The markets started the day flat and then Mr. Powell spoke… that added some intraday volatility with the initial reaction to the upside then sold and ended with the buyers taking control into the close. The topic of choice remains the Fed and the labor markets. The Fed Chair stated that inflation is starting to ease, but interest rates will still likely rise. Treasury yields followed stocks up and down following the comments and close at 3.6% up 4 bps on the worries along with the dollar slipping in response. Earnings continue to be mixed not helping matters. The leaders still look good in the current trend higher as technology, semiconductors, Nasdaq 100, and others show solid patterns. Energy bounced back on Tuesday as crude prices rose on the day. The intraday action offered entry points for some trading opportunities as we continue to take what the market offers and manage the risk accordingly.
The President’s State of the Union’ address is Tuesday night… not sure he can say anything to change things near term… unless he is going to promote a higher deficit and more money giveaways. His primary points are more taxes on the rich stating it isn’t ‘fair’ for wealthy people to not pay more. After all, they are only paying 95% of the taxes collected from individuals. Corporations will also be targeted to pay more taxes. I have only one question… where are the cuts in spending? Where is the balanced budget based on what taxes are already collected? I know crazy thought that you and I have to have a balanced budget but the government doesn’t. Sure the speech will offer me plenty of sleeping time.
Is this a new bull market? I would like to say no, but the talking heads are wanting everyone to believe it is different this time… the Fed is going to engineer a soft landing, growth will return and we will all live happily ever after. The greatest challenge is the charts. They don’t lie. The move off the October low has been solid. It tested the first stage in December and resumed the uptrend. The modest test the last few days responded higher on Tuesday as investors took hope away from Powell’s comments on inflation. The August highs are in sight. Volume has been above average and the golden cross (50 moved above the 200 DMA) showed up on the S&P 500 index on Thursday… All said the charts are in good shape. Thus, you take what is offered and wait for the other shoe to drop… if it doesn’t, you are in the right positions and enjoying the gains. We added positions Tuesday in the volatility that pushed stocks higher. If the downside returns we have our stops in place and watching how this all unfolds near term. This is why we follow the charts and keep it simple. Overthinking gets you into trouble.
The volume was below average, the VIX closed at 18.6 down slightly on Fed comments. The S&P 500 index closed up 1.3% for the day. The NASDAQ was up 1.9%. Small Caps (Russell 2000) were 0.7%… all higher following the two-day test. The ten-year treasury yield closed at 3.67% up 4bps for the day as TLT reversed on the recent rise in rates and testing support. Important to note as treasury yields tested the 3.4% support level and bounced… if the yield breaks and holds below 3.4% this gets interesting for stocks. Crude (USO) was up 3.4% adding to Monday’s gains with a solid bounce-off support. Gasoline (UGA) was up 3.2% and moved back above the 200 DMA level of support. Natural gas (UNG) was up 4.3% and holding above the April 2021 lows. The dollar has been higher as the economic data pointed to the Fed staying in a hiking mode for interest rates. We adjusted our stops and will focus on managing the risk as we hit targets on the upside position.
Things to Watch This Week:
Key Data: 1)New York Fed inflation expectation (5% previous). 2) Wholesale Inventories ($28 billion previous. $27 billion expected). 3) Jobless Claims (183k previous. 192k expected). 4) University of Michigan Consumer Sentiment Index (64.9 previous. 65.1 expected). 5) Powell speaks on Tuesday… all ears want to hear if he has truly changed his tone inflation. Powell in his comments did seem confident that inflation is declining and we are on the path to a soft landing… markets liked what he had to say… if he truly believes that, equities will rally in response… until which time earnings fall based on slower growth. He didn’t address the growth side of the equation, but he did elude to disinflation as part of the process. Remember, don’t fight the Fed.
Consumer Credit: $11.6 billion versus 24.5 billion December versus 33.1 billion November… see a trend here? 65% drop from November! That is a big number. Revolving Credit (credit cards) $7.2 Billion versus 15.3 billion. Non-revolving debt (autos, student loans, etc) $4.4 billion versus $17.8 billion. What is happening? Consumers can’t afford it or don’t want it… interest rate shock is in play my belief. The average credit card rate is 20.4% according to the Fed report. This remains a big issue for the system and reserves have been rising in banks to buffer against the looming defaults.
