The markets moved lower early in the day and attempted to bounce but closed lower on the day. The downside was led by energy once again with the data from China showing a weaker economic picture. Utilities led the upside as interest rates continued to decline. The cloud hanging over the markets was once again the debt ceiling issue which went to a vote in Congress… passage wasn’t guaranteed and thus the struggle for investors. Add in the Fed presidents running around talking about inflation concerns and future rate hikes. Even if the bill passes Congress there is the Senate to deal with. Thus, uncertainty is in play and we know the markets don’t like that. Economic data was limited with Mortgage applications falling by 3.7%. Expected in the rising interest rate environment. Chicago’s PMI fell to 40.4 in May from 48.6 in April. Not a great picture as it shows further contraction. The JOLTS job openings totaled 10.103 million in April from a revised 9.745 million in March. That was a big jump and one the Fed will take note of. Overall the markets remain in an uptrend with a modest test of the move higher.
Overall markets were negative on the day… questions relative to the downside in XLV, XLI, XLB, XLP, IYR, XLE, IYZ, and XLU as they all show downtrends on the charts short term. XLF is sideways, and the two upsides are XLK and XLY. Not the kind of balanced market you want to see. Four of the eleven sectors closed in positive territory on Wednesday. The S&P 500 index closed down 0.6%. The NASDAQ was down 0.6% with SOXX down 2.5%. Small Caps (Russell 2000) were down 1%. The ten-year treasury yield closed at 3.63% down 7 bps the day with TLT bouncing on the move. Crude (USO) was down 2.6% dropping on the outlook for consumption. (UGA) was down 2.1%. Natural gas (UNG) was down 2% turning lower again. The dollar was up 0.05% holding the uptrend currently. We are focused on managing the risk and watching how this all unfolds. Markets are closed for Memorial Day.
ONE Chart to Watch: QQQ – 1) Held $347.55 moving lower on the day. 2) Short-term trend is UP… starting from the January low. 3) Accelerated above the trendline with verticle move. Watching the overextended move for test. 4) TQQQ entry $27.45. stop $34.50 (adjusted). target $32.28 (hit letting it run). Adjusted the stop and sold 1/2 of the position at $31.65. Letting it run for now.
Additional Charts to Watch: SPY – Moved above the resistance $415.20 and held. Trendline off the March lows is in play. IWM – back below $174.50 and remains in a trading range. SOXX – gapped higher last week and is overextended. Tested lower $473.23 level to hold. Manage the risk. Added SOXL @ $14.65. Stop $21.56 (Stop Hit locked in gains). USO – oversold… gapped lower showing downside pressure.
Leadership – NASDAQ, NASDAQ 100, SP500, XLY, XLK, SOXX… QQQ – All paused on Wednesday. Manage the risk accordingly. Technology is the leading sector. Consumers (XLY) showing signs of slowing and testing lower… If the debt ceiling issue is resolved the upside has a chance of extending, but we saw what happened when news leaked the deal wasn’t done.
Laggards – SP400, RUTX, USO, XLF, XLI, XLE… all lower on Wednesday and lagged overall. If the markets are to run higher we need to see them participate. IJH is testing lows. IWM can’t get out of the bottoming range. 7 of the 11 sectors in the S&P 500 index are supporting downtrends short term.
ON TAP TODAY: 1) Bumbling into default? Vote Wednesday night in Congress. Senate over the weekend? Thus they bumble along. McCarthy said it is done. 2) Watch the testing in some of the mega-caps… Technolgoy… Semiconductors… Software… AI… 3) Watching how markets respond to the vote in Congress as well as the Fed.
Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Earnings 5/4 after-hours beat estimates. Holding. AMZN (bottom reversal) Holding (continued upside on Thursday… raised stop). SOXX reversal. Holding. TQQQ breakout. Holding. SRS Holding (big break higher Tuesday). SJB Holding (break higher Tuesday). TGT (descending triangle short setup with Jun Puts). Holding. Holding. LABU (break up from bottoming range). Holding. ARKK (bottom reversal). Holding. EMTY (breakout confirmation). Added 5/8. FNGU (breaking out). Added Tuesday 5/8. GOOG (Channel breakout – raised stop). Added Wednesday 5/9. MSFT (break from flag pattern). Added 5/18. AI (break higher… $23 level to hold). Added 5/18. MU (break above resistance). Added 5/19. CSCO (bottom reversal… good earnings). Added 5/19. NFLX (test to $350 and bounce?). Added 5/24.
Stops Hit: None
Quote of the Day: “I have the body of an eighteen-year-old. I keep it in the fridge.” – Spike Milligan.
The S&P 500 index closed down 25 points to 4179the index was down 0.57% with average volume on the day. The index moved back below the 4200 level. Managing the risk near term. Debt ceiling agreement on tap. Four of the eleven sectors closed higher on the day with utilities as the leader up 0.9%. The worst performer of the day was energy down 1.7%. The VIX index closed at 17.9 moving higher with anxiety about the debt ceiling still in play. The uptrend from the October low remains in play.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials downtrend off the January highs testing the March lows. Moved below the 200-day MA The sector was down 3% for the week.
XLU – Utilities trending lower from the December highs. Testing the March lows. The sector was down 2.3% for the week. bounced on interest rates.
IYZ – Telecom downtrend from the February highs. No momentum to speak of and looking for a test of the March lows. The sector was down 0.5% for the week.
XLP – Consumer Staples accelerated lower during the week breaking below the 200 day MA. The sector was down 3.2% for the week.
XLI – Industrials triangle pattern of consolidation on the chart. Looking for a trend to break up or down. The sector was down 1.4% for the week.
XLV – Healthcare accelerated lower during the week. The sector was down 2.9% for the week. March lows are in play. XBI, IHE, IHF, IHI all turning down.
XLE – Energy broke lower testing the March lows… attempted to bounce but not showing any momentum. The sector was down 1.1% for the week. The downtrend is in play from the November highs. Crude is down on global demand speculation relative to slowing economics. Led the downside move.
XLK – Technology The sector broke from the trading range clearing the $154.42 resistance and going vertical. The sector was up 4.6% for the week. Providing leadership for the broad index. SOXX moved higher for the week as well as IGV. Watch for test of the verticle move.
XLF – Financials consolidation pattern near the current lows in play. The sector was down 1.5% for the week. The trend is down from the February highs. Banks are the key to the outlook. Moving lower.
XLY – Consumer Discretionary Broke higher from the consolidation pattern in play on the chart. Retail got a boost on reports that the consumer is spending. The sector was up 0.3% for the week.
IYR – REITs broke lower from the trading range and testing the March lows. The sector was down 1.3% 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.
Summary: The index was lower testing the move higher overall. Four sectors closed higher on the day… a divided market currently. Remains a sector-driven market. XLK slight test. XLY bounced back from early selling. KRE struggled with the $40 level and closed lower. XLE is challenged by outlook crude prices. XLV, XBI, XLI, IYR, IYZ, and XLU are all struggling to find support. XLP accelerated lower again. The broad index remains in an uptrend from the October low but the breadth remains narrow as seen in only two sectors showing an uptrend on the chart. News is the primary driver up and down for the index. 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 down 82 points to 12,935 as the index was down 0.63% for the day. The index remains in the uptrend and extended technically. Mega-caps leading along with technology. SOXX tested lower on the day. IGV was up 0.6% to help stem losses overall. Taking what is offered long and short.
NASDAQ 100 (QQQ) was down 0.57% with the mega caps resting on the day. The support is $329.77 and watching how the overextended move plays out. The sector had a negative bias with 47 of the 100 stocks closing in positive territory for the day. Added TQQQ entry $27.45 (raised stop $33.54) Sold 1/2 of the position.
Semiconductors (SOXX) broke above the previous highs on NVDA earnings. Tighten stop and let it run. Added SOXL $13.60. Stop $21.50 (Adjusted). The sector was up 10.6% for the week. Well ahead of itself manage the risk. Tested lower $473.23 level to hold.
