The markets prior to the FOMC meeting on Wednesday, then the post-meeting party gave investors more than they wanted to think about. They stated they would skip hiking rates at the June meeting but they expected to raise rates two more times prior to year-end. That took the air out of the balloon of the skip and sent stock scrambling. The last two hours of trading turned into selling followed by buying and eventually closing a the levels prior to the announcement… that leaves investors to mull over the Fed comments and what they mean going forward. In other words, speculation has been introduced to a market that has been trending higher for the last four weeks on confidence. Thursday will be an interesting day of trading as the storyline unfolds. The S&P 500 closed barely higher holding the move above 4300, NASDAQ at new highs, and Semiconductors were higher to lead the day. Treasury yields were lower on the 10-year bond. Economic data was watched closely as the PPI showed positive results falling 0.3% versus up 0.2% previous. The core was up 0.2% versus up 0.2% previous. Year-over-year was up 2.8% versus 2.8% previous. Prices are falling faster on the producer side but that generally doesn’t translate to the consumer side as they will use the difference to play catch up from taking losses earlier and not being able to pass through the previous increases. All said, let the fun begin.
The markets shifted after the FOMC announcement. The afternoon volatility rose and we will watch to see if that translates going forward. XLK led the day with SOXX moving higher. Defensive stocks were higher as XLP, IYR, and IYZ closed in positive territory. IWM, IJH, XLE, and XLV led the downside. Now we watch to see if there is rotation or if we stay the course. Four of the eleven sectors closed in positive territory. The S&P 500 index closed up 0.08%. The NASDAQ was up 0.4% with SOXX up 1.4%. Small Caps (Russell 2000) were down 1%. The ten-year treasury yield closed at 3.79% down 4 bps on the day. Crude (USO) was down 0.5%. (UGA) was up 0.9%. Natural gas (UNG) was up 0.5%. The dollar was down as comments from Yellen continue to weigh on the buck. We are focused on managing the risk and and seeing how investors respond to the revised outlook from the Fed.
ONE Chart to Watch: QQQ – 1) Held $355 break higher and facing resistance from the April 2022 highs. 2) Short-term trend is UP… starting from the January low. 3) Accelerated above the trendline with verticle move. Tested the move and resumed the uptrend. 4) Watch how this responds to the FOMC meeting on Thursday. 5) TQQQ $355.06 Monday. Stop $360.82.
Additional Charts to Watch: SPY – Moved to new highs resuming the uptrend. Trendline off the March lows is in play. IWM – broke from the trading range moving higher and offered an entry at $178.95 (stop $184.45 adjusted)… testing lower on FOMC news. SOXX – cleared $497.61 resistance leading upside move. Entry $492.65. Stop $510. USO – oversold… gapped lower testing bottom end of the trading range… volatility on speculation about consumption. OPEC+ still weighing on the commodity and Goldman Sachs downgraded the commodity price outlook. Supply and demand at work… interesting swings on Wednesday… watching how it unfolds.
Leadership – NASDAQ, NASDAQ 100, SP500, XLY, XLK, SOXX… QQQ – All resumed the upside trend with a break from consolidation. Watching how this unfolds relative to the FOMC announcement. Manage the risk accordingly. Technology has been the leading sector. Consumers (XLY) remains a leader. SOXX moved higher following the Fed news.
Laggards – SP400, RUTX, USO, XLF, XLI… all made positive moves of late with a solid reversal on the charts. IJH, IWM, XLI, XLE, and XLF all made moves to confirm a bounce from their respective consolidation patterns. Now comes the question of how they respond to the Fed. The small caps didn’t fare well on Wednesday and the question is to they return to being laggards on rotation? Letting them play our near term. XLP posted a positive day and we will see how it moves going forward.
Interesting Charts: USO (testing the bottom of the range). FCX (bottom reversal). KSS (breakout above resistance).
ON TAP TODAY: 1) Crude oil… up or down setting up for a move. $75 is the key resistance point for oil. 2) Breakouts… XME, YINN, FCX 3) Breakdown… UUP, GLD… 4) Watching how cyclical stocks react to the Fed as a signal for the markets overall along with rotation.
Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Added 5/7. Holding. AMZN (bottom reversal) Added 5/7. SOXX reversal. Added 5/17 reversal. TQQQ breakout. Added 5/17. Holding. SRS Added 5/17. SJB Added 5/17. LABU (break up from bottoming range). Added 5/17. ARKK (bottom reversal). Added 5/18. FNGU (breaking out). Added Tuesday 5/8. GOOG (Channel breakout). Added 5/9. Added to position 6/6. MSFT (break from flag pattern). Added 5/18. CSCO (bottom reversal… good earnings). Added 5/19. NFLX (test to $350 and bounce?). Added 5/24. AMD (consolidation top from a move higher). Added 6/6. AI (on test move lower). Added 6/6. DIA (break from consolidaiton). Added 6/8. TGT (bear flag). Added puts 6/9. HON (trading range breakout). Added 6/13.
Stops Hit: None
Quote of the Day: “The difference between stupidity and genius is that genius has its limits.” – Unknown
The S&P 500 index closed up 3 points to 4372the index was up 0.008% with above-average volume on the day. The index held the move above 4300 with 4400 next level to clear. Managing the risk of extended move near term. Four of the eleven sectors closed higher on the day with technology as the leader up 1%. The worst performer of the day was healthcare down 1%. The VIX index closed at 13.8 despite the reaction to the Fed. The uptrend from the October low remains in play.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials attempting to reverse the downtrend off the January highs following a bounce at support. Moved back above the 200-day MA The sector was up 0.4% for the week. Trend reversal in play. Led the upside Tuesday. Watching XLB, STLD, FCX, SCCO, X
XLU – Utilities bear flag on the chart sports a reversal. The longer-term trend from the December highs remains down. The sector was up 1.9% for the week. Struggling near the lows.
IYZ – Telecom downtrend from the February highs and trading in a bottoming range. The sector was down 0.3% for the week. Cleared $21.63 resistance.
XLP – Consumer Staples downtrend from the April highs and consolidating near support. Need to clear $73.50. The sector was up 0.6% for the week. Needs to move above the 200-day MA. Cleared resistance at $73.30
XLI – Industrials broad trading range from the March lows. The trend broke to the upside hitting resistance at the $102.40 level. The sector was up 1.4% for the week. Broke above resistance and accelerated.
XLV – Healthcare Bottom reversal in play $130.68 level to clear. The sector was up 0.1% for the week. XBI, IHE, IHF, and IHI all bounced. Tried to break higher through resistance… patience. Cleared $130.68 resistance and gave it back.
XLE – Energy bounced at the lows along with crude. The sector was up 0.4% for the week. The downtrend is in play from the November highs. Needs to clear $82.70 on the upside. Trying to move higher… failed.
XLK – Technology The sector broke from the trading range clearing the $154.42 resistance and going vertical. Posted a flag pattern this week and watching how it unfolds. Could test before resuming upside. The sector was down 0.5% for the week. Providing leadership for the broad index. Hit new highs with SOXX jumping higher.
XLF – Financials consolidation pattern needs to clear the April highs. The sector was up 1% for the week. The trend is down from the February highs. Banks are the key to the outlook. In a position to move higher, but Fed derailed it for now.
XLY – Consumer Discretionary Broke higher from the consolidation pattern in play on the chart. The sector continues to find positive data points to keep the trend alive. One of the key leaders for the broad index. The sector was up 2.6% for the week. Hit new highs.
IYR – REITs broke lower from the trading range and tested the March lows with a bottom reversal in play. The sector was up 0.1% for the week. The negative influence of interest rates and reports of vacancies in commercial rentals are rising. Own SRS on downside risk. Residential moving up… commercial moving down. Big challenges in San Francisco, Chicago, Seattle, Portland as major real estate given back to the banks.
Summary: The index posted a positive day taking into consideration the FOMC meeting news. Watching how this unfolds in the next few days relative to all the data and the FOMC meeting. Four sectors closed higher on the day… breadth took a hit on the day and watching looking forward. Remains a sector-driven market. XLK led on the day. XLY led on the day. KRE needs to clear $44.75. XLE needs to clear $82.74. XLV, XBI, XLI, IYR, IYZ, and XLU found support and watching. The broad index remains in an uptrend from the October low looking for stronger money flow from investors or rotation based on the news. Taking what is offered near term and letting it all unfold. 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 53 points to 13,626 as the index was up 0.39% for the day. The index remains in the uptrend and faces resistance at the 13,620 level. Support is 13,274. Watching how the trend unfolds short term. SOXX was higher on the day. IGV moved higher as well. Taking what is offered long and short.
