The markets closed higher as Biden and McCarthy said there would be no default on US debt. There isn’t a deal yet but we are not going to default according to the two sides. Thus the Republicans throw in the towel and move on to continue rambling about how they are fiscal conservatives. The smoke and mirrors used to get to this conclusion are yet to be seen, but you can bet it isn’t going to be good for the taxpayers. The result was a continuation of the upside move for the NASDAQ. The S&P 500 moved through resistance. The SOXX continued the move higher from Monday. Small caps reversed off the lows. And as they say in the movies, everyone lived happily ever after. Banks rallied as Western Alliance said deposits have increased. That led to buying in the sector which triggered some short covering as KRE jumped on the day. All said it was a fairytale ending and all is well. The economic data showed Housing Starts for April up 2.2% versus -4.5% previous. Permits -1.5% versus -3% previous. The sector isn’t slowing to the degree many believed it would due to higher interest rates. Mega cap stocks looked good on the day accelerating above the trend line and stretching to the highs of the Bollinger Bands. The volume however remained below average. We will take what is offered and manage the risk that is.
The S&P 500 moved back to the top of the current range. QQQ accelerated in the uptrend. The NASDAQ composite index equally accelerated higher. Breadth finally increased taking growth stocks higher on the day. SOXX resumed leadership on a solid continuation move higher. Volume was below average on the day with nine of the eleven sectors closed in positive territory. The S&P 500 index closed up 1.2%. The NASDAQ was up 1.2% with SOXX up 2.4%. Small Caps (Russell 2000) were up 2.2% regaining Monday’s momentum. The ten-year treasury yield closed at 3.58% up 4 bps on the day. Crude (USO) was up 3.3%… pushing above $72 per barrel. Gasoline (UGA) was up 3.8%. Natural gas (UNG) was up 0.5% still showing a positive reversal on the chart. The dollar was up 0.2% still struggling overall. We are focused on managing the risk and watching how this all unfolds.
ONE Chart to Watch: QQQ – 1) Continued the move higher breaking above $329.77 resistance and testing the August highs. 2) Short-term trend is UP… starting from the January low. 3) Accelerated above the trendline showing an extended move short term. 4) Note the declining trend in volume since the March lows… that has not changed during the entire rally. 5) Breakout confirmed and trend established for now. $31.23 is the next resistance. 6) TQQQ entry $27.45. stop $28.50. target $32.28. Adjusted the stop and letting it play out.
Additional Charts to Watch: SPY – reversed back above support at $407.19. Followed through to break higher… and needs to clear the January highs. IWM – bounced again… favoring the downside technically, but watching the move from Wednesday… SOXX – reversed the downtrend on Monday and solid follow-through on Wednesday. Added SOXL @ $14.65. USO – oversold… gap bounces off the lows offered entry on Wednesday at $63.60. Stop $62.50.
Leadership – NASDAQ, NASDAQ 100, SP500, XLY, XLK… QQQ breaks higher along with the NASDAQ. SPY finds upside momentum. Consumer and technology leading the sectors. Volume was below average on the moves… finally saw some breadth in the move Wednesday, but still plenty of work to be done. If the debt ceiling issue is off the table the upside has a chance of extending.
Laggards – SOXX, SP400, RUTX, USO, XLF… All bounced on Wednesday after growth stocks have lagged overall. If the markets are to run higher we need to see them participate. SOXX posted a positive move Wednesday to continue the bottom reversal. IWM can’t get out of the bottoming range but did move to the upper end of the range on Wednesday. IJH bounced off the recent lows. XLE reversed the break lower but remains in a downtrend. KBE bounced on positive deposit data.
ON TAP THIS WEEK: 1) Empire State Manufacturing Expected -5. (absolutely ugly report at -31.8…) Philly Fed Factory Survey -20 expected. 2) Retail Sales +0.8% expected. (0.4% versus -0.7% previous). 3) Industrial Production 0.1% expected. Capacity Utilization 79.7% expected. 4) Housing Starts 1.4 million expected. (up 2.2% versus -4.5% previous). Building Permits 1.43 million expected. (-1.5% versus -3% previous). Existing Home Sales 4.26 million are expected. 5) US leading economic indicators -0.6% expected. 6) Fed presidents are out all week beating the drum against inflation. (Bostic stated he didn’t see a rate cut prior to year end). 7) Resistance needs to be broken if the uptrend is to continue.
