Markets continued lower

Moving the markets Thursday weakness in the megacaps. Earnings were a lot as investors attempted to separate the good, the bad, and the ugly. Interest rates on treasury bonds were lower despite concerns geopolitically about Israel’s Prime Minister stating they would start a ground invasion in Gaza. The 10-year moved to 4.84% giving some relief to bonds for the day. The 7-year auction was much stronger today… hum… was someone sent to buy? The leadership was thin with REITs and utilities leading. The laggards were plentiful telecom, tech, and consumer discretionary led the downside. The move was enough to push the SP500 index below the 4151 level breaking the next level of support. The move confirmed the downside renewal and is down 5.4% in the last eight trading days. As we stated in the notes the move had to validate itself and that certainly didn’t happen. The talking heads have all jumped on the correction language for the markets. The third leg lower from the July highs is definitely in play as volume remains above average on the selling. The NASDAQ joined other indexes breaking below the 200-day MA. Overall ugly day for stocks as they continue to move lower. The key for Friday would be to find a relief bounce or this will accelerate and the VIX could emulate the March activity.

Monday we stated that $354.22 for QQQ key. $420.66 SPY key. $457.26 for SOXX key. Decision time for all three was the question. The response on Tuesday was SPY held move up. QQQ held moved up. SOXX held moved up… Wednesday needed to follow through. Oops… SPY broke below support as did SOXX and QQQ. Thursday takes on a new light with the break lower. AMZN may offer the relief bounce many are looking for with solid earnings after-hours Thursday.

Thursday stocks opened lower and bounced midday. By the close, however, they were near the lows of the day… not a pretty day, or last eight for that matter. The megacap earnings haven’t helped the cause and have been a big drain on the NASDAQ. As stated it was a decision point for stocks on Wednesday… and stocks continued the leg lower. The complexity of the outlook for global economics, domestic economics, and uncertainty are alive and well. The major indexes failed to hold key levels of support. The S&P 500 index closed down 1.1%. The NASDAQ was down 1.7%. The SOXX was down 0.6%. Small Caps (Russell 2000) were up 0.2%. The ten-year treasury yield was 4.84% down 11 bps for the day. Crude (USO) was down 2%. (UGA) was down 08%. Natural gas (UNG) was up 3.4%. The dollar was up 0.2%. 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: “A day without sunshine is like, you know, night.” – Steve Martin.

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$13.11.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed down 49 points to 4137 moving the index down 1.18% with above-average volume on the day. The index broke below the 4151 support and continued to move lower. Three of the eleven sectors closed higher on the day with REITs as the leader up 1.9%. The worst performer of the day was Telecom down 2.1%. The VIX index closed at 20.7 moving higher on the day. Plenty to ponder between the headlines and facts. The index breaks below support again.

XLB – Basic Materials broke support at the $77 level. Consolidation pattern breaks lower bringing the $67 level into play on the downside. The sector was down 3.4% for the week. No Positions. Moved below the June lows… the accelerated downside is oversold technically. Bounced Tuesday failed to follow through.

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 down 2.1% for the week. Bottom reversal is testing. Nice bounce last three days as money gets defensive.

IYZ – Telecom reversed lower again test support at the $20.50 level. Remains in a downtrend and testing the previous low. The sector was down 0.8% for the week. No Positions. Gapped lower.

XLP – Consumer Staples Remains in a downtrend with a bear flag pattern on the chart. The sector was up 0.7% for the week. No Positions. Defensive money moves in. Bottoming consolidation pattern.

XLI – Industrials downtrend remains in play and back to the support at $99. The sector was down 3% for the week. No Positions. $97 next level of support. Moved below the June lows.

XLV – Healthcare downtrend in play with $127 near-term support. Managed to bounce but reversed to retest support. The sector was down 1.6% for the week. No Positions. Moved lower.

XLE – Energy gapped higher as the war in Gaza broke out. letting the volatility settle as the upside resumes. The sector was up 0.7% for the week with some testing on Friday. More selling on the downside… broke 87.52 support. Watching $84.33.

XLK – Technology The sector renewed the downtrend and remains challenged by the economic picture. The sector was down 2.7% for the week. No Positions. Closed lower… a negative.

