The market liked what it saw in the CPI data and moved higher following the report. With the June number showing an increase of 0.2% versus the 0.3% expected buyers were ready to put more money to work. The Year over year number was 3% versus 3.2% expected. At the end of the day, the major indexes posted solid gains and pushed above the June highs. Breadth was solid and volume was higher. Now begs the question of how high do we go? Being that we hit new near-term highs it will all depend on momentum and confidence from investors. We will ride the wave and let it unfold. Semiconductors resumed the upside leadership with IWM and IJH posting solid moves on the day. The S&P 500 index was up 0.7% while the S&P equal weight ETF (RSP) was up 0.5% showing better breadth in the move. The mega-cap Vanguard Growth ETF (MGK) ended up 1.3% resuming the leadership role. All said it was a positive day overall on the charts. We adjusted our stops and watch how it all unfolds. The next focus on the agenda is earnings and the FOMC meeting. Expectations remain for the Fed to hike rates at the next meeting. Take what is offered and manage your risk accordingly.
The markets started higher and continued higher throughout the day with some intraday volatility. Most of the key indexes closed higher on the day semiconductors leading the way. Eight of the eleven sectors closed in the green. Scanning the key sectors there was definitely tentative moves in some while others made solid advances. Inflation, earnings growth, economic conditions, and geopolitical issues remain the obstacle to clarity and investor confidence. Volume was finally above average on strong buying. XLK and XLY are the only two sectors outperforming the S&P 500 index since the March lows. XLE, XLU, and IYZ are the worst performers since the March lows. That said, XLE is making a solid move off the current test of the lows. The S&P 500 index closed up 0.7%. The NASDAQ was up 1.1%. The SOXX was up 1.7%. Small Caps (Russell 2000) were up 1.1%. The ten-year treasury yield closed at 3.86% down 12 bps. Crude (USO) was up 1.2%. (UGA) was up 2%. Natural gas (UNG) was down 3%. The dollar was down 1.1% dumping on the day. We are focused on managing the risk and seeing how investors respond to the optimism relative to the outlook.
ONE Chart to Watch: QQQ – 1) Moved back above the $366.14 mark after testing support once again. closed at a new 52-week high. 2) Short-term trend is UP… starting from the January low. 3) Broke higher from the consolidation pattern. 4) TQQQ $39.55 Entry. Stop $39.55 adjusted. Reentered position. 4) Put in a higher low to keep the uptrend in play.
Additional Charts to Watch:
SPY – Moved above the June highs and resumed the uptrend. Manage your stops accordingly.
IWM – struggled and reversed off support with solid follow-through on the upside clearing the $189 level. TNA entry $36.31.
SOXX – moved back above the $497.61 level and near the June highs. Friday established a higher lower and Monday followed through. Entry $497.60.
USO – broke above the top of the range with upside pressure coming from the supply data. Hit the entry point on Friday at $65. Stop $66.23 (adjusted). A solid move higher last two days.
TSLA downgraded… watching the reaction to the extended stock. Last week announced deliveries of automobiles were the highest ever… stock jumped 6.9%. Added short entry $275 July 28 puts.
IYT transports tested back to the $247.67 level bounced and moved to new highs. Watching the Wednesday high to low day… warning or some profit taking?
DIA reversed the swing trade upside and tested back to the $337.10 support… added a position $339.35. Stop $337.10. Solid gains for the week thus far.
DIS – double bottom pattern. Entry $89.60. Bounced at support on Tuesday.
Gold (GLD/GDX) bottoming pattern in play. Watching the dollar in freefall on Wednesday. $179.60 level to clear. UGL leveraged ETF. GDX – will trade higher if gold moves up. Entry UGL $58.80. Entry GDX $30.90.
ON TAP TODAY: 1) Cleared the June highs… how high do we go. 2) Leadership resuming. 3) Wednesday bounce… IWM, IJH, DIA, XLE, XLI… do they continue with the previous leadership XLY, XLK? Broader moves overall?
Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Added 5/7. Holding. AMZN (bottom reversal) Added 5/7. MSFT (break from flag pattern). Added 5/18. NFLX (test to $350 and bounce?). Added 5/24. HON (trading range breakout). Added 6/13. TQQQ (reversal) Added 6/27. DIA (technical entry) Added 6/29.
Stops Hit: None
Quote of the Day: “Our life is the creation of our mind.” – James Clear.