Previous Data: ISM Manufacturing Jan. (47.4% versus 48.4% previous. 48% expected). More slowing in the manufacturing sector as expected. Rental Vacancy Rate (5.8% versus 6% previous). Initial Jobless Claims (183k versus 186k previous. 195k expected). Continuing Claims (1.66 million versus 1.67 million previous). Nonfarm Payroll Jan. (517k versus 223k previous. 190k expected). Much higher than expected and could keep the Fed engaged longer. Unemployment Rate Jan (3.4% versus 3.5% previous. 3.6% expected). Average Hourly Earnings Jan. (0.3% versus 0.3% previous. 0.3% expected). Labor Participation Jan. (82.7 versus 82.4 previous). ISM Services Index Jan. (55.2% versus 49.6% previous. 50.8% expected). Much better than expected and another data point that keeps the Fed in play.
Charts to Watch: KBE, KRE, BAC
Tuesday: SOXX (bounced at support added SOXL trade), XLB (bounced at support added XLB trade), USO (bounce at support added UCO trade.)
Metals & Mining: XME (hit entry), SLX (hit entry), GDX, SCCO, PAAS testing their respective moves higher. JJM at key support in the trend. Trend is being challenged as money flow drops. Watching how it unfolds as some stops hit in the sector.
Energy: XLE, IEO moving lower of late with some stocks breaking key support. (COP)… watching how this unfolds with the downside trade setting up. Crude has moved lower along with other commodities in the sector. Both crude and energy bounced on Tuesday… watching to see if the trend resumes.
Previous Charts of Interest Still in Play: FCX (test support, raised stop as hit resistance), RIG (cup and handle breakout, big move adjusted stop). SPY (reversal, reentered). QQQ (reversal, adjusted stop). SOXX (back above $380=added to position). XME (trending higher. Break to the upside.) IGV – (broke out offering an entry signal.) Ran higher and tested on Friday. QQQ (broke above resistance hit entry). Ran higher and tested on Friday. SOXX broke higher hit entry. Ran higher and tested on Friday. Metals & Mining XME, SLX hard metals broke through resistance. Watch resistance 4086 SPX… Broke and continued higher with a test and a bounce on Tuesday.
Stops Hit: KWEB
Quote of the Day: “A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.” – Ann Landers.
The S&P 500 index closed up 52.9 points to 4164 the index was up 1.29% with above-average volume. The index tested the 4086 level and bounced on Tuesday. Seven of the eleven sectors closed higher on the day with energy as the leader up 3.2%. The worst performer of the day was consumer staples down 0.41%. The VIX index closed at 18.6 as sentiment shifts again on Fed comments. Managing the risk. 4300 target remains as we see how it unfolds near term.
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 0.01% for the week. Entry $79. Reverse head and shoulder pattern on the chart. Broke above resistance… Tested and bounced.
XLU – Utilities broke support and tested lower. There is a downward stairstep on the chart and the breakdown on Friday was negative. The sector was down 1.4% for the week. Tried to regain support levels
IYZ – Telecom cup and handle with a break higher. Moved above the 200 DMA as well. The sector was up 1.5% for the week. Watching how it unfolds. Entry $22.50. Broke above resistance and added to the gains. Testing the break higher.
XLP – Consumer Staples found support and bounced modestly near the 200 DMA. The sector was up 0.7% for the week. Looking for a decision on direction as the downtrend remains in play. Testing again.
XLI – Industrials moved back to the previous highs and attempted to break higher. The sector was up 1.7% for the week. Need to hold above $102.50.
XLV – Healthcare Struggling to find direction $131.40 support is level to hold. The sector was down 0.1% for the week. The weakest sector currently.
XLE – Energy Moved to resistance and is testing lower showing weakness currently. The sector was down 5.7% for the week. Commodities are moving lower in the sector as well… setting up downside trade. Bounced with crude.
XLK – Technology The sector broke higher from a cup and handle pattern. This is the key component in the current bounce off the previous lows. The sector was up 3.7% for the week. Entry at $127.50. $143.45 resistance in play – remains the leader. Back to resistance.
