The positive momentum for the start of the year remains in play but stocks struggled all session following the long weekend. Most indices hit resistance points which we discussed in the weekend update and failed to break higher. The talking heads of course raised the question about the rally being over. Time will tell but there are solid setups on the charts and technical data remains optimistic. We will take what the market offers and manage the risk accordingly. As long as there is an underlying belief the Fed will stop hiking rates soon based on improving data relative to inflation the markets will react in a positive tone. On the other hand, there is economic data that is not so hot. So, what is a positive on one hand, is a negative on the other. If the economy slows so do earnings… which translates into lower stock prices. The Empire State Manufacturing Index was UGLY! -32.9 versus -11.2 previous and -7 forecast… talk about bad economic data that was not a good sign for manufacturing overall. The economic news on Wednesday will see retail sales for December… forecast is -1% versus -0.6% previous. Not sure it will be that good based on the projections from holiday sales. Big data day that could set the tone. All said patience is what we have to have for now as we take it one day at a time. The volume was higher, the VIX was higher at 19.3, and sentiment remains on the positive side. The short-term downtrend reversed last week, but the downtrend off the August highs remains in play. The S&P 500 index closed down 0.2% for the day. The NASDAQ was up 0.1%. Small Caps (Russell 2000) was down 0.1% and remains in a leadership role. That is a key indicator for the markets showing anticipation of growth to return. The ten-year treasury yield closed at 3.53% up 2 bps as TLT remains in an uptrend. Important to note the dip near the 3.4% support level for the bond… a break below would be of interest. Crude (USO) was up 1.1%. Gasoline (UGA) was up 0.9%… not a good sign for inflation if that continues. Natural gas (UNG) was up 4.1% bouncing at support. The dollar was up 0.3% trying to find near-term support. The goal is to see how this plays out as we move forward. own long-side trades with solid gains… watch and manage the immediate risk daily.
Things to Watch on This Week: 1) Retail Sales for December (-0.6% previous. -1% projected). 2) Producer Price Index December (0.3% previous. -0.1% projected). 3) Industrial Production December (-0.2% previous. -0.1% projected). 4) Capacity Utilization December (79.7 previous. 79.6 projected). 5) Business Inventories November revisions (0.4% previous. 0.4% projected). 6) Fed Presidents are out speaking this week. 7) Jobless Claims (205k previous. 215k projected). 8) Building Permits (1.35 million projected). 9) Existing Home Sales December (4.09 mil previous. 3.95 mil projected). 10) Philly Fed Manufacturing index Jan (-13.8 previous. -10 projected). 11) Jobs… MSFT 11k layoffs announced.
Charts to Watch: SPY $399.50 resistance, QQQ $281.32 resistances, SOXX $390.40 resistance, IWM $186.60 resistance. Need to clear the next level of resistance if they are to continue the upside move.
Previous Charts of Interest Still in Play: FCX (test support, raised stop as hit resistance), KWEB (breaking higher “V” bottom, hitting resistance). UGA (double bottom, broke above the 50 DMA). Adjusted stops as necessary. GOLD (saucer breakout, hit stop). RIG (cup and handle breakout, big move adjusted stop). SOXX (break upside through resistance, hit next level resistance). SPY (reversal, at resistance). QQQ (reversal, adjusted stop). IWM (Reversal, at resistance).
Stops Hit: GOLD (watching for reentry.
This Week’s Data Reports:
Quote of the Day: “I’ve been on a diet for two weeks and all I’ve lost is two weeks.” – Totie Fields
The S&P 500 index closed down 8.1 points to 3990 the index was down 0.2% with above-average volume. The index is hitting again some near-term resistance as sentiment remains overall positive. The next resistance level is at 4086. Five of the eleven sectors closed higher on the day with technology as the leader up 0.45%. The worst performer of the day was telecom down 1%. The VIX index closed at 19.3 as sentiment shifted to positive. Adjusted stops and watching.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials broke from the trading range back to the previous highs. The sector was up 4.2% for the week. Entry $79. Tested lower.
XLU – Utilities struggling with the 200 DMA putting the uptrend in question. The sector was up 0.4% for the week. Letting it play out.
IYZ – Telecom bottom reversal follow through and back above the previous highs. The sector was up 2.4% for the week. Solid break on the upside for the week. Entry $22.50. cup and handle forming?
XLP – Consumer Staples developing a trading range. The sector was down 1.3% for the week. Looking for a decision on direction.
XLI – Industrials bottom reversal and cleared resistance at the $99 level. The sector was up 1.5% for the week. Entry $99.20.
XLV – Healthcare Struggling to find direction needs to clear $136.50 resistance. The sector was down 0.1% for the week. Remains in a trading range.
XLE – Energy established a trading range and broke higher. The sector was up 2.7% for the week. Entry hit $89. USO and UGA are in play currently. Doji candle.
XLK – Technology The sector reversed off the lows finally breaking through the $127 level. This will be a key component if the upside is to continue. The sector was up 4.6% for the week. Entry at $127.50.
