Jim’s Notes Wednesday Recap

Moving the Market Update – February 7th

The markets show a positive low to high activity on the day, albeit on a narrow scale. Technology returned to a leadership role with IGV and SOXX leading along with the megacaps. To that point, MGK was up 1.3% closing at a new high and RSP was up 0.4% still in a trading range. It is back to the megacaps leading. Further to the point IWM closed in negative territory -0.2%. NYCB bounced 7% after falling 14% earlier in the day. Moody’s downgraded their long-term debt to junk status causing the selling, then short covering push to stock back into positive territory… KRE dipped 0.3% and is still showing a negative trend. Downside in the banks is still something to be aware of looking forward. Interest rates remain strong with the 10-year back to 4.11%. The 10-year bond auction went off well on the day as well. The dollar remains positive on the Fed’s interest rates stance currently. On the economic side mortgage applications rose 3.7% and refinance applications were up 12%. Consumer credit rose in December $1.6 billion. Revolving credit set a record at $1.31 trillion along with non-revolving credit at $3.69 trillion. US citizens follow the leadership of their government… keep borrowing. The rate of borrowing has slowed due to higher rates and the availability of credit, but it still is a major concern for the economy. We continue to follow the trends and take what is offered.

Stocks set a positive tone throughout the day. The chatter remains from the Fed and the need to not cut rates until there is more clarity that inflation is under control. Based on the data that may be a while. Watching the volatility factor along with the sector activity relative to strength and weakness. The economic data was important to the longer-term view but offered little relative to the day’s activity. The NASDAQ closed up 0.9%, DIA was up 0.4%, and the SP500 was up 0.8%. The major indexes were higher on the day. The SOXX was up 1.5%. Small Caps (Russell 2000) were down 0.2%. The ten-year treasury yield was 4.11% up 2 bps for the day. Crude (USO) was up 0.9%. (UGA) was up 2.3%. Natural gas (UNG) was down 1.6%. The dollar was down 0.1%. We are focused on managing the risk in the current environment and letting it unfold.

Charts to Watch: See Notes on “Reality of the Markets” & “Jim’s Beliefs About the Market” pages…

Quote of the Day: “It’s okay to be wrong; it’s unforgivable to stay wrong.” — Martin Zweig.

Additional Charts To Watch

A story lost in the headlines was the NYBC bank cutting dividends and showing financial stress. This is one of the largest regional banks and was not even mentioned following the FOMC meeting. Reuters posted a brief article outlining problems in 3 regional banks late in the day. Even with the BTFP these banks are in trouble. It is also interesting to note that in the Fed statement following the FOMC meeting deleted the the sentence, “The US banking system is sound and resilient.” NYBC fell 37%. KRE was down 5.8%. We have discussed this for the last 5 or 6 months that the system is weaker than being reported… how many more of these are on deck? One analyst comment summarizes this very clearly to me, “This regional banking crisis that we saw last year, the problems never really got solved – all these banks are still holding a lot of crappy mortgages, there’s a lot of stuff on these books, it just kind of got forgotten. They’re still holding all these same crappy mortgages, a lot of these regional banks obviously still have issues and I think this is just an eye-opener for the market to a certain extent today.” Why no headlines… there is other news “more important”. Wednesday the long-term debt was downgraded to junk status… stock fell 14%. A new chairman and some short-covering rallied the stock to up 7% on the day. KRE closed down 0.2%.

Agriculture (DBA) As seen on the chart the bottoming pattern is in position to reverse the downtrend. We cleared $21.08 Monday. Entry $21.30. Stop $21.30. Broke higher and has shown solid gains since… Raise your stops.

Home Construction (ITB) Consolidation near the highs broke to the upside Monday. Looking for a follow-through above the $103 level. Oops, failed to hold the move higher as interest rates moving higher impacts the DHI earnings report. Failed break higher.

