Thursday brought more economic data on inflation with the PPI gaining 0.7% versus -0.2% previously… the data reflects the increased costs at the producer level for goods. Those prices eventually get pushed on the consumer raising concerns about future CPI reports. Add in two Fed presidents speaking in the media of the possible need to move 50 bps at the next FOMC meeting versus the expected 25 bps. That rattled investors and stocks sold off late in the day. The S&P 500 index started the day down 1.4% on the PPI data but managed to fight back to near even on the day. In the last hour of trading the bottom fell out and the index closed lower on the day. There has been plenty of economic data this week and for the most part, investors have taken it in stride. There were some major shifts in the last three days with the dollar moving higher, interest rates moving higher, and inflation worries rising. The data isn’t as good as the headlines want us to believe. Retail sales on Wednesday were higher than expected, but so was inflation which retail sales are reported in dollars, not units sold. The propaganda house, alias White House, wants us to believe all is well. A true sign of indecision about the data is showing up in the intraday charts and the daily charts are showing an attempt to resume the uptrend until the last hour of trading on Thursday. This brings us to Friday trading and how investors will respond. After-hours futures were trading lower. The S&P 500 index closed above the 4086 key level at 4090… if we close below that mark on Friday I would look for the markets to retrace further. 4011 would be the next potential support. The NASDAQ shows a break higher from the flag pattern on average volume. The decision relative to direction is still in play. All said the leaders held helping the upside mantra and we watch to see if that continues on Thursday with more economic data on tap. The breaks higher are holding and we will continue to take what the market offers.
The volume remains average giving some questions about the bump higher, the VIX closed at 20.1 rising 10% on the PPI data. The S&P 500 index closed down 1.4% for the day. The NASDAQ was down 1.8%. Small Caps (Russell 2000) were down 1%. The leadership in technology and consumer stocks tested lower on the day but remains in a position to resume the uptrend. The ten-year treasury yield closed at 3.84% up 3 bps for the day. Bonds are pricing in the Fed and future rate hikes. TLT broke the trendline from the November lows and offered a short entry signal (TMV) which moved higher on Thursday as yeilds rose. Crude (USO) was down 0.8% as it remains in a trading range. Gasoline (UGA) was down 2.1% and moving below the 50 DMA. Natural gas (UNG) was down 1.9% and holding near the April 2021 lows. The dollar was up 0.1% on the day adding to the bottom reversal and showing belief the Fed will continue hiking rates. We are focused on managing the risk and watching how this all unfolds.
Things to Watch This Week: 1) CPI Jan (0.5% versus -0.1% previous. 0.4% expected). Core CPI Jan (0.4% versus 0.3% previous. 0.3% expected). YOY CPI (6.4% versus 6.5% previous. 6.2% expected). YOY Core CPI (5.6% versus 5.7% previous. 5.5% expected). 2) Retail Sales Jan (3% versus -1.1% previous. 1.9% expected). Empire State Manufacturing Index Jan (-5.8 versus -32.9 previous. -20.3 expected). Industrial Production (0% versus 01% previous. 0.4% expected). Capacity Utilization (78.3 versus 78.4 previous. 79 expected). 3) Housing Starts Jan (1.31 mil versus 1.37 mil previous. 1.35 expected). Permits Jan (1.34 mil versus 1.34 mil. 1.35 expected). PPI Jan (0.7% versus -0.2% previous. 0.4% expected). YOY (6% versus 0.2% previous). Philly Fed Feb (-24.3 versus -8.9 previous. -7.8 expected). 4) LEI on Friday. Economic data pointing to inflation is still in play which in turn keeps the Fed in play. Rate hikes and mixed data lead to indecision from investors as the consolidation trend remains in play.
