The week was supposed to be focused on CPI and how it would relate to the Fed and the upcoming FOMC meeting. Things changed quickly as the banking issues took center stage. It change the issue from the FOMC meeting being about inflation to how the Fed will work to secure liquidity in the banking system. The end result is more questions than there are answers… that translates to uncertainty and we know how the market likes uncertainty. End result was elevated volatility in both intraday trading and weekly results. The outlook for the Fed is now a 25 bps hike versus 50 bps and some have the Fed not hiking rates at all. There are projections the Fed will cut rates by 100 bps by year-end. Again, uncertainty breeds speculation and volatility. Investors need to be cautious and patient. Economic data has been lost in the news that is more interesting like banks failing, but the housing starts were better than expected at 1.45 million versus 1.32 million previously. Permits were up to 1.52 million from 1.34 million previously. Initial jobless claims fell to 192k versus 212k previously. Philly Fed manufacturing came in at an ugly -23.2 versus -24.3 previously showing little improvement in the region. Consumer sentiment fell to 63.4 versus 67 previously. LEI was lower for the 11th month in a row -0.3… does that say a recession is in play? Overall the economy continues to slow and the outlook isn’t great for growth. KBE is down 24.8% over the last two weeks. Friday it fell 5.5% negating the 3% bounce on Thursday… fear is real in the sector as money flow fell dramatically. The ‘discount window’ is a process for the Fed to lend money to the banks to maintain liquidity. On March 8th there was $4.581 billion lent, in the past week that number rose to $152.85 billion… liquidity is an issue for banks currently. The challenge from my perspective is the crisis may have been averted for now, but you have to believe there is more to come. Whatever the reality we as investors have to manage what we know and deal with the reality as it unfolds. The markets ended the week on a negative note and you can be assured there will be plenty of discussion over the weekend about the future of banks and the Fed’s response. The volatility index closed at 25.5%… elevated, to say the least. Money flow dipped to 33.8 on the S&P 500 index which also closed the week at 3916. How this unfolds going forward will be of interest as we manage our positions accordingly. No matter what our beliefs the chart is the ultimate decision maker.
Plenty of questions remain about the current market environment. The S&P 500 index closed up 1.4% for the week despite the volatility. The NASDAQ was up 4.4%. Small Caps (Russell 2000) were down 2.8%. An attempt to recover from last weeks selling, but as stated above too many questions unanswered or unanswerable. The ten-year treasury yield closed at 3.39% well off the 4% mark two weeks ago. Money flow into bonds has risen on a flight to safety. Watching how this storyline unfolds. Crude (USO) was down 12.6% for the week… $65.70 is the key level of support for crude. Gasoline (UGA) was down 5.7%. Natural gas (UNG) was down 3%. The dollar was down 0.5% holding the near-term uptrend. Overall crazy week for the markets. We are focused on managing the risk and watching how this all unfolds. The negative sentiment is in play with a glimpse of hope here and there… patience is the key.
Charts to Watch: AAPL (cup & handle). META (cup & handle). XLP – down trendline breaks higher as money looks to the defensive sector. PG – trading range break as part of the consumer staples money rotation. ERY – short energy trade still in play… looking for a break above resistance at the 200 DMA. SRS – short REITs trade still in play… looking for a break above resistance of the December highs. TZA – short trade still in play… looking for a break above resistance of December highs.
Friday: QQQ follows through upside along with SOXX. (didn’t happen… we actually reversed on some selling… worthy of watching at the beginning of the week. If turns negative SOXS could offer trade.) KBE money flow. (turned lower again on Friday and watching downside continuation.) PANW (cup and handle pattern). IGV (leader in tech). SWKS (breakout).
Credit default swaps didn’t dive lower on the bailouts… US sovereign reached a new record high even with the bailouts… immediate panic was averted… but is the smart money betting the banking issues aren’t over? Interesting question… my bet is no. In the words of Winston Churchill, “Never let a good crisis go to waste.”
Money flow is getting interesting… prime money fund accounts with brokerages and banks hit a record low $5 trillion… money is moving to treasury bonds. For example (Bloomberg reported) Schwab’s prime funds are down 8.8 billion in outflows. Government treasury funds are up $14 billion. The fear factor is rising.
Previous Charts of Interest Still in Play: LSCC (testing uptrend). Added uptrend in play. SOXX (upside follow-through) Added. AAPL (reversal confirmed) Added. GBTC (trading range breakout). Added. TSLA (185 puts on the break of support). Added. XRT (Apr 06 65 put). Added. Thursday sold half. TMF (interest rates reversal on fear). Added. Thursday sold half. TZA (IWM broke support from consolidation pattern). Added. AMZN (bottom reversal) Added. GDX (bottom reversal) Added Friday.