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). MCD breakout. Holding. TSLS. Holding. SPXL breakout. Holding. 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. DLTR (Consolidation breakout). Added on Friday 5/12. CL (Flag pattern). Added Friday 5/12. MSFT (break from flag pattern). Added 5/18. ON (breakthrough resistance. $83). Added 5/18. AI (break higher… $23 level to hold). Added 5/18.
Stops Hit: UGL (even), BNKD (small gain)
Quote of the Day: “The avoidance of taxes is the only intellectual pursuit that still carries any reward.” – John Maynard Keynes.
The S&P 500 index closed down 49 points to 4160 the index was up 1.19% with below-average volume on the day. The index held above the 4086 support. 4173 is the next key resistance for the index. Debt ceiling news/rumors gave the catalyst to the upside. Nine of the eleven sectors closed higher on the day with consumer discretionary as the leader up 2.1%. The worst performer of the day was utilities down 0.3%. The VIX index closed at 16.8 reversing lower on the day. The uptrend from the October low remains in play. Plenty to watch as this all unfolds.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials downtrend off the January highs with some volatility along the way. Flirting with the 200-day MA as support. The sector was down 2% for the week. Back below the 200-day MA.
XLU – Utilities trending lower from the December highs. 200-day MA is resistance on the chart. $68 is the support. The sector was flat for the week. Entry $68. Stop $67.80 HIT STOP. Third day lower breaking support.
IYZ – Telecom downtrend from the February highs. No momentum to speak of and looking for a break lower. The sector was down 1.6% for the week. Bear flag on chart.
XLP – Consumer Staples upside trend with flag pattern last few weeks showing a pause. The sector was down 0.1% for the week. The trend is up from the March lows. Rolling top. Testing support.
XLI – Industrials triangle pattern of consolidation on the chart. Looking for a trend to break up or down. The sector was down 1% for the week.
XLV – Healthcare drifting lower with support at $130.68. Topping pattern on the chart. The sector was down 1% for the week. XBI solid upside trend. Testing support?
XLE – Energy broke the $82.74 support… attempted to bounce but resumed the downside. The sector was down 2.1% for the week. The downtrend is in play from the November highs. Crude is down on global demand speculation relative to slowing economics. Short-side trade entry hit $82.70 (XLE). ERY entry $30.50. Stop $33.50. Broke lower and bounced.
XLK – Technology The sector remains in a trading range. Closed at the top of the range… need to clear $151.53. The sector was down 0.2% for the week. Need some leadership from the sector if markets are going higher. SOXX lagging. GOOG running on AI news. Cleared the $151.53 resistance… $154.42 next.
XLF – Financials broke below the $32.36 level… banks are still a challenge for the sector overall. The sector was down 1.3% for the week. The trend is down from the February highs. KBE & KRE up on deposit increases… watching the propaganda.
XLY – Consumer Discretionary consolidation pattern in play on the chart with an attempted break higher during the week. Retail got a boost on reports that the consumer is spending. They learned from the government. The sector was up 0.4% for the week. Broke from the trading range… need to follow through. Cleared $147.11 resistance added to upside.
IYR – REITs remain in a trading range within the downtrend from the February highs. The sector was down 1.1% for the week. The negative influence of interest rates and reports of vacancies in commercial rents are rising. Own SRS on downside risk. Residential moving up… commercial moving down. Broke support at $82.96… bounced and watching.
Summary: The index was higher on the day. It is moving higher in the uptrend. Breadth expanded giving some hope to the current move. Remains a sector-driven market. XLK and XLY leading the move higher. KBE bounced on deposit-increasing news. XLE is still on the short side of the chart but it did bounce on Wednesday. The index remains in an uptrend from the October low. 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 down 157 points to 12,500 as the index was up 1.28% for the day. The index moved above resistance and followed through in the uptrend. Mega-caps leading along with technology. SOXX is starting to contribute. 12,246 is the level of support to hold.
