The market closes the week reinforcing the uncertainty in the markets currently. After last week’s sentiment shift to positive this week has been neutral to negative overall with the S&P 500 index breaking key support at 4086. Volume has been below average all week and the money supply turned lower. What changed? Essentially the data… the thing that doesn’t matter until it does. Investors are trying to determine what the data means to the Fed and in turn to stocks. This is a speculation game at its best. Those prices eventually get pushed on the consumer raising concerns about future CPI reports. Add in the Fed presidents speaking in the media about the possible need to move 50 bps at the next FOMC meeting versus the expected 25 bps and you just add to the anxiety and uncertainty. The S&P 500 index started the day down but managed to fight back trading in a range the balance of the day. While losses were minimal the uncertainty was clear. 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 the White House, wants us to believe all is well. This brings us to next weeks trading and how investors will respond. The S&P 500 index closed below the 4086 key level at 4078… if we confirm the break lower I would look for the markets to retrace further. 4011 would be the next potential support. The NASDAQ shows a consolidation pattern and held above the 11,474 support level. The decision relative to direction is still in play. The leaders showed some signs of cracking on Friday and we will watch how that unfolds next week as well. We hit some stops, lock in some more gains, and adjusted our stops.
The volume remains average giving some questions about the current market environment, the VIX closed at 20.2 finishing the week below the 20.6 resistance point. The S&P 500 index closed down 0.3% for the day. The NASDAQ was down 0.6%. Small Caps (Russell 2000) were up 0.3%. 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 3.82% down 2 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). Crude (USO) was down 2.1% gapping lower in the range. Gasoline (UGA) was down 0.6% and testing the 50 DMA. Natural gas (UNG) was down 6% and breaking the April 2021 lows. The dollar was down modestly 0.07% on the day maintaining 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.
The key for the week ahead will be whether the consolidation patterns can hold within the test. Will they be able to engineer a breakout from the consolidation to the upside that advances? Two failures already to accomplish this, if it materializes maybe the third time is the charm. If not a move lower is in order.
Things to Watch This Week: 1) Flash PMI and existing home sales on Tuesday. 2) FOMC minutes on Wednesday. 3) GDP 4th quarter released on Thursday. 4) Consumer spending, Personal Income, Core PCE, New Home Sales, and Consumer Sentiment on Friday.
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.
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:
Previous Charts of Interest Still in Play: SOXX (back above $380=added to position, adjusted stop). Flag pattern on the chart. XME (trending higher. Break to the upside.) TMV @ 200 DMA (hit entry and moved higher ). NAT (double bottom breakout and moved to resistance… took 2/3 of position and profits). Sectors to watch in response to the CPI data. XME (bottom reversal entry in play), 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: RIG, SPY, QQQ, IGV
Quote of the Day: “There ain’t no answer. There ain’t gonna be any answer. There never has been an answer. That’s the answer.” – Gertrude Stein
The S&P 500 index closed down 11.3 points to 4079 the index was down 0.28% with below-average volume. The index moved below the 4086 level as we look for support. Six of the eleven sectors closed higher on the day with consumer staples as the leader up 1.3%. The worst performer of the day was energy down 3.5%. The VIX index closed at 20.2 as anxiety settled on the day. Indecision is in play and looking for support near term.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials broke the uptrend line from the October lows… negative. Closed below the 50 DMA and established a lower low. The sector was down 0.9% for the week. Hit stop locked in a nice gain. Watching how it unfolds near term. XME.
XLU – Utilities closed at the top of the downtrending channel… looking for a break higher. Close above $68 a positive to end the week. The sector was up 1.1% for the week.
IYZ – Telecom moved up for the week closing at the 200 DMA. Uptrend from the October lower remains in play. The sector was up 3% for the week. Watching how it unfolds.
XLP – Consumer Staples downtrend from the December highs remains in play. The sector was up 1% for the week. Letting it play out and looking for a break above the trendline.
XLI – Industrials moved back to the previous highs and attempted to break higher but moving sideways for now. The sector was up 0.9% for the week. Need to hold above $102.50.
XLV – Healthcare Struggling to find direction $131.40 support is level to hold. Down trending channel on the chart. The sector was down 0.4% for the week.
XLE – Energy gapped lower to end the week. Broke both intermediate and short-term trendlines. The sector was down 6.3% for the week. Short entry signal in play ERY, SCO, KOLD.
XLK – Technology The sector moved into a trading range and tested the lower end on Friday. Closed below the 10 DMA which has essentially been the trendline This is the key component in the current trend off the previous lows. The sector was down 0.4% for the week. Entry at $127.50. $141.75 hit stop and locked in gains.
XLF – Financials testing the trendline from the October lows. The sector was down 0.2% for the week. Entry $34.50 Stop $35.80. Watching interest rates and impact near term.
XLY – Consumer Discretionary moved from an uptrend to a consolidation pattern. $147.10 level to hold near term. The sector was up 1.6% for the week. Entry $132. Took some profit (1/2) and letting it play out.
CCL breakout and test of support ($11) offered trade opportunity. $11.50 entry Tuesday.
WMT double bottom breakout. $145 entry. Tested.
