Jim’s Notes Wednesday Recap

Moving the Market – January 31st

The markets closed at or near their lowest levels of the day. The challenge was the FOMC results as the Fed set forth its plans relative to interest rates. They acted as anticipated not raising rates, but the consternation came from the presser following when Mr. Powell stated the Fed would not likely cut rates in March. They believe there will not likely be enough information to confirm it is time to start doing that. That was unsettling to investors as the belief was they would start to cut rates. When what is believed to be true by the majority, isn’t, markets react, and react they did. Just about everything started selling on the comment. I was looking for more breadth in the move… I got it, it just happened to be to the downside. Decliners led 4-to- 1 on the day and all eleven sectors closed in negative territory. Volume rose 51% on the NYSE and 25% on the NASDAQ showing the anxiety from investors relative to the Fed. Treasury yields declined on the news with the 10-year bond back below 4% as TLT was 1%. We did hit some stops on positions and we will watch how Thursday unfolds. At the end of the day, it could have been worse. The economic data did not help the cause on Wednesday with plenty more on tap for the balance of the week. After-hours earnings from QCOM, NXT, and FLEX were all on the positive side. RCL reports before the opening bell. AAPL, AMZN, and META on Thursday after-hours.

Stocks closed near their worst levels on the day following the FOMC meeting. The focus was back on rate cuts and with the Fed stating not until after the March meeting, selling accelerated. The charts show the downturn with some testing first levels of support and others testing the 10 and 20-day MA. The focus is all on the news from the Fed, earnings, and the economics. As we stated in the weekly update this was going to be a challenging week with so much data. The NASDAQ closed down 2.2%, DIA was down 0.8%, and the SP500 was down 1.6%. The major indexes struggled with the FOMC. The SOXX was down 1.4%. Small Caps (Russell 2000) were down 2.4%. The ten-year treasury yield was 3.96% down 10 bps for the day. Crude (USO) was down 2.6%. (UGA) was down 3%. Natural gas (UNG) was up 1.1%. The dollar was up 0.2%. 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: “Short-term volatility is greatest at turning points and diminishes as a trend becomes established.” — George Soros, Hedge Fund Manager.

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”.

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 $21.08. 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.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed down 79 points to 4845 moving the index down 1.61% with above-average volume. The index started lower on earnings data and closed at the lows of the day following the FOMC meeting. The sleepy market woke up to the Fed not agreeing with its beliefs. Zero of the eleven sectors closed higher on the day with healthcare as the leader down 0.1%. The worst performer of the day was technology down 2.1%. The VIX index closed at 14.3 higher on the day. Plenty to ponder between the headlines and facts. Patience. 4815 level of support to hold.

XLB – Basic Materials bottom reversal in play with key support at $81. Held at support and was up 0.3% for the week. Letting the consolidation unfold near term. Activity picking up in the materials CX and EXP.

XLU – Utilities Broke back below the $60.10 support and bounced. Need to clear $61.50 near term. Sold SDP $13.50 for a small gain. Watching how this unfolds. The sector was up 0.4% for the week. Cleared $61.50… gave up some of the move.

IYZ – Telecom Topping pattern continued higher and added to our position at $22.93. The uptrend remains in play. The sector was up 3.2% for the week. Tested lower.

XLP – Consumer Staples Uptrend remains in place for the defensive sector with some modest testing. Trading back at the top of the current range. No Positions. The sector was up 0.8% for the week. Broke higher to continue the uptrend.

XLI – Industrials Topping pattern. Moved back to the top of the current range. $110.75 level of support to hold. No Positions. The sector was up 0.8% for the week.

XLV – Healthcare remains in an uptrend from the October lows. Some sideways trading last month but holding above support. Entry $129. Stop $138.29. The sector was down 0.1% for the week.

XLE – Energy Started a bottoming pattern and cleared $81.97 resistance for entry. Crude oil prices rising to help the sector recover. Entry ERX $52.15. Stop $54.20 (adjusted). Let it play out. Need to clear $84.33 resistance. Volatile day moved back below $84.33.

XLK – Technology Entry $193. Stop $200. Bounce-off support at $183.50 and continued the uptrend. Tested Friday with some profit-taking and worries in SOXX. The sector was up 0.8% for the week. Topping pattern… moved lower on FOMC.

XLF – Financials Entry $33.65. Stop $37. Trading sideways to higher with a solid week. The sector was up 1.9% for the week. Broke above the resistance at $37.95. Solid move higher on Tuesday tested on Wednesday.

