Fed takes center stage

The Fed took center stage on Wednesday with the conclusion of the FOMC meeting. All the top leading up to this meeting was pretty much dead on for the 25 bps hike and one more hike going forward. The key takeaway from Mr. Powell’s comments was the financial markets are tightening and ‘could’ slow the economy. We are going to see tighter lending decisions going forward based on the liquidity and recent failures in banks. This will do the Fed’s work for them relative to inflation and growth. The big question is will the Treasury, White House, and Federal Reserve have what it takes to allow the system to correct or put a bandaid on it like they did in 2007. The shift of the FOMC meeting from being about inflation to how the Fed will work to secure liquidity in the banking system is now the focus. The market felt it got some key answers from the Fed on the direction interest rates will take. It also got more reassurance the liquidity in the banking sector will be okay based on the Fed opening up avenues for banks to access cash. The market’s initial reaction to the Fed was positive. However, as Powell spoke in the presser, they gave up the initial gains and then in the last half hour fell to close negative on the day. The move erased the gains from Tuesday. You can give the scarecrow (Janet Yellen), “if I only had a brain!” credit for the downside move. She stated after the FOMC meeting that the Treasury wasn’t considering a broad increase in deposit insurance. That comment was credited with the downside move. Looking at the chart we can see support coming back into play and a retest of the lows in some sectors. There was no economic data on the day but the Fed gave a very good overview of the current state of the economy and how the banking issues… liquidity, will stall growth and in turn impact employment… all the things the Fed has been trying to do wrapped up in a very nice little package without further interest rate hikes. The challenge from my perspective is the banking crisis may have been averted for now, but you have to believe there is more to come. Whatever the reality we as investors have to manage what we know and deal with the reality as it unfolds. The Fed put it all in perspective and if you read the comments from Powell they believe they now have the upper hand. As with any belief, we will see how reality unfolds moving forward. We at the very least, understand the Fed’s direction near term, and now we see what transpires. The volatility index fell to 20 but thanks to Yellen we closed at 22.2 and watching how it all plays out on Thursday. No matter what our beliefs the chart is the ultimate decision maker.

Plenty of questions remain about the current market environment. The S&P 500 index closed down 1.6% with some intraday volatility. The NASDAQ was down 1.6%. Small Caps (Russell 2000) were down 2.8% showing some weakness as growth talk got kicked to the curb. Thursday will be the aftermath of the Fed meeting as everyone decides what it all meant to the value of stocks looking forward. The ten-year treasury yield closed at 3.5% down 9 bps on the day. Bonds have had a volatile ride of late, but they are likely to remain in the 3.4.-3.7% range for the near term. Watching how that storyline unfolds. Crude (USO) was up 3.4% adding to the bounce… $65.70 is the key level of support for crude. Gasoline (UGA) was up 0.6%. Natural gas (UNG) was down 4.5% volatility remains in the commodity. The dollar was down 0.75% breaking lower on the FOMC meeting. Overall crazy markets. We are focused on managing the risk and watching how this all unfolds. The negative sentiment is in play with a glimpse of hope here and there… patience is the key.

News to follow: COIN was down 8% on Wednesday following a notice from the SEC (Wells Notice) of potential violations of securities laws. This is a key issue as it relates to Crypto and how it is regulated or not regulated by the government. CNBC story link.

Opinion: Powell and Yellen need to get their collective shit together. One, Powell is talking about more regulations to deal with the banking issues moving forward. The other, Yellen is proposing nothing other than word salad via Kamala style. The leadership of the two is a key near term to resolve the current issues facing the financial system. More regulation seems to always be the answer from leadership… enforcing regulations would be the better course of action. We have everything needed to regulate banks we just need to enforce it. The same is true with the SEC as they oversee the securities industry. Yellen is doing the same thing she did when she was the Fed Chair… NOTHING! Stop kicking the proverbial can down the street… deal with the issues now, not later. WATCH: How the markets respond to both comments following the FOMC on Thursday… don’t be surprised if the market bounces.

Charts to Watch: QQQ, SOXX, SPY, IWM… do we bounce following a digestion of the Fed comments? Watching… Upside: MSFT, SLV, PAAS, GLD, NAT, TK. Downside: KBE, KRE, BAC, GS, FCX.

