The markets were modestly on the negative side on Tuesday as talks about inflation and the debt ceiling again dominated the headlines. Some downside pattern setups on the charts as well as some upside setups but neither made a move. There is an underlying belief the Fed will not let the markets fail… that comes from the last 12-plus years of the Fed providing liquidity to keep the markets going. But, there wasn’t inflation and that will be the difference looking forward. Ultimately the ‘markets’ will understand the Fed has to break inflation to keep the system running. Much like providing liquidity kept the system running. The White House meeting with Congressional leaders concluded after the markets closed and there was little hope for any changes near term. They will meet again on Friday, but the longer this is in the headlines without resolve the more angst it will cause investors. The Fed presidents were out parroting their mantra on being tough on inflation speeches but the reality is supply remains strained at best and too much money remains in the system, and demand is higher than supply… simple economics of supply and demand. Until demand declines by excess supply inflation will remain an issue for the US economy. Too many half-truths running around in the headlines for clarity among investors. Thus, we focus on what we see short term and allow the storylines to unfold.
The S&P 500 held above the 4086 support and closed lower on the day. QQQ equally held above the $320.92 level and was down on the day. The NASDAQ composite index closed below the resistance of 12,256. It was an interesting day that drifted lower with no conviction on either side. Volume was well below average on the day showing a lack of interest ahead of the CPI data. Only two of the eleven sectors closed in positive territory. The S&P 500 index closed down 0.4%. The NASDAQ was down 0.6% with SOXX down 1.7%. Small Caps (Russell 2000) were down 0.3% afer making it into positive territory earlier in the day. The ten-year treasury yield closed at 3.52% flat on the day. Crude (USO) was up 0.9%… watching how it plays out against the background of economic data. Gasoline (UGA) was up 1.1%. Natural gas (UNG) was up 1.5% on a solid bounce. The dollar was up 0.3% and struggling globally. We are focused on managing the risk and watching how this all unfolds.
ONE Chart to Watch: QQQ – 1) Held the move back above the $320.92 resistance and looking for follow-through on the upside break. 2) Short-term trend is UP… starting from the January low. 3) Uptrend line held along with the $312.78 support. 4) Solid bounce higher with lackluster follow-through. 5) Note the declining trend in volume since the March lows… money supply same thing, not a confidence builder for the uptrend. 6) Friday move has to follow through… 7) TQQQ entry $27.45. stop $27.
Additional Charts to Watch: SPY – reversed back above support at $407.19. Needs to follow through. IWM – retested the previous lows and bounced with no follow-through yet… favoring the downside technically. SOXX – retesting last week’s lows with a downtrend from the March highs. USO – oversold… gap bounces off the lows. Watching for entry if it holds.
Leadership – NASDAQ, NASDAQ 100, SP500, DBP, Dow… All moving sideways currently. They need to follow through upside if the trend is to continue for the leaders.
Laggards – SOXX, SP400, RUTX, USO, XLF… struggling despite the bounce at the end of the week. The growth stocks are still not showing the needed leadership if the markets are to run higher. Needs to improve if the overall trend is to develop. Energy making a solid bounce attempt off the current lows.
Interesting Charts: BNKD (running higher… look for test and entry near $15.25) got the test on Friday… watching Wednesday. TJX (trading channel). GOOG (Channel breakout). DLTR (Consolidation breakout). YINN (bottom reversal).
ON TAP THIS WEEK: 1) Debt Ceiling is one of the top issues as White House holds meeting… June 1st is the date Yellen gave for being broke. 2) CPI & PPI inflation data… not expecting big changes but any surprises will rock investor psyche. 3) Earnings from DIS, ABNB, RIVN, OXY… each have implications about the economic picture. 4) Consumer Sentiment will end the week. 5) Markets are at key resistance levels. We have been here twice before, do they break higher and continue the uptrend?
Previous Charts of Interest – Still in Play: AAPL (reversal confirmed). Earnings 5/4 after-hours beat estimates. Holding. AMZN (bottom reversal) Holding. MCD breakout. Holding. WMT ‘V’ bottom breakout. Holding. TSLS. Holding. SPXL breakout. Holding. SOXX reversal. Holding. TQQQ breakout. Holding. SRS Holding. SJB Holding. NUGT (cup & handle) Holding. TGT (descending triangle short setup with Jun Puts). Holding. UGL (breaking higher from range). Holding. LABU (break up from bottoming range). Holding. ARKK (bottom reversal). Holding. SIL (bottom reversal). Holding. BTAI (cup & handle breakout). Added Monday. EMTY (breakout confirmation). Added Tuesday. FNGU (breaking out). Added Tuesday.
Stops Hit: PG great upside made.
Quote of the Day: “If evolution really works, how come mothers only have two hands?” – Milton Berle.
The S&P 500 index closed down 19 points to 4119 the index was down 0.46% with below-average volume on the day. The index held above the 4086 support. 4173 is the next key resistance for the index. All eyes are on inflation data… debt ceiling… and more. Two of the eleven sectors closed higher on the day with industrials as the leader up 0.2%. The worst performer of the day was telecom down 1.1%. The VIX index closed at 17.7 adding some anxiety on the day. The uptrend from the October low remains in play. Plenty to watch this week as the data unfolds.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials hit resistance at $81.75 and tested lower holding above the 200-day MA. The downtrend from the January highs remains in play. The sector was down 1.2% for the week. Moved down to the 200-day MA.