XLF – Financials cup and handle pattern broke higher. The sector was up 0.9% for the week. Entry $34.50. Watching interest rates and impact near term. Broke higher on rate hike promise from Fed.
XLY – Consumer Discretionary made the break above key resistance at $146.50 adding to the upside move. The sector was up 2.3% for the week. In a leadership role currently. Entry $132. AMZN ($98 resistance cleared hit entry). Bounced at the 200 DMA.
IYR – REITs bottom reversal is in play with a break above the $90 level resistance. The sector was up 1.5% 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. Moved above resistance and added to the gains.
Summary: The index had two days of testing then comments from Powell pushed them to the upside again as he remains dovish on inflation. We will remain patient for now as investors sort out their collective thoughts about Mr. Powell and inflation. I remain cautious as optimism versus reality is a bitch. The reality is the data released has been flat-out bad overall with some bright spots. ISM Services and the jobs report are two that could keep the Fed engaged longer than some hoped following the FOMC meeting and Mr. Powell’s comments. The break above the 4086 level resistance is a positive and the test is a positive… does the uptrend resume? Watching and managing the risk that is. 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 226.3 points to 12,113 as the index was up 1.9% for the day. The break above 11,474 resistance was positive as we let the test unfold. Watching to see if the bounce Tuesday follows through and resumes the uptrend. Watching how money flow reacts. Technology and semiconductors are the keys…. watching how they play out.
NASDAQ 100 (QQQ) was up 2.07% with the mega caps leading the day for the broader index. Earnings are still in play as the chart fills the gap and needs to clear the $314.27 resistance. The sector had a positive bias with 78 of the 100 stocks closing in positive territory for the day. The chart remains in a positive trend off the December lows. AAPL ($137.20 level to clear/hit entry/adjusted stop). Letting it all unfolds near term.
Semiconductors (SOXX) broke higher for a cup and handle pattern to lead the upside. The sector was up 4.6% for the week. $390.40 resistance cleared and moved to $432.27 resistance. 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). Managing the risk. Solid bounce on Tuesday $432.27 level to clear.
Software (IGV) Upside momentum remains with a break above resistance at $276. The sector was up 2.4% for the week. Target is the August highs. $275 entry. CRM (sup and handle/hit entry/adjusted stop). Bounced following the test.
Biotech (IBB) The sector remains in a trading range with a positive bias of late. The sector was down 0.4% for the week. Entry $134.10. Back to the top of the trading range… looking for a break higher.
Small-Cap Index (IWM) bottom reversal showed leadership breaking through resistance $188.25. Tested the move on Friday as we manage the risk. The sector was up 5.1% for the week. Entry $177. Bounced in the test.
Transports (IYT) reverse head and shoulder pattern broke higher on the week offering upside opportunity. The sector was up 5.9% for the week. Need to clear $234 resistance. Entry $218/adjusted stop. Consolidation pattern. Solid recovery on Tuesday. Broke from the trading range on Wednesday and added to it on Thursday. Flag pattern.
The Dollar (UUP) The dollar moved lower on FOMC news but bounced to end the week as economic data was positive. The dollar was up 1.1% for the week. The outlook remains negative. Watching how this unfolds going forward. Bounced again on Fed worries.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.53% up from 3.51% last week. The yields reversed the last month adding to the upside trade in bonds. TLT was down 0.01% for the week. Entry TLT $102.35. Stop $105.50. Consolidating. Bounced to 3.67% on Fed worries.
Crude oil (USO) Reversal in trend for crude after hitting resistance at $80 and now testing support at $73. Supply-demand speculation as China opens its economy and borders. USO was down 7.3% for the week. Seeing weakness in the commodities and stocks of late… short side trade setting up. Added position on the bounce. Entry UCO $27.
Gold (GLD) The commodity has been trading higher as the dollar declines. The spike higher the buck gapped the metal lower hitting our stops… solid gain. The metal was down 3.2% for the week. GLD entry $154.90. Stop $176 (Stop Hit). Dollar worries in play… looking for entry at support.
Put/Call ratio was 0.91 Tuesday… Positive bias resumes.
