The bulls and the bears continue to fight over the direction with the bears leading the downside on Friday. The indexes started the day down 1% and traded in a narrow range for the balance of the day. The tug-o-war for leadership and direction remains. The activity started following the release of the FOMC minutes from the last meeting. It appeared the meeting was more hawkish on inflation than Mr. Powell was in the “disinflation” press conference following the meeting. The mixed message has many on Wall Street in a quandary about the future. This has already been a big question for investors looking forward and the minutes only added to the issues. The indexes posted their biggest weekly loss for 2023. The message is mixed as some economic data shows positive trends over the last few months. Home sales were the highest in 10 months… all the good news is causing more worries relative to the Fed and its stance on inflation. Volume was below average and the money supply turned lower for the week. Thus this remains a belief versus data debate among investors and talking heads. The speculation about the future of rate hikes from the Fed versus the “stronger” economic data is at the core of the debate. This leaves us with a speculation game at its best and void of any additional data from the Fed, investors are set to wrestle over who is right. The Fed presidents speaking in the media continued with the possible need to move 50 bps at the next FOMC meeting versus the expected 25 bps. That just adds to the anxiety and uncertainty. The S&P 500 index closed lower as we look at 3930 the next support level. The NASDAQ broke lower on Friday moving below the 11,474 key support level and closing at 11,394 with a third doji candle. The downside break puts the sellers in control for now. How this unfolds next week will be of interest as we manage our positions accordingly. No matter what our beliefs the chart is the ultimate decision maker.
The volume remains below average giving some questions about the current market environment, the VIX closed at 21.6 up from Thursday as the volatility remains intraday. The S&P 500 index closed down 1% for the day. The NASDAQ was down 1.7%. Small Caps (Russell 2000) were down 0.9%. The leadership in technology and consumer stocks broke lower on Tuesday and offered short-side entry points and finished the week lower. The ten-year treasury yield closed at 3.95% up 7 bps for the day. Bonds have priced in the Fed and future rate hikes. TLT broke the trendline from the November lows and offered a short entry signal (TMV) last week and that has played out nicely. Crude (USO) was up 1.2% as uncertainty remains. Gasoline (UGA) was down 0.2% and broke below the 50 DMA. Natural gas (UNG) was up 5.2% after breaking below the April 2021 lows and trying to put in a bottom reversal. The dollar was up 0.7% on the day maintaining the bottom reversal and showing belief the Fed will continue hiking rates. We are focused on managing the risk and watching how this all unfolds. The negative sentiment is building for stocks as investors focus on the Fed and interest rates.
Things to Watch This Week:
Last Week Key Data: 1) Flash PMI US Services (50.5 versus 46.8 returns to expansion as a surprise to investors). Flash PMI US Manufacturing (47.8 versus 46.9 improves but still shows contraction). Existing Home Sales Jan (4 million versus 4.03 million. 4.02 million expected). 2) FOMC minutes set off mixed trading as investors deal with the belief about the Fed and stocks. 3) GDP 4th quarter revised (2.7% versus 2.9%. 2.9% expected) PCE revised higher to 3.9% from 3.5% bad news. Personal consumption fell to 1.4% from 2.9%. bad news. Watching the data continue to add up on the downside. Initial jobless claims remain near the weekly 190k. Continuing claims were 1.654 million down 37k. 4) Consumer spending (1.8% versus -0.1%. 1.4% expected). Personal Income (0.6% versus 0.3%. 1.2% expected). Core PCE index (0.6% versus 0.4%. 0.5% expected) YOY (4.7% versus 4.6%. 4.4% expected). New Home Sales (670k versus 625K. 620k expected). Consumer Sentiment (67 versus 66.4. 66.4 expected).
Charts to Watch: ARKK (double top short setup). ZIM (cup and handle pattern). DHT (J-Hook pattern). BDRY (bottom reversal). RUN (descending triangle break lower short signal). BOAT (break higher in an uptrend).
Previous Charts of Interest Still in Play: TMV @ 200 DMA (hit entry and moved higher ). TMV (cup pattern followed through upside. Added to position). GBTC (cup & handle pattern). Nice upside move testing near term. UNG, UGA, USO bottom reversals? FCX short entry breaks lower.
