The markets spent two and a half days anticipating what Powell and company would say about the economy and future rate hikes… what they got was the promise of another cut prior to year-end as promised, they skipped hiking at this meeting, and no promise of lower rates in 2024. In essence, the Fed stated clearly the fight isn’t over against inflation. Interest rates were flat on the day relative to Fed comments… that is good news. Stocks on the other hand fell following Powell’s comments Large-cap stocks in the NASDAQ led the way. This raises more questions about the outlook and what action the Fed will take looking forward. The key comments were about the economy and how positive the Fed is… not sure what they see in the data that I and others don’t. Thus, we are setting the markets up for a cold dose of reality and it isn’t about the growth. Issues worthy of attention from the day… crude oil fell testing the current move higher. DG downgraded on a weaker consumer… opposite of what the Fed stated. We will see how markets respond on Thursday in follow-up to the selling on Wednesday.
The NASDAQ & SP500 indexes both traded lower in the last hour to close in negative territory. Both broke below near-term support offering short-side trading positions. Volume accelerated in the selling in the last two hours but remained below average overall. The sell-side bias picked up momentum but still has to follow through and break the previous lows before this gets ugly. The S&P 500 index closed down 0.9%. The NASDAQ was down 1.5%. The SOXX was down 1.6% and remains problematic short term. Small Caps (Russell 2000) were down 1%. The ten-year treasury yield closed at 4.35% down 1 bps. Crude (USO) was down 1.6%. (UGA) was down 2.1%. Natural gas (UNG) was down 3.4%. The dollar was up 0.1%. We are focused on managing the risk and seeing how investors respond to the current situation.
ONE Chart to Watch: QQQ – 1) Broke support $366.14. 2) Broke the uptrend from the August low. 3) Added short side trade with SQQQ entry $18.62. Stop $18.62.
Additional Charts to Watch:
SOXX – weakness accelerated Wednesday breaking support at the $473.23 level. The head and shoulder pattern breaks lower and looking for confirmation on Thursday. SOXS added $10.35. Stop $10.72.
Retail Stores – EMTY breaking higher as commercial real estate for retail stores struggles with plenty of distressed sales and bankruptcy issues in play. Short side entry was taken. Entry $15.25. Stop moved to $16.37 and let it unfold near term. Cup and handle pattern on the chart.
Energy – Tested support near $86 and bounced… entry $87.80. Stop $91.02. Hit Stop. Crude tested lower as well. UCO entry $30.72. Stop $35.44. Letting it work. Rolling top. Expect some testing but a return to the upside. Watching opportunities.
Stops Hit: XLE nice gain. IEO Solid gain.
Quote of the Day: “Economics is extremely useful as a form of employment for economists.” – John Kenneth Galbraith.
The S&P 500 index closed down 41 points to 4402 moving the index down 0.94% with below-average volume on the day. The index is holding support at 4338 currently. Lower high established and downside risk is elevated. Four of the eleven sectors closed higher on the day with REITs as the leader up 0.1%. The worst performer of the day was technology down 1.5%. The VIX index closed at 15.1 moving higher after reaction to the Fed comments. Break lower has our attention.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials gave up the majority of the bounce and is looking at the 200-day MA as support. The sector was down 0.1% for the week. No Positions. Moved below the 200 day MA.
XLU – Utilities back to the previous lows and bounced moving above the $64.11 level for entry at $64.15. Stop $64.15. The sector was up 2.8% for the week.
IYZ – Telecom reversed back into the trading range and tested the bottom of the range again. The sector was flat for the week. No Positions.
XLP – Consumer Staples broke below the June lows. Remains in a downtrend. The sector was down 1.4% for the week. No Positions. Back to the previous lows.
XLI – Industrials established low and bounced… trying to reverse but still not looking healthy. The sector was 0.5% for the week. No Positions. Broke support $102.40 next level to hold.
XLV – Healthcare broke support at $132.64 again after an attempt to move higher. The sector was up 0.1% for the week. No Positions. Need to hold $124.60.
XLE – Energy moving higher on higher oil prices on the production cuts from Russia and Saudi Arabia… Biden administration has painted themselves in a corner relative to the petroleum sector. The sector was down 0.1% for the week. Entry $81.95. Stop $91 (hit stop). Letting it unfold. Resistance at $92.94 in play. Topping pattern on the chart. Tested below $91 support.
XLK – Technology The sector has turned lower and broke support at the $169.50… negative short-term outlook. The sector was down 2.2% for the week. Moved below the 50-day MA. August lows support.
XLF – Financials Tested the $33.78 level of support and bounced. The sector was up 1.5% for the week. Bank downgrades not helping the sector. BAC testing support and a break lower would be negative for the sector overall.
XLY – Consumer Discretionary Bounced off support and watching the outcome. The sector was up 1.8% for the week. No Positions. Led downside on Monday and confirmed move lower on Tuesday. Retail chart moving lower as stocks show weakness.
IYR – REITs Bounced at support… flattened out as the outlook for commercial real estate isn’t great. The sector was up 0.3% for the week. No Positions. Retest of the August lows.
Summary: The index closed lower following the Fed comments. More hikes promised and no cuts in 2024… left investors in a bad mood. Rates were flat, energy and tech lower, and semiconductors added to the downside. Retail turning lower. The index moved to key support and remains in a negative bias. Let the charts unfold and take what is offered. SPY closed back below the $444 support with the August lows now in play. Remember two things; first, the trend is your friend, and second, don’t fight the Fed. The Fed proves once again they are in control.
(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 209 points to 13,469 as the index was down 1.53% for the day. Mega-caps led the selling. Support at 13,618 broken… 13,274 previous low is in play. Watching how stocks respond on Thursday to the move. SOXX was down 1.6% and IGV was down 0.9% for the day. Downside gained some momentum on the day. Needs to follow through.