Previous Charts of Interest Still in Play: LSCC (testing uptrend). Added uptrend in play. SOXX (upside follow-through) Added. AAPL (reversal confirmed) Added to the position. GBTC (trading range breakout). Added. XRT (Apr 06 65 put). Added. Thursday sold half. AMZN (bottom reversal) Added. GDX (bottom reversal) Added Friday. PG – trading range break as part of the consumer staples money rotation. Added Monday. KBE April Put $38 @ $2 or allow any bounce to play out and then buy puts at the money. Added Wednesday.

Stops Hit: NONE

Quote of the Day: “All I know is just what I read in the Congressional Record. They have had some awful funny articles in there lately. As our government deteriorates, our humor increases.” — Will Rogers

The S&P 500 index closed down 65.9 points to 3936 the index was down 1.65% with the above-average volume on the day. Moved back to the 3930 level and watching 3804 support. None of the eleven sectors closed higher on the day with consumer staples as the leader down 0.9%. The worst performer of the day was REITs down 3.5%. The VIX index closed at 22.2 as anxiety move up on the FOMC meeting. Watching how the index responds Thursday.

Sector Rotation and the S&P 500 Index:

XLB – Basic Materials Moved below the 200 DMA. Broke support and short-term downtrend in play. The sector was down 3.4% for the week. Closed at $76.25.

XLU – Utilities broke higher from the down-trending channel… $68 is resistance. The sector was up 3.9% for the week. Led the downside again on Wednesday.

IYZ – Telecom bottoming pattern this week on the chart. Need to move above $22.35 to have a chance at the upside. Let it unfold. The sector was up 1.2% for the week. Moved back below $22.35.

XLP – Consumer Staples downtrend from the December highs remains in play. The sector was up 1.4% for the week. Letting it unfold. Tried to break higher…

XLI – Industrials Sideways trend broke lower and hit the 200 DMA as support. The sector was down 2.3% for the week. Back to the previous lows.

XLV – Healthcare downtrend in play with a break below the $127.50 mark. Found some support at the October lows. The sector was up 1.3% for the week. Closed below the $127.50 level.

XLE – Energy broke support at $82.74 and looking for a level of support. The sector was down 6.8% for the week. ERY entry $32.40. Stop $32.40. Retraced the bounce.

XLK – Technology The sector bounced off support at $135. Maintaining leadership but struggling with the rest of the market. The sector was up 5.6% for the week. Watching for direction and opportunity near term. $143.45 resistance in play. Back below $143.45…

XLF – Financials pressure in banks continues pushing the sector lower. Downtrend accelerated on the news and watching how this unfolds. The sector was down 5.9% for the week. KBE puts in play. FAZ entry hit $18.35. Stop $22. Down on the Treasury Secretaries comments.

XLY – Consumer Discretionary short-term downtrend in play. $141.60 level of support broken. The sector was up 2.2% for the week. Bottom reversal? Gave up the gains from Tuesday.

IYR – REITs $82.96 support was broken on Friday. The sector was down 0.1% for the week. The negative influence of interest rates and reports of vacancies in commercial rents are rising. Short-side trade opportunity. SRS entry $17.95. Stop $17.95. Bottom fell out on the tighter financial lending comments from Powell.

Trouble is building in commercial office space as the return to the office efforts aren’t working. The headlines are steadily showing the fight between corporations and employees. Amazon is the latest showing 1/2 are willing or want to return to the office for the three days a week proposed. This is impacting commercial property owners as mortgage payments are being delayed more than two months. Banks raised their reserves in January and are likely to increase more in February. With that in mind IYR and REM bounced off the October lows but may retest those lows or beyond based on future defaults. Worth watching the downside risk with SRS.

