The broad indexes moved lower to start the day with a modest recovery in the afternoon but they still closed lower on the day. The NASDAQ moved to the 50 DMA and tested support at the 13,842 mark. Typical test of the bounce off the lows in August. The question is, will the index attempt another run higher? The consensus and statistical probability is yes. On the economic front, ISM Services were better than expected at 54.5 versus 52.5% expected and 52.7% previously. Mortgage apps fell 2.9% versus being up 2.4% previous. There is continued weakness in demand. Airlines are warning relative to earnings with the rise in crude prices. We continue to see weakness in the economic picture but the data remains mixed. Some are projecting that the economy will not fall into a recession, but the reality of what is happening to the average consumer shows they already are in one. The St. Louis Fed shifted the forecast for Q3 from 5.5% growth to -0.7% contraction… quite a shift in outlook from two weeks ago… their batteries must have been dying on their calculators. The beige book from the Fed equally showed slowing from July to August and they actually acknowledged the consumer was slowing in spending and that saving have been used up… what? Another shift in the reality versus fiction positions. IF the Fed is starting to acknowledge the reality of the current economic environment maybe the markets are reflecting some of the reality as well. The key is to manage your risk and let this current volatility work through the markets. A look at restaurant and discount retail stocks shows weakness this week as well… more reality acknowledgment? All said, bull markets die hard and we have to take what is offered. Watch how this test of support on the major indexes unfolds.
The markets moved modestly lower again on Tuesday… NASDAQ needs to hold the 50-day MA and the S&P 500 needs to to hold the 4450 level. Volume has picked up the last two days on the selling… while the downside has not been aggressive the bias is towards the sell side. Scanning the indexes we see the move to resistance on the chart followed by a test lower… watching how the near-term trend will unfold… thus patience for now. The S&P 500 index closed down 0.7%. The NASDAQ was down 1%. The SOXX was down 0.7%. Small Caps (Russell 2000) were down 0.3%. The ten-year treasury yield closed at 4.29% up 3 bps. Crude (USO) was up 1%. (UGA) was up 0.8%. Natural gas (UNG) was down 2.5%. The dollar was up 0.03%. We are focused on managing the risk and seeing how investors respond to the current situation.
Markets are closed on Monday for the Labor Day Holiday.
ONE Chart to Watch: QQQ – 1) Tested to the $372.68 mark of support and needs to hold near term. 2) Need to hold support for the uptrend to continue. 3) $379.55 resistance in play. 4) Entry $370. Stop $374.
Additional Charts to Watch:
SOXX – Tested to support at $473.23. Bounced off the low offered entry $497. Stop $504. Letting it unfold.
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.
Energy turns higher – Tested support near $86 and bounced… entry $87.80. Stop $88.50. Crude marching higher again as well. UCO entry $30.72. Stop $31.30. Letting it run. UGA watching for entry hasn’t followed crude higher yet. The sector is ahead of itself and looking for a test of the move.
Stops Hit: NONE
Quote of the Day: “You’re only as good as your last haircut.” – Fran Lebowitz
The S&P 500 index closed down 31 points to 4465 moving the index down 0.7% with average volume on the day. The index holding support at 4338 and watching the uptrend test currently. Three of the eleven sectors closed higher on the day with telecom as the leader up 0.2%. The worst performer of the day was technology down 1%. The VIX index closed at 14.4 moving higher as sentiment shifted this week. Watching support levels relative to the test lower.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials Reversed to the 200-day MA and bounced. The sector was up 1.1% for the week. No Positions. XME broke higher looking for an entry point. Added to the move lower.
Metals – Moving higher again and worthy of attention. NUE, STLD, X, FCX, SCCO…
XLU – Utilities back to the previous lows and looking ugly near term. Short entry hit. The sector was down 0.2% for the week. SDP entry. Dropped 1.5% to break support… Think treasury yields near 4.3% versus dividends on utility stocks… cause for the drop.
IYZ – Telecom broke higher from the trading range offer upside position. Entry $22.50. The sector was up 3.7% for the week. Manage the risk. Back into the trading range.
XLP – Consumer Staples moved back to the June lows. The sector was down 0.4% for the week. No Positions. Broke previous lows not looking good.
XLI – Industrials Tested support at $105.41 and bounced. Looking for upside follow through. The sector was up 2.1% for the week. No Positions. Reversing the upside move.
XLV – Healthcare Moved back to support at $132.64. The sector was up 0.1% for the week. No Positions. Broke support…
XLE – Energy tested to support with lower crude prices… then bounced on higher prices to resume the uptrend. Big and small caps are moving higher on the cuts from Russia and Saudi Arabia… Biden administration has painted themselves in a corner relative to the petroleum sector. The sector was up 3.6% for the week. Entry $81.95. Stop $85.05. Back above the previous high. Gapped higher again… watching for a test of the upside move.
IEO – broke higher as offshore interest rise. Entry $85. Stop $97.10.
OIS – break higher on Friday… entry $8.35 if holds the move higher.
