The market continued to retreat following Wednesday’s selling as anxiety rises. Inflation talk from the Fed gets more of the blame, but the reality of the US economic picture is starting to sink in for investors. The data points continue to show growing weakness in manufacturing, housing, and earnings. Throw in more weak economic data and the selling began. It wasn’t horrible but enough to keep reality in play. After indices hit resistance points on Tuesday and the retreat the last two days raised concerns that the move higher is over. Time will tell as the storyline shifts. As we have discussed many times… don’t fight the Fed. The challenge looking forward is will the underlying belief the Fed will stop hiking rates soon based on improving data relative to inflation go away… if it does the positive momentum will go away. Remember, if the economy slows so do earnings… which translates into lower stock prices. The Empire State Manufacturing Index was UGLY! -32.9 versus -11.2 previous and -7 forecast… throw in lower retail sales, PPI fell more than expected (good news for inflation), housing starts fell 1.4% M/M, Philly Fed index was -8.9 showing contraction, and industrial production declined faster than expected. Bad economic data especially in the manufacturing sector. The economic news on Friday will existing home sales and more Fed presidents out speaking. All said patience is what we have to have for now as we take it one day at a time. The volume was above average, the VIX was higher at 20.5, and sentiment got a gut check. The S&P 500 index closed down 0.76% for the day. The NASDAQ was down 0.96%. Small Caps (Russell 2000) was down 0.96%. The ten-year treasury yield closed at 3.39% up 2 bps as TLT remains in an uptrend gaining 8.4% from the December lows. Important to note the dip near the 3.4% support level for the bond… if the break holds this gets interesting for stocks. Crude (USO) was up 1.5% after starting the day higher. Gasoline (UGA) was up 3.5% and closing above the 50 DMA. Natural gas (UNG) was down 1% breaking support again. The dollar was flat trying to find near-term support. The goal is to see how this plays out as we move forward. We took some profits on positions as we watch and manage the immediate risk daily.
Things to Watch on This Week: 1) Retail Sales for December (-1.12% versus -1% previous. -1% projected). 2) Producer Price Index December (-0.5 versus 0.3% previous. -0.1% projected). 3) Industrial Production December (-0.7% versus -0.2% previous. -0.1% projected). 4) Capacity Utilization December (78.8% versus 79.7 previous. 79.6 projected). The manufacturing sector slowing faster than expected! 5) Business Inventories November revisions (0.4% versus 0.4% previous. 0.4% projected). 6) Fed Presidents are out speaking this week. 7) Jobless Claims (190k versus 205k previous. 215k projected). 8) Building Permits (1.33 million versus 1.35 million projected). 9) Existing Home Sales December (4.09 mil previous. 3.95 mil projected). 10) Philly Fed Manufacturing index Jan (-8.3 versus -13.8 previous. -10 projected). 11) Jobs… MSFT 11k layoffs announced.
Charts to Watch: SPY $399.50 resistance, QQQ $281.32 resistances, SOXX $390.40 resistance, IWM $186.60 resistance. All tested lower… failed to hold initial support and puts the move higher in question. Watching how investors respond to news and earnings.
FXB the British pound is in an interesting pattern. The cup and handle pattern over the last six months is in a position to break higher. The dollar has been weakening of late and thus the move above the August highs.
Metals & Mining: XME, SLX, GDX, SCCO testing but holding up well.
Energy: XLE, IEO holding up well along with individual stocks FANG, COP.
Previous Charts of Interest Still in Play: FCX (test support, raised stop as hit resistance), KWEB (breaking higher “V” bottom, hitting resistance). UGA (double bottom, broke above the 50 DMA). Adjusted stops as necessary. GOLD (saucer breakout, hit stop). RIG (cup and handle breakout, big move adjusted stop). SOXX (break upside through resistance, hit stop). SPY (reversal, Hit Stop). QQQ (reversal, adjusted stop). IWM (Reversal, Hit Stop).
Stops Hit: SOXX
This Week’s Data Reports:
Quote of the Day: At a party, a young wife admonished her husband, “That’s the fourth time you’ve gone back for ice cream and cake. Doesn’t it embarrass you?”
“Why should it?” answered her spouse. “I keep telling them it’s for you.” — Selma Glasser
The S&P 500 index closed down 30.1 points to 3898 the index was down 0.76% with above-average volume. The index hit resistance Wednesday and continued to give back gains. The move below 3947 was negative for the upside move. Watching how Friday unfolds. Two of the eleven sectors closed higher on the day with energy as the leader up 0.2%. The worst performer of the day was industrials down 2%. The VIX index closed at 20.5 as sentiment shifted negative again on the day. Managing the risk.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials broke from the trading range back to the previous highs. The sector was up 4.2% for the week. Entry $79. Tested lower. Doji Candle.
XLU – Utilities struggling with the 200 DMA putting the uptrend in question. The sector was up 0.4% for the week. Letting it play out. Breaking from the bottom of the trading range.
IYZ – Telecom bottom reversal follow through and back above the previous highs. The sector was up 2.4% for the week. Solid break on the upside for the week. Entry $22.50. Testing the move higher.
XLP – Consumer Staples developing a trading range. The sector was down 1.3% for the week. Looking for a decision on direction. Broke lower offering a short side trade and confirmed.
XLI – Industrials bottom reversal and cleared resistance at the $99 level. The sector was up 1.5% for the week. Entry $99.20. Back to the December lows.
XLV – Healthcare Struggling to find direction needs to clear $136.50 resistance. The sector was down 0.1% for the week. Remains in a trading range. Broke key level of support.
