The markets closed lower with economic data impacting investors’ psyche relative to the Fed and interest rates. The ADP report showed private sector hiring increased by 497k versus the consensus of 245k. Jobless claims rose 248k and continuing claims declined slightly to 1.72 million. JOLTS job openings declined to 9.824 million from 10.32 million previous. ISM Services rose to 53.9% from 50.3% previous well ahead of expectations at 51.1%. The bottom line was the data all reinforced the Fed’s desire to hike rates further to rein in inflation. That sentiment led to early selling with a midday bounce but still closing lower on overall. The jobs report is on tap for Friday and could rock the cart even further for stocks. All eleven sectors closed in negative territory with the VIX pushing above the 15 mark on the close but peaked above 17 intraday… if the volatility continues to pick up showing worry among investors the test lower could gain momentum. The yield on the 10-year bond rose above 4% for the first time since March. Crude oil inventories fell by 1.51 million barrels following last week’s draw of 9.6 million. Showing summer demand but also the cuts from OPEC+ could be showing an impact as well. Overall challenging day for investors and Friday is shaping up to be more of the same.
The move on Thursday started with a gap down open, bounced slightly, and ended the day lower. None of the eleven sectors closed in the green. Bonds fell on rising interest rates. Inflation, earnings growth, economic conditions, and geopolitical issues remain the obstacle to clarity and investor confidence. Volume remained below average. Money flow has dipped in the last few days. XLK and XLY are the only two sectors outperforming the S&P 500 index currently. XLE, XLU, and IYZ are the worst performers since the March lows. The S&P 500 index closed down 0.8%. The NASDAQ was down 0.8%. The SOXX was down 1.2%. Small Caps (Russell 2000) were down 1.6%. The ten-year treasury yield closed at 4.04% up 10 bps. Crude (USO) was down 0.3%. (UGA) was up 1.0%. Natural gas (UNG) was down 1%. The dollar was down 0.2% as it holds above the 50-day MA. We are focused on managing the risk and seeing how investors respond to the revised outlook for global economics.
ONE Chart to Watch: QQQ – 1) Moved back to the $366.14 mark and testing support once again. Watching how it holds the $352 level of support. 2) Short-term trend is UP… starting from the January low. 3) Watching how the mega caps respond to end the week. 4) TQQQ $39.55 Entry. Stop $39.55 adjusted. Reentered position. 4) Watching as it stalled at the previous highs.
Additional Charts to Watch: SPY – Moved to new highs from March lows and tested the move. Manage your stops accordingly. Gapped lower and holding $438.15 level. IWM – struggling again giving up 2.6% the last two days. SOXX – moved back below the $497.61 level forming a double top on the chart. USO – holding at the top of the range with upside pressure coming from the supply data. TSLA downgraded… watching the reaction to the extended stock. Monday announced deliveries of automobiles were the highest ever… stock jumped 6.9% and holding. IYT transports tested back to the $247.67 level. The inside day on Wednesday led to selling on Thursday. DIA reversed the swing trade upside and tested back to the $337.10 support… added a position $339.35. Stop $337.10. DIS – double bottom pattern. Entry $89.60.
ON TAP TODAY: 1) Signs of a topping pattern are back. Double top on the charts. 2) Leadership testing. 3) Watching the jobs report for directional activity early on Friday.
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: SOXL
Quote of the Day: “Before you criticize someone, walk a mile in their shoes. That way, you’ll be a mile from them, and you’ll have their shoes.” – Jack Handey.
The S&P 500 index closed down 35 points to 4411 the index was down 0.79% with below-average volume on the day. The index held above the 4400 level barely. Managing the risk as the upside remains challenged. None of the eleven sectors closed higher on the day with consumer staples as the leader down 0.2%. The worst performer of the day was energy down 2.2%. The VIX index closed at 15.4 as it inched higher on the day. The uptrend from the October low remains in play.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials Cup and handle pattern breaks above resistance $81.75. A positive week for the sector up 4%. Positive uptrend in play short term. Continued lower on Thursday.
XLU – Utilities Bottom reversal fails as the downtrend remains in play, but attempts to establish a double bottom. The sector was up 0.6% for the week. Double bottom on the chart.
IYZ – Telecom In a downtrend from the February highs but bounced at support and trying to reverse the trend. The sector was up 5% for the week.