Stops Hit: None
Quote of the Day: “I must say I find television very educational. The minute somebody turns it on, I go into the library and read a good book.” – Groucho Marx
The S&P 500 index closed down 43.6 points to 3916 the index was down 1.1% with the above-average volume on the selling. Back below the 3930 level and watching 3804 support. Eleven of the eleven sectors closed lower on the day with technology as the leader down 0.1%. The worst performer of the day was financials down 3.2%. The VIX index closed at 25.5 as anxiety remains with all the headlines. The bounce Thursday was short-lived as we close the week up 1.4%.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials Moved below the 200 DMA. Broke support and short-term downtrend in play. The sector was down 3.4% for the week.
XLU – Utilities broke higher from the down-trending channel… $68 is resistance. The sector was up 3.9% for the week.
IYZ – Telecom bottoming pattern this week on the chart. Need to move above $22.35 to have a chance at the upside. Let it unfold. The sector was up 1.2% for the week.
XLP – Consumer Staples downtrend from the December highs remains in play. The sector was up 1.4% for the week. Letting it unfold.
XLI – Industrials Sideways trend broke lower and hit the 200 DMA as support. The sector was down 2.3% for the week.
XLV – Healthcare downtrend in play with a break below the $127.50 mark. Found some support at the October lows. The sector was up 1.3% for the week.
XLE – Energy broke support at $82.74 and looking for a level of support. The sector was down 6.8% for the week. ERY entry $32.40. Stop $32.40.
XLK – Technology The sector bounced off support at $135. Maintaining leadership but struggling with the rest of the market. The sector was up 5.6% for the week. Watching for direction and opportunity near term. $143.45 resistance in play.
XLF – Financials pressure in banks continues pushing the sector lower. Downtrend accelerated on the news and watching how this unfolds. The sector was down 5.9% for the week. KBE puts in play. FAZ entry hit $18.35. Stop $23.50.
XLY – Consumer Discretionary short-term downtrend in play. $141.60 level of support broken. The sector was up 2.2% for the week. Bottom reversal?
IYR – REITs $82.96 support was broken on Friday. The sector was down 0.1% for the week. The negative influence of interest rates and reports of vacancies in commercial rents are rising. Short-side trade opportunity. SRS entry $17.95. Stop $17.95.
Trouble is building in commercial office space as the return to the office efforts aren’t working. The headlines are steadily showing the fight between corporations and employees. Amazon is the latest showing 1/2 are willing or want to return to the office for the three days a week proposed. This is impacting commercial property owners as mortgage payments are being delayed more than two months. Banks raised their reserves in January and are likely to increase more in February. With that in mind IYR and REM bounced off the October lows but may retest those lows or beyond based on future defaults. Worth watching the downside risk with SRS.
Summary: The index remains volatile on the uncertainty surrounding… everything. The bailout money helped for one day as anxiety returns over banks and liquidity. Money flowed into technology as expected with the too-big-to-fail money pushing in the NASDAQ 100 largest stocks. Even more money flowed into treasury bonds… The unknown is always the deepest threat to the investor psyche. It is a news-driven market and the headlines are driving for now. The Fed focus isn’t gone just on the back burner while we deal with the liquidity issues that could very well be Fed-induced. The charts are a mess for the last few weeks with indecision and increased volatility. Support is 3804 for the index. Interest rates moved to 3.39% validating the flight to safety. Seven of the sectors have established a short-term downtrend… the other four are not in great shape… watching how they respond moving forward. Some bounced on Thursday… gave most back on Friday as we watch for the opportunities. We will remain patient for now as investors sort out their collective thoughts about what is fear and what is real. We continue to manage our positions accordingly. Taking exits as necessary and adding where opportunities arise. 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 86.7 points to 11,630 as the index was down 0.74% for the day. The 10,941 support held and the index moved back above the 11,474 previous support. Money flow remains below 50 with all the news and speculation creating uncertainty around the markets. Technology and semiconductors are the keys… SOXX held up well in the face of the selling and bounced nicely on Thursday to lead tech. Watching how this unfolds inching forward.
NASDAQ 100 (QQQ) was down 0.47% with the mega caps moving back above $303 previous support. The sector had a negative bias with 16 of the 100 stocks closing in positive territory for the day. Watching how negative sentiment plays out near term.
Semiconductors (SOXX) sideways trading range with $432.27 resistance. Showing leadership overall. The sector was up 5.1% for the week. If breaks higher offers some sign of hope for stocks near term.
