Markets add to Friday’s bounce

The markets gapped higher at the open to start the trading week and spent the day trading up and down to close modestly higher on the day. A scan of the sector charts shows consolidation patterns still in play off support. The question is will we bounce or pause to continue lower? It is still a tug-o-war over direction and no real conviction from the buyers. No big news other than the Fed showing they are in charge for now. A look at money flow relative to M1 and M2 shows how much tightening the Fed has created. This is impacting the economic picture along with higher interest rates impacting growth in company expansion and growth. As I have stated many times the Fed and the government are willing to accept the collateral damage of the consumer and small businesses in a trade for lower inflation. They continue to validate that month by month as the real economy moves lower. Maybe we are seeing some reality sinking in for investors versus the pie-in-the-sky talk from the government data.

The markets moved modestly higher to start the week of trading. Volume was below average on the day. Scanning the indexes we see consolidation patterns building on the charts… this shows indecision from investors near term… it will play out and the cycle of the trend will unfold… thus patience for now. The S&P 500 index closed up 0.6%. The NASDAQ was up 0.8%. The SOXX was up 1.2%. Small Caps (Russell 2000) were up 0.9%. The ten-year treasury yield closed at 4.21% down 2 bps. Crude (USO) was down 0.1%. (UGA) was down 3%. Natural gas (UNG) was down 0.1%. The dollar was down 0.1%. We are focused on managing the risk and seeing how investors respond to the current situation.

It is important to remember Mr. Powell’s speech was to explain the Fed is in control… and they are willing to accept the collateral damage caused by their actions. Price hikes are still being realized across the economy. The prices that rose over the last 20 months have not receded one penny. In other words, we have not had price deflation. This is an economy that is slowing despite what the data from the government states. Bankruptcies are rising both personally and corporately. The data shows that 65% plus of Americans are living paycheck to paycheck as goods cost 20-30% more across the board for consumers. Hardship loans from retirement plans are climbing at aggressive rates. Credit card debt topped $1 trillion for the first time last month. And while all this is happening the current administration in Washington is talking about how great the economy is… they are all just playing another game of bullshit Bingo.

ONE Chart to Watch: QQQ – 1) The Chart broke below the $366.14 support… closed barely above that mark on Monday. 2) Short-term trend broke the uptrend from the January lows… big negative to overcome. 3) $357.24 level to hold. 4) Consolidation at support in play.

Additional Charts to Watch:

SOXX – Tested to support at $473.23. Bounced off the low showing consolidation at support. $474.15 level to hold currently… break of support offers short side entry.

Mega Caps – AAPL failed to move above the 20-day EMA. AMZN moved to the 50-day MA and held. META moved below the 50-day EMA tested lower and closed on a doji candle. GOOG held the 10-day MA. MSFT closed at the 50-day MA. Leadership continues to struggle and downside risk remains in play.

Retail Stores – EMTY breaking higher as the short side of commercial real estate for retail stores struggles with plenty of distressed sales and bankruptcy issues in play. Hit Entry $15.25. Stop moved to $15.25 and let it unfold near term.

Stock moves of interest from Friday: INTU (upside breakout), MRVL (downside break), JWN (break lower), ULTA (break lower)… retail showing weakness despite the great economy Washington pontificates.

Downside of rising interest rates – Mortgage-backed Securities have been declining in value as interest rates have risen. The downside is for banks that hold them as well as investors who hold them in their portfolios without even realizing it. Bond mutual funds, 401K plans, retirement plans, ETFs, etc. Take a look at a chart of VMBS ETF and you see a decline of more than 15% over the last 20+ months. Apple 2060 bond issued at 2.2% in 2020 is down 40% based on current yields. I understand if you hold them to maturity you get your principal back… but in the meantime, inflation has averaged over 5% while you get 2.2% in dividends… risk either way you approach it… Thus, look for the opportunity in the downside of bonds going forward… if Powell doesn’t back off interest rates soon, the downside risk will continue to rise for banks, bonds, ETFs, and other financial instruments. Where there is smoke there is opportunity.

