Small caps take a leadership role

Wednesday the large caps and tech stocks continued their respective pause in leadership. The Small and Midcap stocks continued to move higher adding to the break from consolidation patterns and showing some new leadership and breadth for the markets. Economic data showed that consumer credit continues to climb as it rose $13.5 billion bringing it to $1.244 trillion 13.1% above 2022 with an average interest rate of 20.9%… not going to end well. China’s exports fell more than expected showing the continued strain on their economy left by the closures from the pandemic. The S&P 500 index was lower and still attempting to break above the 4300 level. The NASDAQ was sluggish after breaking to new highs early and closed well off those levels on the day. EIA data showed a drawdown of 451k barrels versus last week’s build of 4.49 million barrels. Crude closed higher on the day as activity in the commodity has been challenged following the OPEC+ move to cut production by 1 million barrels per day. Industrials, energy, materials, and REITs led the day. Overall more consolidation and juggling with nothing really changing overall. Technology will be a sector of interest on Thursday.

The bottom bounce from the lows remains in play with some testing from the leaders. Small and Midcaps have picked up some slack leading the day with a solid continuation move. XLK and XLY both closed in negative territory as they test the move higher. XLE, XLI, XLB, and IYR led the upside. Seven of the eleven sectors closed in positive territory with the balance showing some distribution. The S&P 500 index closed down 0.4%. The NASDAQ was down 1.3% with SOXX down 0.3%. Small Caps (Russell 2000) were up 1.6%. The ten-year treasury yield closed at 3.78% up 9 bps on the day. Crude (USO) was up 1.4% showing a solid gain on the day. (UGA) was up 3.7%. Natural gas (UNG) was up 2.9% bouncing off the lows. The dollar was up 0.03% and holding steady. We are focused on managing the risk and letting stocks run for now.

ONE Chart to Watch: QQQ – 1) Held $347.55 showing distribution on Wednesday. 2) Short-term trend is UP… starting from the January low. 3) Accelerated above the trendline with verticle move. Watching the test/consolidation currently in play… a break of $347 could test to the $340 level. 4) TQQQ entry $27.45. stop $35.61 (stop hit nice gain). Watching how this unfolds and what opportunity is offered short term.

Additional Charts to Watch: SPY – Moved above the resistance $420.51 holding the move on Wednesday. Trendline off the March lows is in play. IWM – broke from the trading range breaking higher and offered an entry at $178.95 (stop $182.732 adjusted)… the follow through the last two days offers solid gain on position. SOXX – is overextended and consolidating. Tested lower to the $473.23 level and showing a flag pattern currently on the chart. Manage the risk. Watch for reentry. USO – oversold… bounced off the lows… confirmed bounce. OPEC+ still weighing on the commodity as investors look to the data, supply and demand, to decide… watching how it unfolds.

Leadership – NASDAQ, NASDAQ 100, SP500, XLY, XLK, SOXX… QQQ – All resumed upside last week with a current consolidation and test of the move. Watching how this unfolds and the next move. Manage the risk accordingly. Technology has been the leading sector. Consumers (XLY) added to the uptrend. SOXX is showing some fatigue.

Laggards – SP400, RUTX, USO, XLF, XLI, XLE… all made positive moves of late with a solid reversal on the charts. IJH, IWM, XLI, XLE, and XLF all made moves to confirm a bounce from their respective consolidation patterns. We stated these sectors needed to participate if the markets were to run higher and they have done that in the last three days. 7 of the 11 sectors in the S&P 500 index are supporting downtrends short term but five have now bounced off the lows… has my attention as we added a position IWM, IJH, XLI, and XLB.

Interesting Charts: DIA (break from consolidaiton). USO (bounce off the lows). TGT (bear flag).

ON TAP TODAY: 1) Crude oil… up or down setting up for a move. $75 is the key resistance point for oil. 2) Breakouts… KRE, OIH, IYR, DFEN. 3) Breakdown… IGV caught my attention.

