Stocks post a nice low-to-high move to start the week with the indexes closing higher. With the CPI data out on Tuesday the markets looked a little tentative relative to volume. The S&P volume was down 20% from last week. All said Tuesday is about inflation and how will be interpreted by investors and traders. No big news out during the day left traders to do their own thing… as you can see on the chart they attempted to keep the bounce in play. A look at the charts shows the S&P 500 index closing back above the 4086 key level and looking at the 4160 level next. The NASDAQ shows a flag pattern bouncing back from Friday’s move lower. No decisions for investors relative to direction as they weigh the outlook for the markets as it relates to growth and inflation. The topic of choice Monday was inflation and alien balloons. The Fed presidents are all out on Tuesday speaking and interpreting the CPI data for the masses to make them “calm”. All said the leaders were back helping the upside and we watch to see if that continues on Tuesday with the inflation data/news. The breaks higher are holding and looked positive on Monday… we will know plenty pre-open as the data will be released at 8:30 am.
The volume was below average giving some questions about the bump higher Monday, the VIX closed at 20.3 declining slightly in front of CPI data. The S&P 500 index closed up 1.14% for the day. The NASDAQ was up 1.5%. Small Caps (Russell 2000) were up 1.2%… a solid day for stocks. The ten-year treasury yield closed at 3.71% down 3 bps for the day as TLT is sitting on the trendline from the November lows. Crude (USO) was down 0.5% as it remains in a trading range. Gasoline (UGA) was up 0.5% and holding near the 200 DMA. Natural gas (UNG) was down 5.2% and holding near the April 2021 lows. The dollar was lower on the day. We adjusted our stops and will focus on managing the risk as we await the CPI data.
Things to Watch This Week: 1) CPI on Tuesday. 2) Retail Sales and Empire State PMI on Wednesday. 3) Housing Starts, Permits, PPI, and Philly Fed on Thursday.
Key Data: 1) New York Fed inflation expectation (5% versus 5% previous). 2) Wholesale Inventories (0.1% versus 0.1% previous. 0.1% expected). Consumer Credit ($12 billion versus $28 billion previous. $27 billion expected). 3) Jobless Claims (196k versus 183k previous. 192k expected). Continuing Claims (1.69 million versus 1.65 million previous). 4) University of Michigan Consumer Sentiment Index (66.4 versus 64.9 previous. 65.1 expected). 5) Powell speaks on Tuesday… all ears want to hear if he has truly changed his tone inflation. Powell in his comments did seem confident that inflation is declining and we are on the path to a soft landing… markets liked what he had to say… if he truly believes that, equities will rally in response… until which time earnings fall based on slower growth. He didn’t address the growth side of the equation, but he did elude to disinflation as part of the process. Remember, don’t fight the Fed.
Consumer Credit: $11.6 billion versus 24.5 billion December versus 33.1 billion November… see a trend here? 65% drop from November! That is a big number. Revolving Credit (credit cards) $7.2 Billion versus 15.3 billion. Non-revolving debt (autos, student loans, etc) $4.4 billion versus $17.8 billion. What is happening? Consumers can’t afford it or don’t want it… interest rate shock is in play my belief. The average credit card rate is 20.4% according to the Fed report. This remains a big issue for the system and reserves have been rising in banks to buffer against the looming defaults.
Charts to Watch: UVXY bottom reversal, SPXS bottom reversal. Downside TWM, QID, SDS, DXD… bottom reversal all on the chart. NAT (double bottom breakout). Positive moves on Monday… watching the CPI data short side could be in play on bad news. All the talking heads are expecting things to be in line and okay… we will see what happens.
Tuesday: Sectors to watch in response to the CPI data. XME, XLI, XLE, SOXX upside opportunities on in-line or better CPI.