The S&P 500 index closed up 33 points to 4472 the index was up 0.72% with below-average volume on the day. The index added to the move above the 4400 level. Managing the risk as the upside establishes renewed momentum. Eight of the eleven sectors closed higher on the day with utilities as the leader up 1.4%. The worst performer of the day was telecom down 0.5%. The VIX index closed at 13.5 lower with intraday volatility in play. The uptrend from the October low remains in play.
Point of Interest: The S&P 500 index’s top 2 holdings of AAPL and MSFT now account for 14.4% of the overall weighting of the index. That is the highest combination in the history of the index. The previous high was IBM & T at 10.9%. Something to think about in trading SPY. The top 5 stocks make up 24.1%… starting to invalidate the index as a benchmark for the broad markets.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials chart is a mess as indecision takes over. $81.75 is the level to clear and move higher. The sector was down 1.9% for the week. No Positions. Gapped higher.
XLU – Utilities Bottom reversal fails as the downtrend remains in play, but could establish a double bottom. The sector was down 0.2% for the week. No Positions. Bounced.
IYZ – Telecom In a downtrend from the February highs but bounced at support and trying to reverse the trend. Need to clear $22.30 resistance. The sector was down 0.2% for the week. IYZ entry $21.63. Tested move higher.
XLP – Consumer Staples messy consolidation pattern in play and moved back to the 50-day MA. The sector was down 0.9% for the week. No Positions.
XLI – Industrials The trend broke to the upside breaking above resistance at the $102.40 level. Tested the breakout and moved higher. The sector was down 1% for the week. XLI entry $102.40. Solid upside continuation.
XLV – Healthcare Remains in a consolidation pattern from the March lows. Tough week as it traded lower in the pattern. The sector was 2.8% for the week. No Positions.
XLE – Energy Bounce attempt from the test of the lows yet again. The sector was down 0.5% for the week. The downtrend is in play from the November highs. Needs to move above the $82.74 level. Bounced and cleared resistance… added ERX $55.95.
XLK – Technology The sector tested the move higher consolidating. The sector was down 1.5% for the week. Need to resume the leadership for the broad index. XLK entry $151.53. Solid move… still needs to clear the previous highs.
XLF – Financials holding above $33.35 support and in an uptrend from the March lows. The sector was down 0.3% for the week. No Positions. KIE breaking above resistance. Entry $40.60. Cleared the previous highs.
XLY – Consumer Discretionary broke higher from the consolidation pattern at the highs. Tested on the week. The sector was down 0.2% for the week. Remains in a leadership role. XLY Entry $147.10.
IYR – REITs moved above the $85.50 resistance level and looking for a follow-through moving forward. The sector was up 0.1% for the week. The negative influence of interest rates and reports of vacancies in commercial rentals are rising but money flow has increased to other areas of the sector. No Positions.
REITs on watch with interest rates rising above 4% and the latest round of mortgage data showing a 4.4% decline in applications. That is the first decline in four weeks. 30-year mortgage jumped to 6.85%. IYR and ITB are on watch relative to the downside. Added to upside move.
Summary: The index made a move to establish a higher low in the uptrend clearing the previous highs. The next challenge is earning season begins and it should be interesting. Eight of the eleven sectors closed higher on the day as we watch how the index responds. Remains a sector-driven market with breadth building. The broad index remains in an uptrend from the October lows with some interim testing. 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 158 points to 13,918 as the index was up 1.15% for the day. The index remains in the uptrend with a higher low in play. Support is 13,274. Watching how the trend unfolds short term. SOXX was up 1.8% on the day. IGV was up 0.5%. Taking what is offered in the current trend.
NASDAQ 100 (QQQ) was up 1.26% on the day. Moved back above the $366.14 support and the 10-day MA. The mega-caps remain extended from the May break higher and thus we need to manage the risk short term. The sector had a positive bias with 75 of the 100 stocks closing in positive territory for the day.
Special Rebalance – The NASDAQ exchange operator is set to rebalance the NASDAQ 100. An announcement will be made on July 14th with the change taking place on July 24th. Since we invest in QQQ regularly it will be news of interest relative to the asset’s future growth. Link to article.
Semiconductors (SOXX) The sector remains in a consolidation pattern. Established a higher low on Friday and need to see it follow through if the upside is to continue. The sector was down 2.7% for the week. Watching how it unfolds and the next opportunity. No Positions. Solid reversal on Monday and back to the previous highs on Wednesday.
