be moved.” – Ezra Pound.
The S&P 500 index closed down 47 points to 4145 the index was down 1.12% with below-average volume on the day. The index broke below the 4160 support. Watching how the test unfolds on Wednesday. Managing the risk near term. Debt ceiling agreement stalls and stalls markets along with it. One of the eleven sectors closed higher on the day with energy as the leader up 1%. The worst performer of the day was basic materials down 1.5%. The VIX index closed at 18.5 moving higher as anxiety grows about the debt ceiling. 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 1.2% for the week. Breaks lower testing the March lows.
XLU – Utilities trending lower from the December highs. Broke below the 50-day MA and $68 support. The sector was down 4.2% for the week. Hit stop on positions.
IYZ – Telecom downtrend from the February highs. No momentum to speak of and looking for a break lower. The sector was up 1.2% for the week. Bear flag on chart. Moved back to $21.63 previous support.
XLP – Consumer Staples upside trend with flag pattern breaking lower testing the 50-day MA. The sector was down 1.5% for the week. Trend reversal in play. Gapped lower with signs of the consumer slowing…
XLI – Industrials triangle pattern of consolidation on the chart. Looking for a trend to break up or down. The sector was down 1.3% for the week.
XLV – Healthcare drifting lower with support at $130.68. Topping pattern on the chart. The sector was down 0.6% for the week. XBI testing the upside trend. Struggling at support.
XLE – Energy broke lower testing the March lows… attempted to bounce to end the week. The sector was up 1.4% for the week. The downtrend is in play from the November highs. Crude is down on global demand speculation relative to slowing economics. Hit stop on short positions with nice gain… watching how the week starts. Bounced off the lows.
XLK – Technology The sector broke from the trading range clearing the $154.42 resistance. The sector was up 4.3% for the week. Providing leadership for the broad index. SOXX moved higher for the week as well as IGV. GOOG running on AI news. Testing at the highs.
XLF – Financials broke below the $32.36 level and recovered with a modest bounce in the banks. The sector was up 2.1% for the week. The trend is down from the February highs. Double bottom setup. KRE adde 1% on news.
XLY – Consumer Discretionary Broke higher from the consolidation pattern in play on the chart. Retail got a boost on reports that the consumer is spending. They learned from the government. The sector was up 2.5% for the week. Testing on retail data weakening.
IYR – REITs remain in a trading range within the downtrend from the February highs. The sector was down 1.9% for the week. The negative influence of interest rates and reports of vacancies in commercial rentals are rising. Own SRS on downside risk. Residential moving up… commercial moving down.
Summary: The index was lower on Tuesday. Started off well but the lack of deal on the debt ceiling weighed on the markets. Remains a sector-driven market. XLK testing at the highs. XLY testing on retails sales data. KRE added to bounce on news. XLE bounced… breaking the down trendline. XLV, XBI, XLI, IYR, IYZ, and XLU are all struggling to find any momentum. XLP accelerated lower again on Tuesday. The index remains in an uptrend from the October low. News is the primary driver up and down for the index. Taking what is offered near term and letting it all unfold. 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 160 points to 12,560 as the index was down 1.26% for the day. The index remains in the uptrend and we will watch how this plays out. Mega-caps leading along with technology. SOXX tested along with IGV. 12,246 is the level of support to hold.
NASDAQ 100 (QQQ) was down 1.27% with the mega caps testing off the highs. Moved above the $329.77 resistance and testing the trend. The support is $329.77. The sector had a negative bias with 17 of the 100 stocks closing in positive territory for the day. Added TQQQ entry $27.45 (raised stop $30.01) Sold 1/2 of the position.
Semiconductors (SOXX) Tested the $400 level of support and finally found some upside momentum. The trend reversed back to the upside and needs to clear the March highs. Added SOXL $13.60. Stop $17.07 (Adjusted). The sector was up 7.8% for the week. Watching how it plays out next week. Flag pattern.
Software (IGV) Broke above the $304 resistance adding to the uptrend. Added IGV $291. Stop $310 (adjusted). The sector was up 5.2% for the week. Mega caps leading the sector. Tested Tuesday.
Biotech (IBB) The sector tested back to the $128.35 level and consolidating. The sector was down 0.1% 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 upside Monday but failed to hold breakout on Tuesday.
Small-Cap Index (IWM) lagging overall as investors move away from growth to safety. Established a bottoming range. The sector was up 1.9% for the week. Letting it unfold. Bounced back to the top of the range.
Transports (IYT) negative earnings created a big test lower to support at the $213 level. Established a trading range. The sector was up 1.5% 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 for 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 0.6% for the week. Uptrend continued.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.69% up from 3.46% last week. Rates climbed all week on Fed talk. Yields trended higher for the week pushing TLT lower. TLT was down 3% 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 up 2.9% for the week. Bear flag on the chart. Warning from the Saudi energy minister to speculators… pushed the agenda of another production cut.
Gold (GLD) The commodity moved lower on the stronger dollar all week. It managed to bounce on Friday… worth watching how this plays out next week. The stronger dollar is weighing on the metal… for now. The metal was down 1.7% for the week.
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.
Money Market Funds showed an $18.3 billion increase in deposits. Bank deposits fell $26.4 billion for week of 5/10. Third week of outflows… “sound & resilient”! Small banks are at the lowest deposits since 5/2021 with 5 consecutive weeks of outflows and declines. The picture isn’t improving and Treasury Secretary Janet Yellen said to expect more bank mergers going forward… i.e. failures.
Volatility Index (VIX–X) Tested down to the 16 level the last month showing little anxiety from investors despite all the news surrounding the markets. Short-term belief is they are focused on the Fed over the debt ceiling issues. Still an underlying belief the Fed will cut rates prior to the end of the year… despite what all the Fed folks say. The CBOE has added a a 1-day Volatility Index (VIX1D) you can now track the volatility daily versus the rolling 30-day in the regular VIX. Note Monday’s volatility actually dropped despite the debt-ceiling deal not getting done. Worth tracking and learning more.
Consumer credit card debt is on the rise. It totaled $986 billion in the first quarter. This is a negative sign for the economic picture as most consumer debt is attributed to monthly expenses rising due to inflation.
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 with the trend higher overall but plenty of volatility along the way. We remain focused on short-term trades until there is longer-term directional clarity. Trading the volatility has performed better than holding through the cycle. 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.
Tuesday: Stocks traded lower awaiting the news on the debt ceiling. The leadership tested as well. The markets held up well overall despite some shift in anxiety. Banks (KBE) bounced again on news showing more short covering. Energy (XLE) bounced as some expect cuts in production globally. All eyes on Washington for now and letting this test of the upside move play out. One 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. Major indexes showed some resilience overall. Confidence in the move seems to have momentum in the mega caps but plenty of issues underlying and nagging investors. Taking what is offered and managing the risk that is.
What I am watching on Wednesday: Large-cap biotech XBI resumed the upside momentum following a test to the previous lows… KBE/KRE follow through on bounce? Test of the mega caps… could offer some entry opportunities. GLD bounce? XLE bounce? USO bounce? This market has to be evaluated sector by sector to define the leadership near term. Positive setups are in place… Upside: QQQ, SOXX, SPY. Downside: FAZ, SRS, ERY, TZA, DIA. Practice Simple.
“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.