Stops Hit: ITA, DBA
Quote of the Day: “I don’t make jokes. I just watch the government and report the facts.” – Will Rogers
The S&P 500 index closed down 42.2 points to 3970 the index was down 1.05% with below-average volume. The index posted the worst week of 2023 losing 2.9%. Watching to see if it can regain upside footing following the rising concerns about the Fed. Mixed reactions to the FOMC minutes and how the Fed responds with interest rates. Three of the eleven sectors closed higher on the day with basic materials as the leader up 0.6%. The worst performer of the day was telecom down 2%. The VIX index closed at 21.6 as anxiety remains elevated on Fed worries. The downside is in play and watching how this unfolds.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials broke the uptrend line from the October lows… negative. Closed below the 50 DMA and established a short-term downtrend. The sector was down 0.6% for the week. Watching how it unfolds near term.
XLU – Utilities remain in the down-trending channel… looking for a break higher, but the downside remains in control. Bounced Friday off the 61.2% Fibonacci retracement line? The sector was down 1.7% for the week.
IYZ – Telecom broke the head and shoulder pattern on the chart to the downside… broke below the trendline off the October lows… obvious short-side trade. The sector was down 5.4% for the week.
XLP – Consumer Staples downtrend from the December highs remains in play. The sector was down 0.04% for the week. Letting it play out as it failed to break above the trendline. Consolidation pattern.
XLI – Industrials Sideways trend in narrow trading range remains in play. The sector was down 2% for the week. Need to hold $97 and break above the $102.40 level.
XLV – Healthcare downtrend in play with a break below the $131.40 mark. Broke from the downtrend channel and accelerated the selling. Short-side trades remain in play (RXD). The sector was down 1.7% for the week.
XLE – Energy continued lower for the week testing support at $82.74. Broke both intermediate and short-term trendlines. The sector was down 3.3% for the week. Short entry signal in play ERY raised stops.
XLK – Technology The sector moved to support at $136.10. Held the 50 DEMA. Maintaining leadership but struggled all week. The sector was down 3.9% for the week. Watching for direction and opportunity near term.
XLF – Financials broke the trendline from the October lows. The sector was down 2% for the week. HIt stop posting a small gain. Watching interest rates and impact near term.
XLY – Consumer Discretionary rolling top broke to the downside. $147.10 support broken. $141.60 next level of support. The sector was down 4.4% for the week. Stopped out of the balance of the position and watching how this unfolds.
IYR – REITs uptrend off the October lows broken. The sector was down 4.5% for the week. The negative influence of rising interest rates and reports of vacancies in commercial rents are rising. Short side trade opportunity.
Trouble is building in commercial office space as a 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 in an uptrend from the October lows… barely bouncing off the trendline on Friday. It broke the short-term trendline from the January lows. The 50 DMA is the next level to watch. 3930 level of support is in play. Fed uncertainty getting all the attention as economic data bumps higher causing a fear factor about interest rates. We will remain patient for now as investors sort out their collective thoughts about the Fed and inflation. We hit stops, held on some positions, added some short-side trades, and raised stops on existing short-side trades. 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 195.4 points to 11,394 as the index was down 1.69% for the day. The 11,474 support broke offering the possibility of more downside. Money flow has turned negative with all the news and speculation creating uncertainty around the Fed. Technology and semiconductors are the keys…. both bounced and pushed lower on Friday to end the week. The index was down 3.9% for the week. Short-side entries were added Wednesday with DXD, SOXS, and TECS.
NASDAQ 100 (QQQ) was down 1.67% with the mega caps breaking below the $292 support. The sector had a negative bias with 10 of the 100 stocks closing in positive territory for the day. The chart trend broke lower from the consolidation pattern and moved lower on the week down 3.8%… the question is how low do we move near term? Added SQQQ Tuesday.
Semiconductors (SOXX) trend turned down breaking support. The sector was down 3.8% for the week. $390.40 is near-term support. Banked solid gains on the move higher and looking for direction near term… watching downside opportunities.
Software (IGV) broke the short-term uptrend from January lows. The sector was down 3.3% for the week. Flirting with short-side trades near term. Volatility is in play as the sector tests lower.
Biotech (IBB) The sector broke lower from the double top pattern giving short entry. The sector was down 4.3% for the week. 200 DMA in play.
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.
Small-Cap Index (IWM) uptrend into a pennant consolidation that broke lower. Exited positions with a nice gain. The sector was down 2.6% for the week. Money flow turned negative.
Transports (IYT) uptrend from the October low remains in play with plenty of volatility along the way. Trying to hold the $224 support level. The sector was down 3.2% for the week.