XLU – Utilities trading range developing on the chart with resistance at the 200-day MA. The sector was up 0.1% for the week. Entry $68. The downtrend is in play from the January highs.
IYZ – Telecom traded down to $21.63 support and watching again. The sector was down 4.2% for the week. The downtrend is in play from the January highs. Retesting the lows on Tuesday.
XLP – Consumer Staples upside trend continues as money continues to move toward the “safe” haven of defensive stocks. The sector was down 0.2% for the week. The trend is up from the March lows.
XLI – Industrials moving sideways with some volatility showing on the chart. The sector was down 0.3% for the week. Consolidation pattern.
XLV – Healthcare made a move through two resistance points. Topping pattern on the chart. The sector was down 0.1% for the week.
XLE – Energy broke the $82.74 support. The sector was down 5.7% for the week. The downtrend is in play from the November highs. Accelerated lower with crude on the week. Short-side trade entry hit $82.70 ERY.
XLK – Technology The sector remains in a trading range. Closed at the top of the range… need to clear $151.53. The sector was up 0.3% for the week. Need some leadership from the sector if markets are going higher.
XLF – Financials broke below the $32.36 level and bounced back… banks are still a challenge for the sector overall. The sector was down 2.5% for the week. The trend is down from the February highs.
XLY – Consumer Discretionary consolidation pattern in play on the chart. Retail is struggling as consumer debt rises to record levels. They learned from the government. The sector was down 0.4% for the week.
IYR – REITs remain in a trading range within the downtrend from the February highs. The sector was down 0.3% for the week. The negative influence of interest rates and reports of vacancies in commercial rents are rising. Tracking SRS for an opportunity.
Summary: The index was lower on the day but held the move back above the 4086 level… all is well… right? The uptrend from the October low remains intact with three higher lows keeping the trend in place. Earnings pushed the index up and the Fed is getting the blame for the move lower… however, we have not reversed the trend… yet. CPI is on tap before the opening on Wednesday and will likely not offer much in terms of change… thus the reaction will be purely speculative in nature. 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 77 points to 12,179 as the index was down 0.63% for the day. The index moved back to resistance and looking for a follow-through if the uptrend is to resume. 11,800 is the level of support to hold. Technology is the key… SOXX still lagging.
NASDAQ 100 (QQQ) was down 0.6 3% with the mega caps barely holding the break higher. Held above the $320.92 resistance again… needs to follow through if the upside is to resume. The support is $312.78 and watching as we break from the trading range. The sector had a negative bias with 36 of the 100 stocks closing in positive territory for the day. Added TQQQ entry $27.45.
Semiconductors (SOXX) Tested the $400 level of support and bounced with an upside on Friday. Still trading below the 50-day MA. Added SOXL $13.60. The sector was up 0.5% for the week. Watching how it plays out next week. Dropped lower on Tuesday holding the downside trend from the March highs.
Software (IGV) Tested to the $289 support level and bounced Friday. Added IGV $291. Stop $291 (adjusted). The sector was down 1.1% for the week. Mega caps leading the sector. Reversal off the lows remains in play.
Biotech (IBB) The sector tested back to the $128.35 level and bounced. The sector was down 2.2% for the week. Added IBB $129.50. Consolidation pattern in a downtrend.
Small-Cap Index (IWM) lagging overall as investors move away from growth to safety. Established a bottoming range. The sector was down 0.3% for the week. Letting it unfold.
Transports (IYT) negative earnings created a big test lower to support at the $213 level. Established a trading range. The sector was up 0.5% for the week. If the markets are to move higher overall they need transport to be positive.
The Dollar (UUP) The dollar remains volatile as more countries are willing to trade outside the dollar. Held within the range for the week… watching how it unfolds. The dollar was down 0.3% for the week.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.44% down from 3.45% last week. Mixed reactions all week reacting to the news. TLT was down 1.5% for the week. 3.52% on worries about the debt ceiling.
Crude oil (USO) Tough week for oil as 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. Nice bounce on Friday to end the week. USO was down 6.6% for the week. Upside continued to start the week.
Gold (GLD) The commodity is consolidating near the highs. The metal was up 1.3% for the week. Watching for the upside to resume.
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: 19 banks borrowed $32.6 billion last week. $360 billion of deposit outflows in the last three weeks alone. The Fed is giving just enough money through the BTFP (Bank Term Funding Program) facility to keep from a collapse but not enough to eliminate the pain. “Sound and resilient” are the words uttered by many… not even close.
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. We have to remain focused on short-term trades until there is longer-term directional clarity. 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.
Tuesday: Stocks moved modestly lower on below-average volume. Overall the signals are mixed with the indexes attempting to resume the upside. Friday was likely a bounce from the oversold conditions and we would anticipate a return to the downside… the same issues are still present that started the selling. CPI will be the wildcard along with the debt ceiling talks. Two of the eleven sectors closed higher on the day with average volume. We see the overall trend is still up from the October lows. Testing is in play and we continue to see opportunities setting up both on the downside and the upside on the charts. I am willing to be more patient than anxious currently as the trend unfolds.
What I am watching on Wednesday: GOOG failed breakout on Tuesday… Precious metals upside SIL, GLD… Large-cap biotech XBI upside… UNG bottom reversal… KBE/KRE downside continuation… (BAC, PACW, WFCThis market has to be evaluated sector by sector as the overall trend is neither up nor down.
“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.