XLE – Energy established a trading range and broke higher. The sector was up 2.7% for the week. Entry hit $89. USO and UGA are in play currently. Tested support and bounced.
XLK – Technology The sector reversed off the lows finally breaking through the $127 level. This will be a key component if the upside is to continue. The sector was up 4.6% for the week. Entry at $127.50. Testing the downside again.
XLF – Financials established a bottom reversal and moved through resistance at $35.20. Added to the upside on earnings for the week. The sector was up 2.1% for the week. Entry $34.50. Ugly day as earnings take sector lower.
XLY – Consumer Discretionary bottom reversal in play. The sector was up 5.8% for the week. After leading the downside see solid upside bounce. Entry $132. Turned down on Wednesday and Thursday.
IYR – REITs bottom reversal in play. The sector was up 4.4% for the week. Lower rates could offer some upside to the sector near term. Doji candle… reversed. Watching how Friday unfolds.
Summary: The index was down 0.7% for the day. It has established a bottom reversal that tested on Wednesday… added selling on Thursday and the big question is can it maintain any momentum in the bounce? We will watch how trading unfolds from here. 3898 key level to hold. Booked gains on the sector as it hit stops. 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 104.74 points to 10,852 as the index was down 0.96% for the day. The bounce off the October lows is in question. Watching to see if Friday offers a solution or do we retest the previous low? Technology and semiconductors are the key…. watching how it plays out.
NASDAQ 100 (QQQ) was down 0.98% with the large caps testing the bounce. $274.84 is level to hold near term. The test the last two days is making investors nervous near term. The sector had a negative bias with 18 of the 100 stocks closing in positive territory for the day. The chart shows a test of the positive momentum. AAPL ($137.20 level to clear). AMZN (hitting resistance). GOOG (bottoming pattern). MSFT (bottom reversal).
Semiconductors (SOXX) made a move higher to break from the bottoming range and added nicely to the upside for the week. The sector was up 6.2% for the week. $390.40 next level of resistance. Entry $355. AVGO (cup & handle). RMBS (broke above previous highs). SWKS solid break higher). Shed 2.8% on Thursday leading the downside.
Software (IGV) Attempted a bottom reversal on the week but still needs some upside momentum. The sector was up 4.9% for the week. Watching how the week begins. Tested.
Biotech (IBB) The sector managed to break to the upside to end the week and needs to follow through. The sector was up 2.3% for the week. Entry $134.10. Tested.
Small-Cap Index (IWM) bottom reversal with leadership overall showing a positive trend. The sector was up 5.3% for the week. Entry $177. Resistance $188.15 level to clear. Big test lower on Wednesday and Thursday.
Transports (IYT) Bottom reversal and positive upside momentum. The sector was up 3.73% for the week. Need to clear $234 resistance. Entry $218. CSX (need to break from consolidation pattern). Tested on Wednesday and Thursday.
The Dollar (UUP) The dollar moved lower on economic data dropping 1% Thursday and breaking the previous lows. The dollar was up 1.5% for the week. The outlook remains negative. Intraday reversal on Fed talk closed flat.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.51% down from 3.57% last week. The yields reversed adding to the upside trade in bonds. TLT was up 1.5% for the week. Entry TLT $102.35. 3.39% Big move lower in rates in response to the Fed talk… TLT had a great move upside.
Crude oil (USO) Reversal in trend for crude last week pushing back to the previous highs. Supply-demand speculation as China opens its economy and borders. USO was up 8% for the week. Entry $67. Double bottom on the chart… OIS (uptrend). XOM (at resistance). CVX (breaking higher from consolidation pattern).
Gold (GLD) The commodity has been trading higher as the dollar declines. The metal was up 2.9% for the week. GLD entry $154.90. Stop $174. Moved to resistance at $174.30 and got the break higher. Entry AGQ $23.50. Stop $31. Letting it run and adjusting stops. Rested and continued upside.
Put/Call ratio was 0.99 on Thursday… Bias shifted on Wednesday to negative.
Questions to Ponder: Navigating Uncertainty
Remember the infrastructure spending bill that Congress passed last year? $1 trillion is to be spent on refurbishing and establishing new infrastructure… it has started impacting stocks like Caterpillar (CAT) and Freeport McMoRan (FCX)… This is a sector that will be a benefactor in years to come. We own FCX and watching others as opportunities relative to the spending unfold. URI, TEX, RIO, BHP, DE… some to track.
FINAL NOTES:
Thursday: The markets struggled with the weight of the Fed comments again throughout the day. Throw in some not-so-great earnings, negative economic data, talking heads, and speculation… you have the making of a great trading day. The reality of the Fed still being hawkish towards rates is sinking in, but the economic data and earnings are more heavily weighted currently than the media is portraying. Watching how this unfolds relative to sentiment and outlook. We are a far way from seeing growth… my opinion. Managing our risk as we hit stops on several positions. The dollar was flat. Watching near-term support and how the activity is on Friday. Take what is offered and manage the risk accordingly. Volatility closed at 20.5 as anxiety levels get rise some. The money supply was shifting towards positive but has stalled. Volume moved above average. 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.
As stated above we continue to watch and take what is offered. 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 turning towards stagflation of late which could be worse for consumers as it tends to last longer with a slow negative effect. We remain focused on short-term trades until there is directional clarity. The charts are showing a short-term trend reversal… technology and consumer discretionary have led the move. Financials reversed along with major indexes as earnings helped… along with lower interest rates. 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.