NASDAQ 100 (QQQ) was up 1.21% with the mega caps pushing to new highs. Moved above the $329.77 resistance and watching how it unfolds near term. The support is $320.92. The sector had a positive bias with 79 of the 100 stocks closing in positive territory for the day. Added TQQQ entry $27.45 (raised stop $28.50).
Semiconductors (SOXX) Tested the $400 level of support and struggling to find any upside momentum. Still trading below the 50-day MA. A downtrend is in play from the March highs. Added SOXL $13.60. Stop $13.10. The sector was down 1% for the week. Watching how it plays out next week. Resumed the bottom reversal with $32.27 next level to clear… Watching for the follow-through.
Software (IGV) Tested to the $289 support level and bounced. Added IGV $291. Stop $291 (adjusted). The sector was up 1.3% for the week. Mega caps leading the sector. Accelerated to new highs leading the technology sector.
Biotech (IBB) The sector tested back to the $128.35 level and consolidating. The sector was down 1.3% for the week. Large caps are outperforming small and mid-cap stocks. Added IBB $129.50. Added XBI $82.80. Consolidation pattern in a downtrend. Retesting the $128.35 support and bounced.
Small-Cap Index (IWM) lagging overall as investors move away from growth to safety. Established a bottoming range. The sector was down 1% for the week. Letting it unfold. Bounced again? Watching for an upside follow through if the trend is to reverse.
Transports (IYT) negative earnings created a big test lower to support at the $213 level. Established a trading range. The sector was down 1.6% for the week. If the markets are to move higher overall they need transport to be positive. Downside momentum building again… bounced on Wednesday.
The Dollar (UUP) The dollar remains volatile but did break higher to end the week. What is on the horizon? If the dollar gets stronger watch the ripple effect… but, needs to follow through first. The dollar was up 1.6% for the week. Bounced again?
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.46% up from 3.44% last week. Mixed reactions all week reacting to the news. Consolidation range for yields & TLT. TLT was down 0.6% for the week. 3.58% up 4 basis points. TLT was lower on the day.
Crude oil (USO) Bounced and then sold lower… the news states China and US are consuming less on weaker economic data. The pressure will be on the upside longer term… watching how the short term unfolds and what opportunities are offered. USO was down 1.5% for the week. Bounced and looking for direction…
Gold (GLD) The commodity is consolidating near the highs and testing this week. The stronger dollar is weighing on the metal… for now. The metal was down 0.3% for the week. Watching for the upside to resume. Big downside with the dollar moving higher.
Questions to Ponder: Navigating Uncertainty
Stagflation – 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.
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: banks borrowed $8 billion last week down from the $32.6 billion the previous week. 9% decline reported by regional banks in deposits… outflows remain… “sound and resilient”. The Fed is giving just enough money through the BTFP (Bank Term Funding Program) facility to keep from a collapse ($305.4 billion, up $8 billion on the week) but not enough to eliminate the pain. “Sound and resilient” are the words uttered by many… not even close.
Week ending 5/3 – Money Market Funds showed an $18.3 billion increase in deposits. Bank deposits fell $13.8 billion. Doesn’t include the PACW announcement of a 10% decline in deposits… “sound & resilient”!
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.
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. We have to remain focused on short-term trades until there is longer-term directional clarity. 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.
Wednesday: Stocks were higher on below-average volume. NASDAQ mega-caps closed positive with a solid upside move. Banks (KBE) bounced on deposit news showing some short covering. Energy (XLE) bounced but was still in a downtrend. The balance of the sectors showed some signs of life. The question is if the debt ceiling deal is done… how does the market respond moving forward? Nine of the eleven sectors closed higher on the day with below-average volume. We see the overall trend is still up from the October lows. NASDAQ is leading, S&P 500 is playing catch up, and Small caps and Dow bounced but still lagging. Got some breadth in the move higher to gain confidence in the move but plenty of work to be done. Taking what is offered and managing the risk that is.
What I am watching on Thursday: Large-cap biotech XBI upside resumption with a test to the previous lows… KBE/KRE follow through on bounce? A run higher in GOOG… SOXX follow through… broader leadership coming? This market has to be evaluated sector by sector to define the leadership near term. Positive setups are in place watching the Wednesday bounce… real of news driven. Upside: QQQ, SOXX. Downside: FAZ, SRS, ERY, TZA.
“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.