Markets look ahead to CPI data

Moving the markets on Monday was a downgrade to the outlook for the US economic picture and bonds. After having most of the weekend to mull it over, most analysts and investors chose to ignore it… The bigger concern was CPI data to be released on Tuesday. In response, the indexes settled unchanged for the most part. There was a general lack of conviction from either the buyers or the sellers. The end result was six sectors closing slightly higher led by energy. Boeing was up nicely on $52 billion in plane orders from Emirates Air. The only news was the Treasury budget which showed a deficit of $66.6 billion down from $87.9 billion. And speaking of budgets… Friday is the deadline for the fiscal budget from Congress… it is not looking good based on the headlines… something to watch as the government may be shut down. Fed Chair Powell continues to reiterate the fight against inflation is not over. Interest rates, continue to be a topic of choice and they closed flat on the day. Technically the NASDAQ has moved above the down trendline from July is seen as a positive. The SP500 index cleared resistance at the October highs. The economic data remains questionable at best but optimism springs eternal. Just look at the headlines and listen to the financial talking heads. Consolidation day on the charts as the major indexes started lower and closed flat. The volatility index nudged higher with SVXY up 0.6%. Overall flat day as buyers remained hopefully engaged with stocks. Taking what the market gives and managing the risk.

Monday was a day to wait and see… with the CPI out on Tuesday and PPI on Wednesday why not see if things have heated up further in prices. As I have stated the last week, the charts are not a picture of strength but the bounce is in play and we will take the good with the bad. Two weeks of higher moves for the market as the buyers remain engaged. Earnings continue to be good and bad turning it into a stock picker market. 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. The major indexes were flat on the day as we look to Tuesday. The S&P 500 index closed down 0.1%. The NASDAQ was down 0.2%. The SOXX was down 0.9%. Small Caps (Russell 2000) were up 0.1%. The ten-year treasury yield was 4.63% up 1 bps for the day. Crude (USO) was up 1.5%. (UGA) was up 2.6%. Natural gas (UNG) was up 6.1%. The dollar was down 0.1%. 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: “I never feel more alone than when I’m trying to put sunscreen on my back.” — Jimmy Kimmel

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. 2) Big names, big bounce. AAPL, GOOG, AMZN, MSFT, NFLX. 3) IGV tested $355 and up 2.5% on Friday. Need to clear $366.25 resistance. 4) GLD broke support signaling more downdside. Nice bounce on Monday. 5) CPI data on Tuesday… it will set the tone.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed down 3 points to 4411 moving the index down 0.08% with below-average volume on the move. The index moved above resistance at the 4386 level and the October high and reversed the downtrend from the July highs. Five of the eleven sectors closed higher on the day with energy as the leader up 0.7%. The worst performer of the day was utilities down 1.1%. The VIX index closed at 14.7 moving higher on the day. Plenty to ponder between the headlines and facts. The index cleared resistance and the down trendline from the July highs. Looking for a follow-through this week.

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.

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 below $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.

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.

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.

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

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.

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.

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.

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

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.

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 weeks of moves to the upside validate that belief. The index moved above the 4386 resistance level led by large-cap stocks. I continue to state this is a relief bounce and could turn into the year-end rally many analysts are hoping and asking for… Patience is key as every move has a test or two. Watching CPI 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 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 down 30 points to 13,767 as the index was down 0.22% for the day. The index continues to see momentum from the semiconductor and software stocks. 13,618 level cleared and watching how this unfolds this week. A test and upside resumed. Patience and stops in play.

NASDAQ 100 (QQQ) was down 0.31% for the day as the mega-caps tested on Monday. The sector held the break above the downtrend line from July. Cleared $366.15 resistance. The sector had a negative bias for the day with 38 of the 100 stocks closing in positive territory for the day. Adjust stops and let it play out. Entry $354.20. Stop $373.

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. Tested Monday.

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 $360 (adjusted).

Biotech (IBB) tough week for the sector reversing back to the $115 level. The sector was down 3.5% for the week. No Positions.

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.

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.

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.

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.

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. Continued bounce on Monday.

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.

FINAL NOTES

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. The short-term upside move in the last two weeks is good but leaves plenty of work to be done from a longer-term perspective. If the longer-term trend is to resume the short-term downtrend needs to be confirmed this week… 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 relief bounce unfolds? The current bounce off the lows is in play but challenged by uncertainty in the economy and geopolitics. 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.

Monday: Indexes were flat and looking towards CPI on Tuesday. Buyers moved into software and semiconductors last week to push the NASDAQ through resistance and confirm the bounce off the lows two weeks ago. Watching how this relief bounce continues to unfold… maybe a relief bounce and some selling? Maybe the start of the year-end rally? Maybe speculation around the Fed? Maybe a bond rally? Maybe inflation is dead? Whatever the rationale, the fact remains to follow the charts and manage the risk while waiting for the facts to confirm the belief over time. Tuesday will offer some facts (or the statistical version of them) with the CPI report. There is no lack of issues on the table with each taking their respective turn in the spotlight. The leadership is narrow as the large and megacap stocks take the lead… 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. Remember all upside moves at this point are relief rallies and we will treat them as such until they validate otherwise. Watching XLK, QQQ, SOXX, IGV as opportunities and leaders.

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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