Stocks rally to start the new month but pare gains into the last hour of trading. The S&P 500 index moved back above the 4200 level led by the large-cap stocks. Some of the laggard sectors, energy, metals, materials, and industrials led the day showing more breadth in the move. With Congress passing the debt ceiling bill most were positive it would clear the Senate as soon as Saturday and that set the tone of hope for more upside in the markets. It was notable that money moved back into the market in front of the jobs report due out Friday morning. The data from the jobs has been up and down making it a guessing game relative to the FOMC meeting ahead. Add in the Fed presidents running around talking about inflation concerns and future rate hikes. Economic data showed ADP employment report up 278k versus the 180k expected and 291k previous. Initial jobless claims were 232k versus 230k prior. Q1 Productivity revised to -2.1% versus -2.7% prior. Labor Costs revised to 4.2% versus 6.3% prior. Productivity fell way short of hours worked showing more weakness. ISM Manufacturing for May fell to 46.9 versus 47.1 prior. The data showed continued contraction in the activity with new orders and supplier deliveries down. Some parts of the economy show hope but overall it is a negative outlook in the coming months.
Overall markets were positive on the day… questions relative to the downside in XLV, XLI, XLB, XLP, IYR, XLE, IYZ, and XLU as they all show downtrends on the charts short term. XLI, XLB, and XLE posted a solid day broadening the upside influence on the index. XLF is sideways, and the two upsides are XLK and XLY. Not the kind of balanced market you want to see. Eight of the eleven sectors closed in positive territory on Thursday. The S&P 500 index closed up 1%. The NASDAQ was up 1.3% with SOXX up 1.7%. Small Caps (Russell 2000) were 1.1%. The ten-year treasury yield closed at 3.61% down 3 bps the day with TLT bouncing on the move. Crude (USO) was up 3.1% bouncing at support. (UGA) was down 0.2%. Natural gas (UNG) was down 4.1% turning lower again. The dollar was down 1.1% on the debt ceiling deal. We are focused on managing the risk and watching how this all unfolds.
ONE Chart to Watch: QQQ – 1) Held $347.55 moving higher on the day. 2) Short-term trend is UP… starting from the January low. 3) Accelerated above the trendline with verticle move. Watching the overextended move for test. 4) TQQQ entry $27.45. stop $34.50 (adjusted). target $32.28 (hit letting it run). Adjusted the stop and sold 1/2 of the position at $31.65. Letting it run for now.
Additional Charts to Watch: SPY – Moved above the resistance $415.20 and held. Trendline off the March lows is in play. IWM – remains in a trading range Modest bounce on Thursday. SOXX – gapped higher and is overextended. Tested lower $473.23 level and bounced. Manage the risk. Added SOXL @ $14.65. Stop $21.56 (Stop Hit locked in gains). USO – oversold… bounced off the lows… looking for opportunity.
Leadership – NASDAQ, NASDAQ 100, SP500, XLY, XLK, SOXX… QQQ – All resumed upside on Thursday. Manage the risk accordingly. Technology is the leading sector. Consumers (XLY) added to the uptrend. SOXX was higher but showing some fatigue.
Laggards – SP400, RUTX, USO, XLF, XLI, XLE… all made positive moves on Thursday. They have lagged overall. If the markets are to run higher we need to see them participate. IJH is testing lows and bounced. IWM can’t get out of the bottoming range. 7 of the 11 sectors in the S&P 500 index are supporting downtrends short term.
Interesting Charts: AMD (consolidation top from a move higher). AI (on move lower). GOOG (pennant consolidation pattern). GLD (bottom reversal… weaker dollar). USO (bounce off the lows… weaker dollar ahead).
ON TAP TODAY: 1) Jobs Report leads the day… it will offer some insight into the FOMC meeting. 2) Watch for the follow-through of the buying Thursday. 3) Watch the breadth… does it continue? A wider net gives more confidence to 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 Thursday… raised stop). SOXX reversal. Holding. TQQQ breakout. Holding. SRS Holding (big break higher Tuesday). SJB Holding (break higher Tuesday). TGT (descending triangle short setup with Jun Puts). Holding. Holding. LABU (break up from bottoming range). Holding. ARKK (bottom reversal). Holding. EMTY (breakout confirmation). Added 5/8. FNGU (breaking out). Added Tuesday 5/8. GOOG (Channel breakout – raised stop). Added Wednesday 5/9. MSFT (break from flag pattern). Added 5/18. MU (break above resistance). Added 5/19. CSCO (bottom reversal… good earnings). Added 5/19. NFLX (test to $350 and bounce?). Added 5/24.