Food for Thought: The Fed is engaged in propping up banks through the “discount window” a traditional source of providing short-term liquidity, but since early this year they have been offering loans through the newly established BTFP (Bank Term Funding Program). This is to help offset the strain of “under” performing assets on their balance sheets… MBS bonds and other long-term debt issued prior to 2022 in low-interest-rate environments. The Fed has to keep the system going while it stamps out inflation through lower money supply… thus, banks need money to remain solvent… Thus, my point is to watch how the markets respond to Powell… his minions will be at work to prop up the system from failure by putting more money in the system through banks to invest in the markets… I know I made all this up and there is no way the Fed, Banks, and Government would collude on this process… Believe me, this is not the first time the Fed has propped up banks to allow them to recover from mismanagement of assets… yours and my assets FYI as taxpayers. Yes, the higher rates and lower money supply hurt consumers and small businesses but that has always been acceptable collateral damage to the Fed and the Government.

Stops Hit: NONE

Quote of the Day: “If you’re going through hell, keep going.” – Winston Churchill

The S&P 500 index closed up 27 points to 4433 moving the index up 0.63% with below-average volume on the day. The index held support again at 4338 and left the chart below the 50-day MA. Ten of the eleven sectors closed higher on the day with telecom as the leader up 0.8%. The worst performer of the day was utilities down 0.1%. The VIX index closed at 15.1 moving lower as sentiment shifted away from the negative outlook. Micro-term downtrend remains in play with some consolidation at support… the Fed outlook is really unchanged but markets tried to make it a positive.

Sector Rotation and the S&P 500 Index:

XLB – Basic Materials Reversed to the 200-day MA and holding for now. The sector was down 0.2% for the week. No Positions.

XLU – Utilities back to the previous lows and support. Consolidating currently. Need to hold $63. The sector was down 0.2% for the week. No positions.

IYZ – Telecom In a downtrend from the February highs moved into a trading range. The sector was down 0.2% for the week. No Position.

XLP – Consumer Staples moved back to the June lows. The sector was down 0.8% for the week. No Positions.

XLI – Industrials Broke uptrend $105.41 support. Consolidation pattern on the chart. The sector was down 0.3% for the week. No Positions.

XLV – Healthcare Moved back to support at $132.64. The sector was down 0.1% for the week. No Positions

XLE – Energy Topping pattern broke lower on lower crude prices. The sector was down 1.3% for the week. Entry $81.95. Stop $85.05 Need to clear $87.70.

IEO – broke higher as offshore interest rise. Entry $85. Stop $95.04.

XLK – Technology The sector broke lower found support at $165 and bounced. The sector was up 2.2% for the week. Entry $167. Stop $168.40.

XLF – Financials Testing the $33.78 level of support. The sector was down 0.1% for the week. Bank downgrades not helping the sector.

XLY – Consumer Discretionary Bounced off support and watching the outcome. The sector was up 1.2% for the week. No Positions.

IYR – REITs Bounced at support… watching how it unfolds. The sector was up 0.8% for the week. No Positions.

Summary: The index moved modestly higher on the day following Mr. Powell’s speech. The Fed continues the stance on inflation and will move ‘cautiously’ on interest rates looking forward… BLAH, BLAH, BLAH. Eleven of the eleven sectors closed higher on the day with XLK in the leadership role lower. XLY followed. The index is looking for direction and the talking heads believe it is lower… let the charts unfold and take what is offered. 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 114 points to 13,705 as the index was up 0.84% for the day. The index showed buyers at support and moved modestly higher throughout the day. Support is 13,274. Letting the move unfold as tech and megacaps find their collective direction. SOXX was up 1.2% on the day. IGV was up 0.5%. Watching support and how the activity unfolds.