As it relates to the DHI earnings report… they missed on revenue… is the sector starting to show some effects of higher interest rates and affordability issues relative to construction? Something to ponder as the balance of the homebuilders report earnings. Maybe a downside trade opportunity? Sold to the bottom of the range… bounced on New Home Sales up 8%… watching how it plays as it remains in the range. Mortgage applications were up… but, purchase applications fell 1%… watching.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed up 40 points to 4995 moving the index up 0.82% with below-average volume. The index came close to clearing the 5000 level. The index posted a new high and watching the breadth or lack of. Eight of the eleven sectors closed higher on the day with technology as the leader up 1.3%. The worst performer of the day was telecom down 1.7%. The VIX index closed at 12.8 and lower on the day. Plenty to ponder between the headlines and the facts. Patience. 4815 level of support held and bounced. Remain patient for now.

XLB – Basic Materials bottom reversal in play with key support at $81. Bounced at support and was up 0.7% for the week. Letting the consolidation unfold near term. Activity picking up in the materials CX and EXP. Broke lower on Monday and bounced back on Tuesday…

XLU – Utilities bounced back above the $60.10 support. Need to clear $62.90 near term. Watching how this unfolds. The sector was up 0.4% for the week. Moved back to $60.10 support.

IYZ – Telecom Topping pattern continued and broke below the 10-day MA. The uptrend remains in play but not looking good. The sector was down 2.2% for the week. Sold positions with a solid gain. Moved back to support at $22.93 and broke lower offer a short side trade.

XLP – Consumer Staples Uptrend remains in place for the defensive sector with a move towards resistance at $74.72. No Positions. The sector was up 2.1% for the week. See notes above.

XLI – Industrials Topping pattern broke above resistance. Held $110.75 level of support and cleared $114.20 resistance. No Positions. The sector was up 1.9% for the week. Breaking higher…

XLV – Healthcare remains in an uptrend from the October lows. Solid upside for the week clearing the previous high. Entry $129. Stop $140. The sector was up 1.9% for the week. Added to the upside… closed on doji candle.

XLE – Energy shows a bottoming pattern and cleared $81.97 resistance for entry. Some volatility during the week as crude oil retreated. Entry ERX $52.15. Stop $54.20 (adjusted). Let it play out. Need to clear the $84.33 resistance.

XLK – Technology Entry $193. Stop $200. Bounce-off support at $183.50 and continued the uptrend. Tested early in the week and bounced… watching how this unfolds near term. The sector was up 0.2% for the week. Consolidation pattern.

XLF – Financials Entry $33.65. Stop $37.80. Traded higher for the week. The sector was up 0.8% for the week. Holding move above the resistance at $37.95. NYCB regional bank drop is worthy of our attention moving forward.

XLY – Consumer Discretionary Tested support $171.50. Broke higher from the downtrend channel on the chart. Cleared $176.70. The sector was up 3.2% for the week. Reversal back to the upside.

IYR – REITs Moved to the next level of support at $87. The sector has been drifting lower on higher interest rates of late. The sector was down 1.3% for the week. Watching Interest rates near term. Watching NYCB as they cut their dividend due to commercial loans underwater… Broke support at the $87 level offering short side entry.

Summary: The index was higher with narrow breadth returning. The market has been rotating toward defensive stocks, but Wednesday was back to the megacap leadership. We could see a last stage push higher, but the undercurrents are showing a negative bias building towards stocks. Watching how the sectors unfold as seen above we are watching how the leaders and laggards unfold. Some reversals from selling earlier in the week on the charts and letting it unfold and taking it one day at a time. 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 147 points to 15,756 as the index was up 0.95% for the day. Large caps and technology led the day as investors continued to find reasons to buy. The index showed a positive move in SOXX and IGV. Upside remains in play and watching how the data impacts the trend moving forward. Managing the risk that is and watching how this unfolds.

NASDAQ 100 (QQQ) was up 1% for the day as the megacaps lead again. The index set a new high. Manage stops and let it play out. Entry $354.20. Stop $423. Letting the uptrend play out.

Semiconductors (SOXX) Banked solid gain on position and watching how the test of support unfolds. Tested lower… Key support at $583.41. Watching for what opportunities are presented. The sector was down 0.2% for the week. Back to the upside leadership… been an up-and-down week.