IYR – REITs uptrend remains from the October lows. The sector was down 0.8% for the week. $90.47 is the level to hold near term.
Summary: The index remains in an uptrend from the October lows. Broke the 10 DMA which has acted as the trendline. Moved back below the 4086 level Friday and if it confirms the move it will be a negative for the index. CPI, 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 68.5 points to 11,787 as the index was down 0.58% for the day. The break above 11,474 is still in play with a test of the trend in play. Money flow has turned negative with all the news and speculation creating indecision. Technology and semiconductors are the keys…. watching how they play out. Looking at sector opportunities.
NASDAQ 100 (QQQ) was down 0.71% with the mega caps back below the $303 level of support and watching how it unfolds. The sector had a negative bias with 37 of the 100 stocks closing in positive territory for the day. The chart trend has moved sideways into a consolidation pattern… question is will it resume the uptrend or test lower?
AAPL ($137.20 level to clear/hit entry/adjusted stop). Letting it all unfolds near term. Hitting against resistance $154.57.
Semiconductors (SOXX) trend turned sideways and testing support. The sector was down 1.5% for the week. $432.27 resistance held. Entry $355/adjusted stop. Took some gains (1/2). NVDA entry $171.95. Stop $211.50. Took some gains (1/2). AVGO (cup & handle/adjusted stop) entry $559.10. Took some gains (1/2). RMBS (broke above previous highs/adjusted stop/ took gains on 1/2). SWKS solid break higher/hit stop locked in gains). Managing the risk. Pennant pattern on the chart looking for direction near term. Taking some profits and watching.
Software (IGV) Uptrend moving sideways and consolidating. The sector was down 1.1% for the week. Target is the August highs. $275 entry (sold 1/2). Volatility is in play as the sector test moves sideways.
Biotech (IBB) The sector remains in a trading range with a double-top pattern. The sector was up 0.7% for the week.
Small-Cap Index (IWM) uptrend into a pennant pattern. Indecision on the chart short term. The sector was up 1.5% for the week. Money flow turned negative.
Transports (IYT) uptrend from the October low remains in play with plenty of volatility along the way. Trying to hold the $234 support level. The sector was down 0.1% for the week.
Nordic American Tank Shipping (NAT) double bottom breakout ($3.25) and follow through. $3.40 entry. Moved to resistance at $3.76 took 2/3 position off and banked the profits.
The Dollar (UUP) The dollar moved lower on FOMC announcement but bounced as economic data may keep the Fed in play relative to interest rates. The dollar was up 0.4% for the week. The outlook remains negative longer term. Fed driven for now.
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 adjusted the stop.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.82% up from 3.74% last week. The yields reversed the downtrend following the FOMC announcement. TLT was down 1% for the week. Added TMV $112.50. Raised stop.
Crude oil (USO) trading range on the chart with a gap lower on Friday. Economic speculation is impacting supply-demand speculation globally. USO was down 4.1% for the week. The weekly chart shows the downtrend building in crude. A break of support sets up short-side trade.
Gold (GLD) The commodity shifted lower with the bounce in the dollar. The metal was down 1.2% for the week. Watching for support at $171.10.
Put/Call ratio was 1.03 on Friday… Options expiration on Friday shifted the bias towards negative.
Questions to Ponder: Navigating Uncertainty
Consumer credit was up $394 billion. That is the biggest gain in 20 years, to a record $16.9 trillion. That is up $2.75 trillion from 2020. Mortgage balances were up $254 billion in Q4 2022 and up 1 trillion for 2022. Home equity credit lines were up $14 billion to $340 billion. Student loans outstanding up $21B to $1.60 trillion. Auto loan balances up $28 Q4 2022. Delinquency rates for mortgages 90 days late +0.57% (2x from 2021). Auto loans +0.6%. Credit card +0.8% (to 4%). Substantial rises across the board from Q4 2021. Younger age groups are having particular trouble with their revolving debt. Credit card balances up $61 billion to $986 billion, surpassing the pre-covid high of $927 billion.
64% of all Americans are living paycheck to paycheck.
FINAL NOTES:
Friday: Stocks were lower on the day and ended the week down 1.2%. The debate about interest rates, inflation, the Fed, economic data, consumer, and just about everything else is impacting the outlook for stocks. With all the uncertainty surrounding the future stocks have turned sideways to down with volatility picking up and money flow declining. 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 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 would rally the S&P 500 index by 1.5% or more. It has managed a 1.4% 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, but it is being challenged by the data. Too soon to tell on the data and thus the speculation. We will watch patiently and manage our money accordingly. We took some profits, raised stops, and added some positions throughout the week.
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. We traded the hope in the move higher. We have banked some gains and hit some stops since. We have added new positions both short and long over the last two weeks. 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 caught the attention of the talking heads only from the perspective that it goes against the FOMC message. Watching how that twist turns out near term. 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 3.82% on the ten-year bond up from 3.4% two weeks ago 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. The leaders took a turn down on Friday as they test key support levels. Energy turned negative on Friday with a gap lower. Volatility closed at 20.2 and held below 20.6 as the key level. The money supply has turned lower showing more money on the sidelines. 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.
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 from the upside… technology and consumer discretionary have led the move and tested key support to end the week. 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.