Markets started lower but managed to work their way back to positive territory to end the week. Bond yields were higher again and Russia cut oil production by 5% to push crude higher along with the energy sector. No big news out during the day left traders to do their own thing without influence… as you can see on the chart that just led to more indecision. Earnings were again mixed with some beats and some misses. Now we take the weekend to dig in some and formulate a plan for the coming week. A look at the charts shows the S&P 500 index closing back above the 4086 key level. It showed some resilience to bounce off the lows of the day. The NASDAQ shows a flag pattern breaking below the 10 DMA and the uptrend line on the move from the January lows. No decisions for investors relative to direction as they weigh the outlook for the markets as it relates to growth and inflation. The topic of choice remains the Fed and the labor markets. The Fed Chair and presidents all stated that inflation is starting to ease, but interest rates will still likely rise. The focus on the Fed comments were the two data points from last week that we discussed… employment data was too high and the ISM Services showed positive growth. All the Fed heads talked about both as a need to continue to hike rates. Cryptocurrency got slaughtered on Thursday as Kraken settled with the SEC on staking operations… fear of regulatory issues remains in the sector some more selling on Friday. All said the leaders need to take control if the upside is to resume. Indexes are showing signs of retracing their gains and thus we hit some stops, took some more gains, and letting this unfold.
The volume was average, the VIX closed at 20.5 climbing during the week and showing anxiety among investors. The S&P 500 index closed up 0.2% for the day. The NASDAQ was down 0.6%. Small Caps (Russell 2000) were up 0.2%… mixed day for stocks. The ten-year treasury yield closed at 3.74% up 6 bps for the day as TLT reversed on the rise in rates and broke support. Crude (USO) was up 2.8% after Russia announced a 5% cut in oil production. Gasoline (UGA) was up 2.6% and holding near the 50 DMA. Natural gas (UNG) was up 5.2% and holding near the April 2021 lows. The dollar was higher on the day. We adjusted our stops and will focus on managing the risk as we hit targets on the upside position.
Things to Watch This Week: 1) CPI on Tuesday. 2) Retail Sales and Empire State PMI on Wednesday. 3) Housing Starts, Permits, PPI, and Philly Fed on Thursday.
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: UVXY bottom reversal, SPXS bottom reversal. Downside TWM, QID, SDS, DXD… bottom reversal all on the chart. Some selling early Friday, but held support overall. Watching how this unfolds in the new week of trading. NAT (double bottom breakout).
Previous Charts of Interest Still in Play: FCX (test support, raised stop as hit resistance), 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).
Stops Hit: None… taking some gains on portions of positions.
Quote of the Day: “The mystery of government is not how Washington works but how to make it stop” – P. J. O’Rourke
The S&P 500 index closed up 8.9 points to 4090 the index was up 0.22% with above-average volume. The index moved back above the 4086 level at the close… watching how that unfolds next week. Eight of the eleven sectors closed higher on the day with energy as the leader up 3.9%. The worst performer of the day was consumer discretionary down 1.17%. The VIX index closed at 20.5 as sentiment shifts again on Fed worries. SPXS setup if the buyers don’t return.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Summary: The index remains in an uptrend from the October lows. 4086 level of resistance is back in play as the uncertainty takes root. Broke lower on Thursday and moved slightly above on Friday… looking for direction as sentiment shifts to more of neutral on the week. We will remain patient for now as investors sort out their collective thoughts about Mr. Powell and inflation. I remain cautious as optimism versus reality is a bitch. The reality is the data released has been flat-out bad overall with some bright spots. ISM Services and the jobs report are two that could keep the Fed engaged longer than some hoped following the FOMC meeting and Mr. Powell’s comments. 4160 on the upside is level to clear. 3900 is level to hold. 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 71.49 points to 11,718 as the index was down 0.61% for the day. The break above 11,474 is what we are watching currently as the index tests the move. Flag pattern broke lower on Friday as a negative sign. Money flow has declined the last six days. Technology and semiconductors are the keys…. watching how they play out. Took some gains and managing the balance.
NASDAQ 100 (QQQ) was down 0.66% with the mega caps testing again on the day. They broke the $303 level of support and watching $294. Broke lower on Friday and if confirmed could see further tests on the downside. The sector had a negative bias with 44 of the 100 stocks closing in positive territory for the day. The chart remains in a positive trend off the December lows but watching the break of the 10 DMA. AAPL ($137.20 level to clear/hit entry/adjusted stop). Letting it all unfolds near term.
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.
Software (IGV) Upside momentum 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 tests moves higher.
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.
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. Flag pattern breaks lower.
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.
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.
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.
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.
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.
Put/Call ratio was 1.03 Friday… negative sentiment creeping in.
Questions to Ponder: Navigating Uncertainty
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.
Thursday: Stocks struggled again on Friday as they started lower and traded sideways throughout the day. There has been an increase in volatility and questions are being raised about the end of the rally… That speculation could be a bit premature, but worthy of watching and managing our risk. There were breaks lower in weaker sectors, leaders are testing support as well. Patience is the name of the game. We took some profits, adjusted stops, and looking at short-side setups in weaker sectors of the market.
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. The jobs report and ISM Services data would lend a rationale to the Fed’s argument… this all brings into question the current trend higher for stocks. Is the market ahead of the facts? Yes, it usually is, and thus the consolidation and retracement this week in trading. We still have a lot of work to do before growth resumes in a manner that is positive for the markets.
Earnings have been a battle of good and bad… fewer good than bad. With the end of earnings season coming earnings announcements have been contained to the stock itself versus the sector or market overall. This tug-o-war isn’t going away anytime soon as seen all week with the ups and downs as investors attempt to find conviction about direction. The euphoria pushing stock prices higher has been challenged over the last five days. The first level of concern is the 4086 mark being tested to end the week. Watching how it unfolds in the coming 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 and we will trade the hope in the move higher. We will manage our risk of hope giving way to reality along the way. The near-term climb has offered solid gains and we have taken portions of those this week. But, the future risk of reality is what we will manage against. Stops raised on positions. Some gains banked on Wednesday and Thursday. Some stops hit on Friday. Eyes open. Emotions removed. Mixed economic data has been mostly ignored. Sentiment has shifted to neutral over the last few days. 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 3.74% level on the ten-year bond based on 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 the test near term. 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 20.4 as some intraday anxiety shifted the index. VVIX jumped intraday. The money supply has tailed off in the last six days as a sign of sentiment shifting. Volume remains 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 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.