XLK – Technology The sector broke lower found support at $165 and bounced. The sector was up 4.4% for the week. Entry $167. Stop $170.
XLF – Financials Tested the $33.78 level of support and bounced. The sector was up 2% for the week. Bank downgrades not helping the sector. BAC consolidation pattern on chart.
XLY – Consumer Discretionary Bounced off support and watching the outcome. The sector was up 3% for the week. No Positions.
Retail: Break down on the charts of the discount store… DG, DLTR, FIVE, BIG = Ugly. TJX, ROST, WMT slowing but holding their trends. RH, ANF, AEO, DBI, CAL are all trending higher… an interesting picture of the current economic picture. Interesting move in MCD, YUM, DRI, EAT as well.
IYR – REITs Bounced at support… watching how it unfolds. The sector was up 1.9% for the week. No Positions. Down 1.2% reversed…
Summary: The index moved modestly lower on the day, but as seen above some negative reversals in sectors breaking support. Investors may see a recession on the horizon based on the numbers… I believe we are already in one. Three of the eleven sectors closed higher on the day with IYZ in the leadership role. The index is looking for direction and the talking heads believe it is lower… no, higher? Let the charts unfold and take what is offered. SPY needs to hold $444. 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 148 points to 13,872 as the index was down 1.06% for the day. The index was mixed overall with the mega caps testing on the day. Support is 13,762 currently… 13,274 previous low. Letting the move unfold as tech and megacaps find their collective direction. SOXX was down 0.7% on the day. IGV was up 0.1%. Watching support and how the activity unfolds.
NASDAQ 100 (QQQ) was down 0.88% on the day as mega caps traded flat. The sector hit resistance and needs to hold the $378.68 level. The sector had a negative bias with 46 of the 100 stocks closing in positive territory for the day.
Semiconductors (SOXX) The sector held support at $473.23 and bounced. Moved back above the $497 level to show momentum. The sector was up 5.4% for the week. Entry $497. Stop $505.
Software (IGV) The sector tested below the $336 level of support and bounced. The sector was up 4.6% for the week. Entry $345.50. Stop $355.
Biotech (IBB) The sector remains in a four-month trading range. The sector was up 1.9% for the week. No Positions. Negative day and back below $128.35 support.
Small-Cap Index (IWM) Tested back to the 200-day MA and bounced showing some near-term leadership. The sector was up 3.7% for the week. No Position. Gave up gains down 2.1%. Midcaps fell 2.3% giving up gains as well.
Transports (IYT) Tested below the $247.67 and bounced modestly but still not showing much strength. Consolidation pattern on the chart near the lows. The sector was up 1.8% for the week. No positions. Fell below the previous support $246.54.
The Dollar (UUP) The dollar moved back above the June highs with a wild week of trading… The dollar was up 0.2% for the week. More chatter about losing dollar status globally as BRIC nations establish gold-backed currency. No Positions. Uptrend remains in play.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.17% down from 4.23% last week. TLT was down 0.4% for the week. Watching how the Fed manages the yield curve. Yields back up to 4.29%.
Crude oil (USO) Crude bounced off support and broke higher. USO was up 6.1% for the week. UCO entry $30.72. Letting it unfold. Higher again $87.54…
Gold (GLD) The commodity found support and offered entry at $57.46 UGL. Stop $57.46. The metal was up 1.4% for the week. Letting it unfold. Down again at the 200-day MA.
FINAL NOTES:
Our longer-term view shifted to neutral as the upside trend from the October lows was 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 tested the longer-term trend and we need to manage stops accordingly on longer-term positions. The topping patterns broke short-term support to create micro-term downtrends that have found support and bounced. Taking what is offered short term and managing the risk longer term. The economic data is showing signs of fatigue relative to growth. We added some short-term positions this week and letting them play out. Sector-driven activity is in play as seen in energy and software. 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: Added to the downside move and watching key support level near term. Negative data on the economic picture shows some reality… the question is how investors respond to the move. The major indexes held first-level support bouncing some from early selling. Letting it play out as we look for directional confirmation on QQQ, SPY, SOXX, and IWM. We continue to follow the trends as they play out. Looking at how this bounce plays out with a test at resistance the last few days. 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 Thursday:
See if the pullback is finished for large caps. Reaction to selling in six sectors. XLF, XLV, IYZ, XLU, XLI, XLB
IGV looking positive on the chart. GBTC… upside favored.
Leadership… energy isn’t my favorite as it taxes the consumer… but we own it for the upside move. USO, XLE, OIS, IEO… Oil prices are moving higher? Russia stated it would increase its oil production cuts. Saudi Arabia has extended its cuts as well… This leads to inflation not just at the pump, but in products that use petroleum in production… This could get ugly looking forward.
Previous highs/resistance leading to first levels of support.
Economic data due: Jobless claims, productivity, labor costs, six Fed presidents out speaking…
Trending concerns:
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.
To Quote The Babylon Bee: “Bidenomics is so successful the average American has twice as many jobs as [he] had 2 years ago.”
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.