The market reacted positive to the Fed talk on Friday. The suggestion of a 0.25% hike at the next FOMC meeting gave investors hope… on the other hand Vice Chair Brainard on Thursday was quoted that rates may have to remain restrictive for some time to ensure inflation comes back down to the 2% target of the Fed. The bottom line is what a difference a day makes! The data points continue to show growing weakness in manufacturing, housing, and earnings. Ignore that… look stocks are cheap everyone buy today… we taking what is offered and managing the risk that is. NFLX earnings are a good example of what and how investors are thinking currently. They reported subscriber growth well ahead of expectations and the stock jumped 8.6% on the day…. but, they missed earnings and projected a 7.7% decline year-over-year. Ignore the significant data for the data we like. Buyer beware. For the week the S&P 500 index was down 0.76% after posting a solid gain Friday to cut the losses for the week. As we have discussed many times… don’t fight the Fed and the Fed is in full marketing mode relative to the Feb 1st meeting. There have been nine of the presidents out all week talking about their position on inflation. They don’t want markets to be surprised by their continued hikes in rates. The challenge looking forward is the underlying belief the Fed will stop hiking rates soon based on improving data relative to inflation… remember inflation is only part of the equation. Tackling inflation is slowing the economy and in turn that will slow earnings… which translates into lower stock prices. Look at the data reported this week (see below) bad economic data, especially in the manufacturing sector. The economic news on Friday showed more slowing in existing home sales. All said patience is what we have to have for now as we take it one day at a time. The volume was above average, the VIX closed the week at 19.8, and sentiment got a gut check but bounced on Friday. The S&P 500 index closed up 1.9% for the day. The NASDAQ was up 2.7%. Small Caps (Russell 2000) was up 1.6%. The ten-year treasury yield closed at 3.48% up 9 bps as TLT remains in an uptrend gaining 7.4% from the December lows. 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 up 1.3% after starting the day higher. Gasoline (UGA) was up 1.4% and closing above the 50 DMA. Natural gas (UNG) was down 2.3% 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 This Week: 1) The indices fought back versus falling back to the October lows… upside bias remains. 2) Earnings. 3) Watch resistance… if we get through August highs are the target.
Last Weeks Data: 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 (190k versus 205k previous. 215k projected). 8) Building Permits (1.33 million versus 1.35 million projected). 9) Existing Home Sales December (4.02 mil versus 4.09 mil previous. 3.95 mil projected). 10) Philly Fed Manufacturing index Jan (-8.3 versus -13.8 previous. -10 projected). 11) Jobs… MSFT 11k layoffs announced.
All said, not great economic data. The Fed is the key component currently as they spent the week talking about inflation. They needed to get their two cents in prior to the quiet period of the FOMC meeting Jan 31st.
Charts to Watch: SPY $399.50 resistance, QQQ $282.80 resistances, SOXX $390.40 resistance, IWM $186.60 resistance. All tested lower… All bounced on Friday… Sellers have to break the trends off the lows before the downside will emerge… thus, be aware of the upside bias still in play. Watching how investors respond to news and earnings next week.
SOXX/XLK offering leadership is another positive for the indices.
FXB the British pound is in an interesting pattern. The cup and handle pattern over the last six months is in a position to break higher. The dollar has been weakening of late and thus the move above the August highs.
Metals & Mining: XME, SLX, GDX, SCCO, PAAS testing but holding up well. JJM shows the trend.
Energy: XLE, IEO holding up well along with individual stocks FANG, COP.
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 stop). SPY (reversal, Hit Stop). QQQ (reversal, adjusted stop). IWM (Reversal, Hit Stop). SOXX (back above $380).
Stops Hit: None
Quote of the Day: “When my time on earth is gone and my activities here are past, I want them to bury me upside down, and my critics can kiss my ass!” — Bobby Knight
The S&P 500 index closed up 73.6 points to 3972 the index was up 1.89% with above-average volume. The index hit resistance Wednesday and continued to give back gains then bounced to end the week. Back to the 200 DMA and watching how the new week unfolds. Eleven of the eleven sectors closed higher on the day with technology as the leader up 2.7%. The worst performer of the day was healthcare up 0.5%. The VIX index closed at 19.8 as sentiment shifted again 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 and tested the move. The sector was down 1.2% for the week. Entry $79.
