The positive momentum got a bucket of reality from the Fed as they were out speaking about inflation. Thus the hawkish tone gave investors the belief they weren’t done hiking rates. Throw in more weak economic data and the selling began. It wasn’t horrible but enough to keep reality in play. After indices hit resistance points on Tuesday the test of the move on Wednesday raised concerns that the move higher is over. Time will tell as the storyline shifts. As we have discussed many times… don’t fight the Fed. We will take what the market offers and manage the risk accordingly. The challenge looking forward is will the underlying belief the Fed will stop hiking rates soon based on improving data relative to inflation go away… if it does the positive momentum will go away. Remember, if the economy slows so do earnings… which translates into lower stock prices. The Empire State Manufacturing Index was UGLY! -32.9 versus -11.2 previous and -7 forecast… throw in lower retail sales, PPI fell more than expected (good news for inflation), and industrial production declined faster than expected. Bad economic data especially in the manufacturing sector. The economic news on Thursday will show how jobs, building permits, housing starts, and the Philly manufacturing index are doing. Of course, the Fed will be out speaking again adding to what they prognosticated on Wednesday. All said patience is what we have to have for now as we take it one day at a time. The volume was higher, the VIX was higher at 20.3, and sentiment got a gut check. The S&P 500 index closed down 1.5% for the day. The NASDAQ was down 1.2%. Small Caps (Russell 2000) was down 1.6%. The ten-year treasury yield closed at 3.37% down 16 bps as TLT remains in an uptrend gaining 2.4%. Important to note the dip near the 3.4% support level for the bond… if the break holds this gets interesting for stocks. Crude (USO) was down 1.9% after starting the day higher. Gasoline (UGA) was down 1.7% after starting higher as well. Natural gas (UNG) was down 8% breaking support again. The dollar was flat trying to find near-term support. The goal is to see how this plays out as we move forward. We took some profits on positions as we watch and manage the immediate risk daily.
Things to Watch on This Week: 1) Retail Sales for December (-1.12% versus -1% previous. -1% projected). 2) Producer Price Index December (-0.5 versus 0.3% previous. -0.1% projected). 3) Industrial Production December (-0.7% versus -0.2% previous. -0.1% projected). 4) Capacity Utilization December (78.8% versus 79.7 previous. 79.6 projected). The manufacturing sector slowing faster than expected! 5) Business Inventories November revisions (0.4% versus 0.4% previous. 0.4% projected). 6) Fed Presidents are out speaking this week. 7) Jobless Claims (205k previous. 215k projected). 8) Building Permits (1.35 million projected). 9) Existing Home Sales December (4.09 mil previous. 3.95 mil projected). 10) Philly Fed Manufacturing index Jan (-13.8 previous. -10 projected). 11) Jobs… MSFT 11k layoffs announced.
Charts to Watch: SPY $399.50 resistance, QQQ $281.32 resistances, SOXX $390.40 resistance, IWM $186.60 resistance. All tested lower… need to hold support and resume the buying if the bounce is to sustain any upside momentum.
Previous Charts of Interest Still in Play: FCX (test support, raised stop as hit resistance), KWEB (breaking higher “V” bottom, hitting resistance). UGA (double bottom, broke above the 50 DMA). Adjusted stops as necessary. GOLD (saucer breakout, hit stop). RIG (cup and handle breakout, big move adjusted stop). SOXX (break upside through resistance, hit next level resistance). SPY (reversal, Hit Stop). QQQ (reversal, adjusted stop). IWM (Reversal, Hit Stop).
Stops Hit: GOLD (watching for reentry). SPY. IWM.
This Week’s Data Reports:
Quote of the Day: “My wife and I were happy for 20 years. Then we met.” – Rodney Dangerfield
The S&P 500 index closed down 62.1 points to 3928 the index was down 1.56% with above-average volume. The index hit resistance again early in the trading day and fell from there. The move below 3947 was a negative for the upside move. Watching how Thursday unfolds. Eleven of the eleven sectors closed lower on the day with technology as the leader down 1.3%. The worst performer of the day was consumer staples down 2.7%. The VIX index closed at 20.3 as sentiment shifted negative on the day. Managing the risk.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials broke from the trading range back to the previous highs. The sector was up 4.2% for the week. Entry $79. Tested lower.
XLU – Utilities struggling with the 200 DMA putting the uptrend in question. The sector was up 0.4% for the week. Letting it play out. Bottom of the trading range
IYZ – Telecom bottom reversal follow through and back above the previous highs. The sector was up 2.4% for the week. Solid break on the upside for the week. Entry $22.50. cup and handle forming?
XLP – Consumer Staples developing a trading range. The sector was down 1.3% for the week. Looking for a decision on direction. Broke lower offering a short side trade.
XLI – Industrials bottom reversal and cleared resistance at the $99 level. The sector was up 1.5% for the week. Entry $99.20. Back to the 50 DMA.
XLV – Healthcare Struggling to find direction needs to clear $136.50 resistance. The sector was down 0.1% for the week. Remains in a trading range. Broke key level of support.
XLE – Energy established a trading range and broke higher. The sector was up 2.7% for the week. Entry hit $89. USO and UGA are in play currently. Doji candle… reversed. Watching how Thursday unfolds.
