Last week there was a tug-o-war between the buyers and sellers with the sellers getting the upper hand to end the week. We start this week with the same action. The indexes started the day higher but then managed to give most of it back by the close of the day. A scan of the charts shows some positives on the day in XLY, XLK, and SOXX all bouncing modestly from the lows of last week. Durable goods orders were -4.5% as airplane orders from December were absent in January and balanced out the numbers making investors happy. But the core jumped 0.8% showing some strength. The Dallas PMI was -13.5 versus -9.3 previously. That is 10 consecutive months of negative. The same issues remain in play with pockets of economic data showing slowing, some showing strength, and the Fed talking rate hikes. It is a mixed message and investors continue to show indecision on the uncertainty in play. Last week home sales were the highest in 10 months… Monday Pending home sales were up 8.1% for the second month in a row with a solid increase. Lower interest rates sparked the buying, but rates are higher again not likely to continue in February. Volume was below average and the money supply turned lower on the day. Thus this remains a belief versus data debate among investors and talking heads. The speculation about the future of rate hikes from the Fed versus the “stronger” economic data is at the core of the debate. This leaves us with a speculation game at its best and void of any additional data from the Fed, investors are set to wrestle over who is right. The Fed presidents speaking in the media continued with the possible need to move 50 bps at the next FOMC meeting versus the expected 25 bps. That just adds to the anxiety and uncertainty. The S&P 500 index closed slightly higher and 3930 remains the next support level. The NASDAQ faired better on the day closing below the 11,474 key support level and closing at 11,466 and trying to hold support. How this unfolds this week will be of interest as we manage our positions accordingly. No matter what our beliefs the chart is the ultimate decision maker.
The volume remains below average giving some questions about the current market environment, the VIX closed at 20.9 receding slightly on the early buying. The S&P 500 index closed up 0.3% for the day. The NASDAQ was up 0.6%. Small Caps (Russell 2000) were up 0.3%. The leadership in technology and consumer stocks showed up again on Monday following the downside leadership last week. The ten-year treasury yield closed at 3.92% down 3 bps for the day. Bonds have priced in the Fed and future rate hikes. TLT broke the trendline from the November lows and offered a short entry signal (TMV) and letting it play out near term. Crude (USO) was down 1.2% as uncertainty remains. Gasoline (UGA) was up 0.2% and broke below the 50 DMA. Natural gas (UNG) was up 5.5% after breaking below the April 2021 lows and putting in a bottom reversal. The dollar was down 0.5% as the bottom reversal remains to show belief the Fed will continue hiking rates. We are focused on managing the risk and watching how this all unfolds. The negative sentiment is building for stocks as investors focus on the Fed and interest rates.
Charts to Watch: LSCC (testing uptrend). UAL (trading range). COIN (triangle pattern).
Monday: ARKK (double top short setup). ZIM (cup and handle pattern) broke higher. DHT (J-Hook pattern). Added to the upside move. BDRY (bottom reversal) remains bullish. RUN (descending triangle break lower short signal). Bounced back… watching. BOAT (break higher in an uptrend). Added to the upside move.
Previous Charts of Interest Still in Play: TMV @ 200 DMA (hit entry and moved higher ). TMV (cup pattern followed through upside. Added to position). GBTC (cup & handle pattern). Nice upside move testing near term. UNG, UGA, USO bottom reversals? FCX short entry breaks lower.
Stops Hit: None
Quote of the Day: “I would never die for my beliefs because I might be wrong.” – Bertrand Russell
The S&P 500 index closed up 12.2 points to 3982 the index was up 0.31% with below-average volume. The index failed to hold the gap open and settled slightly higher on the day. Watching to see if it can regain upside footing following the rising concerns about the Fed. sox of the eleven sectors closed higher on the day with consumer discretionary as the leader up 1.2%. The worst performer of the day was utilities down 0.7%. The VIX index closed at 20.9 as anxiety remains elevated on Fed worries. The downside is in play and watching how this unfolds.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials broke the uptrend line from the October lows… negative. Closed below the 50 DMA and established a short-term downtrend. The sector was down 0.6% for the week. Watching how it unfolds near term. Bounced off lows.
XLU – Utilities remain in the down-trending channel… looking for a break higher, but the downside remains in control. Bounced Friday off the 61.2% Fibonacci retracement line? The sector was down 1.7% for the week. Led the downside.
