The markets gapped higher at the open with technology stocks leading the upside move… however, 30 minutes into trading the bottom fell out and stocks reversed to close significantly lower on the day. The significance was a candlestick pattern called a bearish engulfing pattern. On Wednesday the up candle on the chart (green) was “engulfed” by the down candle on the chart (red) on Thursday, indicating a bear/downside risk for the markets. Both the S&P 500 and the NASDAQ index showed this on the chart Thursday leaving an opening for the sellers to take back control of the trading direction near term. NVDA opened up more than 8% but equally gave up gains to close flat on the day. Why the shift in sentiment on Thursday following three days of positive movement on the charts? Simply put, Mr. Powell and the Fed, he speaks on Friday from Jackson Hole on the economic outlook and the Fed’s stance on inflation and interest rates. The speculation is the Fed will not back away from the fight on inflation. A look at money flow relative to M1 and M2 shows how much tightening the Fed has created. This is impacting the economic picture along with higher interest rates impacting growth in company expansion and growth. Maybe we are seeing some reality sinking in for investors versus the pie-in-the-sky talk from the government data. Friday will be a key day for the markets and one we will watch closely.
The markets moved down following the gap up open leaving the negative results discussed above. Powell will speak on Friday and be watched by all and then pontificated on by the talking heads… all that matters is what stocks do not what others say. The bounce was short-lived based on Thursday’s activity as all eleven sectors closed in negative territory. Volume was below average on the day. Scanning the indexes we see significant reversals and tests of support again… is this the resumption of the downside that started on the first of August? The S&P 500 index closed down 1.3%. The NASDAQ was down 1.8%. The SOXX was down 3.3%. Small Caps (Russell 2000) were down 1.3%. The ten-year treasury yield closed at 4.23% up 3 bps. Crude (USO) was up 0.1%. (UGA) was up 0.3%. Natural gas (UNG) was up 1.9%. The dollar was up 0.8%. We are focused on managing the risk and seeing how investors respond to the current situation.
It is important to remember on the eve of Mr. Powell’s speech that inflation has not stopped… the pace has slowed. Price hikes are still being realized across the economy. The prices that rose have not receded one penny. In other words, we have not had price deflation. This in an economy that is slowing despite what the data from the government states. Bankruptcies are rising both personally and corporately. The data shows that 65% plus of Americans are living paycheck to paycheck as goods cost 20-30% more across the board for consumers. Hardship loans from retirement plans are climbing at aggressive rates. Credit card debt topped $1 trillion for the first time last month. And while all this is happening the current administration in Washington is talking about how great the economy is… they are all just playing another game of bullshit Bingo.
ONE Chart to Watch: QQQ – 1) Broke below the $366.14 support… bounced back the last three days… reversed again. 2) Short-term trend broke the uptrend from the January lows… big negative to overcome. 3) $352.39 level to hold. 4) Stop hit on TQQQ at $37.50. Stop $38.24. Modest gain. 5) Watching Friday action with Powell and stocks.
Additional Charts to Watch:
SOXX – Tested to support at $473.23. Bounced off the low entry and posted a modest gain to end the week. $475.50 level to hold or short-side entry will be offered again.
Mega Caps – AAPL failed to move above the 20-day EMA. AMZN moved to the 50-day MA and held. META moved below the 50-day EMA tested lower and closed on a doji candle. GOOG held the 10-day MA. MSFT closed at the 50-day MA. Leadership continues to struggle and downside risk remains in play.
Retail Stores – EMTY breaking higher as the short side of commercial real estate for retail stores struggles with plenty of distressed sales and bankruptcy issues in play. Hit Entry $15.25. Stop moved to $15.25 and let it unfold near term.
Stock moves of interest from Friday: INTU (upside breakout), MRVL (downside break), JWN (break lower), ULTA (break lower)… retail showing weakness despite the great economy Washington pontificates.