XLK – Technology The sector reversed off the lows finally breaking through the $127 level. This will be a key component if the upside is to continue. The sector was up 4.6% for the week. Entry at $127.50. Best sector on Wednesday… watching.
XLF – Financials established a bottom reversal and moved through resistance at $35.20. Added to the upside on earnings for the week. The sector was up 2.1% for the week. Entry $34.50.
XLY – Consumer Discretionary bottom reversal in play. The sector was up 5.8% for the week. After leading the downside see solid upside bounce. Entry $132. BBY (cup & handle pattern). Turned down on Wednesday.
IYR – REITs bottom reversal in play. The sector was up 4.4% for the week. Lower rates could offer some upside to the sector near term. Doji candle… reversed. Watching how Thursday unfolds.
Summary: The index was down 1.5% for the day. It has established a bottom reversal that tested on Wednesday… the big question is can it maintain any momentum in the bounce? We will watch how trading unfolds from here. 3898 key level to hold. Booked gains on the sector as it hit stops. 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 138.1 points to 10,957 as the index was down 1.24% for the day. The chart found support at the October lows again and bounced. The test of the move on Wednesday has everyone’s attention as to how this unfolds moving forward. Technology and semiconductors held up well on the day…. watching how it plays out.
NASDAQ 100 (QQQ) was down 1.3% with the large caps bouncing off the October lows and clearing $274 resistance. $284.37 is the next level to clear. Technically the momentum shifted, but plenty of questions remain. The test on Wednesday is now the focus. The sector had a negative bias with 13 of the 100 stocks closing in positive territory for the day. The chart shows a test of the positive momentum. AAPL ($137.20 level to clear). AMZN (hitting resistance). GOOG (bottoming pattern). MSFT (bottom reversal).
Semiconductors (SOXX) made a move higher to break from the bottoming range and added nicely to the upside for the week. The sector was up 6.2% for the week. $390.40 next level of resistance. Entry $355. AVGO (cup & handle). RMBS (broke above previous highs). SWKS solid break higher). Held up Wednesday only down 0.5% positive sign.
Software (IGV) Attempted a bottom reversal on the week but still needs some upside momentum. The sector was up 4.9% for the week. Watching how the week begins. Tested.
Biotech (IBB) The sector managed to break to the upside to end the week and needs to follow through. The sector was up 2.3% for the week. Entry $134.10. Tested.
Small-Cap Index (IWM) bottom reversal with leadership overall showing a positive trend. The sector was up 5.3% for the week. Entry $177. Resistance $188.15 level to clear. Big test lower on Wednesday.
Transports (IYT) Bottom reversal and positive upside momentum. The sector was up 3.73% for the week. Need to clear $234 resistance. Entry $218. CSX (need to break from consolidation pattern). Tested on Wednesday.
The Dollar (UUP) The dollar moved lower on economic data dropping 1% Thursday and breaking the previous lows. The dollar was up 1.5% for the week. The outlook remains negative. Intraday reversal on Fed talk closed flat.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.51% down from 3.57% last week. The yields reversed adding to the upside trade in bonds. TLT was up 1.5% for the week. Entry TLT $102.35. 3.37% Big move lower in rates in response to the Fed talk… TLT had a great move upside.
Crude oil (USO) Reversal in trend for crude last week pushing back to the previous highs. Supply-demand speculation as China opens its economy and borders. USO was up 8% for the week. Entry $67. Trending higher and tested Wednesday. OIS (uptrend). XOM (at resistance). CVX (breaking higher from consolidation pattern).
Gold (GLD) The commodity has been trading higher as the dollar declines. The metal was up 2.9% for the week. GLD entry $154.90. Stop $174. Moved to resistance at $174.30 and got the break higher. Entry AGQ $23.50. Stop $31. Letting it run and adjusting stops. Rested.
Put/Call ratio was 1.22 on Wednesday… SVXY trade setup ($57.50 entry, stop $62 hit stop nice gain). Bias shifted on Wednesday to negative.
Questions to Ponder: Navigating Uncertainty
Remember the infrastructure spending bill that Congress passed last year? $1 trillion is to be spent on refurbishing and establishing new infrastructure… it has started impacting stocks like Caterpillar (CAT) and Freeport McMoRan (FCX)… This is a sector that will be a benefactor in years to come. We own FCX and watching others as opportunities relative to the spending unfold. URI, TEX, RIO, BHP, DE… some to track.
Wednesday: The markets struggled with the weight of the Fed comments throughout the day. SPY, SOXX, IWM, and QQQ are in positive territory hitting resistance again at the opening of trading but then reversed on Fed comments about inflation and the selling played out the balance of the day. The economic data was ugly again with retail sales in negative territory versus last month. The hope remains for the Fed to rest relative to rates but they didn’t sound ready to stop just yet in all the comments from four Fed Presidents. Watching how this unfolds relative to sentiment and outlook. We are a far way from seeing growth… my opinion. Managing our risk as we hit stops on several positions. The dollar was lower but bounced back to even on the day. Watching near-term support and how the activity is on Thursday. Take what is offered and manage the risk accordingly. Volatility closed at 20.3 as anxiety levels get rise some. The money supply is shifting towards positive. Volume moved 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… technology and consumer discretionary have led the move. Financials reversed along with major indexes as earnings helped… along with lower interest rates. 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.