Software (IGV) Broke above the $318 resistance adding to the uptrend. Added IGV $291. Stop $318 (adjusted). The sector was up 3.3% for the week. Mega caps leading the sector. Solid upside.
Biotech (IBB) The sector broke below the $128.35 support. Could test the March lows. The sector was down 2.3% for the week. Hit stop on positions.
Small-Cap Index (IWM) lagging overall and remains in a trading range. The sector was up 0.02% for the week. Letting it unfold. Testing lows of the range again.
Transports (IYT) Established a trading range and content for now. The sector was down 0.8% for the week. If the markets are to move higher overall they need transport to be positive.
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 up 1.1% for the week. Uptrend continued.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.81% up from 3.69% last week. Rates climbed 35 bps in the last two weeks. The FOMC meeting is on deck and rates are projected to move higher on the data. TLT was down 0.01% for the week. Down 7 bps on Wednesday adding to upside in TLT.
Crude oil (USO) Establishing a bottoming range. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. USO was up 1.4% for the week. Warning from the Saudi energy minister to speculators… pushed the agenda of another production cut. EIA showed big drawdown in supply… Global consumption concerns remain… OPEC+ meeting this week.
Gold (GLD) The commodity moved lower on the stronger dollar for the second week. letting this unfold with the trend higher from the October lows. The metal was down 1.5% for the week. Trying to bounce?
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.
Money Supply – Falling at the fastest rate since 1930. M2 fell 2.2% in February and fell 2.4% in March… Contraction in supply should contract liquidity in the system and stifle inflation. Watch bank deposits they are still declining. See the above definition of stagflation… the pressure on the economy is building.
Banking Facts: Money market inflows surged the last week… outflows remain from banks to money market funds… they gained $47 billion to a new record $5.39 trillion… “sound and resilient”. The Fed is giving just enough money through the BTFP (Bank Term Funding Program) facility to keep from a collapse (lending rose to $91.9 billion from $87 billion last week). “Sound and resilient” are the words uttered by many… not even close.
Interest Rates: Fed Funds Rate currently stands at 5.25%… Jamie Diamon (JP Morgan) stated in a presentation he believes rates go to at least 6% and possibly 7% before inflation breaks. Think about what that means for the financial markets if that is true.
Volatility Index (VIX–X) Tested down to the 16 level the last month showing little anxiety from investors despite all the news surrounding the markets. Short-term belief is they are focused on the Fed over the debt ceiling issues. Still an underlying belief the Fed will cut rates prior to the end of the year… despite what all the Fed folks say. The CBOE has added a 1-day Volatility Index (VIX1D) you can now track the volatility daily versus the rolling 30-day in the regular VIX. Note Monday’s volatility actually dropped despite the debt-ceiling deal not getting done. Worth tracking and learning more.
Consumer credit card debt is on the rise. It totaled $986 billion in the first quarter. This is a negative sign for the economic picture as most consumer debt is attributed to monthly expenses rising due to inflation.
Data is not supporting a Fed pause in rates. PCE was higher, core PCE was higher, personal income higher, personal spending higher, durable goods higher, and capital investments higher… that was all from Friday… FOMC meeting is two weeks away and the pressure will be on the Fed to hike rates based on the data.
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. We remain focused on short-term trades until there is longer-term directional clarity. Trading the volatility has performed better than holding through the cycle. Sector-driven activity is in play short term with narrow leadership. 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: Stocks traded lower on the day following a gap lower open. Interest rates dropped again on the day pushing bonds higher… a defensive move. Technology remains the leader along with consumer discretionary which tested slightly on the day. We see the overall trend is still up from the October lows. Major indexes have moved higher on the mega-cap moves and AI. Manage the risk as news continues to drive the indexes higher. Showing extended moves in technology.
What I am watching on Thursday: Debt ceiling reaction and vote reaction… Inflation worries and the Fed… extended moves in XLK, SOXX, IGV, QQQ… possible test heading into the balance of the week.
“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.