Software (IGV) continued the uptrend from the January test. Shows some topping on the chart. The sector was up 1.4% for the week. Watching how this plays out in the coming week. Resumed upside move.

Biotech (IBB) Topping pattern on the chart and letting it unfold. Entry $121.30. Stop $133. The sector was down 0.5% for the week. $136.50 level to clear on the upside.

Small-Cap Index (IWM) Downtrending channel in play. Added at $192.13 upside move. Need to clear $198.64 near term. Flag pattern on the chart. Tested $192.13 support and held. Moved to support.

Transports (IYT) Trading sideways in an established trading range. Close at the top of the range and watch for a break higher. Red Sea issues continue to escalate. BDRY has done well in response, bouncing back from the test at $8.95. The sector was up 0.5%. Broke higher from the trading range. BDRY leading.

Red Sea issues are continuing to be bad. There are been ships on fire, protection vehicles turned back, and just an overall mess. The cost in some cases is over $100k per day. The true impact of this on prices has yet to be passed all the way through to consumers… this is a growing issue looking forward. Two ships fired on in the Red Sea Tuesday.

The Dollar (UUP) The dollar bounced off the December lows and has not looked back. Stronger dollar in January The buck was up 0.6% for the week. Dollar running higher on the Fed talk.

Treasury Yield 10-Year Bond (TNX) The yield had been creeping higher on the 10-year… then the move was lower as we approached the FOMC meeting. Following as well until the jobs report on Friday… the reality of the numbers hurt the outlook for rate cuts from the Fed and rates spiked 17 bps. The yield moved from 4.16% to 4.03% this week down 13 bps. TLT was up 2.4% for the week. This is of interest as it relates to stocks. Rates running higher on Fed talks. 4.11%.

Crude oil (USO) Remains a challenge relative to clarity. Production has been higher than expected as OPEC allowed producers to have voluntary cuts. OPEC now set a meeting for March to discuss extending the cuts. Crude has been all over as seen on the chart. The break higher moved to resistance at $73.26 and then moved towards support at $66.23 to close the week… we stopped out of our long positions (UCO) with a nice gain, but now we are watching to see how this unfolds. The commodity was down 7.3% for the week. Bottom reversal?

Natural Gas (UNG) The move higher from the December lows came to an abrupt end with natural gas falling on projected supply rising the first half of the year. We traded the upside move and the downside move. Pressure is on the downside based on the White House taking away permits for new LNG facilities for transport globally. There is a build-in supply on warmer weather and demand. Looking for the next opportunity. The commodity was down 3.8% for the week. Moved lower again. $18.06 previous low in play.

Gold (GLD) The commodity continues to trade sideways with some volatility sparked by a stronger dollar the last month. The dollar gained some near-term strength adding downside pressure on the metal. The metal was up 0.8% for the week. Trading with the dollar.

FINAL NOTES

Wednesday: The broad index maintained the uptrend with the megacaps returning to leadership. Watching the charts we see some rotation. Narrow breadth, new highs on large caps, NASDAQ trying to hit new highs, and small caps lagging. Eioght of the eleven sectors closed higher showing upside strength for now. We will watch how the dust settles as the Fed continues to talk higher rates for longer. Banks are a challenge. Take what is offered and stop listening to the talking heads… that is why the remote has a mute button.

Longer-Term View: The uptrend from the October lows continues. They had moved above the July and August highs and broke above the 2022 highs to a new high. This resumes the long-term uptrend from October 2022. Currently, we are allowing the short-term to unfold in light of the longer-term perspective… don’t combine the two as the weekly charts look very different than the daily. A look at the weekly chart below shows the uptrend from the October 2020 lows is still in play at a slower degree of assent. There are always positive and negative swings in a longer-term trend. A look at the daily chart from the October 2022 lows validates that premise with plenty of volatility along the way. Short term the market has resumed the uptrend from the October 2023 lows. The current bounce remains in play despite any issues on the horizon. Time will tell how this plays out. Current activity shows optimism from the buy side and we will take what the market gives. We look to charts and fundamentals for answers. 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.

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.

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