Software (IGV) bounced at $273.40 support. Trying to offer some leadership in the technology sector. The sector was up 5.1% for the week. Watching how it unfolds next week.
AI stocks are heating up as companies race to launch new products amid the ChatGPT AI phenomenon. Here is a list to watch and trade the existing opportunities as they present themselves… NVDA, ANET, GTLB, META, BIDU, SPT, CXM, TIXT, STX, MSFT.
Biotech (IBB) The sector moved below the 200 DMA and remains in a downtrend from the February highs. The sector was up 2.1% for the week. LABD entry $18.26. Stop $18.26
MRNA – Moderna cancer vaccine results could drive the company higher longer term. Despite the tough week for the stock, it is worth keeping on our watch list. Entry $142. Finding support… added small position ($144).
Small-Cap Index (IWM) downtrend accelerated to support at the December lows. The sector was down 2.8% for the week. Money flow turned negative. Entry TZA $29.20. Stop $34.30.
Transports (IYT) established a downtrend from the January highs. $214 is the support level. The sector was down 2.4% for the week.
The Dollar (UUP) The dollar was choppy all week on the back-and-forth talk about the Fed and interest rates. The dollar was down 0.5% for the week. Watching how it responds to the FOMC meeting next week.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.39 down from 3.69% last week. Big shift in the last two weeks as the fear of the bank fallout impacts investors’ risk tolerance. TLT was up 1.2% for the week. Entry TLT $102.90.
Crude oil (USO) trading range is broken as the price falls through the bottom end of the range. Economic speculation is impacting supply-demand globally. USO was down 12.3% for the week. The weekly chart shows the downtrend building in crude. $65 level is key for crude relative to the downside support. SCO entry $27. Stop $29.20.
Gold (GLD) The commodity bounced this week as the dollar waffled and fear rose. The metal was up 5.7% for the week. Held support at $168 and posted a solid reversal. Entry $169.50. UGL in play.
Put/Call ratio was 0.98 Friday… Turned neutral.
Questions to Ponder: Navigating Uncertainty
Retail sector (XRT) is lagging of late… but the White House says the economy is strong. Scanning the stocks shows WMT, TGT, JWN, KSS, M, etc are all slowing of late. Watching how this unfolds moving forward. Short side has played out well.
Adding to the speculation about the Fed doing the dirty work, JP Morgan is of the opinion with increased 0DTE options (zero days to expiration) trading daily it could send the market down as much as 25% intraday. Reuters posted an article on the impact on Monday. The daily dollar value is now up to $1 trillion per day. One thing is certain… the markets are never dull.
Friday: Stocks turn volatile on speculation around banks… bailout Thursday helped investor psyche for day… fear returned on Friday as banks pushed down 6%. The talk turns to the Fed FOMC meeting next week and what will transpire. Belief is 25-50 bps hike in rates. The key will be the Fed comments relative to the current liquidity crisis in the banking sector. Bailouts, inflation, and the economy will also be part of the FOMC meeting as well. The question is how much of the problem in banks is being caused by the Fed? Did the Fed put pressure on the larger banks to help bail out Republic? The line between the banks, the Treasury, and the Fed are very blurred. Remember if the Fed is providing liquidity it is taking more onto its balance sheet which is the opposite of what it wants to do. It is one big tangled mess. We have discussed the M2 (money supply) issue for the Fed and the need to withdraw it to curb inflation… did it go too fast? Were the banks ready for the withdrawal of liquidity? Do the banks have too much equity exposure? Have the Treasury, the Fed, and big banks provided enough liquidity currently to curb the issues in banks? Plenty of questions… too much speculation.
Fear is present as VIX rises to 25.5. It remains a balancing act between hope and fear. We look to the charts to provide the next direction near term… Seven of the eleven sectors have created short-term downtrends on the charts. The bounce on Thursday gave way to more selling on Friday. Follow the leaders, in both directions, and let it unfold. Technology held up well in the face of the current dilemma and showed solid leadership with the SOXX. Treasury bonds have risen on the flight to safety. If that eases, watch for the money to flow out of bonds… ie. downside plays. Eyes open. Emotions removed. Interest rates are at 3.39% falling 19 bps on the shift in sentiment around the banks… watching. It is a time for patience as the storylines unfold and the direction is determined. The money supply has turned lower showing more money on the sidelines (flight to safety in treasury bonds). 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.
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 trickling back into the headlines. Market correction headlines are growing in numbers. But, we have to remain focused on short-term trades until there is longer-term directional clarity. The charts are showing a short-term trend reversal from the upside. 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 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.