Key Data: 1) New York Fed inflation expectation (5% versus 5% previous). 2) Wholesale Inventories (0.1% versus 0.1% previous. 0.1% expected). Consumer Credit ($12 billion versus $28 billion previous. $27 billion expected). 3) Jobless Claims (196k versus 183k previous. 192k expected). Continuing Claims (1.69 million versus 1.65 million previous). 4) University of Michigan Consumer Sentiment Index (66.4 versus 64.9 previous. 65.1 expected). 5) Powell speaks on Tuesday… all ears want to hear if he has truly changed his tone inflation. Powell in his comments did seem confident that inflation is declining and we are on the path to a soft landing… markets liked what he had to say… if he truly believes that, equities will rally in response… until which time earnings fall based on slower growth. He didn’t address the growth side of the equation, but he did elude to disinflation as part of the process. Remember, don’t fight the Fed.
Consumer Credit: $11.6 billion versus 24.5 billion December versus 33.1 billion November… see a trend here? 65% drop from November! That is a big number. Revolving Credit (credit cards) $7.2 Billion versus 15.3 billion. Non-revolving debt (autos, student loans, etc) $4.4 billion versus $17.8 billion. What is happening? Consumers can’t afford it or don’t want it… interest rate shock is in play my belief. The average credit card rate is 20.4% according to the Fed report. This remains a big issue for the system and reserves have been rising in banks to buffer against the looming defaults.
Charts to Watch: NASDAQ Index breakout from the flag pattern… needs to follow through and SOXX and IGV will be key components of that happening.
Friday:
Wednesday: OIH (trading range), UNG (bottom reversal),
Previous Charts of Interest Still in Play: RIG (cup and handle breakout, big move adjusted stop). SPY (reversal, reentered). QQQ (reversal, adjusted stop). SOXX (back above $380=added to position, adjusted stop). Flag pattern on the chart. XME (trending higher. Break to the upside.) IGV – (broke out offering an entry signal.) Ran higher. QQQ (broke above resistance hit entry). Tested all week. Watch 4086 SPX… Consolidation is in play currently for the index. TMV @ 200 DMA (hit entry and moved higher ). NAT (double bottom breakout and moved to resistance… took 1/3 of position and profits). Sectors to watch in response to the CPI data. XME (bottom reversal entry in play), XLE (bottom reversal follow through with test on Wednesday), SOXX (back above the 10 DMA added to position). AAPL (flag pattern did break higher). XLK $143.50 ($144.09 at the close). TMV (cup pattern followed through upside). ITA (Breakout and follow through). MAR (flag breakout and test). DBA (breakout ‘V’ bottom)
Stops Hit: None
Quote of the Day: “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”– Laurence J. Peter
The S&P 500 index closed down 57.2 points to 4090 the index was down 1.38% with average volume. The index moved held above the 4086 level as we look for some support on Friday. One of the eleven sectors closed higher on the day with telecom as the leader up 0.4%. The worst performer of the day was consumer discretionary down 2.1%. The VIX index closed at 20.1 as anxiety returned pushing the index up 10% on the day. Watching how markets respond Friday.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials uptrend still in play. Tested to the 50 DMA and watching. The sector was down 1.6% for the week. Entry $79. Reverse head and shoulder pattern on the chart. Patience. Held the 50 DMA.
XLU – Utilities broke support and tested lower. There is a downward stairstep on the chart and the break below $68 was negative. The sector was down 0.3% for the week. Found support?
IYZ – Telecom a failed break higher as the sector retreated back to the 50 DMA for the week. The sector was down 4.4% for the week. Watching how it unfolds. Hit stop banked solid gain. Bounced at the 50 DMA.
XLP – Consumer Staples downtrend from the December highs remains in play. The sector was down 0.6% for the week. Letting it play out and looking for support. Testing support.
XLI – Industrials moved back to the previous highs and attempted to break higher. The sector was down 0.7% for the week. Need to hold above $102.50. Stuck near the $102.41
XLV – Healthcare Struggling to find direction $131.40 support is level to hold. Down trending channel on the chart. The sector was down 0.1% for the week. Testing lower in of down trending channel.