Previous Charts of Interest Still in Play: RIG (cup and handle breakout, big move adjusted stop). SPY (reversal, reentered). QQQ (reversal, adjusted stop). SOXX (back above $380=added to position, adjusted stop). Flag pattern on the chart. XME (trending higher. Break to the upside.) IGV – (broke out offering an entry signal.) Ran higher. QQQ (broke above resistance hit entry). Tested all week. Watch 4086 SPX… Consolidation is in play currently for the index. TMV @ 200 DMA (hit entry).
Stops Hit: FCX
Quote of the Day: “Practical politics consists in ignoring facts” – Henry Adams
The S&P 500 index closed up 46.8 points to 4137 the index was up 1.14% with below-average volume. The index moved back above the 4086 level and looking at 4160 next. Ten of the eleven sectors closed higher on the day with technology as the leader up 1.7%. The worst performer of the day was energy down 0.2%. The VIX index closed at 20.3 as sentiment was flat in front of the CPI data. Watching how markets respond to the data/news on inflation.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials uptrend still in play. Tested to the 50 DMA and watching. The sector was down 1.6% for the week. Entry $79. Reverse head and shoulder pattern on the chart. Patience. Held the 50 DMA.
XLU – Utilities broke support and tested lower. There is a downward stairstep on the chart and the break below $68 was negative. The sector was down 0.3% for the week. Found support?
IYZ – Telecom a failed break higher as the sector retreated back to the 50 DMA for the week. The sector was down 4.4% for the week. Watching how it unfolds. Hit stop banked solid gain. Bounced at the 50 DMA.
XLP – Consumer Staples downtrend from the December highs remains in play. The sector was down 0.6% for the week. Letting it play out and looking for support. Bounced at support.
XLI – Industrials moved back to the previous highs and attempted to break higher. The sector was down 0.7% for the week. Need to hold above $102.50.
XLV – Healthcare Struggling to find direction $131.40 support is level to hold. Down trending channel on the chart. The sector was down 0.1% for the week.
XLE – Energy tested lower and bounced as crude rises. The sector was up 4.9% for the week. Commodities got a boost from the announced production cuts from Russia. Watching near term direction.
XLK – Technology The sector broke higher from a cup and handle pattern and consolidated near the current highs. This is the key component in the current bounce off the previous lows. The sector was down 0.4% for the week. Entry at $127.50. $143.45 resistance in play – took some gains and hold the balance with a tighter stop. Back to resistance.
XLF – Financials cup and handle pattern broke higher testing. The sector was down 0.2% for the week. Entry $34.50. Watching interest rates and impact near term.
XLY – Consumer Discretionary made the break above key resistance at $146.50 and consolidating. The sector was down 2.1% for the week. Flag pattern on the chart. Entry $132. Took some profit and letting it play out. Held support.
CCL breakout and test of support ($11) offers trade opportunity.
IYR – REITs bottom reversal is in play with a break above the $90 resistance and testing. The sector was down 2% for the week. Uptrend remains in play. Held support.
Summary: The index remains in an uptrend from the October lows. Moved back above 4086 level of resistance and 4160 next level to clear. The bounce albeit on lower volume is keeping the upside possibilities in play. Watching CPI data Tuesday. We will remain patient for now as investors sort out their collective thoughts about Mr. Powell and inflation. I remain cautious as optimism versus reality is a bitch. The reality is in the data CPI will offer some reality or hope… watching. Watching and managing the risk that is. 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 173.6 points to 11,891 as the index was up 1.48% for the day. The break above 11,474 is what we are watching currently as the index tested the move and bounced Monday on below-average volume. Flag pattern in play. Money flow has declined the last six days. Technology and semiconductors are the keys…. watching how they play out. Took some gains and managing the balance.
NASDAQ 100 (QQQ) was up 1.6% with the mega caps leading on the day. They broke back above the $303 level of support and watching how it unfolds. The sector had a positive bias with 89 of the 100 stocks closing in positive territory for the day. The chart remains in a positive trend off the December lows and bounced back to the 10 DMA.
AAPL ($137.20 level to clear/hit entry/adjusted stop). Letting it all unfolds near term. Flag pattern on the chart.
