Moving the markets on Wednesday was the Treasury refunding announcement which pushed the 10-year bond down to 4.78%. One of the key issues for the market has been interest rates moving up to 5%, thus the decline gave equity buyers some confidence. The renewed optimism with the Fed following Powell’s comments added to the buying in the afternoon. Is this the beginning of the rally many have discussed? Or just another relief rally? Time will tell, but opportunities were offered on the move above previous support levels. Bear flag patterns on charts broke to the upside and reversed the third leg lower at least for now. We will watch how Thursday unfolds as it relates to the Fed and economic data. ISM Manufacturing data was out and moved lower to 46.7%… as we know anything below 50% is a contraction in the sector. With the Fed in play on the day it was ignored. The economy continues to weaken and it seems everyone is conveniently ignoring the data. Technology and consumer discretionary returned to their leadership role for the day. Semiconductors added to their move off the low clearing $447.50 resistance. The SP500 index climbed back above the 4200 level and closed just shy of the 200-day MA. Some of the negative talk has abated with three days of upside for the broad indexes. The volatility index dipped lower as markets bounced pushing SVXY higher. Overall positive day as buyers remained engaged with stocks. Watching how the response to the FOMC is overnight. Taking what the market gives and managing the risk.
Wednesday was a positive day for the markets overall as buyers showed up again… patterns on the charts are not a picture of strength but the bounce is in play and we will take the good with the bad. The technology, consumer discretionary, and utility sectors led the day. Earnings have been good and bad turning it into a stock picker market. We concluded the FOMC meeting with what most wanted and expected. The complexity of the outlook for global economics, domestic economics, and uncertainty are alive and well. The major indexes were higher on the day, but we are far from being out of the woods. The S&P 500 index closed up 1%. The NASDAQ was up 1.6%. The SOXX was up 2.3%. Small Caps (Russell 2000) were up 0.5%. The ten-year treasury yield was 4.78% up 9 bps for the day. Crude (USO) was down 0.3%. (UGA) was down 1.2%. Natural gas (UNG) was down 3%. The dollar was up 0.03%. We are focused on managing the risk in the current environment.
Charts to Watch: See Notes on “Reality of the Markets” & “Jim’s Beliefs About the Market” pages…
Quote of the Day: “Christmas is a baby shower that went totally overboard.” — Andy Borowitz
Additional Charts To Watch
KBE/KRE – The banking sector is being challenged by higher rates. Despite the solid earnings from the sector the overhang of rates pushed both the money center banks and the regional banks below the October lows and renewed the concerns over balance sheets. SEF offered an entry signal on the development… watching how this storyline unfolds near term. Entry $13.35. Stop$13.35. Bear flag on the chart and watching near term. $39.86 level to clear for KRE.
Sector Rotation And The S&P 500 Index
The S&P 500 index closed up 44 points to 4237 moving the index up 1.05% with above-average volume on the day. The index moved back above the 4200 support and at the 200-day MA. Nine of the eleven sectors closed higher on the day with technology as the leader up 1.9%. The worst performer of the day was energy down 0.2%. The VIX index closed at 16.8 moving lower on the day. Plenty to ponder between the headlines and facts. The index bounced off the lows, confirmed the move, and if it follows through or if the sellers return.
XLB – Basic Materials broke support at the $77 level. Bear flag pattern brings the $67 level into play on the downside. The sector was down 0.4% for the week. No Positions. Bear flag watching.
XLU – Utilities found support at the $56 level… bounced and faced some resistance at the $59.50 level. No follow-through upside. The sector was up 1.2% for the week. Entry point if breaks above resistance. Broke above $59.50 resistance and needs to follow through.
IYZ – Telecom reversed lower again and broke support at the $20.50 level. Remains in a downtrend and testing the previous low. The sector was down 4.1% for the week. No Positions. Bounced off the lows.
XLP – Consumer Staples Remains in a downtrend with a bear flag pattern on the chart. The sector was down 1% for the week. No Positions.
XLI – Industrials downtrend remains in play and back to the support at $96. The sector was down 2.2% for the week. No Positions. Small bounce.
XLV – Healthcare downtrend in play with Mach lows current support. Action on Friday clearly shows negative momentum in play. The sector was down 3.8% for the week. No Positions. Doji bounce and follow through.
XLE – Energy moved all the way back to $84.33 support. Earnings were the downside catalyst. The sector was down 6.2% for the week. Small bounce at support.
XLK – Technology The sector renewed the downtrend and remains challenged by the economic picture. The sector was down 1.7% for the week. No Positions. Solid follow through upside.
XLF – Financials The move higher in interest rates impacts the sector on the downside. The sector was down 2.3% for the week. Broke support at $32.26 and offered entry on the short side trade. SEF entry $13.13. Hit stop $13.35. Bounced on Monday… back above the $32.26 level .