XLE – Energy tested lower and bounced as crude rises. The sector was up 4.9% for the week. Commodities got a boost from the announced production cuts from Russia. Watching near-term direction.
XLK – Technology The sector broke higher from a cup and handle pattern and consolidated near the current highs. This is the key component in the current bounce off the previous lows. The sector was down 0.4% for the week. Entry at $127.50. $143.45 resistance in play – took some gains and hold the balance with a tighter stop. Closed at $144.09 watching for follow-through. Failed to follow through on Thursday.
XLF – Financials cup and handle pattern broke higher testing. The sector was down 0.2% for the week. Entry $34.50. Watching interest rates and impact near term. Testing the trendline off the October lows.
XLY – Consumer Discretionary made the break above key resistance at $146.50 and consolidating. The sector was down 2.1% for the week. Flag pattern on the chart. Entry $132. Took some profit and letting it play out. Held support and bounced in consolidation pattern.
CCL breakout and test of support ($11) offers trade opportunity. $11.50 entry Tuesday.
WMT double bottom breakout. $145 entry. Tested.
IYR – REITs bottom reversal is in play with a break above the $90 resistance and testing. The sector was down 2% for the week. Uptrend remains in play. Held support and bounced.
Summary: The index remains in an uptrend from the October lows. Moved back above 4086 level of resistance. Friday will be of interest relative to this level of support. The bounce was tested late on Thursday and we will see if that carries over into Friday’s trading. PPI and the Fed comments created some indecision for investors as it tests the current short-term trend. We will remain patient for now as investors sort out their collective thoughts about the Fed and inflation. I remain cautious as optimism versus reality is a bitch. The reality is in the data and CPI and PPI showed we are still facing headwinds relative to inflation and will keep the Fed engaged. The Retail Sales offered the same headwinds without inflation applied. Watching and managing the risk that is. 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 214.7 points to 11,855 as the index was down 1.78% for the day. The break above 11,474 is still in play with a test of the trend in play. Money flow has flatlined with all the news and indecision creating indecesion. Technology and semiconductors are the keys…. watching how they play out. Looking at sector opportunities.
NASDAQ 100 (QQQ) was down 1.88% with the mega caps giving up Wednesday’s gains. They held above the $303 level of support and watching how it unfolds. The sector had a negative bias with 9 of the 100 stocks closing in positive territory for the day. The chart remains in a positive trend off the December lows and moved back below the 10 DMA.
AAPL ($137.20 level to clear/hit entry/adjusted stop). Letting it all unfolds near term. Hitting against resistance $154.57.
Semiconductors (SOXX) broke higher for a cup and handle pattern to lead the upside. The sector was down 2% for the week. $390.40 resistance cleared and moved to $432.27 resistance. Entry $355/adjusted stop. Took some gains. NVDA entry $171.95. Stop $193.35. Took some gains. AVGO (cup & handle/adjusted stop). Took some gains. RMBS (broke above previous highs/adjusted stop). SWKS solid break higher/adjusted stop). Took some gains. Managing the risk. Pennant pattern on the chart looking for direction near term. Held the 10 DMA. Bounced and failed to move above the $432.27 resistance.
Software (IGV) Upside momentum is being tested near term. The sector was down 1.5% for the week. Target is the August highs. $275 entry. CRM (sup and handle/hit entry/adjusted stop). Took some gains. Volatility in play as sector test moves higher. Testing the trend in play.
Biotech (IBB) The sector remains in a trading range with a negative bias of late. The sector was down 3.1% for the week. Entry $134.10. Double top pattern in play.
Small-Cap Index (IWM) testing back to the $188 breakout level. Remains in an uptrend but not looking great of late. The sector was down 3.4% for the week. Hit stops. The flag pattern breaks lower. Tested support and bounced.
