Jim’s Notes Monday Recap

Moving the Market Update – February 5th

The markets started the week with more of Mr. Powell who was on 60 Minutes Sunday to reiterate higher for longer rate stance. The markets reacted to the downside early and then bounced back to stem losses on the day. Part of the problem is interest rates moving up to 4.16% again following the FOMC meeting and Mr. Powell’s stance on keeping rates higher… this ripple effect will be felt in the bond market as well as the credit markets… which means banks are back in the crosshairs if they rise too sharply. Equally, stocks will fade lower as well if rates continue to climb. TLT has gapped lower the last two days of trading and is below the 200-day MA. IWM and IJH were lower on the day as money continued to exit the growth stocks. Both tested key support levels on Monday and we will see how they unfold from here… they are currently setting up short-side trade opportunities. As we discussed over the weekend, there are setups showing downside risk near term. On Friday, despite the upside moves in the major indexes, only 5 of the 11 sectors closed in positive territory. Meanwhile, some buyers want to take one last run at the upside before any crisis begins. There were positives in the economic data with ISM Services better than expected showing some promise, but if you dig into the data you find prices are rising again. (See Outside the Market notes) Watching how this unfolds moving forward as undercurrents of problems build against the markets. It will and is starting to show on the charts.

Stocks started lower, bounced midday, but struggled into the close to end the day in negative territory. The chatter remains focused on the Fed and the potential for future rate cuts, but the Fed is out in force this week banging the drum of no cuts in March and maybe not May. Watching the volatility factor along with the number of sectors lagging or breaking support levels. ISM Services data was very telling on Monday. The NASDAQ closed down 0.2%, DIA was down 0.7%, and the SP500 was down 0.3%. The major indexes were lower on the day. The SOXX was up 1.3%. Small Caps (Russell 2000) were down 1.2%. The ten-year treasury yield was 4.16% up 13 bps for the day. Crude (USO) was up 1%. (UGA) was up 3.4%. Natural gas (UNG) was down 0.5%. The dollar was up 0.5%. We are focused on managing the risk in the current environment and letting it unfold.

Charts to Watch: See Notes on “Reality of the Markets” & “Jim’s Beliefs About the Market” pages…

Quote of the Day: “Are you willing to lose money on a trade? If not, then don’t make the trade. You can only win if you’re not afraid to lose. And you can only do that if you truly accept the risks in front of you.” — Sami Abusaad.

Additional Charts To Watch

A story lost in the headlines was the NYBC bank cutting dividends and showing financial stress. This is one of the largest regional banks and was not even mentioned following the FOMC meeting. Reuters posted a brief article outlining problems in 3 regional banks late in the day. Even with the BTFP these banks are in trouble. It is also interesting to note that in the Fed statement following the FOMC meeting deleted the the sentence, “The US banking system is sound and resilient.” NYBC fell 37%. KRE was down 5.8%. We have discussed this for the last 5 or 6 months that the system is weaker than being reported… how many more of these are on deck? One analyst comment summarizes this very clearly to me, “This regional banking crisis that we saw last year, the problems never really got solved – all these banks are still holding a lot of crappy mortgages, there’s a lot of stuff on these books, it just kind of got forgotten. They’re still holding all these same crappy mortgages, a lot of these regional banks obviously still have issues and I think this is just an eye-opener for the market to a certain extent today.” Why no headlines… there is other news “more important”.

Agriculture (DBA) As seen on the chart the bottoming pattern is in position to reverse the downtrend. We cleared $21.08 Monday. Entry $21.30. Stop $21.08. Broke higher and has shown solid gains since… Raise your stops.

Home Construction (ITB) Consolidation near the highs broke to the upside Monday. Looking for a follow-through above the $103 level. Oops, failed to hold the move higher as interest rates moving higher impacts the DHI earnings report. Failed break higher.

