Markets gap higher on CPI data

Moving the markets on Tuesday was better than expected CPI adding fuel to the argument the Fed is done hiking interest rates. Gains were widespread with all eleven sectors moving higher. There was a sharp drop in the yields on treasury bonds adding to the financial sector gains. And of course, there was short covering activity as well helping the upside move. The laggards played catchup with small caps up 5.5%, REITs gained 5.3%, and utilities were up 3.9%. The energy sector was the only on to still show fatigue up on 0.5% as crude closed slightly lower. The major question now is how the Fed responds. There were five officials out on Tuesday spreading the news that the fight against inflation isn’t over… and they are right, but convincing investors of that is another issue. For now, it is all rainbows and unicorns as investors put money to work and shift their attention to the Fed offering stimulus to put the economy back on a positive track. Time will tell on all of that, but for now, the buyers take control and what started as a relief bounce has become an early Santa rally. Friday is the deadline for the fiscal budget from Congress… it was not looking good based on the headlines… but, Congress voted for a stop gap budget averting a potential shutdown as the bill heads to the Senate for an approval vote. This would push the budget to January and another discussion for the fiscal budget. Interest rates, continue to be a topic of choice as they closed lower on the day in response to the inflation data. We will watch how that unfolds going forward as well. Technically the NASDAQ and SP500 index cleared resistance at the October highs followed by Tuesday’s rally to the August highs. The economic data remains questionable at best but optimism springs eternal. Just look at the headlines and listen to the financial talking heads. Breakout day on the charts as the major indexes started higher and closed near the intraday highs. The volatility index was mildly lower with SVXY hitting against resistance at the September highs. Overall blockbuster day as buyers remained hopefully engaged with stocks. Taking what the market gives and managing the risk.

Tuesday the market got the news it was hoping for… the CPI data was flat to better than expected. The euphoria was present in the buying but there were details in the data that show inflation exists for the consumer but was offset by lower energy prices. What happens if energy jumps? A look below the headlines is worthy of your attention for some of the reality of what is still costing consumers more of their discretionary income. The charts show a ‘V’ bottom reversal followed through by a gap back to the August highs. Two plus weeks of higher moves for the market as the buyers remain engaged. Earnings continue to be good and bad, but the focus is on the Fed not the economy or earnings… reality always finds a way of showing up on the charts eventually. The complexity of the outlook for global economics, domestic economics, and uncertainty remains in the background. Money has been chasing the belief the Fed is done with interest rates despite Mr. Powell’s comments. Now that the proverbial dog has caught the car, what does he do with it? The major indexes were higher with gaps above resistance points. The S&P 500 index closed up 1.9%. The NASDAQ was up 2.3%. The SOXX was up 3.7%. Small Caps (Russell 2000) were up 5.4%. The ten-year treasury yield was 4.44% down 19 bps for the day. Crude (USO) was down 0.3%. (UGA) was down 0.8%. Natural gas (UNG) was down 3.8%. The dollar was down 1.6%. 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: “You can tell a lot about a person by the way they handle three things: a rainy day, lost luggage, and tangled Christmas tree lights.” — Maya Angelou

Additional Charts To Watch

1) Interest rates are back in play relative to the Fed and the financial markets. TLT, KRE, KBE are all worthy of attention. Modest bounce on Friday. Flat on Monday. Big move on Tuesday… nice gains. 2) Big names, big bounce. AAPL, GOOG, AMZN, MSFT, NFLX. All posted solid gains on Tuesday. 3) IGV tested $355 and up 2.5% on Friday. Added 2.7% Tuesday. Cleared $366.25 resistance. 4) GLD broke support signaling more downdside. Nice bounce on Monday. Gapped higher on Tuesday. 5) PPI data on Tuesday… it will garner more attention towards the Fed and interest rates.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed up 84 points to 4495 moving the index up 1.91% with above-average volume on the move. The index moved above resistance at the 4386 level and the October high. The next hurdle will be the August highs. Eleven of the eleven sectors closed higher on the day with REITs as the leader up 5.4%. The worst performer of the day was healthcare up 0.6%. The VIX index closed at 14.1 moving lower on the day. Plenty to ponder between the headlines and facts. The index cleared resistance and the down trendline from the July highs. Now comes the validation of the belief going forward.

XLB – Basic Materials broke support at the $77 level and reversed to end the week. Needs to clear resistance at $79.50. The sector was down 1.8% for the week. No Positions. Gapped above the $77 level.

XLU – Utilities moved back to support at the $60.15 mark. The sector was down 2.5% for the week. Watching for the opportunity if it breaks higher. Moved back above the $60.15 support again.

IYZ – Telecom bottom reversal negated with the break below $21.30. The sector was down 3% for the week. No Positions. Moved back above the $21.30 level…

XLP – Consumer Staples Moved higher from the consolidation pattern to resistance at $69.30. Need to break above the resistance near term. The sector was up 0.3% for the week. No Positions. Moved above the $69.30 resistance.

XLI – Industrials bottom reversal in play $102.41 level cleared and needs to confirm the upside. The sector was up 0.9% for the week. No Positions. Cleared $102.41 resistance.

XLV – Healthcare sold lower mid-week, not showing much upside potential. The sector was down 0.9% for the week. No Positions. $129 level to clear.

XLE – Energy moved below $84.33 support and held above $82… watching how this plays out near term with a downside bias in play. The sector was down 3.7% for the week. Made the move above the $84.33 mark offering an entry point.

XLK – Technology bottom reversal and solid upside move to lead for the week. The sector was up 4.5% for the week. Entry XLK $166. Stop $175. Cleared the July highs and reestablished the longer-term uptrend line.