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). LABU (break up from bottoming range). Holding. ARKK (bottom reversal). Holding. FNGU (breaking out). Added Tuesday 5/8. GOOG (Channel breakout – raised stop). Added Wednesday 5/9. Added to position 6/6. 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. AMD (consolidation top from a move higher). Added 6/6. AI (on test move lower). Added 6/6.

Stops Hit: None

Quote of the Day: “Everybody talks about the weather, but nobody does anything about it..” – Charles Dudley Warner.

The S&P 500 index closed down 16 points to 4267 the index was down 0.38% with above-average volume on the day. The index attempted to move above 4300 but faded to close negative for the day. Managing the risk of extended move near term. Seven of the eleven sectors closed higher on the day with energy as the leader up 2.6%. The worst performer of the day was technology down 1.5%. The VIX index closed at 13.9 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 bounced at support. Moved back above the 200-day MA The sector was up 3.5% for the week. Trend reversal in play.

XLU – Utilities bear flag on the chart as the sector continues to show weakness. The sector was up 0.8% for the week. Followed through on the bottom reversal.

IYZ – Telecom downtrend from the February highs and trading in a bottoming range. The sector was up 2.4% for the week.

XLP – Consumer Staples downtrend from the April highs. Bounce off the lows to end the week and watching for an upside follow-through. The sector was up 0.6% for the week.

XLI – Industrials broad trading range from the March lows. Looking for a trend to break up or down with a solid upside move to end the week. The sector was up 3.4% for the week. Broke higher from the trading range.

XLV – Healthcare accelerated lower to start the week. Bottom reversal in play $130.68 level to clear. The sector was up 2% for the week. XBI, IHE, IHF, and IHI all bounced. Tried to break higher through resistance… closed lower.

XLE – Energy bounced at the lows along with crude. The sector was up 1% for the week. The downtrend is in play from the November highs. Needs to clear $80.70 on the upside. Cleared resistance on upside move.

XLK – Technology The sector broke from the trading range clearing the $154.42 resistance and going vertical. Posted a flag pattern this week and watching how it unfolds. Could test before resuming upside. The sector was up 4.1% for the week. Providing leadership for the broad index. SOXX moved higher for the week as well as IGV. Tested lower on Wednesday.

XLF – Financials consolidation pattern near the current lows with a positive move to end the week. The sector was up 3% for the week. The trend is down from the February highs. Banks are the key to the outlook. Moved higher from consolidation looking for a follow-through.

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. One of the key leaders for the broad index. The sector was up 5.7% for the week. Moved above the January highs and gave up early gains on Wednesday.

IYR – REITs broke lower from the trading range and tested the March lows with a bottom reversal in play. The sector was up 4.4% 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. Moved higher off the lows.

Summary: The index was slightly lower on the day with some consolidation following the upside move. Seven sectors closed higher on the day… watching the laggards and if they follow through of bottom reversals. Remains a sector-driven market. XLK tested on the day. XLY was flat. KRE bounced through the resistance and needs to clear $44.75. XLE reversed directions. XLV, XBI, XLI, IYR, IYZ, and XLU found support and bounced off the lows. The broad index remains in an uptrend from the October low and the breadth is widening showing stronger money flow from investors. News has been the primary mover of stocks, but starting to see economic and financial data have an influence. 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.)


The NASDAQ index closed down 171 points to 13,104 as the index was down 1.29% for the day. The index remains in the uptrend and testing. Support is 12,977. Watching how the trend unfolds short term. SOXX was slightly negative on the day. IGV dropped 3% on the day as AI stocks see profit taking. Taking what is offered long and short.

NASDAQ 100 (QQQ) was down 1.7% with the mega caps consolidating and turning lower on the day. The move is overextended and the testing is in play and watching support at $347.55. The sector had a negative bias with 34 of the 100 stocks closing in positive territory for the day. Added TQQQ entry $27.45 (Hit stop $35.610) Locked in solid gain and watching next opportunity.