XLP – Consumer Staples messy consolidation pattern in play and trying to establish the uptrend again. The sector was up 0.5% for the week.
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 up 3.9% for the week.
XLV – Healthcare Remains in a consolidation pattern from the March lows. The sector was up 0.5% for the week. Watch for a break from the pattern as the next opportunity.
XLE – Energy Bounce attempt from the test of the lows yet again. The sector was up 4.9% for the week. The downtrend is in play from the November highs. Needs to move above the $82.74 level. Remains in range with selling on Thursday.
XLK – Technology The sector tested the move higher with a solid bounce on Friday. The sector was up 1.6% for the week. Need to resume the leadership for the broad index. Topping pattern.
XLF – Financials retested the $32.36 level of support and bounced back to the 200-day MA. The sector was 2.9% for the week. The trend is up from the March lows… slow and steady wins the race.
XLY – Consumer Discretionary broke higher from the consolidation pattern at the highs. The sector was up 2.6% for the week. Resumed the leadership role. Downside move on Thursday.
IYR – REITs moved above the $85.50 resistance level and looking for a follow-through moving forward. The sector was up 5.2% 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. Following through on the break higher.
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 ar on watch relative to the downside.
Summary: The index is testing again. The struggles the last two days came from a lack of clarity relative to the Fed… they got it and didn’t like it. None of the eleven sectors closed higher on the day as we watch the jobs report on Friday. Remains a sector-driven market as we look for short-term direction. 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 down 112 points to 13,679 as the index was down 0.82% for the day. The index remains in the uptrend with some testing near the highs. Support is 13,274. Watching how the trend unfolds short term. SOXX was down 1.2% on the day. IGV was down 1%. Taking what is offered long and short.
NASDAQ 100 (QQQ) was down 0.76% 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 need to manage the risk short term. The sector had a negative bias with 13 of the 100 stocks closing in positive territory for the day.
Semiconductors (SOXX) The sector tested the uptrend and bounced to end the week. The sector was up 4.6% for the week. Watching how it unfolds and the next opportunity. Sold on Wednesday and Thursday… need to put in a higher low to keep the trend alive.
Software (IGV) Testing the uptrend as the sector moves above the $336 level. Added IGV $291. Stop $335.90 (adjusted). The sector was up 2.7% for the week. Similar to the SOXX need to put in a higher lower to keep the trend alive. Testing $335.96 support.
Biotech (IBB) The sector moved back to support at the $125.50 level. bounced but still needs money flow to turn positive. The sector was down 1.2% for the week. Still lagging testing support.
Small-Cap Index (IWM) found some buyers near the 200-day MA. Need to clear the $188 level. The sector was up 3.7% for the week. Hit resistance and tested.
Transports (IYT) Made a break above the January highs and showed solid momentum. The sector was up 5.2% for the week. Inside day… sold Thursday at support $247.50.
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 and holding 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 0.1% for the week. More chatter about losing dollar status globally. Got a boost from the Fed minutes.
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 3.81% up from 3.73% last week. Rates are reacting to the Fed talk on hiking rates… indecision in the action of late. TLT was down 0.4% for the week. Rates jumped to 4.04% on Fed minutes.
Crude oil (USO) Remains in a short-term downtrend on worries about central banks raising interest rates to fight inflation. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. USO was up 1.8% for the week. Trying to break highs? Supply data still shows drawdowns weekly.
Gold (GLD) The commodity is in a downtrend from the May highs. Letting this unfold and opportunities presented. The metal was up 0.04% for the week.
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.
BTFP hits new record: The emergency bank bailout facility moved to another record high of 103.1 billion dollars. Sound and resilient… passed the stress test… borrowing when no one has stated there is an emergency. All is well in OZ.
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. We remain focused on short-term trades based on the short-term volatility and until there is longer-term directional clarity we remain with our current approach. 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.
Thursday: The Fed and interest rates remain a torn in the market’s side. Watching how stocks respond to the jobs report on Friday. Technology remains the leader along with consumer discretionary with both testing near the highs. Testing in the semiconductors as well. Trading the trends on 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 Friday: 1) Response to jobs report. 2) QQQ, SPY, XLK, and XLY testing support. 3) GLD, SLV, lagging… GLD broke support? Downside in play or temporary? 4) VIX up last two days… does anxiety return? 5) GOOG & AI break from consolidation patterns. 6) Earnings for the second quarter start soon!
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.