Optimism springs eternal

The week starts with Yellen talking investors in off the ledge assuring investors that the banking system will have enough liquidity. Between Fed actions and Yellen’s bumbling talk on liquidity, the financial stocks led the markets higher on Tuesday. The big question is will the Treasury, White House, and Federal Reserve have what it takes to allow the system to correct or put a bandaid on it like they did in 2007. If you keep bailing out the addict without fixing the cause they will just return to being an addict. The over-leveraged situation in banks is insane. The reality versus what is being said isn’t even close. If all is well why did FRC why all the ups and downs? Why are they trying to raise capital? The shift of the FOMC meeting from being about inflation to how the Fed will work to secure liquidity in the banking system is now the focus. We will know at 2 pm on Wednesday what the Fed will say and do… speculation now stands at a 25 bps hike and blather about banks being safe. The end result is more questions than there are answers… that translates to uncertainty and we know how the market likes uncertainty. For Tuesday the answers were attempted unless you read the transcripts of what was said… NOTHING! Yellen couldn’t answer a question with an intelligible sentence. The markets did manage to add to the move on Monday… positive. The small caps were up for the second day… positive. Investors need to be cautious and patient. Economic data showed existing home sales higher for the first time in 11 months. Lower rates and lower prices helped. What happens with rates higher and credit hard to get… banking issues remember? Don’t expect this to repeat. 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 market closed higher on Tuesday, but the rumblings are still in the headlines and on the sidelines. The volatility index closed at 21.3 down 11.5% from Monday… another positive. Money flow was up on the day… positive. 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 1.3% with some intraday volatility. The NASDAQ was up 1.5%. Small Caps (Russell 2000) were up 1.8% after a positive Monday. Wednesday will be a key day for stocks as the Fed FOMC meeting will over insight into what the Fed believes currently. The ten-year treasury yield closed at 3.59% up 9 bps on the day. Money flow into bonds has risen on a flight to safety. Watching how this storyline unfolds. Crude (USO) was up 3.4% adding to the bounce… $65.70 is the key level of support for crude. Gasoline (UGA) was up 0.3%. Natural gas (UNG) was up 3.2% volatility remains in the commodity. The dollar was down 0.04% breaking lower as we start the FOMC meeting. Overall crazy 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: SPY, QQQ, IWM, SOXX – response to the FOMC meeting.

Tuesday: KBE April P $38 @ $2 or allow any bounce to play out and then buy puts at the money. Bounced early… watching with the FOMC in play on Wednesday.

Previous Charts of Interest Still in Play: LSCC (testing uptrend). Added uptrend in play. SOXX (upside follow-through) Added. AAPL (reversal confirmed) Added to the position. GBTC (trading range breakout). Added. XRT (Apr 06 65 put). Added. Thursday sold half. Added. AMZN (bottom reversal) Added. GDX (bottom reversal) Added Friday. PG – trading range break as part of the consumer staples money rotation. Added Monday.

Stops Hit: TSLA short, TMF second half, TZA

Quote of the Day: “Most conversations are simply monologues delivered in the presence of witnesses.” – Margaret Millar

The S&P 500 index closed up 51.3 points to 4002 the index was up 1.3% with the above-average volume on the day. Moved back above the 3930 level and watching 3804 support. Eight of the eleven sectors closed higher on the day with energy as the leader up 3.4%. The worst performer of the day was utilities down 2%. The VIX index closed at 21.3 as anxiety dipped on the financials moving higher. Watching how the index responds to the FOMC news.

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. Led the day back above $76.25.

XLU – Utilities broke higher from the down-trending channel… $68 is resistance. The sector was up 3.9% for the week. Led the downside as rates bounce for the second day.

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. Moved back above $22.35.

XLP – Consumer Staples downtrend from the December highs remains in play. The sector was up 1.4% for the week. Letting it unfold. Tried to break higher…

XLI – Industrials Sideways trend broke lower and hit the 200 DMA as support. The sector was down 2.3% for the week. Bounced off the lows.

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. Closed above the $127.50 level.

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. Led the upside bounce.

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. Cleared $143.45…

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. Soild day on reassurance that everything is fine… ????

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? Solid upside on Tuesday.

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 Monday, reassurances helped on Tuesday… the FOMC on Wednesday… Money flow is of interest as some risk in small caps showed up… QQQ was higher again… crude bounced… treasury bonds dipped… still plenty of issues to be faced. 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 which held and move to 4002 on Tuesday. Seven of the sectors have established a short-term downtrend… the other four are not in great shape… watching the two-day bounce off the lows for follow-through and sentiment. 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.)


The NASDAQ index closed up 184.5 points to 11,860 as the index was up 1.58% for the day. The 10,941 support held and the index moved back above the 11,474 previous support. Money flow remains below 50 but improved the last two days. Technology and semiconductors are the keys… SOXX held up well in the face of the selling and bounced nicely to lead tech. Watching how this unfolds inching forward.