NASDAQ 100 (QQQ) was up 0.73% with the mega caps leading on the day. The move is overextended but moving higher nonetheless. The sector had a positive bias with 51 of the 100 stocks closing in positive territory for the day. TQQQ reentry in play.
Semiconductors (SOXX) broke above the previous highs and broke from the flag pattern. The sector was up 0.6% for the week. Watching how it unfolds and the next opportunity. Broke higher from the flag pattern to continue the uptrend despite the FOMC news.
Software (IGV) Broke above the $318 resistance adding to the uptrend. Added IGV $291. Stop $322.80 (adjusted). The sector was up 0.02% for the week. Big test midweek and manage to bounce back… managing our stop. Moved above $355.96 resistance resuming leadership role.
Biotech (IBB) The sector moved back above the $128.35 level. Remains in a downtrend from the January highs. The sector was down 0.1% for the week. Moved higher entry $130. Tested on Wednesday.
Small-Cap Index (IWM) lagging overall but did manage to break from the trading range… looking for follow through to the move. The sector was up 1.6% for the week. Letting it unfold. Resumed upside and tested on Wednesday.
Transports (IYT) Made a break higher from the trading range and needs to clear the $234 resistance. The sector was up 0.8% for the week. If the markets are to move higher overall they need transport to be positive. Cleared the $233.95 resistance in play and added to the upside move.
Thursday: Tentative agreement on the west coast port stoppage and strikes. The challenge is getting $5.2 billion of backed-up cargo in containers and trucks to start moving again. 14 days doesn’t sound like much but to clear it could take months to clear. IYT was up 1.2% on the news. Watching the break higher.
The Dollar (UUP) The dollar remains volatile but produced an uptrend back to the March highs. What is on the horizon? If the dollar gets stronger watch the ripple effect… The dollar was down 0.3% for the week. FOMC meeting results will have an impact on the dollar. Broke support falling 0.5% on the FOMC.
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 3.74% up from 3.69% last week. Rates are looking at the FOMC meeting and the decision the Fed makes along with guidance. TLT was down 0.07% for the week. Watching from the FOMC move.
Crude oil (USO) Remains in a short-term downtrend but it did manage to bounce off the lows. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. USO was down 1.9% for the week. OPEC+ voluntary cuts up to 1 million barrels per day… oil moved up slightly then sold lower on economic news from China. Fell to support at the bottom of the current range. Bounced Tuesday… tested Wednesday… watching.
Gold (GLD) The commodity moved sideways with the dollar indecisive on the week. letting this unfold with the trend higher from the October lows. The metal was up 0.5% for the week. Tested support… watching.
Questions to Ponder: Navigating Uncertainty
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.
Port of Los Angeles and ports up the west coast staging strikes… watch the supply chain issues this creates looking forward… that will equally impact inflation. Strikes were settled on Wednesday… now we see what ramifications it will cause from the stoppage.
Janet Yellen has been on the financial stations talking about more “consolidation” in the banking sector. Under normal circumstances we would view that as mergers and acquisitions… but, it seems like she is talking about a takeover relative to the failure of more banks. Despite that outlook, banks have rallied more than 12% in the last week. Take what is offered but manage your risk accordingly.
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. 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 for more than six months 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 narrow leadership. The breadth did improve over the last few weeks, but we will need to see follow-through on the moves. 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 your money.
Wednesday: The charts broke from the consolidation patterns to start the week. Technology remains the leader along with consumer discretionary. SOXX moved higher to lead the sectors. Trading the trends on sectors showing strength. We see the overall trend is still up from the October lows. Major indexes have moved higher on the mega-cap moves and technology. We introduced some speculation and uncertainty on the FOMC announcement. Watching how that unfolds over the next few days. Manage the risk that is and look for some rotation.
What I am watching on Thursday: 1) Response to the FOMC statement and outlook. 2) QQQ, and SOXX are extended on the upside watching the response to the Fed accordingly. 3) DBA, XLB, XLI making moves to the top of their respective ranges… 4) GLD, SLV, lagging… weaker dollar on the chart could spark an upside in the metals. 5) XME attempting to break higher. 6) Looking for signs of rotation… cyclical especially. 7) SOXX – SWKS, MXL, LRCX.
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.