Downside of rising interest rates – Mortgage-backed Securities have been declining in value as interest rates have risen. The downside is for banks that hold them as well as investors who hold them in their portfolios without even realizing it. Bond mutual funds, 401K plans, retirement plans, ETFs, etc. Take a look at a chart of VMBS ETF and you see a decline of more than 15% over the last 20+ months. Apple 2060 bond issued at 2.2% in 2020 is down 40% based on current yields. I understand if you hold them to maturity you get your principal back… but in the meantime, inflation has averaged over 5% while you get 2.2% in dividends… risk either way you approach it… Thus, look for the opportunity in the downside of bonds going forward… if Powell doesn’t back off interest rates soon, the downside risk will continue to rise for banks, bonds, ETFs, and other financial instruments. Where there is smoke there is opportunity.
Food for Thought: The Fed is engaged in propping up banks through the “discount window” a traditional source of providing short-term liquidity, but since early this year they have been offering loans through the newly established BTFP (Bank Term Funding Program). This is to help offset the strain of “under” performing assets on their balance sheets… MBS bonds and other long-term debt issued prior to 2022 in low-interest-rate environments. The Fed has to keep the system going while it stamps out inflation through lower money supply… thus, banks need money to remain solvent… Thus, my point is to watch how the markets respond to Powell… his minions will be at work to prop up the system from failure by putting more money in the system through banks to invest in the markets… I know I made all this up and there is no way the Fed, Banks, and Government would collude on this process… Believe me, this is not the first time the Fed has propped up banks to allow them to recover from mismanagement of assets… yours and my assets FYI as taxpayers. Yes, the higher rates and lower money supply hurt consumers and small businesses but that has always been acceptable collateral damage to the Fed and the Government.
Stops Hit: NONE
Quote of the Day: “If you’re going through hell, keep going.” – Winston Churchill
The S&P 500 index closed up 29 points to 4405 moving the index up 0.67% with below-average volume on the day. The index held support again at 4338 and left the chart below the 50-day MA. Eleven of the eleven sectors closed higher on the day with consumer discretionary as the leader up 1.1%. The worst performer of the day was REITs down 0.2%. The VIX index closed at 15.6 moving lower as sentiment shifted away from Thursday’s negative outlook. Micro-term downtrend remains in play with some consolidation at support… the Fed outlook is really unchanged but markets tried to make it a positive.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials Reversed to the 200-day MA and holding for now. The sector was down 0.2% for the week. No Positions.
XLU – Utilities back to the previous lows and support. Consolidating currently. Need to hold $63. The sector was down 0.2% for the week. No positions.
IYZ – Telecom In a downtrend from the February highs moved into a trading range. The sector was down 0.2% for the week. No Position.
XLP – Consumer Staples moved back to the June lows. The sector was down 0.8% for the week. No Positions.
XLI – Industrials Broke uptrend $105.41 support. Consolidation pattern on the chart. The sector was down 0.3% for the week. No Positions.
XLV – Healthcare Moved back to support at $132.64. The sector was down 0.1% for the week. No Positions
XLE – Energy Topping pattern broke lower on lower crude prices. The sector was down 1.3% for the week. Entry $81.95. Stop $85.05 Need to clear $87.70.
IEO – broke higher as offshore interest rise. Entry $85. Stop $95.04.
XLK – Technology The sector broke lower found support at $165 and bounced. The sector was up 2.2% for the week. Entry $167. Stop $168.40.
XLF – Financials Testing the $33.78 level of support. The sector was down 0.1% for the week. Bank downgrades not helping the sector.
XLY – Consumer Discretionary Bounced off support and watching the outcome. The sector was up 1.2% for the week. No Positions.
IYR – REITs Bounced at support… watching how it unfolds. The sector was up 0.8% for the week. No Positions.
Summary: The index moved modestly higher on the day following Mr. Powell’s speech. The Fed continues the stance on inflation and will move ‘cautiously’ on interest rates looking forward… BLAH, BLAH, BLAH. Eleven of the eleven sectors closed higher on the day with XLK in the leadership role lower. XLY followed. The index is looking for direction and the talking heads believe it is lower… let the charts unfold and take what is offered. 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 126 points to 13,589 as the index was up 0.94% for the day. The index showed buyers at support and moved modestly higher throughout the day. Support is 13,274. Letting the move unfold as tech and megacaps find their collective direction. SOXX was up 0.4% on the day. IGV was up 2%. Watching support and how the activity unfolds.