Semiconductors (SOXX) broke higher for a cup and handle pattern to lead the upside. The sector was down 2% for the week. $390.40 resistance cleared and moved to $432.27 resistance. Entry $355/adjusted stop. Took some gains. NVDA entry $171.95. Stop $193.35. Took some gains. AVGO (cup & handle/adjusted stop). Took some gains. RMBS (broke above previous highs/adjusted stop). SWKS solid break higher/adjusted stop). Took some gains. Managing the risk. Pennant pattern on the chart looking for direction near term. Held the 10 DMA. Bounced Monday to keep the trend in play.
Software (IGV) Upside momentum being tested near term. The sector was down 1.5% for the week. Target is the August highs. $275 entry. CRM (sup and handle/hit entry/adjusted stop). Took some gains. Volatility in play as sector tests moves higher. Bounced Monday to keep the trend in play.
Biotech (IBB) The sector remains in a trading range with a negative bias of late. The sector was down 3.1% for the week. Entry $134.10. Bounced at support.
Small-Cap Index (IWM) testing back to the $188 breakout level. Remains in an uptrend but not looking great of late. The sector was down 3.4% for the week. Hit stops. Flag pattern breaks lower. Bounced at support.
Transports (IYT) reverse head and shoulder pattern broke higher and failed moving lower on the week. The sector was down 3.3% for the week. Hit stop. Watching for direction. Bounced Monday to keep the trend in play.
Nordic American Tank Shipping (NAT) double bottom breakout ($3.25) and follow through.
The Dollar (UUP) The dollar moved lower on FOMC news but bounced as economic data may keep the Fed in play relative to interest rates. The dollar was up 0.7% for the week. The outlook remains negative. Watching how this unfolds going forward. Flat and still working on a bottom reversal.
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.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.74% up from 3.53% last week. The yields reversed the downtrend following the FOMC announcement. TLT was down 3.1% for the week. Hit Stop. Added TMV $112.50. Watching the Fed. Inflation data will offer direction to bonds.
Crude oil (USO) Bottom reversal in crude as the dollar gained. The cut in production announced by Russia on Friday added to the upside move. Supply-demand speculation in China remains part of the equation as well. USO was up 8.93% for the week. Added position on the bounce. Entry UCO $27. Trading range bound for now.
Gold (GLD) The commodity shifted lower with the bounce in the dollar. The metal was down 0.06% for the week. Watching for support and bounce in metal. CPI will offer some direction.
Put/Call ratio was 0.92 on Monday… hope remains in play.
Questions to Ponder: Navigating Uncertainty
The smell of job cuts are in the air… the headlines have been consistent with companies announcing layoffs and office closures. Twilio announced 17% cut in staff and closing offices on Monday. Two thoughts on this front… First, office closures will likely hit REITs that hold commercial space buildings. They have struggled since the “pandemic”, but bounced on the reopening. Remote working is still in full swing and impacting commercial properties in large cities. Second, bottom-line earnings for companies. Corporations are trying to get in front of slumping earnings reports and cutting jobs pushes more profits to the bottom-line. Something to watch looking forward.
Fed Chair Powell sounds like he believes the Fed is in the process of engineering a soft landing for the economy. Looking at his comments from the FOMC meeting and following the language has changed. He stated, “this is not a standard business cycle, it is unique.” He is referring to the ‘pandemic’ and since we have never had one, a pandemic, in the Fed’s existence, it is different this time. Yes, the sharp increase in interest rates has slowed things near term, but the longer-term impact is set to overshoot and push the economy into a recession. Big changes in money supply, the yield curve inversion, etc. are going to have a big ripple effect through the US and global economies. It is not looking like a soft landing to me, we will be lucky if we don’t nose-dive into a market crash. Speaking of which, the Fed released the 2023 banking stress test measures on Thursday… a new component of the test is how the eight largest banks would hold up in a market crash… hmmm!
