Reality of the Markets – Sector Rotation

Updated – May 22nd

The S&P 500 index closed down 39 points to 5267 moving the index down 0.74% on above-average volume. The index traded lower on the day. None of the eleven sectors closed higher on the day. The leading sector was technology down 0.8%. The leader on the downside was REITs down 2.1%. The VIX index closed at 12.7 higher for the day. There is plenty to ponder between the headlines and the facts.

Losers:

XLY – Consumer Discretionary The sector bounced off support at $169.75. Trading at the $178 level of resistance. The sector was up 0.3% for the week. Added UGE entry $16.65. Stop $17.50. Letting it play out short term. Consolidation wedge. Broke below the $178 support offering short side trade… Confirmed and accelerated lower.

IYR – REITs plenty of volatility as interest rates, defaults, and speculation factor into the activity. Commercial real estate remains a big question mark looking forward. Moved back above $87 with interest rates declining. Bottom reverse remains in play and the down trendline is the next resistance from the December highs. The sector was up 1.4% for the week. Moved back to $87 support. Confirmed break lower.

IYZ – Telecom moved back above the $21.74 level showing a modest uptrend off the lows. The sector was up 1.7% for the week. Watching how this unfolds relative to the reversal pattern. Broke below $21.30 negative development.

Leaders:

XLU – Utilities tested $62.90 and hasn’t looked back. The speculation around higher demands from AI for electricity has sparked a rally that has now gone verticle. Entry $61. Stop $71.50 (HIT STOP). The sector was up 1.5% for the week. Let the trend play out adjusted the stop. Testing at the highs, breaks lower hit stop.

XLF – Financials solid upside as interest rates were lower and Fed talk helping the cause. The sector was up 1.5% for the week. Uptrend is back in play. Topping pattern broke lower – hit stops.

KBE – Banks were in a trading range and $47 level was cleared on the upside. We traded the range and now we see how it unfolds. KBE entry $44. Stop $46.98 (HIT STOP). Letting it unfold relative to liquidity, CRE, defaults, interest rates, etc. Testing support at $47 and broke lower hitting stop.

XLI – Industrials The sector was down 0.3% for the week. Bounced off support at $120 with a double bottom pattern. Still positive overall despite the pullback. Sideways trading broke lower.

XLB – Basic Materials Tested support at the $88.13 level with a double bottom pattern that resumed the upside move. For the week was up 0.3%. Rolling top.

XLP – Consumer Staples Uptrend breaks out and moves above $74.72 resistance with a cup and handle pattern with a breakout. The sector was up 0.7% for the week. Solid upside and letting it play out. Testing highs, moved lower.

Laggards:

XLV – Healthcare Downtrend to support at $138.40 and breaking above the $144.63 resistance. The sector was up 1.9% for the week. Biotech (XBI/IBB) adding to the upside. Moved to $144.63 support.

XLK – Technology cleared the $207.90 level and broke to new highs. Consolidated the last two days and watching how it unfolds. IGV and SOXX are the keys to the upside move. The sector was up 3% for the week. TECL entry $68.40. Stop $79.35. Tested at the highs.

XLE – Energy has turned sideways holding support at $92.50. The sector was up 1.2% for the week. Watching crude and natural gas relative to the upside for the stocks as inventories have been higher, but UNG and USO showing signs of buyers. Letting it unfold. Broke $92.50 support… short signal ERY.

UNG – Natural gas has struggled on too much supply versus demand. Bounced off the previous lows… Big bounce on EQT, the largest US producer, announced it was cutting production in response to lower prices and demand. Talk of increased electrical demands for AI leading to the bounce… yes, the electric companies converted from coal to natural gas thus expectations are for increased demands. This is speculative as the demand is over the next five years not today. Added to the upside move as we follow the trend. For the week the commodity was up 15.6%. Entry $15.15. Stop $19.06. Modest test on Thursday.

Summary:

The SP500 index gapped higher and reversed to close lower on Thursday. Held the March highs with an outside day on the chart. Watching how Friday plays out in front of a long weekend. Downside leadership from IYR, IYZ, XLY, IYT, and XLU.

(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.)

Other Indexes To Watch

The NASDAQ index closed down 65 points to 16,736 with the index down 0.39% for the day. The index holds near the highs. Trading in semiconductors and software were lower on the day. The focus is to follow the trend and manage the risk. Moved through the 16,504 resistance to new highs and a test.

NASDAQ 100 (QQQ) was down 0.45% with the sector trading lower on the day. Cleared the $449 level and confirmed that the upside remains in play. Adjusted stops and let it play out following the high-to-low action on Thursday.

1) AAPL Broke higher from flag pattern entry added. Hit stop. Down 2.1% on Thursday. 2) AMZN resistance at the previous high. Short setup? Tested the 50-day MA. 3) GOOG beat earnings up 9% and climbing. Tested on Thurday. 4) MSFT Clear $412 with entry. Added to the upside. At the March highs. 5) META down 11% on earnings. Bounced with a rolling top. 6) NFLX Down 9% on earnings guidance. On the run since. Moved above the April highs. 7) TSLA gapped 15% on EV self-driving cars in China. Filled the gap on the move lower… reversal at support? Jumped on Semi truck updates and tested again. 8) NVDA trading sideways to slightly higher. Earnings beat up 9%. Manage your stops if you hold positions and manage the risk accordingly.