As it relates to the DHI earnings report… they missed on revenue… is the sector starting to show some effects of higher interest rates and affordability issues relative to construction? Something to ponder as the balance of the homebuilders report earnings. Maybe a downside trade opportunity? Sold to the bottom of the range… bounced on New Home Sales up 8%… watching how it plays as it remains in the range.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed down 15 points to 4942 moving the index down 0.32% with below-average volume. The index posted an inside trading day and watching money flow. Two of the eleven sectors closed higher on the day with healthcare as the leader up 0.3%. The worst performer of the day was basic materials down 2.5%. The VIX index closed at 13.6 flat on the day. Plenty to ponder between the headlines and facts. Patience. 4815 level of support held and bounced. The question being… how high do we go?

Note: If you look at the sectors of the S&P 500 index you are seeing some rotation to risk-off. If you compare XLP (consumer staples) to XLI, XLY, XLK, and XLF you will see a trend higher in money flow to XLP. This is a sign that investors are becoming more defensive and/or hedging their portfolios.

XLB – Basic Materials bottom reversal in play with key support at $81. Bounced at support and was up 0.7% for the week. Letting the consolidation unfold near term. Activity picking up in the materials CX and EXP. Ugly downside as it breaks support.

XLU – Utilities bounced back above the $60.10 support. Need to clear $62.90 near term. Watching how this unfolds. The sector was up 0.4% for the week. Moved back to $60.10 support.

IYZ – Telecom Topping pattern continued and broke below the 10-day MA. The uptrend remains in play but not looking good. The sector was down 2.2% for the week. Sold positions with a solid gain. Moved back to support at $22.93

XLP – Consumer Staples Uptrend remains in place for the defensive sector with a move towards resistance at $74.72. No Positions. The sector was up 2.1% for the week. See notes above.

XLI – Industrials Topping pattern broke above resistance. Held $110.75 level of support and cleared $114.20 resistance. No Positions. The sector was up 1.9% for the week.

XLV – Healthcare remains in an uptrend from the October lows. Solid upside for the week clearing the previous high. Entry $129. Stop $140. The sector was up 1.9% for the week.

XLE – Energy shows a bottoming pattern and cleared $81.97 resistance for entry. Some volatility during the week as crude oil retreated. Entry ERX $52.15. Stop $54.20 (adjusted). Let it play out. Need to clear the $84.33 resistance.

XLK – Technology Entry $193. Stop $200. Bounce-off support at $183.50 and continued the uptrend. Tested early in the week and bounced… watching how this unfolds near term. The sector was up 0.2% for the week.

XLF – Financials Entry $33.65. Stop $37.80. Traded higher for the week. The sector was up 0.8% for the week. Holding move above the resistance at $37.95. NYCB regional bank drop is worthy of our attention moving forward.

XLY – Consumer Discretionary Tested support $171.50. Broke higher from the downtrend channel on the chart. Cleared $176.70. The sector was up 3.2% for the week. Gave back Friday’s gains.

IYR – REITs Moved to the next level of support at $87. The sector has been drifting lower on higher interest rates of late. The sector was down 1.3% for the week. Watching Interest rates near term. Watching NYCB as they cut their dividend due to commercial loans underwater… Broke support at the $87 level offering short side entry.

Summary: The index traded lower as growth sectors flounder. The market is rotating toward defensive stocks. We could see a last stage push higher, but the undercurrents are showing a negative bias building towards stocks. The buyers got a blast of reality from the Fed relative to rate cuts and there will be a firehose of more rhetoric from the Fed this week. Watching how the sectors unfold as seen above there were moves to support and some below support starting to materialize on the charts. Letting it unfold and taking it one day at a time. 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 31 points to 15,597 as the index was down 0.2% for the day. Large caps and technology struggled on the day as investors jockey for direction. The index showed a positive move in SOXX. Upside remains in play and watching how the data impacts the trend moving forward. Managing the risk that is and watching how this unfolds.

NASDAQ 100 (QQQ) was down 0.13% for the day stocks jockey for direction. Day of ups and downs as the leaders show some strength. Manage stops and let it play out. Entry $354.20. Stop $421. Watching for a test lower near term.

Semiconductors (SOXX) Banked solid gain on position and watching how the test of support unfolds. Tested lower… Key support at $583.41. Watching for what opportunities are presented. The sector was down 0.2% for the week. Bounce-off support continued higher.