Stops Hit: Sold TGT puts for mega gain. AI solid gain.
Quote of the Day: “Middle age is when your age starts to show around your middle.” – Bob Hope.
The S&P 500 index closed up 41 points to 4221 the index was up 0.99% with above-average volume on the day. The index moved back above the 4200 level. Managing the risk near term. Debt ceiling agreement headed to the Senate. Eight of the eleven sectors closed higher on the day with basic materials as the leader up 1.33%. The worst performer of the day was utilities down 0.7%. The VIX index closed at 15.5 moving lower showing hope and faith in growth. The uptrend from the October low remains in play.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials downtrend off the January highs testing the March lows. Moved below the 200-day MA The sector was down 3% for the week. Led the day higher.
XLU – Utilities trending lower from the December highs. Testing the March lows. The sector was down 2.3% for the week. Gave back Wednesday’s gains.
IYZ – Telecom downtrend from the February highs. No momentum to speak of and looking for a test of the March lows. The sector was down 0.5% for the week.
XLP – Consumer Staples accelerated lower during the week breaking below the 200 day MA. The sector was down 3.2% for the week.
XLI – Industrials triangle pattern of consolidation on the chart. Looking for a trend to break up or down. The sector was down 1.4% for the week. Bounced off the lows on Thursday.
XLV – Healthcare accelerated lower during the week. The sector was down 2.9% for the week. March lows are in play. XBI, IHE, IHF, IHI all turning down. Followed through on bounce off the lows… watching for entry.
XLE – Energy broke lower testing the March lows… attempted to bounce but not showing any momentum. The sector was down 1.1% for the week. The downtrend is in play from the November highs. Crude is down on global demand speculation relative to slowing economics. Bounced off the lows.
XLK – Technology The sector broke from the trading range clearing the $154.42 resistance and going vertical. The sector was up 4.6% for the week. Providing leadership for the broad index. SOXX moved higher for the week as well as IGV. Watch for a test of the verticle move.
XLF – Financials consolidation pattern near the current lows in play. The sector was down 1.5% for the week. The trend is down from the February highs. Banks are the key to the outlook. Up 1.1% Thursday.
XLY – Consumer Discretionary Broke higher from the consolidation pattern in play on the chart. Retail got a boost on reports that the consumer is spending. The sector was up 0.3% for the week. Back to the February highs.
IYR – REITs broke lower from the trading range and testing the March lows. The sector was down 1.3% for the week. The negative influence of interest rates and reports of vacancies in commercial rentals are rising. Own SRS on downside risk. Residential moving up… commercial moving down.
Summary: The index was higher on the day with more breadth in the move. Eight sectors closed higher on the day… watching the laggards and if they follow through on Friday. Remains a sector-driven market. XLK testing highs. XLY solid day. KRE bounced back to the $40 level resistance. XLE is challenged by outlook crude prices, both bounced on Thursday. XLV, XBI, XLI, IYR, IYZ, and XLU are all struggling to find support. XLP is lower again. The broad index remains in an uptrend from the October low but the breadth remains narrow as seen in only two sectors showing an uptrend on the chart. News is the primary driver up and down for the index. Taking what is offered near term and letting it all unfold. 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 165 points to 13,101 as the index was up 1.28% for the day. The index remains in the uptrend and extended technically. Mega-caps leading along with technology. SOXX bounced back on the day. IGV was flat as some profit taking showing in the stocks. Taking what is offered long and short.
NASDAQ 100 (QQQ) was up 1.16% with the mega caps solid on the day. The move is overextended and could see some testing and consolidation allowing other sectors to catch up. The sector had a positive bias with 71 of the 100 stocks closing in positive territory for the day. Added TQQQ entry $27.45 (raised stop $34.50) Sold 1/2 of the position.
Semiconductors (SOXX) broke above the previous highs on NVDA earnings. Tighten stop and let it run. Added SOXL $13.60. Stop $21.50 (Adjusted). The sector was up 10.6% for the week. Well ahead of itself manage the risk. Tested lower $473.23 level and bounced.
Software (IGV) Broke above the $318 resistance adding to the uptrend. Added IGV $291. Stop $318 (adjusted). The sector was up 3.3% for the week. Mega caps leading the sector. Solid upside.