IYZ – Telecom broke the head and shoulder pattern on the chart to the downside… broke below the trendline off the October lows… obvious short-side trade. The sector was down 5.4% for the week.
XLP – Consumer Staples downtrend from the December highs remains in play. The sector was down 0.04% for the week. Letting it play out as it failed to break above the trendline. Consolidation pattern.
XLI – Industrials Sideways trend in narrow trading range remains in play. The sector was down 2% for the week. Need to hold $97 and break above the $102.40 level.
XLV – Healthcare downtrend in play with a break below the $131.40 mark. Broke from the downtrend channel and accelerated the selling. Short-side trades remain in play (RXD). The sector was down 1.7% for the week. Added to downside break.
XLE – Energy continued lower for the week testing support at $82.74. Broke both intermediate and short-term trendlines. The sector was down 3.3% for the week. Short entry signal in play ERY raised stops.
XLK – Technology The sector moved to support at $136.10. Held the 50 DEMA. Maintaining leadership but struggled all week. The sector was down 3.9% for the week. Watching for direction and opportunity near term. Modest bounce led by SOXX.
XLF – Financials broke the trendline from the October lows. The sector was down 2% for the week. HIt stop posting a small gain. Watching interest rates and impact near term.
XLY – Consumer Discretionary rolling top broke to the downside. $147.10 support broken. $141.60 next level of support. The sector was down 4.4% for the week. Stopped out of the balance of the position and watching how this unfolds. Upside leader on the day.
IYR – REITs uptrend off the October lows broken. The sector was down 4.5% for the week. The negative influence of rising interest rates and reports of vacancies in commercial rents are rising. Short side trade opportunity.
Trouble is building in commercial office space as a return to the office efforts aren’t working. The headlines are steadily showing the fight between corporations and employees. Amazon is the latest showing 1/2 are willing or want to return to the office for the three days a week proposed. This is impacting commercial property owners as mortgage payments are being delayed more than two months. Banks raised their reserves in January and are likely to increase more in February. With that in mind IYR and REM bounced off the October lows but may retest those lows or beyond based on future defaults. Worth watching the downside risk with SRS.
Summary: The index remains in an uptrend from the October lows… barely bouncing off the trendline on Friday and holding Monday. It broke the short-term trendline from the January lows. The 50 DMA is the next level to watch. 3930 level of support is in play. Fed uncertainty getting all the attention as economic data bumps higher causing a fear factor about interest rates. We will remain patient for now as investors sort out their collective thoughts about the Fed and inflation. We continue to manage our positions accordingly and looking for the best opportunities near term. 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 72 points to 11,466 as the index was up 0.63% for the day. The 11,474 support failed again as we watch to see how this unfolds. Money flow has turned negative with all the news and speculation creating uncertainty around the Fed. Technology and semiconductors are the keys…. both bounced slightly on the day. We are managing our risk on short side trades and upside.
NASDAQ 100 (QQQ) was 0.72% with the mega caps pushing back above the $292 support. The sector had a positive bias with 73 of the 100 stocks closing in positive territory for the day. The chart trend broke lower from the consolidation pattern and held steady on Monday… watching how this unfolds.
Semiconductors (SOXX) trend turned down breaking support. The sector was down 3.8% for the week. $390.40 is near-term support. Banked solid gains on the move higher and looking for direction near term… watching downside opportunities. Nice bounce on the day.
Software (IGV) broke the short-term uptrend from January lows. The sector was down 3.3% for the week. Flirting with short-side trades near term. Volatility is in play as the sector tests lower.
Biotech (IBB) The sector broke lower from the double top pattern giving short entry. The sector was down 4.3% for the week. 200 DMA in play. Held at the lows.
MRNA – Moderna cancer vaccine results could drive the company higher longer term. Despite the tough week for the stock, it is worth keeping on our watch list.
Small-Cap Index (IWM) uptrend into a pennant consolidation that broke lower. Exited positions with a nice gain. The sector was down 2.6% for the week. Money flow turned negative. bounced modestly.
Transports (IYT) uptrend from the October low remains in play with plenty of volatility along the way. Trying to hold the $224 support level. The sector was down 3.2% for the week. Gapped higher on the day.
BDRY – Dry bulk shipping looking bullish with a bottom reversal in play.
The Dollar (UUP) The dollar moved lower on the FOMC announcement but bounced as economic data may keep the Fed in play relative to interest rates. The dollar was up 1.3% for the week. The outlook ris positive with the Fed-driven move in play. Struggled on Monday.
