Jim’s Notes – Market Reacts to PMI Data

Moving the Market – May 23rd

The markets started the day celebrating NVDA earnings and ended the day lower as sellers became more active. I stated yesterday the five days of consolidation had shown ‘thin’ leadership and to actively manage the risk and proceed with caution. The high-to-low action on Thursday was blamed on the better PMI data eluding to less chance of a Fed rate cut. That may well be the explanation but our focus should be on the underlying issue that investors and analysts are fixated currently on the Fed’s actions and attempting to predict them and the outcome. It isn’t about the data it is about how the data may cause the Fed to act looking forward. Remember the Fed minutes on Wednesday were essentially what the Fed has been saying for a while, interest rates will stay higher for longer if inflation continues. Higher PMI data shows economic activity picking up… inflation remains… interest rates remain higher for longer… sell stocks. Sounds logical, right? Not really, it is speculation driven by emotions. Stocks moved lower on Thursday based on this “enlightenment”… it is an interesting response since the storyline from the Fed hasn’t really changed. What did change over the last month was the hope (emotions) that the Fed would take into account the slowing economic picture (speculation) and shift their attitude towards cutting rates (lack of reality relative to the facts)… thus the combination of the minutes not showing any hints of rate cuts near term and the PMI data moving higher shifted the hope and speculation as investors took it as a negative and sold stocks. This raises the question, does this selling continue? Do investors brush it off and return to hope and speculation? Maybe we could get a good dose of reality? The answer lies in the combination of it all and we will watch how the markets react on Friday in front of a three-day weekend. We will continue with our thought of a test and resumption of the uptrend based on emotions and speculations with a dose of facts sprinkled in to keep things balanced. The action on Thursday was high-to-low caused by some selling in light of positive data and interest rates moving back near 4.5%. Plenty of action and reaction on the charts to digest. Take what is offered and manage the risk accordingly.

The major indexes closed the day lower with some key selling points. The focus on the Fed minutes from the FOMC meeting in conjunction with PMI data set the tone for the day. Leadership was had to come by except on the downside were consumer discretionary, transportation, and REITs led the selling. The direction now comes into question on the upside. Friday could offer some insight. The NASDAQ closed down 0.4%, DIA was down 1.5%, and the SP500 was down 0.7%. The major indexes closed lower on the day. The SOXX was down 0.5%. Small Caps (Russell 2000) were down 1.6%. The ten-year treasury yield was 4.47% up 4 bps for the day. Crude Oil (USO) was down 0.5%. (UGA) was up 0.2%. Natural gas (UNG) was down 2.1%. The dollar was up 0.2%. Plenty to deal with moving forward as we manage our money and emotions relative to the current environment.

Friday Outlook: Broad indexes will respond to NVDA earnings and PMI data. We asked the question if there would be a let down from the FOMC minutes… when combined with the PMI data the answer was yes. More economic data on tap with consumer sentiment and durable goods. Watching how the technology sector responds to NVDA following some selling. Watching IYT, XLY, IYZ, and IYR as all broke lower and were already lagging. XLF sold on higher interest rates. GLD dumped lower on dollar and rate responses. Data mattered on Thursday… will that continue? Remember the facts will eventually matter until then, you follow the trend. 1) Watching the dollar, does it bounce following the FOMC minutes? YES, does it follow through? 2) Interest rates, do they rise in response to the FOMC? YES, how high do they go? 3) Crude oil fell on supply data? How does that unfold? 4) Natural gas is up 40+% the last three weeks… 5) DBA was up the last four days to bounce off the lows. 6) Patience as the answers unfold… take what is offered up or down.

Charts to Watch: See Notes on “Reality of the Markets”

Headlines Worthy of Note:

Are we back to having a global trade issue? A container capacity crunch is beginning to impact freight. Bad weather, longer ocean transits, and vessels skipping ports are adding to the supply chain issues. BDRY remains on our watch list.

SEC approves rule change to allow the creation of ether ETFs. This will expand the investment footprint of cryptocurrency.

Putin wants a Ukraine ceasefire on the current frontlines… this is an interesting development if true. It is a storyline that would change the outlook of short-term and long-term economics in Europe.

Quote of the Day: “Either move or be moved.” — Ezra Pound.

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