XLU – Utilities broke support and tested lower. Watching how it unfolds going forward. The sector was down 3.2% for the week.
IYZ – Telecom broke above the previous highs then tested the move. The sector was down 1.8% for the week. Watching how it unfolds. Entry $22.50.
XLP – Consumer Staples broke lower adding to the weakness of the sector. The sector was down 2.8% for the week. Looking for a decision on direction.
XLI – Industrials sold back to support giving up all the gains from last week. The sector was down 3.4% for the week. Tested the December lows.
XLV – Healthcare Struggling to find direction needs to clear $136.50 resistance. The sector was down 1.1% for the week. Broke support but trying to rebound.
XLE – Energy established a trading range and broke higher. The sector was up 0.6% for the week. Entry hit $89. USO and UGA are in play currently.
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 0.6% for the week. Entry at $127.50.
XLF – Financials established a bottom reversal and tested the move. Positive moves to end the week. The sector was down 2.1% for the week. Entry $34.50. C (break above resistance). GS (short setup).
XLY – Consumer Discretionary bottom reversal in play. The sector was down 0.6% for the week. After leading the downside see solid upside bounce. Entry $132. AMZN ($98 resistance).
IYR – REITs bottom reversal in play. The sector was down 0.6% 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.
Summary: The index was down 0.7% for the day. It has established a bottom reversal that tested on Wednesday… added selling on Thursday and 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 up 288.1 points to 11,140 as the index was up 2.66% for the day. The bounce off the October lows resumed on Friday. The positive momentum coming from the Fed talk. Technology and semiconductors are the keys…. watching how they play out.
NASDAQ 100 (QQQ) was up 2.74% with the large caps testing the bounce. $274.84 held on Friday. The test made investors nervous, but the comments from the Fed offered some perceived optimism. The sector had a positive bias with 99 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 then tested the move and bounced back on Friday to end the week higher. The sector was down 0.3% for the week. $390.40 next level of resistance. Entry $355. NVDA entry $171.95. Stop $166. AVGO (cup & handle). RMBS (broke above previous highs). SWKS solid break higher).
Software (IGV) Attempted a bottom reversal on the week but still needs some upside momentum. The sector was up 1.5% for the week. Watching how the week begins. CRM (sup and handle).
Biotech (IBB) The sector remains in a trading range with a positive bias of late. The sector was down 0.6% for the week. Entry $134.10.
Small-Cap Index (IWM) bottom reversal with leadership overall showing a positive trend. Tested the move higher and bounce on Friday. The sector was down 1.1% for the week. Entry $177.
Transports (IYT) Bottom reversal and positive upside momentum with cup and handle pattern. The sector was down 0.6% for the week. Need to clear $234 resistance. Entry $218. ODFL, UAL, RYAAY
The Dollar (UUP) The dollar moved lower on economic data and broke the previous lows. The dollar was down 1% for the week. The outlook remains negative. Building a bottoming range.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.48% down from 3.51% last week. The yields reversed the last month adding to the upside trade in bonds. TLT was up 2.1% for the week. Entry TLT $102.35. Stop $105.50. Cup and handle setup.
Crude oil (USO) Reversal in trend for crude the last few weeks pushing back to the previous highs. Supply-demand speculation as China opens its economy and borders. USO was up 3.7% for the week. Entry $67. Stop $69. 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 3% for the week. GLD entry $154.90. Stop $176. Cleared resistance at $174.30 and got the break higher. Letting it run and adjusting stops. GDX entry$31.50.
Put/Call ratio was 0.85 on Friday… Bias moved to positive to end the week.
Questions to Ponder: Navigating Uncertainty
With all the sanctions on Russian oil, they are still the largest provider of crude to Europe… interesting!
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.
Friday: The markets struggled all week to find their footing, but some off-the-cuff remark from a Fed president on rates and everyone throws money in… never said it would make sense… kind of like listening to Biden speak. Throw in some not-so-great earnings, negative economic data, talking heads, and speculation… you have the making of a great trading day. The reality of the Fed still being hawkish towards rates is sinking in, but the economic data and earnings are more heavily weighted currently than the media is portraying. 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 flat. Watching near-term support and how the activity is on Friday. Take what is offered and manage the risk accordingly. Volatility closed at 20.5 as anxiety levels get rise some. The money supply was shifting towards positive but has stalled. 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.