Software (IGV) Consolidation pattern on the chart. Testing the uptrend as the sector remains above the $336 level support. Added IGV $291. Stop $335.90 (adjusted). The sector was down 1.8% for the week. Similar to the SOXX need to put in a higher lower to keep the trend alive. Solid upside with a double bottom pattern.
Biotech (IBB) The sector broke support at the $125.50 level. Setting up ad short side trade based on the negative sentiment. The sector was down 2% for the week. No Positions. Solid bounce of the new low.
Small-Cap Index (IWM) Tested lower and bounced… very volatile with an uptrend in place from the May lows. The sector was down 1.3% for the week. No Positions. Higher low established… solid follow through and gap higher.
Transports (IYT) Made a break above the January highs and showed solid momentum as it tests near the highs. The sector was down 0.04% for the week. IYT Entry $231. Added to the highs. Wednesday gave up gains from the higher open… worth watching.
Worry: UPS is going on strike if they don’t get a new contract by July 31st. Supply chain disruption will be a challenge for the economic picture.
The Dollar (UUP) The dollar remains volatile with a cup and handle pattern on the chart. What is on the horizon? Weak dollar policy from the current administration. The dollar was up 0.4% for the week. More chatter about losing dollar status globally. No Positions. Five days moving lower with gap down on Wednesday not pretty.
Yellen says to expect a gradual decline in the dollar’s share of global reserves… amazing how between Obama and Biden the dollar has deteriorated.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.05% up from 3.81% last week. Rates are reacting to the Fed talk on hiking rates… big move up in rates. TLT was down 3.7% for the week. TMV entry $119.35. Fell 11 bps on Wednesday to 3.86%.
Crude oil (USO) Broke higher from the consolidation pattern showing positive momentum based on supply data during the week. USO was up 3.6% for the week. UCO entry $24.15. Breaking higher on Tuesday. Followed through on Wednesday.
Gold (GLD) The commodity is in a downtrend from the May highs but establishing a base. Entry if we break above $179.36. UGL is the trade. Letting this unfold and opportunities presented. The metal was up 0.4% for the week. Added UGL. More upside Wednesday on a weaker dollar.
Questions to Ponder: Navigating Uncertainty
Bank Stress Test – Wednesday the Fed said that all 23 major financials passed their annual stress tests, with sufficient levels of capital to get through a severe recession. Interesting considering that just four months ago the sky was falling. And let’s not forget the Fed continues to provide liquidity to banks in short-term loans. KBE continues to trade laterally following the big downside move in March. Worthy to see how this unfolds in light of this news.
Bidenomics – The president rolled out his newly revised plan that has created the greatest economy ever… 14% inflation, -3.1% hourly earnings growth, trillions added to the debt, etc. greatest presidency ever.
Stagflation – is defined as 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. Layoffs from early 2022 to current continue… Bankruptcy filings are not slowing as the hit the fastest pace since 2010. War – Costs… Ukrain/Russia endless war isn’t good for the US economy. Inflation is here 1970’s style. Markets are giving the Fed cover to hike again with the surge in technology stocks. Although the leadership is narrow. Things are not as good as they seem on the surface.
Our longer-term view is shifting to neutral as the upside trend from the October lows remains in play. 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. With the trend higher it puts the broad indexes in intermediate uptrend… this is a positive overall for the broad markets. However, the last two weeks have shown resistance at the current level with increased intraday volatility. Tightening our stops on intermediate and short-term positions. Trading the volatility has performed better than holding through the cycle. Sector-driven activity is in play short term with some testing at the highs. If the uptrend resumes following the recent test it will be the fifth stage higher. News has been 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. Listen to the market not the talking heads.
Wednesday: The Fed and interest rates remain a torn in the market’s side, but investors are looking past that and putting money to work as it breaks higher on weaker CPI data. Don’t forget the sudo stimulus in the form of the Fed’s bank rescue funds… that money is making its way into the markets to offset underperforming assets on banks’ balance sheets from the low-interest rate environment. Thus, the need to pass the stress test from the Fed… one hand washes another. Solid upside following the CPI and managing the risk as the indexes move higher. Trading the trends in sectors showing strength and weakness… We see the overall trend is still up from the October lows. Watching where money is going near term for clues of what is on the horizon. Manage the risk that is and let the current trend play out.
What I am watching on Thursday: 1) IWM, DIA, QQQ & SPY all established a higher low and added to the move higher. 2) Follow through in SOXX, XLK, XLY. 3) GLD, SLV, lagging… GLD broke higher as the dollar struggled. 4) Intraday volatility and opportunity. 5) Earnings for the second quarter begin.
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.