XLF – Financials relief in interest rates moving lower sparks rally off the bottom. Holding near the $33.64 level is a positive. Still needs to find momentum to continue higher. The sector was up 0.4% for the week. Confirmed the move above the $33.64 mark.

XLY – Consumer Discretionary bottom reversal needs to clear resistance at the $163 level. The sector was up 0.7% for the week. No Positions. Gapped higher above the $163 resistance.

IYR – REITs bottom reversal moved to resistance and bond yields continue to plague the sector for now. Watching as reverse head and shoulder pattern on the chart. The sector was down 2.3% for the week. No Positions. Gapped higher as interest rates fall below 4.5% on ten-year bond.

Summary: The investor has been buying into the rhetoric of the Fed being done… all is well scenario being played out in the media. Two-plus weeks of moves to the upside validate that belief. The index moved above the 4386 resistance level led by large-cap stocks. Tuesday the indexes gapped higher as CPI was flat… leading to solid gains and moving into the second leg of the bottom reversal. The next hurdle is the August highs. Watching PPI data out tomorrow. Managing the risk of our trades we have been banking some gains and lessening the risk where the markets have moved the most. The near-term move extended the upside and watching how it unfolds with our stops in place. 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 326 points to 14,094 as the index was up 2.37% for the day. The index continues to see momentum from the semiconductor and software stocks. 13,618 level cleared and the move to the August highs is in play. The index is up 11.9% from the October lows in 13 trading days. Manage your risk accordingly.

NASDAQ 100 (QQQ) was 2.15% for the day as the mega-caps gapped higher. The sector held the break above the downtrend line from July. Cleared $366.15 resistance. Now faces the July highs. The sector had a positive bias for the day with 94 of the 100 stocks closing in positive territory for the day. Adjust stops and let it play out. Entry $354.20. Stop $380.

Semiconductors (SOXX) The sector moved above $490 resistance leading the week. The sector was up 4.1% for the week. SOXL entry $448. Stop $489. Gapped higher on Tuesday.

Software (IGV) bottom reversal moved above the $345 resistance to post a positive week. The sector was up 4.1% for the week. Added IGV $336. Stop $364 (adjusted). Gapped to a new high on Tuesday.

Biotech (IBB) tough week for the sector reversing back to the $115 level. The sector was down 3.5% for the week. No Positions. Gapped higher still has plenty of work to reverse the tend.

Small-Cap Index (IWM) Bounced off the lows… sold off again… weakness in the sector remains for now. The sector was down 3.1% for the week. No Position. Played catchup gaining 5.5% on Tuesday and cleared resistance at $174.40.

Transports (IYT) bottom reversal bounce… all too many reasons for this to fail. Needs to clear resistance and reverse the downtrend. Letting it unfold and take what is given. The sector was up 0.5% for the week. No positions. Gapped higher clearing $231.15 resistance.

The Dollar (UUP) The dollar bounced back on the week. Holding in a trading range. The dollar was down 0.8% for the week. No Positions. Tanked on the CPI numbers falling 1.6%. Reversal in play short term.

Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.62% down from 4.66% last week. TLT was up 0.4% for the week. Watching how the Fed manages the issues with banks and treasury auctions. Falls 19 bps on the yield to 4.44% as TLT jumps up 2.2%

Crude oil (USO) Crude sold lower on worries about consumption. An increase in supply for the week was a concern. USO was down 4.1% for the week. Up and down activity all week. Downtrend on the chart. Didn’t clear $73.26 resistance on Tuesday… looking for entry if it does.

Gold (GLD) The commodity broke lower on a higher dollar for the week. $180.85 support broke and we banked some solid gains hitting our stop. The metal was down 2.8% for the week. Bounced back from selling on Friday… gapped higher on Tuesday with a weaker dollar.


Our longer-term view shifts with the break above the downtrend line from the July highs. The bounce cleared 4386 first and the down trendline from the July highs second. Tuesday pushed the index back to the August highs showing more buyers engaged. The short-term upside move in the last two-plus weeks is good but there is still work to be done from a longer-term perspective and a resumption of the long-term trendline. The activity for the week was led by technology and consumer discretionary. 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 October trend broken, it puts the broad indexes in an intermediate downtrend… the last twelve weeks’ short-term trend has offered downside trades… with the reversal two weeks ago upside trades short term… question remains how well this bounce will unfold? The current bounce is challenged by uncertainty in the economy and geopolitics. Time will tell how this plays out. 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.

Tuesday: Indexes gapped higher with flat to improved CPI data on Tuesday. Buyers moved into all eleven sectors as the move broadened and the trends shifted. Watching how this “relief ‘V’ bottom bounce continues to unfold… you have your pick of theories being offered by the talking heads. The reality is the move is predicated on the Fed being done with rate hikes… CPI gave them hope and the buyers showed up along with some short covering. The fact remains to follow the charts and manage the risk while waiting for the facts to confirm the belief over time. Tuesday offered some facts but they weren’t as clear as the headlines would like to make them out. Plenty of inflation on the consumer still underlying in the numbers… energy offset those numbers. We will be patient and take what is offered but not be naive enough to believe all is well on the inflation front. There is no lack of issues on the table with each taking their respective turn in the spotlight. The leadership is narrow albeit they broadened on Tuesday… 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 with stops and profit-taking where appropriate, as we take what the markets give. One day at a time is all I am willing to deal with as the trends build and the facts validate. Leaders continue to lead XLK, QQQ, SOXX, IGV offering opportunities.

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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