Did the Fed shift in bias relative to inflation? In theory no, but in action yes. The FOMC meeting was a big shift in what the Fed said relative to future rate hikes and their outlook for inflation. It is something to watch in the coming weeks. Mr. Powell was out on Tuesday to reinforce the fight on inflation and parrot much of what he said following the FOMC meeting. Interest rates are showing a belief by investors that they believe Powell and the Fed are done… that said, rates jumped 21 bps the last three days as economic data and comments show the Fed isn’t done hiking rates, but they are encouraged about inflation slowing. The real sign will come from banks, interest rates, earnings, and more importantly a recession pending. Tracking it and following the trend.
Treasury Secretary Yellen was quoted as saying, “you don’t have a recession when you have 500k jobs and the lowest unemployment in more than 50 years.” She must have been sipping some of Bidens Kool-aid. The government’s annual adjustments to the jobs report for January his a head-scratcher… if you take the real jobs losses for seasonal jobs from the holidays we actually lost 2.3 million jobs. But when you are trying to make the current administration look good… adjust the numbers. Not to mention the adjustments to the participation rate… what about people holding two and three jobs being counted in the participation rate? Kind of like dead people voting. Remember numbers don’t lie only statisticians. Or is that politicians?
Jobs versus productivity: The data out on Friday, if true, showed that productivity is falling. That would mean that corporate margins are under pressure as labor costs rise. The math doesn’t lie just the numbers provided to do the math. Thus, we need to watch this data going forward because if wage inflation heats up as some believe it will… margins will decline further as seen in the earnings reports from META, GOOG, AMZN, and AAPL. Lower earnings impact stock prices. There is sooooo much wrong relative to the economy, thus we proceed with caution and take what the charts offer.
Monday: Stocks found some buyers on Monday to keep the trend alive. There has been an increase in volatility and questions are being raised about the end of the rally… That speculation could be a bit premature as all eyes shift to the CPI data/news on Tuesday. The breaks lower bounced on Monday keeping the trends in play for now. Patience is the name of the game. We took some profits, adjusted stops, and we will look at short-side setups in weaker sectors of the market. Goldman Sachs analysts put the odds at 70% that CPI data will rally the S&P 500 index by 1.5% or more. There is a belief of ‘disinflation’ in the air… thanks to Mr. Powell. This will make the data all the more important. The markets will likely absorb an in-line number or even one slightly higher… the challenge will come if it shows a sharp rise in inflation.
The market wants to believe the Fed… The Fed wants to believe the Fed. Thus, if you say what you believe enough you will eventually believe it is fact. The FOMC meeting gave hope to investors as Mr. Powell discussed slower inflation… it is still high at 6%. The Fed’s target rate is 2%… thus, Mr. Powell stated the Fed will still hike but at a slower rate. We will look and listen to the data from the CPI and comments from the Fed presidents who will be out speaking today. I expect emotions to in play on the results in either direction… may need to let the dust settle and then decide.
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 and traded the hope in the move higher. We have banked some gains and hit some stops. We now look to the data to provide the next direction near term. It remains a news-driven market and thus offers shorter-term opportunities. We will manage our risk of hope giving way to reality along the way. Eyes open. Emotions removed. Mixed economic data has been mostly ignored. Sentiment has shifted to neutral over the last few days and CPI may be the deciding factor on Tuesday. We are a far way from seeing growth… my opinion, but we trade what the market gives not what we think. Yes, we have thoughts and beliefs, but we will always follow the trend on the charts and never fight the Fed. The dollar turned higher on Fed worries. Interest rates are at 3.71% level on the ten-year bond based on 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. Watching the leaders as the test near term. Watching energy stocks as the commodities struggle of late… crude bounced at support and got a lift from the production cuts announced by Russia. Volatility closed at 20.3 as some intraday anxiety shifted the index. The money supply has tailed off in the last six days as a sign of sentiment shifting. Volume has faded modestly. 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 to the upside… technology and consumer discretionary have led the move. Semiconductors have performed well along with software. 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.