Summary: The index remains volatile on the uncertainty surrounding… everything. The bailout money helped on Monday, reassurances helped on Tuesday… the FOMC on Wednesday gave perspective and stocks fell… Money flow is of interest as some risk in small caps showed up… QQQ is stalling… crude bounced… treasury bonds rallied… still plenty of issues to be faced. The unknown is always the deepest threat to the investor psyche. It is a news-driven market and the headlines are driving for now. The Fed focus is back along with the Treasury Department. The charts are a mess for the last few weeks with indecision and increased volatility. Support is 3804 which held but testing 3930 on Wednesday. Seven of the sectors have established a short-term downtrend… the other four are not in great shape… watching the Wednesday retest… we could still see some upside short term based on Powell’s comments. We will remain patient for now as investors sort out their collective thoughts about what is fear and what is real. We continue to manage our positions accordingly. Taking exits as necessary and adding where opportunities arise. 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 190.1 points to 11,669 as the index was down 1.6% for the day. The 10,941 support held and the index moved back above the 11,474 previous support. Technology and semiconductors are the keys… SOXX gave up early gains but held up well overall. Watching how this unfolds inching forward.

NASDAQ 100 (QQQ) was down 1.36% with the mega caps holding above $303 previous support. The sector had a positive bias with 3 of the 100 stocks closing in positive territory for the day. Watching how sentiment plays out near term. Volume is lagging despite the move higher.

Semiconductors (SOXX) sideways trading range with $432.27 resistance. Showing leadership overall. The sector was up 5.1% for the week. If breaks higher offers some sign of hope for stocks near term. Solid but lagging with resistance at $432.27.

Software (IGV) bounced at $273.40 support. Trying to offer some leadership in the technology sector. The sector was up 5.1% for the week. Watching how it unfolds next week. The move lower in response to the Fed raises concerns short term. Adjusted stops. .

Biotech (IBB) The sector moved below the 200 DMA and remains in a downtrend from the February highs. The sector was up 2.1% for the week. LABD entry $18.26. Stop $18.26. Dumped on the day…

MRNA – Moderna cancer vaccine results could drive the company higher longer term. Despite the tough week for the stock, it is worth keeping on our watch list. Entry $142. Finding support… added small position ($144).

Small-Cap Index (IWM) downtrend accelerated to support at the December lows. The sector was down 2.8% for the week. Money flow turned negative. Entry TZA $29.20. Stop $34.30. Big move lower on Wednesday is a concern as we retest the lows.

Transports (IYT) established a downtrend from the January highs. $214 is the support level. The sector was down 2.4% for the week. Retesting the lows.

The Dollar (UUP) The dollar was choppy all week on the back-and-forth talk about the Fed and interest rates. The dollar was down 0.5% for the week. Watching how it responds to the FOMC meeting next week. Moved lower following the FOMC meeting.

Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.39 down from 3.69% last week. Big shift in the last two weeks as the fear of the bank fallout impacts investors’ risk tolerance. TLT was up 1.2% for the week. Entry TLT $102.90. Down to 3.50% on Wednesday… watching the upside for bonds.

Crude oil (USO) trading range is broken as the price falls through the bottom end of the range. Economic speculation is impacting supply-demand globally. USO was down 12.3% for the week. The weekly chart shows the downtrend building in crude. $65 level is key for crude relative to the downside support. SCO entry $27. Stop $29.20. Bounced off the lows.

Gold (GLD) The commodity bounced this week as the dollar waffled and fear rose. The metal was up 5.7% for the week. Held support at $168 and posted a solid reversal. Entry $169.50. UGL in play. Selling on Tuesday… buying on Wednesday… watching.

Put/Call ratio was 0.92 on Wednesday… an interesting move relative to the markets.

Questions to Ponder: Navigating Uncertainty

Retail sector (XRT) is lagging of late… but the White House says the economy is strong. Scanning the stocks shows WMT, TGT, JWN, KSS, M, etc are all slowing of late. Watching how this unfolds moving forward. The short side has played out well. Failed bounce testing the lows.

Food for thought: The failure of Silicon Valley Bank (SVB) has been blamed on many things in the last few weeks. One was that President Trump signed a deregulation bill in 2018 that reduced oversight on small and mid-sized banks. True or not, one issue, as many know, is never the true cause of any failure in life. It is generally the culmination of events and actions that result in failure. We can dig in and put the pieces together as we review the decision, actions, and inactions taken by the bank… Thus what FDIC and the Treasury are believed to be doing. The public (you and I) will never really know those findings in their entirety, only what they want us to know. So let’s start with the underlying assets of banks… securities being stocks, bonds, and cash, along with options, swaps, and derivatives on those securities. When times are good, all is well. When the underlying markets start to shift, the banks have to make decisions relative to the underlying risk. Thus, the decisions made relative to the beliefs they hold about the future. If they are wrong they lose money… if they are right they make money or at least hedge the risk of the underlying assets. When measuring one variable of risk the odds are simple. However, when more than one variable is introduced the odds change based on how you address them individually and collectively.