BDRY – Dry bulk shipping looking bullish with a bottom reversal in play.
The Dollar (UUP) The dollar moved lower on the FOMC announcement but bounced as economic data may keep the Fed in play relative to interest rates. The dollar was up 1.3% for the week. The outlook ris positive with the Fed-driven move in play.
GBTC – Grayscale Bitcoin Trust is trading at a 47% discount to the underlying asset. Something to watch moving forward. The chart is testing the rise off the January lows… watching how the news of higher regulations will impact prices going forward. Hit Entry $10.60. Testing the move higher.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.95% up from 3.82% last week. The yields reversed the downtrend following the FOMC announcement. TLT was down 0.6% for the week. Added TMV $112.50. Raised stop.
Crude oil (USO) trading range on the chart with a head and shoulder pattern. Economic speculation is impacting supply-demand speculation globally. USO was down 2% for the week. The weekly chart shows the downtrend building in crude. A break of support sets up short-side trade.
UNG – natural gas bounced on the outlook for colder weather in the US over the next few weeks. Projected bump in demand as a result. Short-term trade entry $8.13 on Friday.
Gold (GLD) The commodity shifted lower with the bounce in the dollar. The metal was down 1.4% for the week. Watching for support at $168. Flirting with a break lower as the dollar remains stronger near term.
Put/Call ratio was 1.11 Friday… Negative bias in the index.
Questions to Ponder: Navigating Uncertainty
Speculation/Conspiracy Theory: The Fed is in the position of getting the market to do the dirty work for it. If the market drops 20-30% and crashes liquidity for the average American… they, the average Joe, cut spending out of fear. That allows the Fed to not raise rates above the 6% level by allowing the markets to accomplish the feat while they, in the background, dry up the money supply exacerbating the process. The market would crush inflation and throw the economy into a full-blown recession. Which in turn could and would destroy the middle class. This will all be done for the need to preserve the American way… printing money and raising debt levels while the government gains more control and take more of the freedom our forefathers fought for.
Consumer credit was up $394 billion. That is the biggest gain in 20 years, to a record $16.9 trillion. That is up $2.75 trillion from 2020. Mortgage balances were up $254 billion in Q4 2022 and up 1 trillion for 2022. Home equity credit lines were up $14 billion to $340 billion. Student loans outstanding up $21B to $1.60 trillion. Auto loan balances up $28 Q4 2022. Delinquency rates for mortgages 90 days late +0.57% (2x from 2021). Auto loans +0.6%. Credit card +0.8% (to 4%). Substantial rises across the board from Q4 2021. Younger age groups are having particular trouble with their revolving debt. Credit card balances up $61 billion to $986 billion, surpassing the pre-covid high of $927 billion.
64% of all Americans are living paycheck to paycheck.
Friday: Stocks were lower on Friday as investors grapple with the reality versus belief as it relates to the Fed speak. The debate about interest rates, inflation, the Fed, economic data, consumer, and just about everything else is impacting the outlook for stocks. With all the uncertainty surrounding the future stocks have turned down with volatility picking up and money flow declining. The appearance is plenty of money heading to the sidelines and waiting for some clarity. Friday’s economic data from the PCE data, home sales, consumer confidence, consumer spending, and personal income all led to more selling as the worry temperature rose on expectations of the Fed hiking rates further. We will watch patiently and manage our money accordingly. We took some profits, hit stops, raised stops, and added some short positions. Taking what is offered and managing the risk.
Hope is a beautiful thing… but, as we say many times, the data doesn’t matter until it does. That is where we find ourselves currently. We look to the charts to provide the next direction near term… which is currently moved to a negative bias. We will manage our risk of hope giving way to reality along the way. Eyes open. Emotions removed. Mixed economic data has caught the attention of the talking heads only from the perspective that it goes against the FOMC message. Watching how that twist turns out near term. The dollar turned higher on Fed worries. Interest rates are at 3.95% on the ten-year bond up from 3.4% three weeks ago reflecting Fed worries. I state this so we understand it is the data that ultimately determines the direction of stocks and the Fed is currently in play. The leaders took a turn down on Friday as sellers take control for now. Energy liked the economic data viewing the positive news as driver of more consumption. Volatility closed at 21.6 and elevated on the current uncertainty. The money supply has turned lower showing more money on the sidelines. 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.
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 trickling back into the headlines. We 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… technology and consumer discretionary have led the move but broke key levels of support this week… 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.