Software (IGV) continued the uptrend from the January test. Shows some topping on the chart. The sector was up 1.4% for the week. Watching how this plays out in the coming week.

Biotech (IBB) Topping pattern on the chart and letting it unfold. Entry $121.30. Stop $133. The sector was down 0.5% for the week. $136.50 level to clear on the upside.

Small-Cap Index (IWM) Downtrending channel in play. Added at $192.13 upside move. Need to clear $198.64 near term. Flag pattern on the chart. Tested $192.13 support and held. Moved to support.

Transports (IYT) Trading sideways in an established trading range. Close at the top of the range and watch for a break higher. Red Sea issues continue to escalate. BDRY has done well in response, bouncing back from the test at $8.95. The sector was up 0.5%.

Red Sea issues are continuing to be bad. There are been ships on fire, protection vehicles turned back, and just an overall mess. The cost in some cases is over $100k per day. The true impact of this on prices has yet to be passed all the way through to consumers… this is a growing issue looking forward.

The Dollar (UUP) The dollar bounced off the December lows and has not looked back. Stronger dollar in January The buck was up 0.6% for the week. Dollar running higher on the Fed talk.

Treasury Yield 10-Year Bond (TNX) The yield had been creeping higher on the 10-year… then the move was lower as we approached the FOMC meeting. Following as well until the jobs report on Friday… the reality of the numbers hurt the outlook for rate cuts from the Fed and rates spiked 17 bps. The yield moved from 4.16% to 4.03% this week down 13 bps. TLT was up 2.4% for the week. This is of interest as it relates to stocks. Rates running higher on Fed talks. 4.16% again on Monday.

Crude oil (USO) Remains a challenge relative to clarity. Production has been higher than expected as OPEC allowed producers to have voluntary cuts. OPEC now set a meeting for March to discuss extending the cuts. Crude has been all over as seen on the chart. The break higher moved to resistance at $73.26 and then moved towards support at $66.23 to close the week… we stopped out of our long positions (UCO) with a nice gain, but now we are watching to see how this unfolds. The commodity was down 7.3% for the week.

Natural Gas (UNG) The move higher from the December lows came to an abrupt end with natural gas falling on projected supply rising the first half of the year. We traded the upside move and the downside move. Pressure is on the downside based on the White House taking away permits for new LNG facilities for transport globally. There is a build-in supply on warmer weather and demand. Looking for the next opportunity. The commodity was down 3.8% for the week. Bottoming pattern?

Gold (GLD) The commodity continues to trade sideways with some volatility sparked by a stronger dollar the last month. The dollar gained some near-term strength adding downside pressure on the metal. The metal was up 0.8% for the week. Fell on stronger dollar.

FINAL NOTES

Monday: The broad index maintained the uptrend but showed testing on the charts on more Fed banter. Watching the charts as we see testing of support near term. Some have broken support… and some are making a last effort to maintain the upside move. Two of the eleven sectors closed higher showing some rotation to a defensive stance. We will watch how the dust settles as the Fed continues to talk higher rates for longer. The twists and turns given relative to Powell’s comments following the FOMC have been nothing short of “unbelievable” along with the jobs report and NYCB news. Take what is offered and stop listening to the talking heads… that is why the remote has a mute button.

Longer-Term View: The uptrend from the October lows continues. They had moved above the July and August highs and broke above the 2022 highs to a new high. This resumes the long-term uptrend from October 2022. Currently, we are allowing the short-term to unfold in light of the longer-term perspective… don’t combine the two as the weekly charts look very different than the daily. A look at the weekly chart below shows the uptrend from the October 2020 lows is still in play at a slower degree of assent. There are always positive and negative swings in a longer-term trend. A look at the daily chart from the October 2022 lows validates that premise with plenty of volatility along the way. Short term the market has resumed the uptrend from the October 2023 lows. The current bounce remains in play despite any issues on the horizon. Time will tell how this plays out. Current activity shows optimism from the buy side and we will take what the market gives. We look to charts and fundamentals for 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.

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.

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