XLF – Financials The move higher in interest rates impacts the sector on the downside. The sector was down 3% for the week. Banks posted solid earnings but worry wins. SEF entry $13.13. Moved below $32.36… needs buyers to emerge or more downside.

XLY – Consumer Discretionary broke from the consolidation pattern renewing the downtrend and closing below the 200-day MA. The sector was down 4.6% for the week. No Positions. Resumed downside. $147.11 support.

IYR – REITs returned to support at the $75 level with worries rising with higher interest rates the downside talk focused on defaults rising in commercial real estate. The sector was down 4.3% for the week. No Positions. Broke below $75.

Summary: The index remains challenged by too many issues in too many places. The move lower on Thursday accelerated the downside leg. Earnings set a negative tone for the day. On the positive side economic data was better and interest rates ticked lower. The break of another support level was met with selling and plenty of questions remain. The break below 4150 is in play. 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 down 225 points to 12,595 as the index was down 1.76% for the day. The index opened lower and attempted to bounce, only to close near the low for the day. 12,977 level broken (see chart below). The downtrend from the July highs is still in play. The break of the current support opens the way to 12,246.

NASDAQ 100 (QQQ) was down 1.91% for the day as the megacaps turned lower on earnings. The sector broke the $347.55 level of support. The sector had a negative bias for the day with 29 of the 100 stocks closing in positive territory for the day. Intraday volatility remains in play.

Semiconductors (SOXX) The sector moved back to the $457 support… TSM earnings hurting the outlook. The sector was down 4.1% for the week. Closed below support setting up short side trade with confirmation on Tuesday… but bounced back to close in positive territory… failed miserably on Wednesday as earnings set the tone on the downside. Thursday added to the downside… $436 level to hold.

Software (IGV) The sector moved back to the $336 support. A break lower would get ugly technically. The sector was down 3% for the week. Broke support $336… Closed below August lows… watching short side setup.

Biotech (IBB) The sector remains in a downtrend and broke support at the $119 level. The sector was down 3.6% for the week. More downside… $115 support?

Small-Cap Index (IWM) Broke support at the $170 level and added to the downside. The sector was down 2.2% for the week. No Position. More downside Monday… bounced Tuesday… downside resumed on Wednesday… small gain Thursday?

Transports (IYT) downtrend remains in play with a break of support. Gasoline prices and shipping weighing on the sector. Closed below the 200-day MA. The sector was down 1.4% for the week. No positions. More downside.

The Dollar (UUP) The dollar is showing a bull flag on the chart as it consolidates near the highs. The dollar was down 0.3% for the week. No Positions. Reacted to yields dropping Monday… bounced last three days?

Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.92% up from 4.62% last week. TLT was down 5% for the week. Watching how the Fed manages the yield curve. No Positions. TMV was back in play. Dropped 9 basis points on Bill Ackman covering short positions Monday… quiet Tuesday was welcome… Noise was back on Wednesday with a bad 5-year auction. Thursday saw a positive 7-year aution helping push rates down again. The short-side trade is back.

Crude oil (USO) Crude sold lower on worries about consumption. Drawdowns in supply last week refuted that concern and crude moved back near $90 a barrel. USO was up 2.1% for the week. Down 2.2% Monday… down 2.4% Tuesday… Up Wednesday… down 2% Thursday…

Gold (GLD) The commodity accelerated higher this week on all the geopolitics in play. The metal was 2.6% for the week. Added positions at $172. Stop $180. Managing the risk. See notes below. Holding near the highs.

FINAL NOTES

Our longer-term view remains neutral as the upside trend from the October lows was broken. 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. With the short-term trendlines at key support, a break would hit stops 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 limbo awaiting confirmation… the last ten weeks’ the micro-trend has offered short-term 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. Stops are a must currently on longer-term holdings. Listen to the market not the talking heads.

Thursday: Indexes continue lower and break support. This keeps the short side in play with the third leg lower in play. Watching how Friday 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. For the last six days, ten of the eleven sectors closed in positive territory. There is a lack of leadership except on the downside. 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.

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.

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