The markets traded mostly mixed with the NASDAQ and S&P 500 indexes outperforming led by the mega-caps. The key data point on Wednesday showed CPI was flat for the month of April but the headlines stated inflation was “moderating”. If you look at the intraday charts you see some volatility throughout the day caused by a mixed reaction to the “moderating” inflation data. The bottom line from the news is the inflation rate is heading into what some economists are calling the sticky zone. To get inflation to fall further there will need to be some type of economic decline. This is where we have to watch how the Fed reacts as well as what they do going forward. Technology stocks are the favored darlings currently as investors believe they are still making money and growing despite the economy. What about all the warnings from companies about the future outlook? Reality is still on the horizon. For now, investors are willing to buy on hope. The White House meeting with Congressional leaders gave little hope in terms of an agreement on the debt ceiling. They will meet again on Friday, but the longer this is in the headlines without resolve the more angst it will cause investors. The Fed presidents continued their mantra of being tough on inflation speeches but the reality is supply remains strained at best and too much money remains in the system, and demand is higher than supply… simple economics of supply and demand. Until demand declines by excess supply inflation will remain an issue for the US economy. Too many half-truths running around in the headlines for clarity among investors. Thus, we focus on what we see short term and allow the storylines to unfold.
The S&P 500 held above the 4086 support and closed higher on the day. QQQ equally held above the $320.92 level and led the markets on the day. The NASDAQ composite index closed above the resistance of 12,246 breaking higher. It was an interesting day with some sectors leading and others drifting lower. Volume was below average on the day showing narrow leadership. Six of the eleven sectors closed in positive territory. The S&P 500 index closed up 0.4%. The NASDAQ was up 1% with SOXX up 1%. Small Caps (Russell 2000) were up 0.5% showing some bounce in the sector. The ten-year treasury yield closed at 3.43% down 9 bps on the day. Crude (USO) was down 0.7%… watching how it plays out against the background of economic data. Gasoline (UGA) was up 0.8%. Natural gas (UNG) was down 3.4% giving back some of the recent gains. The dollar was down 0.2% and struggling globally. We are focused on managing the risk and watching how this all unfolds.
ONE Chart to Watch: QQQ – 1) Continued the move above the $320.92 resistance and followed through on the upside break. 2) Short-term trend is UP… starting from the January low. 3) Uptrend line held along with the $312.78 support. 4) Solid bounce higher with positive follow through finally. 5) Note the declining trend in volume since the March lows… money supply same thing, not a confidence builder for the uptrend. 6) Breakout confirmed the entry. 7) TQQQ entry $27.45. stop $27.
Additional Charts to Watch: SPY – reversed back above support at $407.19. Needs to follow through to break higher. IWM – retested the previous lows and bounced without conviction… favoring the downside technically. SOXX – retested lows with a downtrend from the March highs… bounced Wednesday… needs to follow through with some leadership. USO – oversold… gap bounces off the lows. Watching for entry if it holds.
Leadership – NASDAQ, NASDAQ 100, SP500, DBP, Dow… QQQ breaks higher along with the NASDAQ. Others trying to resume upside momentum. DIA closed lower and didn’t participate on Wednesday. Volume was below average on the moves… need more breadth in the move overall. Taking what is offered but playing very cautious near term.
Laggards – SOXX, SP400, RUTX, USO, XLF… struggling as growth stocks are still not showing the needed leadership. If the markets are to run higher we need to see them participate. IWM and IJH both failed to improve much on Wednesday. Energy reversed Wednesday retesting the lows. KBE keeping financials in check and testing the downside again.
Interesting Charts: TJX (trading channel). DLTR (Consolidation breakout). YINN (bottom reversal).
ON TAP THIS WEEK: 1) Debt Ceiling is one of the top issues as White House holds meeting… June 1st is the date Yellen gave for being broke. 2) CPI & PPI inflation data… not expecting big changes but any surprises will rock investor psyche. 2a) CPI was in line with expectations… response muted with mega-caps moving higher. 3) Earnings from DIS (missed moved lower), ABNB (good but outlook was poor), RIVN (positive outlook on recovery in the company), OXY (negative outlook)… each have implications about the economic picture(not the best outlook). 4) Consumer Sentiment will end the week. 5) Markets are at key resistance levels (QQQ breakout on Wednesday). We have been here twice before, do they break higher and continue the uptrend?
Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Earnings 5/4 after-hours beat estimates. Holding. AMZN (bottom reversal) Holding (continued upside on Wednesday). MCD breakout. Holding. WMT ‘V’ bottom breakout. Holding. TSLS. Holding. SPXL breakout. Holding. SOXX reversal. Holding. TQQQ breakout. Holding. SRS Holding. SJB Holding. NUGT (cup & handle) Holding. TGT (descending triangle short setup with Jun Puts). Holding. UGL (breaking higher from range). Holding. LABU (break up from bottoming range). Holding. ARKK (bottom reversal). Holding. SIL (bottom reversal). Holding. BTAI (cup & handle breakout). Added Monday. EMTY (breakout confirmation). Added Tuesday. FNGU (breaking out). Added Tuesday. BNKD (running higher… look for test and entry near $15.25) Added Tuesday. GOOG (Channel breakout). Added Wednesday.
Stops Hit: None.
Quote of the Day: “Start every day off with a smile and get it over with.” – W. C. Fields.
The S&P 500 index closed up 18 points to 4137 the index was up 0.45% with below-average volume on the day. The index held above the 4086 support. 4173 is the next key resistance for the index. All eyes are on inflation data… debt ceiling… and more. Inflation is stable and unchanged. Six of the eleven sectors closed higher on the day with technology as the leader up 1.2%. The worst performer of the day was energy down 1.1%. The VIX index closed at 16.9 receeding on the day. The uptrend from the October low remains in play. Plenty to watch this week as the data unfolds.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials hit resistance at $81.75 and tested lower holding above the 200-day MA. The downtrend from the January highs remains in play. The sector was down 1.2% for the week. Moved down to the 200-day MA.
XLU – Utilities trading range developing on the chart with resistance at the 200-day MA. The sector was up 0.1% for the week. Entry $68. The downtrend is in play from the January highs.
IYZ – Telecom traded down to $21.63 support and watching again. The sector was down 4.2% for the week. The downtrend is in play from the January highs. Retesting the lows.
XLP – Consumer Staples upside trend continues as money continues to move toward the “safe” haven of defensive stocks. The sector was down 0.2% for the week. The trend is up from the March lows. Rolling top.
XLI – Industrials moving sideways with some volatility showing on the chart. The sector was down 0.3% for the week. Consolidation pattern.
XLV – Healthcare made a move through two resistance points. Topping pattern on the chart. The sector was down 0.1% for the week. XBI solid upside trend.
XLE – Energy broke the $82.74 support. The sector was down 5.7% for the week. The downtrend is in play from the November highs. Accelerated lower with crude on the week. Short-side trade entry hit $82.70 ERY. Retested lows.
XLK – Technology The sector remains in a trading range. Closed at the top of the range… need to clear $151.53. The sector was up 0.3% for the week. Need some leadership from the sector if markets are going higher. Solid upside move to breakout.
XLF – Financials broke below the $32.36 level and bounced back… banks are still a challenge for the sector overall. The sector was down 2.5% for the week. The trend is down from the February highs. Banks remain a drain on the sector.
XLY – Consumer Discretionary consolidation pattern in play on the chart. Retail is struggling as consumer debt rises to record levels. They learned from the government. The sector was down 0.4% for the week. Broke from the trading range… need to follow through.
IYR – REITs remain in a trading range within the downtrend from the February highs. The sector was down 0.3% for the week. The negative influence of interest rates and reports of vacancies in commercial rents are rising. Tracking SRS for an opportunity. Residential moving up… commercial moving down.
Summary: The index was higher on the day holding the move back above the 4086 level. Narrow breadth and definitely a sector-driven market. XLK and XLY breaking higher… others are flat to down. The uptrend from the October low remains intact with three higher lows keeping the trend in place. Earnings pushed the index up and the Fed is getting the blame for the move lower… however, we have not reversed the trend… yet. CPI offered hope on Wednesday but failed to change the current environment as volume was weak… the reaction is purely speculative in nature. 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 127 points to 12,306 as the index was up 1.04% for the day. The index moved above resistance and followed through in the uptrend. Mega-caps leading along with technology. SOXX still lagging. 11,800 is the level of support to hold.