NASDAQ 100 (QQQ) was up 0.78% on the day as mega caps traded higher from the intraday lows. Remains below the $366.14 support. The mega-caps, as we have discussed, are/were extended from the May break higher and thus test lower short term. The question is, do they continue lower? The sector had a positive bias with 84 of the 100 stocks closing in positive territory for the day.
Semiconductors (SOXX) The sector held support at $473.23 and consolidation. Needs to move back above the $497.60 level to show momentum. The sector was up 1.4% for the week.
Software (IGV) The sector tested below the $336 level of support and bounced. The sector was up 3% for the week. No Positions. Looking for an upside break on the chart if the directional change is to unfold… $347.60 level to watch.
Biotech (IBB) The sector broke below the $128.35 support and is in a downtrending channel. The sector was up 1.7% for the week. No Positions.
Small-Cap Index (IWM) Tested back to the 200-day MA and tried to find support. Consolidation pattern on the chart. The sector was down 0.3% for the week. No Position.
Transports (IYT) Tested below the $247.67 support level. Consolidation pattern on the chart. The sector was down 1% for the week. No positions.
The Dollar (UUP) The dollar moved back above the June highs and climbing… The dollar was up 0.8% for the week. More chatter about losing dollar status globally as BRIC nations establish gold-backed currency. No Positions.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 4.23% down from 4.32% last week. TLT was up 1.5% for the week. Watching how the Fed manages the yield curve.
Crude oil (USO) Testing the uptrend on China’s economic weakness. USO was down 0.4% for the week. No Positions.
Gold (GLD) The commodity struggling on the stronger dollar. No positions. The metal was up 1.3% for the week. Watching the bounce on BRIC news.
Our longer-term view shifted to neutral as the upside trend from the October lows is challenged but remains in play. 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 with the trend higher overall but plenty of volatility along the way. With the trend higher it puts the broad indexes in an intermediate uptrend… of course, the last three weeks’ micro-trend is testing the longer-term trend and you need to manage stops accordingly on longer-term positions. The topping patterns broke short-term support to create a micro-term downtrend. The economic data is showing signs of fatigue relative to growth. We hit our stops on intermediate and short-term positions. We added some positions as money rotated. Sector-driven activity is in play short term. The key remains, know where you are now, know what is happening now, and know what is on the horizon… act accordingly. The goal is to manage the risk of positions, take what is offered… short or long, and then manage your money. Listen to the market not the talking heads.
Friday: The Fed was engaged and so were investors not wanting the bull market trend to die. The talking heads pontificated on Mr. Powell’s speech and in some ways impacted the move off the intraday lows. Letting it play out as we look for directional confirmation on QQQ, SPY, SOXX, and TLT. We continue to follow the trends as they play out. Micro-term trend found support prompting exits from most of our short-side trades. Looking at how this support plays out with 5-8 day consolidation patterns on plenty of charts. Patience is the key currently. Manage the risk that is and let the current activity play out. Plenty to ponder as we progress in the current environment.
What I am watching on Monday: 1) The reaction to Mr. Powell’s speech. 2) TLT reaction to Powell and his puppets. 3) The dollar’s reaction to Powell. 4) Support on the major indexes… hold or break?
1) Elimination of the debt ceiling by Congress has sent the administration on a spending spree… no big surprise when you can’t bounce checks you keep writing them for undisclosed favors. TLT fell 1.9% Tuesday and we added TBT to our positions. Watching how this storyline unfolds as Fitch downgrades the Treasury Bond to AA+.
2) Inflation warnings are popping up again… on May 4th crude was $67. On August 1st crude was $81.96 which is a 22.1% increase in price… where does it go? Correct, into everything we basically touch. We own USO and UGA in order to keep pace with being able to afford gasoline. But it goes further and we should be looking at where to invest to keep pace with the next wave of inflation.
3) Climate Emergency? If this executive order is enacted by the Biden Administration bar the doors as spending will escalate to levels not seen since WWII. The draconian measures will mirror those seen during the pandemic lockdowns. They want to eliminate anything gas or electric in the name of “clean energy”. Another storyline that has our attention.
Decide what you’re doing before the market opens based on your beliefs. Entry. Exit. Target. Define the risk of the position. Nothing more… Nothing less.
“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.