Biotech (IBB) The sector broke below the $128.35 support. Could test the March lows. The sector was down 2.3% for the week. Hit stop on positions.
Small-Cap Index (IWM) lagging overall and remains in a trading range. The sector was up 0.02% for the week. Letting it unfold. Remain in the trading range.
Transports (IYT) Established a trading range and content for now. The sector was down 0.8% for the week. If the markets are to move higher overall they need transport to be positive.
The Dollar (UUP) The dollar remains volatile but produced an uptrend back to the March highs. What is on the horizon? If the dollar gets stronger watch the ripple effect… The dollar was up 1.1% for the week. Tanked on the debt-ceiling deal.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.81% up from 3.69% last week. Rates climbed 35 bps in the last two weeks. The FOMC meeting is on deck and rates are projected to move higher on the data. TLT was down 0.01% for the week. Down 3 bps on Thursday adding to the upside in TLT.
Crude oil (USO) Establishing a bottoming range. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. USO was up 1.4% for the week. Warning from the Saudi energy minister to speculators… pushed the agenda of another production cut. EIA showed a big drawdown in supply… OPEC+ meeting over the weekend. Bounced off the recent lows… watching for an opportunity… OIH puts if the bounce fails.
Gold (GLD) The commodity moved lower on the stronger dollar for the second week. letting this unfold with the trend higher from the October lows. The metal was down 1.5% for the week. Trying to bounce… weaker dollar ahead?
Questions to Ponder: Navigating Uncertainty
Stagflation – is defined as 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. Layoffs from early 2022 to current continue… Bankruptcy filings are not slowing as the hit the fastest pace since 2010. War – Costs… Ukrain/Russia endless war isn’t good for the US economy. Inflation is here 1970’s style. Markets are giving the Fed cover to hike again with the surge in technology stocks. Although the leadership is narrow. Things are not as good as they seem on the surface.
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: Money market inflows surged again… outflows remain from banks to money market funds… they gained $31.7 billion to a new record $5.42 trillion… 6th straight week of increasing flows… “sound and resilient”. The Fed is giving just enough money through the BTFP (Bank Term Funding Program) facility to keep from a collapse (lending rose to $97.6 billion from $91 billion last week). “Sound and resilient” are the words uttered by many… not even close.
Interest Rates: Fed Funds Rate currently stands at 5.25%… Jamie Diamon (JP Morgan) stated in a presentation he believes rates go to at least 6% and possibly 7% before inflation breaks. Think about what that means for the financial markets if that is true.
Volatility Index (VIX–X) Tested down to the 16 level the last month showing little anxiety from investors despite all the news surrounding the markets. Short-term belief is they are focused on the Fed over the debt ceiling issues. Still an underlying belief the Fed will cut rates prior to the end of the year… despite what all the Fed folks say. The CBOE has added a 1-day Volatility Index (VIX1D) you can now track the volatility daily versus the rolling 30-day in the regular VIX. Note Monday’s volatility actually dropped despite the debt-ceiling deal not getting done. Worth tracking and learning more.
Consumer credit card debt is on the rise. It totaled $986 billion in the first quarter. This is a negative sign for the economic picture as most consumer debt is attributed to monthly expenses rising due to inflation.
Data is not supporting a Fed pause in rates. PCE was higher, core PCE was higher, personal income higher, personal spending higher, durable goods higher, and capital investments higher… that was all from Friday… FOMC meeting is two weeks away and the pressure will be on the Fed to hike rates based on the data.
FINAL NOTES:
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. A look at the daily chart from the October lows validates exactly that premise with the trend higher overall but plenty of volatility along the way. We remain focused on short-term trades until there is longer-term directional clarity. Trading the volatility has performed better than holding through the cycle. Sector-driven activity is 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.
Thursday: Stocks traded higher on the day showing more breadth. Interest rates dropped again on the day pushing bonds higher… dollar tanks on the debt ceiling deal. Technology remains the leader along with consumer discretionary. We see the overall trend is still up from the October lows. Major indexes have moved higher on the mega-cap moves and AI. Manage the risk as news continues to drive the indexes higher. Showing extended moves in technology.
What I am watching on Friday: Reaction to the jobs report… Inflation worries and the Fed… extended moves in XLK, SOXX, IGV, QQQ… possible test ahead. Breadth expanding in the lagging sectors with consolidation in the leaders.
“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.