GBTC – Grayscale Bitcoin Trust is trading at a 47% discount to the underlying asset. Something to watch moving forward. The chart is testing the rise off the January lows… watching how the news of higher regulations will impact prices going forward. Hit Entry $10.60. Testing the move higher.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.95% up from 3.82% last week. The yields reversed the downtrend following the FOMC announcement. TLT was down 0.6% for the week. Added TMV $112.50. Raised stop.
Crude oil (USO) trading range on the chart with a head and shoulder pattern. Economic speculation is impacting supply-demand speculation globally. USO was down 2% for the week. The weekly chart shows the downtrend building in crude. A break of support sets up short-side trade.
UNG – natural gas bounced on the outlook for colder weather in the US over the next few weeks. Projected bump in demand as a result. Short-term trade entry $8.13 on Friday.
Gold (GLD) The commodity shifted lower with the bounce in the dollar. The metal was down 1.4% for the week. Watching for support at $168. Flirting with a break lower as the dollar remains stronger near term.
Put/Call ratio was 1.04 Monday… Negative bias in the index.
Questions to Ponder: Navigating Uncertainty
Speculation/Conspiracy Theory: The Fed is in the position of getting the market to do the dirty work for it. If the market drops 20-30% and crashes liquidity for the average American… they, the average Joe, cut spending out of fear. That allows the Fed to not raise rates above the 6% level by allowing the markets to accomplish the feat while they, in the background, dry up the money supply exacerbating the process. The market would crush inflation and throw the economy into a full-blown recession. Which in turn could and would destroy the middle class. This will all be done for the need to preserve the American way… printing money and raising debt levels while the government gains more control and take more of the freedom our forefathers fought for.
Consumer credit was up $394 billion. That is the biggest gain in 20 years, to a record $16.9 trillion. That is up $2.75 trillion from 2020. Mortgage balances were up $254 billion in Q4 2022 and up 1 trillion for 2022. Home equity credit lines were up $14 billion to $340 billion. Student loans outstanding up $21B to $1.60 trillion. Auto loan balances up $28 Q4 2022. Delinquency rates for mortgages 90 days late +0.57% (2x from 2021). Auto loans +0.6%. Credit card +0.8% (to 4%). Substantial rises across the board from Q4 2021. Younger age groups are having particular trouble with their revolving debt. Credit card balances up $61 billion to $986 billion, surpassing the pre-covid high of $927 billion.
64% of all Americans are living paycheck to paycheck.
FINAL NOTES:
Monday: Stocks were up on Monday but failed to hold the early rally. The debate about interest rates, inflation, the Fed, economic data, consumer, and just about everything else is impacting the outlook for stocks. With all the uncertainty surrounding the future stocks have turned down with volatility picking up and money flow declining. Economic data and Fed comments keeping the worries front and center. We take what the market offers and watch patiently and manage our money accordingly. Monday was a quiet relative to positions and opportunities. Taking what is offered and managing the risk.
Hope is a beautiful thing… but, as we say many times, the data doesn’t matter until it does. That is where we find ourselves currently. We look to the charts to provide the next direction near term… which is currently moved to a negative bias. We will manage our risk of hope giving way to reality along the way. Eyes open. Emotions removed. Mixed economic data has caught the attention of the talking heads only from the perspective that it goes against the FOMC message. Watching how that twist turns out near term. The dollar turned higher on Fed worries. Interest rates are at 3.92% on the ten-year bond up from 3.4% three weeks ago reflecting Fed worries. I state this so we understand it is the data that ultimately determines the direction of stocks and the Fed is currently in play. The leaders took a turn down last week as sellers take control for now. Volatility closed at 20.9 and elevated on the current uncertainty. The money supply has turned lower showing more money on the sidelines. Stay focused and follow the money. Follow the Fed. Don’t assume anything and manage the risk that is. Watch for the volume, direction, sentiment, and volatility levels to lead you to what takes place. There are plenty of moving parts, we have to understand that truth/reality eventually plays out in the markets. Until then we will continue to take what is offered and manage the risk that is.
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. Recession talks are trickling back into the headlines. We remain focused on short-term trades until there is longer-term directional clarity. The charts are showing a short-term trend reversal from the upside… technology and consumer discretionary have led the move but broke key levels of support this week… 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 the risk.
“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.