Questions to Ponder: Navigating Uncertainty
Did the Fed shift in bias relative to inflation? In theory no, but in action yes. The FOMC meeting was a big shift in what the Fed said relative to future rate hikes and their outlook for inflation. It is something to watch in the coming weeks. Mr. Powell was out on Tuesday to reinforce the fight on inflation and parrot much of what he said following the FOMC meeting. Interest rates are showing a belief by investors that they believe Powell and the Fed are done… that said, rates jumped 21 bps the last three days as economic data and comments show the Fed isn’t done hiking rates, but they are encouraged about inflation slowing. The real sign will come from banks, interest rates, earnings, and more importantly a recession pending. Tracking it and following the trend.
Treasury Secretary Yellen was quoted as saying, “you don’t have a recession when you have 500k jobs and the lowest unemployment in more than 50 years.” She must have been sipping some of Bidens Kool-aid. The government’s annual adjustments to the jobs report for January his a head-scratcher… if you take the real jobs losses for seasonal jobs from the holidays we actually lost 2.3 million jobs. But when you are trying to make the current administration look good… adjust the numbers. Not to mention the adjustments to the participation rate… what about people holding two and three jobs being counted in the participation rate? Kind of like dead people voting. Remember numbers don’t lie only statisticians. Or is that politicians?
Jobs versus productivity: The data out on Friday, if true, showed that productivity is falling. That would mean that corporate margins are under pressure as labor costs rise. The math doesn’t lie just the numbers provided to do the math. Thus, we need to watch this data going forward because if wage inflation heats up as some believe it will… margins will decline further as seen in the earnings reports from META, GOOG, AMZN, and AAPL. Lower earnings impact stock prices. There is sooooo much wrong relative to the economy, thus we proceed with caution and take what the charts offer.
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 announcement on Wednesday was perceived as positive… but, Powell was very cautious in his comments. The economic data on Wednesday was bad and showed the impact of the rate hikes. The Fed will, and is, engineering a recession and layoffs as Powell pointed to the labor market as being too good. (The jobs report on Friday reinforced that belief.) The yield curve is flashing recession with the ten-year dipping to 3.4% (bounced back to 3.5% on Friday, but still much lower than October, ISM Manufacturing data shows contraction for the third straight month, but ISM Services jumped back to 55.2% showing expansion/growth in consumer spending… the Fed is promising more rate hikes… Friday data would lend a hand to that promise… either it is different this time, or the market is ahead of itself. Manage your risk.
FINAL NOTES:
Tuesday: The market wants to believe the Fed… The Fed wants to believe the Fed. Thus, if you say what you believe enough you will eventually believe it is fact. The FOMC meeting gave hope to investors as Mr. Powell discussed slower inflation… it is still high at 6%. The Fed’s target rate is 2%… thus, Mr. Powell stated the Fed will still hike but at a slower rate. Friday’s jobs report and ISM Services data would lend a rationale to the Fed’s argument… this all brings into question the current trend higher for stocks. Is the market ahead of the facts? Yes, it usually is. We still have a lot of work to do before growth resumes in a manner that is positive for the markets. Earnings have been a battle of good and bad… fewer good than bad. This tug-o-war isn’t going away anytime soon. The euphoria pushing stock prices higher will be challenged as seen on Friday and Monday. The first level of resistance 4086 was eclipsed and tested. It bounced on Tuesday as we watch how it unfolds with our stops in place. Hope is a beautiful thing… but, as we say many times, the data doesn’t matter until it does. That is where we find ourselves currently and we will trade the hope in the move higher. We will manage our risk of hope giving way to reality along the way. The near-term climb has offered solid gains. But, the future risk of reality is what we manage against. Stops raised on Tuesday’s move higher. We added to positions along with some new ones. Eyes open. Emotions removed. Mixed economic data has been mostly ignored. Sentiment has shifted to neutral over the last few days. 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 turned higher on Fed worries. Interest rates climbed to 3.67% level on the ten-year bond based on Fed worries. I state this so we understand it is the data that ultimately determines the direction of stocks and the Fed is currently in play. Watching the leaders as the test near term. Watching energy stocks as the commodities struggle of late… crude bounced at support on Monday. Volatility closed at 18.6 as some intraday anxiety shifted the index. The money supply shifted to positive and watch looking forward. Volume remains 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 to the upside… technology and consumer discretionary have led the move. Semiconductors have performed well along with software. 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.