NASDAQ 100 (QQQ) was down 1.44% for the day as mega caps traded below support at the $366 level. The sector had a negative bias for the day with 21 of the 100 stocks closing in positive territory for the day.
Semiconductors (SOXX) The sector moved below the $497 level and accelerated lower on Friday. The sector was down 2.6% for the week. SOXS entered. Broke support and looking for confirmation on the downside.
Software (IGV) The sector broke lower on the week $345 is the support level to hold. The sector was down 1.9% for the week. Exit hit at $360 with solid gain. Traded below the 50 day MA.
Biotech (IBB) The sector remains in a four-month trading range with a downside bias. The sector was down 0.2% for the week. No Positions. Back below $128.35 support. Broke lower.
Small-Cap Index (IWM) Tested back to the 200-day MA as support. The sector was down 0.2% for the week. No Position. IJH midcaps were equally as bad on the week. Negative day – head and shoulder pattern on the chart breaks support $182.45.
Transports (IYT) Broke below the $247.67 support and $238.80 is the next level to hold. The trend has reversed to negative short-term. The sector was up 0.3% for the week. No positions. Airlines warning about higher fuel prices… go figure. Broke lower
The Dollar (UUP) The dollar moved back above the June highs and continued higher. The dollar was up 0.3% for the week. More chatter about losing dollar status globally as BRIC nations establish gold-backed currency. No Positions. Some topping on the chart.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.32% up from 4.26% last week. TLT was down 1.5% for the week. Watching how the Fed manages the yield curve. Yields holding at the 4.3% mark for now… Fed wants to keep it there or lower. No Positions. FOMC meeting Wednesday.
Tuesday’s 20-year note action showed again a lack of interest from foreign buyers. Rationale… the increase in US debt by more than 1 trillion dollars over the last three months is worrisome. This issue is not going away and the ripple effect will be determined looking forward.
Crude oil (USO) Crude bounced off support and broke higher. USO was up 3.8% for the week. UCO entry $30.72. Stop $35.44. Letting it unfold. Moved back below the $90 level. Got the near-term test, and now we see how this unfolds short term.
Gold (GLD) The commodity remains in a downtrend from the June highs. The metal was up 0.1% for the week. Letting it unfold. Watching the 200-day MA. Bounced… watching the setup. SLV hit entry. If inflation rises as expected precious metals will look attractive.
Our longer-term view remains neutral as the upside trend from the October lows was challenged but remains in play. 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. With the trend higher it puts the broad indexes in an intermediate uptrend… of course, the last seven weeks’ the micro-trend has tested the longer-term trend and we need to manage stops accordingly on longer-term positions. The topping patterns broke short-term support to create micro-term downtrends that have found support for now. Looking for a renewal of the uptrend or a break lower offering short side positions… we must have the patience to let it unfold. The economic data is showing signs of fatigue relative to growth. Sector-driven activity is in play as seen in energy. 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.
Thursday: Watching the downside pressure with key support levels broken and the August lows in play. Mr. Powell’s comments relative to inflation, interest rates, and the economy rattle investor psyche. Thursday will be key. The question is will buyers step in to reverse the selling? Letting it play out as we look for directional confirmation on QQQ, SPY, SOXX, and IWM. We got a pivotal move on the downside Wednesday… needs to be confirmed on Thursday. Fed did as expected with no rate hike… surprised with the rosy economic outlook… took rate cuts off the table for 2024… markets reacted on the negative side… will it confirm the selling on Thursday?
What I am watching:
How does the market respond to Wednesday’s selling? Plenty to ponder and debate but the reality is in the charts. They broke support leaving a downside bias. If we bounce on Thursday what opportunities does it present? Banks (KBE), Crude (USO), Software (IGV)… all have decent charts. QQQ mega-caps hold part of the answer in how they perform on Thursday. SOXX key drag on the markets broke support. Watch for failure of the bounce if we get one early… bias remains on the downside.
Congress is debating the new spending bill/budget for the US government… September 30th ends the fiscal year and a new budget has to be passed or the nonessential government shuts down. I know that is all the government! They are flirting with big ramifications if they fail to come to a budget. Keeping our eyes on this issue as well.
IGV tested lower a concern relative to leadership. GBTC… upside favored. (Added $18.61.) Nice bounce Tuesday in GBTC.
BTFP hit another record and the size of the loans/gifts was up to $208 million for the week. More borrowing as banks can’t seem to make enough to pay down the underwater assets on their books. The FDIC was out again about the $550+ billion in unrealized losses in the banking system… If I were a betting man it is probably five times that number.
Inflation warnings are popping up again… on May 4th crude was $67. On August 1st crude was $81.96 which is a 22.1% increase in price… where does it go? Correct, into everything we basically touch. We own USO and UGA in order to keep pace with being able to afford gasoline. But it goes further and we should be looking at where to invest to keep pace with the next wave of inflation.
A new study of PFE’s and mRNA shots demonstrates recipients are more susceptible to other viruses and diseases as a result of the shots. Two years ago warnings were issued about VAIDS (Vaccine Acquired Immune Deficiencies) as doctors actually familiar with viral diseases predicted serious problems with the COVID-19 shots. Of course, both sides are fighting about what the study means and its validity, but the point is, that the issues were predicted based on the type of shots and now there is evidence of the same: Why not investigate further? It is all about health and lives, and if there are legitimate issues, instead of arguing, figure it out. This is why the medical industry’s credibility is swirling in the toilet after the response to the covid. To this point, watching how the biotech and healthcare stocks respond.
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.