In the case of SVB, they already had higher-risk loans to start-up companies… thus the risk of their loan portfolio was higher than the average bank. They also held equities in their portfolio… From December 2021 to February 2022 the S&P 500 index declined 18.5%… those assets in their portfolio would be in a negative situation assuming no options, swaps, or derivatives on them… if those existed the risk would be even higher based on the timeframe held and the accuracy of those hedges. During that same period of time interest rates rose 208% on the 10-year treasury bond. If they owned bonds in their portfolio (extremely likely) the value of those bonds based on the 10-year treasury bond fell by at least 14.5%. Those assets would be in a negative situation assuming no options, swaps, or derivatives on them… if they existed the risk would higher depending on the result of the decisions taken. Rates moving higher puts more pressure on the bank’s underlying treasury bonds and cash equivalents along with the use of the Fed window for balancing deposits. Rising rates add pressure to meet the current rate environment with lower-yielding assets already held in the portfolio. It is a slippery slope for banks in this environment.

Just putting the simple explanation above together with the events that have transpired over the last 15 months you can see the increased risk brought on by inflation and higher interest rates. If incorrect decisions were made… the pressure on the underlying assets would rise. In an effort to ease this stress SVB set out to raise more money/assets to create more liquidity to weather the storm. SVB went the public route to raise capital through a stock and debt (bond) raise. When that news came out depositors started withdrawing money making liquidity matters worse. Thus, the snowball rolling downhill effect on deposits and liquidity. Remember where we started… failure is a result of the culmination of events and actions taken. Being wrong wasn’t the failure of SVB… too much risk and inaccurate decisions were. We as investors need to apply this same “stress” test to our own portfolio. Don’t wait until the course is irreversible to make changes to the level of risk you take with your money. Risk management is the difference between losing some money versus losing it all. The one thing in all of this that makes me crazy… talking heads stating everything will be okay, don’t panic, we are in this for the long term… we are in this to protect our money not how long we are invested. It is about risk management nothing more and nothing less.

FINAL NOTES:

Wednesday: Stocks trying to see the positive in Powell’s comments, but Yellen submarined him relative to bank insurance increasing… bailouts and buyouts are still the headlines. Stocks were up for two days heading into the FOMC meeting but failed to hold the gains. The dovish 25 bps hike from the Fed and the outlook was in line with expectations. The surprising reality for investors is tighter financial markets and lending… should have been obvious. The latter will do the work for the Fed to slow the economy and dampen inflation. The key will be the Fed’s willingness to deal with things from a longer-term view versus short-term ease of pain. Bailouts, inflation, and the economy summed up the FOMC meeting. The line between the banks, the Treasury, and the Fed are very blurred as seen in Yellen’s comments. Remember if the Fed is providing liquidity it is taking more onto its balance sheet which is the opposite of what it wants to do. It is one big tangled mess. We have discussed the M2 (money supply) issue for the Fed and the need to withdraw it to curb inflation… did it go too fast? Were the banks ready for the withdrawal of liquidity? Do the banks have too much equity exposure… translated derivatives? Have the Treasury, the Fed, and big banks provided enough liquidity currently to curb the issues in banks? Plenty of questions… too much speculation.

Fear is present despite the VIX being elevated but not in the fear zone. The FOMC provides the next direction near term… Seven of the eleven sectors have created short-term downtrends on the charts and watching how they respond following the FOMC data. Bounced two days, sold one… watching for the Thursday trading day to offer a real response to Fed and Treasury comments. Treasury yields dipped back to 3.5%… the dollar heading lower… crude flattening out… precious metals bounced. Eyes open. Emotions removed. It is a time for patience as the storylines unfold and the direction is determined. The money supply has turned higher… patience. 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.

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 back in the headlines. Market correction headlines are growing in numbers. But, we have to remain focused on short-term trades until there is longer-term directional clarity. The charts are showing a short-term trend reversal from the upside. News is 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 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.

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