XLF – Financials established a bottom reversal and moved through resistance at $35.20. Added to the upside on earnings for the week. The sector was up 2.1% for the week. Entry $34.50.
XLY – Consumer Discretionary bottom reversal in play. The sector was up 5.8% for the week. After leading the downside see solid upside bounce. Entry $132. BBY (cup & handle pattern).
IYR – REITs bottom reversal in play. The sector was up 4.4% for the week. Lower rates could offer some upside to the sector near term. Doji candle.
Summary: The index was up 0.2% for the day. It has established a bottom reversal with some positive momentum near term… the big question is can it follow through on the rally. We will watch how trading unfolds this week. 4086 is the next target level for the index as we watch and manage the risk. We added long positions over the last two weeks and remain focused short term for now. 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 up 15.9 points to 11,095 as the index was up 0.14% for the day. The chart found support at the October lows again and bounce again with a follow-through above 10,941 resistance. 11,475 is the target move. Technology remains the key question should the upside continue near term.
NASDAQ 100 (QQQ) was up 0.2% with the large caps bouncing off the October lows and clearing $274 resistance. $281.50 is the next level to clear. Technically the momentum shifted, but plenty of questions remain. The sector had an even bias with 46 of the 100 stocks closing in positive territory for the day. The chart saw the money flow move higher but needs to find more momentum short term. AAPL ($137.20 level to clear). AMZN (hitting resistance). GOOG (bottoming pattern). MSFT (bottom reversal).
Semiconductors (SOXX) made a move higher to break from the bottoming range and added nicely to the upside for the week. The sector was up 6.2% for the week. $390.40 next level of resistance. Entry $355. AVGO (cup & handle). RMBS (broke above previous highs). SKWS solid break higher).
Software (IGV) Attempted a bottom reversal on the week but still needs some upside momentum. The sector was up 4.9% for the week. Watching how the week begins.
Biotech (IBB) The sector managed to break to the upside to end the week and needs to follow through. The sector was up 2.3% for the week. Entry $134.10.
Small-Cap Index (IWM) bottom reversal with leadership overall showing a positive trend. The sector was up 5.3% for the week. Entry $177. Resistance $188.15 level to clear.
Transports (IYT) Bottom reversal and positive upside momentum. The sector was up 3.73% for the week. Need to clear $234 resistance. Entry $218. CSX (need to break from consolidation pattern).
The Dollar (UUP) The dollar moved lower on economic data dropping 1% Thursday and breaking the previous lows. The dollar was up 1.5% for the week. The outlook remains negative. small bounce.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.51% down from 3.57% last week. The yields reversed adding to the upside trade in bonds. TLT was up 1.5% for the week. Entry TLT $102.35. 3.53% modest move.
Crude oil (USO) Reversal in trend for crude last week pushing back to the previous highs. Supply-demand speculation as China opens its economy and borders. USO was up 8% for the week. Entry $67. Trending higher. OIS (uptrend). XOM (at resistance). CVX (breaking higher from consolidation pattern).
Gold (GLD) The commodity has been trading higher as the dollar declines. The metal was up 2.9% for the week. GLD entry $154.90. Stop $174. Moved to resistance at $174.30 and got the break higher. Entry AGQ $23.50. Stop $31. Letting it run and adjusting stops. Rested.
Put/Call ratio was 0.97 on Tuesday… SVXY trade setup ($57.50 entry, stop $62). Positive bias.
Questions to Ponder: Navigating Uncertainty
Remember the infrastructure spending bill that Congress passed last year? $1 trillion is to be spent on refurbishing and establishing new infrastructure… it has started impacting stocks like Caterpillar (CAT) and Freeport McMoRan (FCX)… This is a sector that will be a benefactor in years to come. We own FCX and watching others as opportunities relative to the spending unfold. URI, TEX, RIO, BHP, DE… some to track.
FINAL NOTES:
Tuesday: The markets struggled to start the week. SPY, SOXX, IWM, and QQQ are in positive territory as they hit the next level of resistance. The economic data was ugly from the Empire State Manufacturing data. The hope remains for the Fed to rest relative to rates and maybe offer stimulus looking forward… this is a long and winding road that will take time to resolve. In the meantime, we will take what is offered and manage the day-to-day activity accordingly. Watching how this unfolds relative to sentiment and outlook. We are a far way from seeing growth… my opinion. That said, we have added positions short-term on the upside moves (see above). The dollar broke below the 200 DMA as lower rates help the global financial markets ease. How far does this move go? Good question! We have posted the next resistance points above along with stops on every position. Take what is offered and manage the risk accordingly. Volatility closed at 19.3 as anxiety levels remain low. The money supply is shifting towards positive. Volume moved above average. 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 turning towards stagflation of late which could be worse for consumers as it tends to last longer with a slow negative effect. We remain focused on short-term trades until there is directional clarity. The charts are showing a short-term trend reversal… technology and consumer discretionary have led the move. Financials reversed along with major indexes as earnings helped… along with lower interest rates. 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.