Transports (IYT) reverse head and shoulder pattern broke higher and failed, moving lower on the week. The sector was down 3.3% for the week. Hit stop. Watching for direction. Bounced to keep the trend in play. $235.60 level to hold.
Nordic American Tank Shipping (NAT) double bottom breakout ($3.25) and follow through. $3.40 entry. Moved to resistance at $3.76 took 1/3 position off and banked the profits.
The Dollar (UUP) The dollar moved lower on FOMC news but bounced as economic data may keep the Fed in play relative to interest rates. The dollar was up 0.7% for the week. The outlook remains negative. Watching how this unfolds going forward. Bottom reversal in play.
GBTC – Grayscale Bitcoin Trust is trading at a 47% discount to the underlying asset. Something to watch moving forward. The chart is testing the rise off the January lows… watching how the news of higher regulations will impact prices going forward. Hit Entry $10.60. Solid upside move on Wednesday, raised the stop.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.74% up from 3.53% last week. The yields reversed the downtrend following the FOMC announcement. TLT was down 3.1% for the week. Hit Stop. Added TMV $112.50. Watching the Fed. 3.84% as economic data points to the Fed remaining in play.
Crude oil (USO) Bottom reversal in crude as the dollar gained. The cut in production announced by Russia on Friday added to the upside move. Supply-demand speculation in China remains part of the equation as well. USO was up 8.93% for the week. Added position on the bounce. Entry UCO $27. Trading range bound for now.
Gold (GLD) The commodity shifted lower with the bounce in the dollar. The metal was down 0.06% for the week. Watching for support and bounce in metal. Broke lower on a stronger dollar and Fed beliefs. GLL is in play short term.
Put/Call ratio was 0.89 on Thursday… hope remains in play.
Questions to Ponder: Navigating Uncertainty
The smell of job cuts are in the air… the headlines have been consistent with companies announcing layoffs and office closures. Twilio announced 17% cut in staff and closing offices on Monday. Two thoughts on this front… First, office closures will likely hit REITs that hold commercial space buildings. They have struggled since the “pandemic”, but bounced on the reopening. Remote working is still in full swing and impacting commercial properties in large cities. Second, bottom-line earnings for companies. Corporations are trying to get in front of slumping earnings reports and cutting jobs pushes more profits to the bottom-line. Something to watch looking forward.
Fed Chair Powell sounds like he believes the Fed is in the process of engineering a soft landing for the economy. Looking at his comments from the FOMC meeting and following the language has changed. He stated, “this is not a standard business cycle, it is unique.” He is referring to the ‘pandemic’ and since we have never had one, a pandemic, in the Fed’s existence, it is different this time. Yes, the sharp increase in interest rates has slowed things near term, but the longer-term impact is set to overshoot and push the economy into a recession. Big changes in money supply, the yield curve inversion, etc. are going to have a big ripple effect through the US and global economies. It is not looking like a soft landing to me, we will be lucky if we don’t nose-dive into a market crash. Speaking of which, the Fed released the 2023 banking stress test measures on Thursday… a new component of the test is how the eight largest banks would hold up in a market crash… hmmm!
Did the Fed shift in bias relative to inflation? In theory no, but in action yes. The FOMC meeting was a big shift in what the Fed said relative to future rate hikes and their outlook for inflation. It is something to watch in the coming weeks. Mr. Powell was out on Tuesday to reinforce the fight on inflation and parrot much of what he said following the FOMC meeting. Interest rates are showing a belief by investors that they believe Powell and the Fed are done… that said, rates jumped 21 bps the last three days as economic data and comments show the Fed isn’t done hiking rates, but they are encouraged about inflation slowing. The real sign will come from banks, interest rates, earnings, and more importantly a recession pending. Tracking it and following the trend.