XLY – Consumer Discretionary broke from the consolidation pattern renewing the downtrend and closing below the 200-day MA with $147.11 as next support. The sector was down 1.3% for the week. No Positions. Bottoming pattern.
IYR – REITs trying to hold support at the $73.80 level with worries rising with higher interest rates the downside talk focused on defaults rising in commercial real estate. The sector was down 1.5% for the week. No Positions. Bottoming pattern.
Summary: The index remains challenged by too many issues in too many places. The move on Wednesday added to the bounce off the lows. Watching how this unfolds. On the positive side interest rates were lower on the Treasury borrowing more money longer term. The index moved back above the 4200 level. For now this is a relief bounce and could turn into the year-end rally many analyst are hoping and asking for… Patience is key. 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 210 points to 13,061 as the index was up 1.64% for the day. The index opened higher drifted into the FOMC decision and rallied into the close. Closed back above the 12,997 level and watching how it responds going forward.
NASDAQ 100 (QQQ) was up 1.74% for the day as the mega-caps were positive again on money flow. The sector moved back above the $354 level of support and added to the move. The sector had a positive bias for the day with 75 of the 100 stocks closing in positive territory for the day. Intraday volatility abated on the upside move.
Semiconductors (SOXX) The sector moved below the $447 support… INTC helped but still lagging. The sector was down 2.8% for the week. SOXS entry $12.55. Stop $13.25. Bounce back above the $447 level and showing postive momentum last two days. Entry hit at $447 Stop $445.
Software (IGV) The sector moved below the $336 support. The break lower could get ugly technically. The sector was down 2.8% for the week. Short side setup. Bounced… watching with move back above $336. Added IGV $336. Stop $334.
Biotech (IBB) The sector remains in a downtrend and broke support at the $115 level. The sector was down 4% for the week. LABD in play. Entry $24. Stop $27. Bounced… back above $115 and watching for follow through.
Small-Cap Index (IWM) Moved to $162 support and added to the downside. The sector was down 2.5% for the week. No Position. TZA in play. Held support.
Transports (IYT) downtrend remains in play with a break of April lows. Gasoline prices and shipping weighing on the sector. The sector was down 6.3% for the week. No positions. Short side in play. Big bounce-off lows. Followed through but needs plenty of help.
The Dollar (UUP) The dollar is showing a bull flag on the chart as it consolidates near the highs. The dollar was up 0.4% for the week. No Positions. Topping pattern.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.84% down from 4.92% last week. TLT was up 1.3% for the week. Watching how the Fed manages the yield curve. No Positions. FOMC meeting on tap. Topping pattern… moved lower on Treasury financing $775 billion longer term.
Crude oil (USO) Crude sold lower on worries about consumption. An increase in supply for the week was a concern and crude moved back near $85 a barrel. USO was down 2.9% for the week. Up and down activity all week. Closed below key support and at a decision point. Trying to bounce…
Gold (GLD) The commodity accelerated higher to end the week on all the geopolitics in play. The metal was up 1.3% for the week. Added positions at $172. Stop $182. Managing the risk. Tested with some volatility.
FINAL NOTES
Our longer-term view is a downside bias as the upside trend from the October lows was broken and fell 10% from the July highs. The short-term downtrend from the July highs is where our attention resides. If the longer-term trend is to resume the short-term downtrend needs to reverse… soon. The activity thus far for the week is trying to bounce, but has plenty of work to do. With the short-term trend down and the third leg in play, we have raised cash on our longer-term positions. Nothing, as we all know, 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 plenty of volatility along the way. With the trend broken, it puts the broad indexes in an intermediate downtrend… the last eleven weeks’ short-term trend has offered downside trades. The current bounce off the lows is being challenged by uncertainty in the economy and geopolitics ramping up. Current activity raises questions relative to direction and growth. We look to charts and fundamentals for some answers. 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.
Wednesday: Indexes bounced for the third day. The move was positive heading into the FOMC meeting on Wednesday remained positive and now we look at how much momentum it generates. Watching how the bounce unfolds… maybe a relief bounce to balance the selling? There is no lack of issues on the table with each taking their respective turn in the spotlight. There is a lack of leadership overall although tech made a good move on Wednesday… needs to add to the move. Economic data is confirming the ugly outlook. I would expect the data to remain negative with the only real caveat being how negative it will be. We have put money to work short term based on the technical moves and we continue to manage risk and take what the markets give. Remember all upside moves at this point are relief rallies and we will treat them as such until they validate otherwise. Watching XLK, QQQ, SOXX, IGV as opportunities and leaders.
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.
Explore the following links for new pages that dig into data both In & Outside the markets. Jim’s insights highlight potential opportunities emerging from the current market environment. The pages also discuss the Reality of closed opportunities, whether they proved profitable or fell short of our expectations.