Semiconductors (SOXX) broke above the previous highs on NVDA earnings. Took nice profits on SOXL and watching how the flat pattern unfolds. The sector was up 5.2% for the week. Well ahead of itself manage the risk. Consolidating and watching how it unfolds.

Software (IGV) Broke above the $318 resistance adding to the uptrend. Added IGV $291. Stop $322.80 (adjusted). The sector was up 4.4% for the week. Mega caps leading the sector. Big move lower $317.95 level to hold.

Biotech (IBB) The sector moved back above the $128.35 level. Remains in a downtrend from the January highs. The sector was up 1.7% for the week.

Small-Cap Index (IWM) lagging overall and did manage to break from the trading range… looking for follow through to the move. The sector was up 0.02% for the week. Letting it unfold. Solid upside confirmation breaking out of the consolidation pattern.

Transports (IYT) Established a trading range and move to the top of the range. The sector was up 2.2% for the week. If the markets are to move higher overall they need transport to be positive. Breaking from the consolidation pattern on upside.

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 down 0.1% for the week. Consolidating at the highs.

Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.69% down from 3.81% last week. Rates fell on worries over the debt ceiling not passing. The FOMC meeting is on deck and rates are projected to move higher on the data. TLT was up 1.7% for the week. Jumped 9 bps on Wednesday… watching the direction near term with FOMC meeting next week.

Crude oil (USO) Remains in a short-term downtrend but it did manage to bounce off the lows. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. USO was up 0.1% 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. OPEC+ voluntary cuts up to 1 million barrels per day? Watching how it unfolds relative to demand.

Gold (GLD) The commodity moved sideways with the dollar indecisive on the week. letting this unfold with the trend higher from the October lows. The metal was up 0.5% for the week. Testing support.

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.

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.

H.8 Fed report showed some more wizardry numbers… seasonally adjusted bank deposits jumped $102 billion… interestingly enough without the adjustment, bank deposit flows fell $28 billion. Changing numbers on a sheet of paper doesn’t change reality.

Janet Yellen has been on the financial stations talking about more “consolidation” in the banking sector. Under normal circumstances we would view that as mergers and acquisitions… but, it seems like she is talking about takeover relative to the failure of more banks. Despite that outlook, banks have rallied more than 12% in the last week. Take what is offered but manage your risk accordingly.

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.

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, jobs higher, and capital investments higher… FOMC meeting is one week away and the pressure will be on the Fed to hike rates based on the data.


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. With the trend higher for more than six months it puts the broad indexes in intermediate uptrend… this is a positive overall for the broad markets. We remain focused on short-term trades based on the short-term volatility and until there is longer-term directional clarity we remain with our current approach. Trading the volatility has performed better than holding through the cycle. Sector-driven activity is in play short term with narrow leadership. The breadth did improve over the last few days, but we will need to see follow-through on the moves. 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.

Wednesday: The leaders showed more consolidation… the laggards led on the day. Some are playing catch-up with IWM and IJH both confirming breaks from their respective patterns. This is expected as investors digest what happened and what is on the horizon. Interest rates were up on the day as we move towards the FOMC meeting. Technology remains the leader along with consumer discretionary. Trading the reversals on sectors showing strength. We see the overall trend is still up from the October lows. Major indexes have moved higher on the mega-cap moves and AI. The laggards are starting to move higher broadening out the move. Manage the risk and see how this unfolds near term. Showing extended moves in technology.

What I am watching on Thursday: 1) More consolidation and juggling from the bounce… Inflation worries and the Fed… extended moves in XLK, SOXX, IGV, QQQ… more testing ahead. 2) Bounce off the lows in 5 of the eleven sectors all held and watching the activity relative to breadth, volume, and depth of a test. 3) Supply Chain worries from LA to Seattle as workers strike… not going to be pretty for inflation data. 4) Crypto attacks from the government COIN sued by the SEC and Binance sued as well. Is Crypto a security? The government has decided it wants to take it down by regulating it to death… take away its freedom. 5) Interest rates as we move towards the FOMC meeting. 6) Software (IGV) selling on Wednesday… test or more to come.

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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