NASDAQ 100 (QQQ) was up 1.09% with the mega caps breaking higher. Held above the $320.92 resistance again… followed through on the uptrend. The support is $312.78 and watching as we break from the trading range. The sector had a positive bias with 67 of the 100 stocks closing in positive territory for the day. Added TQQQ entry $27.45 (raised stop).
Semiconductors (SOXX) Tested the $400 level of support and bounced with an upside on Friday. Still trading below the 50-day MA. Added SOXL $13.60. The sector was up 0.5% for the week. Watching how it plays out next week. Higher on Wednesday still needs to clear $418.
Software (IGV) Tested to the $289 support level and bounced Friday. Added IGV $291. Stop $291 (adjusted). The sector was down 1.1% for the week. Mega caps leading the sector. Mega-caps leading the sector higher as the reversal off the lows remains in play.
Biotech (IBB) The sector tested back to the $128.35 level and bounced. The sector was down 2.2% for the week. Added IBB $129.50. Added XBI $82.80. Consolidation pattern in a downtrend.
Small-Cap Index (IWM) lagging overall as investors move away from growth to safety. Established a bottoming range. The sector was down 0.3% for the week. Letting it unfold.
Transports (IYT) negative earnings created a big test lower to support at the $213 level. Established a trading range. The sector was up 0.5% for the week. If the markets are to move higher overall they need transport to be positive.
The Dollar (UUP) The dollar remains volatile as more countries are willing to trade outside the dollar. Held within the range for the week… watching how it unfolds. The dollar was down 0.3% for the week.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.44% down from 3.45% last week. Mixed reactions all week reacting to the news. TLT was down 1.5% for the week. 3.43% on CPI data.
Crude oil (USO) Tough week for oil as news states China and US are consuming less on weaker economic data. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. Nice bounce on Friday to end the week. USO was down 6.6% for the week. Upside continued to start the week… downside on Wednesday. Remains volatile.
Gold (GLD) The commodity is consolidating near the highs. The metal was up 1.3% for the week. Watching for the upside to resume.
Questions to Ponder: Navigating Uncertainty
Stagflation – persistent inflation combined with stagnant consumer demand and relatively high unemployment. Do we have this situation currently in the US economy? If it doesn’t exist in a purely technically defined way, it is creating the same economic environment currently in the US, and the current administration is in denial. Thus, we will continue to feel the effects of this until we change course.
Money Supply – Falling at the fastest rate since 1930. M2 fell 2.2% in February and fell 2.4% in March… Contraction in supply should contract liquidity in the system and stifle inflation. Watch bank deposits they are still declining. See the above definition of stagflation… the pressure on the economy is building.
Banking Facts: 19 banks borrowed $32.6 billion last week. $360 billion of deposit outflows in the last three weeks alone. The Fed is giving just enough money through the BTFP (Bank Term Funding Program) facility to keep from a collapse but not enough to eliminate the pain. “Sound and resilient” are the words uttered by many… not even close.
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. We have to remain focused on short-term trades until there is longer-term directional clarity. Sector-driven activity in play short term with narrow leadership. News is in the driver’s seat as we take positions that are technically moving and offering opportunities. 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 your money.
Wednesday: Stocks moved modestly higher on below-average volume. NASDAQ mega-caps post higher highs. Defensive stocks moving higher, DBP, GDX, IHE, XBI, Large cap XRT. Banks (KBE) and energy (XLE) are in a position to break lower. Balance moving sideways and bucking resistance. Overall the signals are mixed with QQQ, XLK, XLY, IGV showing leadership. CPI data was flat from April to May. Are we at a level where inflation gets ‘sticky’? That leads to stagflation. Six of the eleven sectors closed higher on the day with below-average volume. We see the overall trend is still up from the October lows. Testing is in play and we continue to see opportunities setting up both on the downside and the upside on the charts. I am willing to be more patient than anxious currently as the trend unfolds.
What I am watching on Thursday: Precious metals upside SIL, GLD… Large-cap biotech XBI upside… UNG bottom reversal… KBE/KRE downside continuation… (BAC, PACW, WFC). SOXX closed on a doji candle? This market has to be evaluated sector by sector as the overall trend is bifurcated.
“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.