NASDAQ 100 (QQQ) was up 0.75% on the day as mega caps traded higher from the intraday lows. Remains below the $366.14 support. The mega-caps, as we have discussed, are/were extended from the May break higher and thus test lower short term. The question is, do they continue lower? The sector had a positive bias with 86 of the 100 stocks closing in positive territory for the day.

Semiconductors (SOXX) The sector held support at $473.23 and consolidation. Needs to move back above the $497.60 level to show momentum. The sector was up 1.4% for the week.

Software (IGV) The sector tested below the $336 level of support and bounced. The sector was up 3% for the week. No Positions. Looking for an upside break on the chart if the directional change is to unfold… $347.60 level to watch.

Biotech (IBB) The sector broke below the $128.35 support and is in a downtrending channel. The sector was up 1.7% for the week. No Positions.

Small-Cap Index (IWM) Tested back to the 200-day MA and tried to find support. Consolidation pattern on the chart. The sector was down 0.3% for the week. No Position.

Transports (IYT) Tested below the $247.67 support level. Consolidation pattern on the chart. The sector was down 1% for the week. No positions.

The Dollar (UUP) The dollar moved back above the June highs and climbing… The dollar was up 0.8% for the week. More chatter about losing dollar status globally as BRIC nations establish gold-backed currency. No Positions.

Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.23% down from 4.32% last week. TLT was up 1.5% for the week. Watching how the Fed manages the yield curve.

Crude oil (USO) Testing the uptrend on China’s economic weakness. USO was down 0.4% for the week. No Positions.

Gold (GLD) The commodity struggling on the stronger dollar. No positions. The metal was up 1.3% for the week. Watching the bounce on BRIC news.

FINAL NOTES:

Our longer-term view shifted to neutral as the upside trend from the October lows is challenged but remains in play. 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 it puts the broad indexes in an intermediate uptrend… of course, the last three weeks’ micro-trend is testing the longer-term trend and you need to manage stops accordingly on longer-term positions. The topping patterns broke short-term support to create a micro-term downtrend. The economic data is showing signs of fatigue relative to growth. We hit our stops on intermediate and short-term positions. We added some positions as money rotated. Sector-driven activity is in play short term. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal is to manage the risk of positions, take what is offered… short or long, and then manage your money. Listen to the market not the talking heads.

Monday: They tried to push higher but it was met with resistance as some head for the exits and some continued to believe in the upside. Letting it play out as we look for directional confirmation on QQQ, SPY, SOXX, and TLT. We continue to follow the trends as they play out. Micro-term trend found support prompting exits from most of our short-side trades. Looking at how this support plays out with 5-8 day consolidation patterns on plenty of charts. Patience is the key currently. Manage the risk that is and let the current activity play out. Plenty to ponder as we progress in the current environment.

What I am watching on Tuesday: 1) The reaction to Monday’s attempt to bounce. 2) TLT reaction to Powell and his puppets. 3) The dollar’s reaction to Powell. 4) Support on the major indexes… hold or break?

Trending concerns:

1) Elimination of the debt ceiling by Congress has sent the administration on a spending spree… no big surprise when you can’t bounce checks you keep writing them for undisclosed favors. TLT fell 1.9% Tuesday and we added TBT to our positions. Watching how this storyline unfolds as Fitch downgrades the Treasury Bond to AA+.

2) Inflation warnings are popping up again… on May 4th crude was $67. On August 1st crude was $81.96 which is a 22.1% increase in price… where does it go? Correct, into everything we basically touch. We own USO and UGA in order to keep pace with being able to afford gasoline. But it goes further and we should be looking at where to invest to keep pace with the next wave of inflation.

3) Climate Emergency? If this executive order is enacted by the Biden Administration bar the doors as spending will escalate to levels not seen since WWII. The draconian measures will mirror those seen during the pandemic lockdowns. They want to eliminate anything gas or electric in the name of “clean energy”. Another storyline that has our attention.

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.

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