NASDAQ 100 (QQQ) was up 1.43% with the mega caps moving back above $303 previous support. The sector had a positive bias with 75 of the 100 stocks closing in positive territory for the day. Watching how sentiment plays out near term. Volume lagged last two days of buying.

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. Solid but lagging with resistance at $432.27.

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. Solid upside helping the tech sector overall.

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. Solid upside last two days are positive.

Transports (IYT) established a downtrend from the January highs. $214 is the support level. The sector was down 2.4% for the week. Bounced off the lows.

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. Dipped lower heading into the FOMC meeting.

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. Up to 3.59% on Tuesday… up 18 bps last two days.

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. Bounced for second day off the lows.

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. Selling on Tuesday as some fear subsided… watching.

Put/Call ratio was 1.03 Tuesday… puts were higher on the day.

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. The short side has played out well. Failed bounce on Tuesday.

Food for thought: The failure of Silicon Valley Bank (SVB) has been blamed on many things in the last few weeks. One was that President Trump signed a deregulation bill in 2018 that reduced oversight on small and mid-sized banks. True or not, one issue, as many know, is never the true cause of any failure in life. It is generally the culmination of events and actions that result in failure. We can dig in and put the pieces together as we review the decision, actions, and inactions taken by the bank… Thus what FDIC and the Treasury are believed to be doing. The public (you and I) will never really know those findings in their entirety, only what they want us to know. So let’s start with the underlying assets of banks… securities being stocks, bonds, and cash, along with options, swaps, and derivatives on those securities. When times are good, all is well. When the underlying markets start to shift, the banks have to make decisions relative to the underlying risk. Thus, the decisions made relative to the beliefs they hold about the future. If they are wrong they lose money… if they are right they make money or at least hedge the risk of the underlying assets. When measuring one variable of risk the odds are simple. However, when more than one variable is introduced the odds change based on how you address them individually and collectively.

In the case of SVB, they already had higher-risk loans to start-up companies… thus the risk of their loan portfolio was higher than the average bank. They also held equities in their portfolio… From December 2021 to February 2022 the S&P 500 index declined 18.5%… those assets in their portfolio would be in a negative situation assuming no options, swaps, or derivatives on them… if those existed the risk would be even higher based on the timeframe held and the accuracy of those hedges. During that same period of time interest rates rose 208% on the 10-year treasury bond. If they owned bonds in their portfolio (extremely likely) the value of those bonds based on the 10-year treasury bond fell by at least 14.5%. Those assets would be in a negative situation assuming no options, swaps, or derivatives on them… if they existed the risk would higher depending on the result of the decisions taken. Rates moving higher puts more pressure on the bank’s underlying treasury bonds and cash equivalents along with the use of the Fed window for balancing deposits. Rising rates add pressure to meet the current rate environment with lower-yielding assets already held in the portfolio. It is a slippery slope for banks in this environment.

Just putting the simple explanation above together with the events that have transpired over the last 15 months you can see the increased risk brought on by inflation and higher interest rates. If incorrect decisions were made… the pressure on the underlying assets would rise. In an effort to ease this stress SVB set out to raise more money/assets to create more liquidity to weather the storm. SVB went the public route to raise capital through a stock and debt (bond) raise. When that news came out depositors started withdrawing money making liquidity matters worse. Thus, the snowball rolling downhill effect on deposits and liquidity. Remember where we started… failure is a result of the culmination of events and actions taken. Being wrong wasn’t the failure of SVB… too much risk and inaccurate decisions were. We as investors need to apply this same “stress” test to our own portfolio. Don’t wait until the course is irreversible to make changes to the level of risk you take with your money. Risk management is the difference between losing some money versus losing it all. The one thing in all of this that makes me crazy… talking heads stating everything will be okay, don’t panic, we are in this for the long term… we are in this to protect our money not how long we are invested. It is about risk management nothing more and nothing less.


Tuesday: Stocks remain volatile on speculation around banks… bailouts and buyouts over the weekend. Stocks are up the last two days heading into the FOMC meeting. My belief/dream is a 25-50 bps hike in rates. 0 bps markets bounce… 25 bps markets are happy… 50 bps they sell off. The key will be the Fed’s willingness to deal with things with a longer-term view versus short-term ease of pain. 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… translated derivatives? 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 despite the VIX dipping on Tuesday. We look to the FOMC to provide the next direction near term… Seven of the eleven sectors have created short-term downtrends on the charts, but they have managed to bounce over the last two days. The bounce on Monday followed through on Tuesday… 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 yields have risen the last two days with the rally. If that eases, watch for the money to flow out of bonds… ie. downside plays. Eyes open. Emotions removed. Interest rates are at 3.58% rising 18 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 higher in the last two days… patience. 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.

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