Semiconductors (SOXX) has moved higher but it has been a struggle at each resistance point. The sector was up 3.6% for the week. Cleared, $222.24 resistance, and tested. SOXL entry $36.90. Stop $51.25 (HIT STOP). NVDA bumped on Thursday but overall closed lower.

Software (IGV) broke higher from a bottoming pattern at $81.75. The sector was up 3.5% for the week. Gained some momentum finally… watching how it unfolds near term. Outside day with high to low action.

Small-Cap Index (IWM) Bounced off $192 support, cleared $199 and $207.63 resistance, and now needs to clear $211.32 resistance. The sector was up 1.8% for the week. Stalled at current highs… Sold below $204.80 support.

Transports (IYT) broke support at $66.40… moved back in a bottoming pattern. Watching all of the dynamics of the global logistics systems with challenges in the Red Sea, Port of Baltimore, and other issues moving goods. The sector was down 0.6% for the week. Needs to find momentum. Short side trade follow-through on Tuesday… tanked on Thursday.

The Dollar (UUP) The dollar reacted to global geopolitics, interest rates, and the Fed moving the buck lower on speculation. The dollar was down 0.6% for the week. $28.60 level to hold. The rising speculation of rate cuts from the Fed is challenging the dollar. The Fed clearing part of its balance sheet isn’t helping the dollar as well. Holding at support with bump from FOMC minutes and upside follow through.

Treasury Yield 10-Year Bond (TNX) The yield on the 10-year bond moved lower on speculation around the Fed. The yield moved from 4.5% to 4.42% this week down 8 bps but plenty of speculation. Watch how yields respond looking forward relative to the Fed talk. TLT was up 0.3% for the week. 4.47% Thursday.

Crude oil (USO) Hit resistance at the October highs and tested lower. Supply is building and bothering some traders as we watch to see how this plays out short term. The commodity was up 1.4% for the week. Broke support on Wednesday… high to low Thursday closing lower.

Gold (GLD) Plenty of speculation in the headlines as we remain patient. Broke support on the stronger dollar as you would expect… and has bounced on the weaker dollar… Some say inflation fears are subsiding… I say price increases in precious metals of late think differently. Gapped higher clearing $214.64 resistance and closed at a new high. GDX, SLV, and SIL all moved higher as metals gained nicely to close the week. We hold positions in each. Tested lower on a stronger dollar Wednesday and Thursday. Back to $214.64 support.

FINAL NOTES

The essence of trading currently is hope and speculation as investors believe the data will convince the Fed it is okay to cut interest rates. The speculation now is the Fed will cut interest rates sooner rather than later. The FOMC minutes took some air out of the speculation balloon as we let this storyline unfold. PMI data added to the deflation of the balloon… Thus, we take what is offered short term and let the longer term picture unfold. Patience and risk management are key. Watching how the storylines unfold.

SEE OUTSIDE THE MARKET PAGE FOR ECONOMIC DATA.

Longer-Term View

The index moved back above the 13-week MA as the data points to the Fed cutting rates… at least that is the belief. The test lower was short-lived with the speculation surrounding the Fed news and inflation. The jobs report, CPI, PPI, and other data gave some hope of a rate cut short term, but the longer-term view is still cloudy at best. Thus the trend resumed higher with the index hitting new highs. The up trends from 2020 are still in play. The accelerated trend from October 2023 is what we are basing our decisions on currently, thus we reentered SPY or equivalent in our 401k plans, IRAs, etc. We will watch how the longer-term trend unfolds. There are always positive and negative swings in a longer-term trend. A look at the daily chart from the October 2022 lows validates that premise with plenty of volatility along the way. Many issues are on the horizon with elections, wars, inflation, and interest rates remaining some of the top challenges for investors. Current activity shows volatility that is associated with extended moves. We look to charts and fundamentals for answers. Longer-term positions are back in play as we watch to see how it unfolds. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal is to manage the risk of positions, take what is offered… short or long, and then manage your money. Listen to the market not the talking heads. SPY entry $516.30.

Decide what you’re doing before the market opens based on your beliefs. Entry. Exit. Target. Define the risk of the position. Nothing more… Nothing less.

Navigating Uncertainty

Volatility Index – VIX retreated from the highs above 20. The uncertainty relative to economic data and the FOMC has kept investors guessing and trading news short term. There has been plenty to chew on with the Fed, inflation data, jobs report, economic data, and earnings. The buyers have pushed the VIX lower and the move below 12.7 on the VIX kept the buyers in play. Closed at 12.7 on Thursday. SVIX trade hit stop.

Technical Summary

The indices finished in negative territory with high to low action intraday. NVDA reported better-than-expected earnings adding hope, but that faded as the sellers took control of the day. Watching how this unfolds in front of the long weekend.

Decide what you’re doing before the market opens based on your beliefs. Entry. Exit. Target. Define the risk of the position. Nothing more… Nothing less.

“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.

* All charts are courtesy of TC2000

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