XLY – Consumer Discretionary Tested support $171.50. Downtrending channel on the chart. Needs to clear $176.70. The sector was down 1.8% for the week. Solid upside Monday… the sector has been lagging and is worth our attention near term… still in the downside range.

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 0.6% for the week. New home sales data had a mild impact. Watching Interest rates near term. Broke support at the $87 level.

Summary: The index traded lower following both earnings and the FOMC news. Yes, there are plenty of issues facing the markets both short-term and long-term. The buyers got a blast of reality from the Fed relative to rate cuts. Now we watch to see how they and others respond to the news. We hit some stops, adjusted some stops, and look for the opportunities ahead. More economic and earnings data on Thursday to digest along with the aftermath of the FOMC meeting. Technology remains the leader and is testing currently. Plenty of rhetoric in the headlines as we watch the charts short term for direction. 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 down 345 points to 15,164 as the index was down 2.23% for the day. Large caps and technology struggled on the day as earnings and the FOMC disappointed investors. The index tested the extension of the uptrend and moved into a consolidation phase. 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 down 1.96% for the day as the mega-caps moved lower on above-average volume. Large-cap tech has a big question mark following earnings with more to come. Manage stops and let it play out. Entry $354.20. Stop $415. Watching for consolidation near term.

Semiconductors (SOXX) Entry $563.80. Stop $602 (HIT STOP). Tested lower… Key support at $583.41. Watching how this unfolds and what opportunities are presented. The sector was down 0.6% for the week. Thursday will be important to the near term direction.

Software (IGV) continued the uptrend from the January test. Shows some topping on the chart. The sector was up 1.2% for the week. Watching how this plays out in the coming week. Disappointing day… Letting this unfold.

Biotech (IBB) Topping pattern on the chart and letting it unfold. Entry $121.30. Stop $133. The sector was up 0.1% for the week. $136.50 level to clear on the upside.

Small-Cap Index (IWM) Downtrending channel developing. Added at $192.13 upside move. Need to clear $198.64 near term. Flag pattern on the chart. Cleared $198.64 and Fell 2.4% following FOMC and back into the channel.

Transports (IYT) Broke support at the $254.50 level and bounced back into the previous trading range. Red Sea issues continue to escalate. BDRY has done well in response, bouncing back from the test at $8.95. The sector was up 1.7%. Solid bounce confirming the reversal at support. Still need to clear the $266 level. Tested lower on Tuesday & Wednesday.

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.

The Dollar (UUP) The dollar has bounced off the December lows and gaining some strength of late. The buck was up 0.3% for the week. Bounced on FOMC decision.

Treasury Yield 10-Year Bond (TNX) The yield has been creeping higher of late as the 10-year moves above the 4% mark again. TLT triggered a short-side opportunity TMV entry $32.10. Stop $33.75. The yield moved from 4.15% to 4.16% this week up 1 bps. TLT was down 0.3% for the week. Yields dipped on the FOMC to 3.96%

Crude oil (USO) Remains a challenge relative to clarity. Production has been higher than expected as OPEC allowed producers to have voluntary cuts. Iran and Russia continue to produce with the need of money. USO broke from the bottom consolidation pattern offering an entry $69.50. Added UCO $27.40. Stop $28. Positive trade opportunity but rising oil has other implications to the economic picture if it continues. The commodity was up 6.2% for the week.

Natural Gas (UNG) The move higher from the December lows came to an abrupt end this week 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. And build in supply on weather and demand. Looking for the next opportunity. The commodity was down 3.1% for the week. Attempting to find support.

Gold (GLD) The commodity dipped below the uptrend line with support at $183.72. The dollar gained some near-term strength adding downside pressure on the metal. Letting this unfold near term. The metal was down 0.5% for the week. Sideways trend. Held support with a modest bounce.

FINAL NOTES

Wednesday: The broad index maintained the uptrend but showed testing on the charts following the FOMC meeting. Technology is the sector to watch as earnings disappointed from MSFT, AMD, and GOOGL. More earnings coming Thursday after-hours. All eleven sectors closed lower on Wednesday. Watching how things unfold after sleeping on the FOMC decision. We discussed the week being filled with data from the end of the month’s economic news, FOMC meeting, and earnings and it keeps coming the next two days. It may be prudent to see how all the dust settles and where the opportunities are heading into the weekend. Plenty of issues on the table. Taking what is offered and letting it all unfold.

Our longer-term view is the uptrend from the October lows. 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. The key currently is to let the short term 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 lows 2020 lows has not resumed but from October 2022 has. 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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