Treasury Secretary Yellen was quoted as saying, “you don’t have a recession when you have 500k jobs and the lowest unemployment in more than 50 years.” She must have been sipping some of Bidens Kool-aid. The government’s annual adjustments to the jobs report for January his a head-scratcher… if you take the real jobs losses for seasonal jobs from the holidays we actually lost 2.3 million jobs. But when you are trying to make the current administration look good… adjust the numbers. Not to mention the adjustments to the participation rate… what about people holding two and three jobs being counted in the participation rate? Kind of like dead people voting. Remember numbers don’t lie only statisticians. Or is that politicians?
Jobs versus productivity: The data out on Friday, if true, showed that productivity is falling. That would mean that corporate margins are under pressure as labor costs rise. The math doesn’t lie just the numbers provided to do the math. Thus, we need to watch this data going forward because if wage inflation heats up as some believe it will… margins will decline further as seen in the earnings reports from META, GOOG, AMZN, and AAPL. Lower earnings impact stock prices. There is sooooo much wrong relative to the economy, thus we proceed with caution and take what the charts offer.
FINAL NOTES:
Thursday: Stocks were in response to the PPI showing inflation alive and well at the producer level. That in turn elevates the concerns about the Fed hiking further… then there are all the Fed puppets our speaking about the economy and inflation. Appearance is plenty of money on the sidelines and waiting for some clarity. The indexes have held up in the modest test and the leaders are still in a good position to continue the upside… Patience is the name of the game as we watch for the consolidation patterns to break up or down. Goldman Sachs analysts put the odds at 70% that CPI data will rally the S&P 500 index by 1.5% or more. It has managed a 1.1% loss in the last three days… obviously, they didn’t assign a timeframe for the move. There is a belief of ‘disinflation’ in the air… thanks to Mr. Powell. This will make the data all the more important and thus the reaction on Thursday. We stated the markets would likely absorb an in-line number or even one slightly higher… thus far they have… they even absorbed the retail sales numbers… but PPI rattled some… watching Friday’s outcome as it will be void of news.
The market wants to believe the Fed… The Fed wants to believe the Fed. Thus, if you say what you believe enough you will eventually believe it is fact. The FOMC meeting gave hope to investors as Mr. Powell discussed slower inflation… it is still high at 6%. The Fed’s target rate is 2%… thus, Mr. Powell stated the Fed will still hike but at a slower rate. Did the CPI change the Fed’s collective minds? Maybe retail sales changed their minds? PPI anyone? Not to mention the Philly Fed reporting -24.3 for February… not pretty. I expect emotions to be in play near term as everyone digests the data. Volume reflects the indecision in place.
Hope is a beautiful thing… but, as we say many times, the data doesn’t matter until it does. That is where we find ourselves currently and traded the hope in the move higher. We have banked some gains and hit some stops. We have added new positions both short and long. We look to the charts to provide the next direction near term… which is currently moved to a neutral bias. It remains a news-driven market and thus offers shorter-term opportunities. We will manage our risk of hope giving way to reality along the way. Eyes open. Emotions removed. Mixed economic data has been mostly ignored. Sentiment has shifted to a positive bias but CPI, PPI, and retail sales could shift that bias. We are a far way from seeing growth… my opinion, but we trade what the market gives not what we think. Yes, we have thoughts and beliefs, but we will always follow the trend on the charts and never fight the Fed. The dollar turned higher on Fed worries. Interest rates are at 3.84% on the ten-year bond reflecting Fed worries. I state this so we understand it is the data that ultimately determines the direction of stocks and the Fed is currently in play. Watching the leaders as they bounce from the test near term, but tested again on Thursday. Watching energy stocks as the commodities struggle of late… crude bounced at support and got a lift from the production cuts announced by Russia. Volatility closed at 20.1 with a bounce in anxiety on the decline Thursday. The money supply flatlines as indecision becomes the norm. Stay focused and follow the money. Follow the Fed. 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.
As stated above we continue to watch and take what is offered. 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. We remain focused on short-term trades until there is directional clarity. The charts are showing a short-term trend reversal to the upside… technology and consumer discretionary have led the move. Semiconductors have performed well along with software. 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.