Jim’s Notes Weekend Recap & Outlook

Moving the Market – February 18th

The markets ended the week on a negative note as PPI shows higher inflation levels than expected confirming with CPI that prices are still rising. It was a challenging week for stocks as they closed the week lower. It was the first time is six weeks the indexes have seen negative returns. The interesting part was investors seemed to shrug off the PPI data as the losses were not like Tuesday’s decline after CPI. All said, only three sectors closed in positive territory. For the week seven of the eleven sectors closed higher. This is bothering some as investors consider the market ‘overpriced’. Goldman Sach warned several times this week about the market, “a breather is warranted, and likely.” Thus, the challenge we all face is wanting to predict what is going to happen. While the solution is to place your stops at the level of risk you are willing to accept currently based on the market activity and let the trends unfold. It isn’t about picking the top or bottom it is about the trend. MGK was down 0.7% versus RSP was down 0.4% a shift away from large caps on the day. Mega caps were down 1.6% for the week showing some rotation away from the sector. Technology fell 2.5% to lead the downside move. In the last two weeks, we have seen a divergence in the ratios of growth vs selling. The number of stocks trading above the 200 and 50-day MA is declining… seeing more slowing. That makes us cautious and it also validates more risk short term in the markets. We have pared back some positions and to protect the gains and adjusted our stops accordingly.

The indexes struggled Friday as volume continued to fade. The hotter PPI pushed interest rates up again along with the dollar… the transportation sector and small caps led the downside on Friday. Watching the volatility factor as it picked up in the afternoon trading. The NASDAQ closed down 0.8%, DIA was down 0.5%, and the SP500 was down 0.4%. The major indexes were lower on the day. The SOXX was down 0.5%. Small Caps (Russell 2000) were down 1.3%. The ten-year treasury yield was 4.29% up 5 bps for the day. Crude (USO) was up 0.7%. (UGA) was up 0.3%. Natural gas (UNG) was up 1.3%. The dollar was up 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: “The elements of good trading are 1) cutting losses, 2) cutting losses, and 3) cutting losses. If you can follow these three rules, you may have a chance.” — Ed Seykota.

Sector Rotation And The S&P 500 Index

The S&P 500 index closed down 24 points to 5005 moving the index down 0.48% with below-average volume. The index held above the 5000 level. Money flow declined for the week showing rotation out. three of the eleven sectors closed higher on the day with basic materials as the leader up 0.5%. The worst performer of the day was telecom down 1.5%. The VIX index closed at 14.2 higher on the day. Plenty to ponder between the headlines and the facts. Held the 20-day EMA and bounce. Watching how the markets respond to the distribution and rotation.

Leaders:

XLK – Technology Entry $183. Stop $202. Bounce-off support at $183.50 and renewed the uptrend. Trading sideways. The sector was down 2.5% for the week.

XLY – Consumer Discretionary Tested support $171.50. Moved into a downtrend channel on the chart and moved back to the previous highs. Needs to break above the December high. The sector was down 0.4% for the week.

XLF – Financials Entry $33.65. Stop $38.70. Broke higher from the consolidation pattern. The sector was up 1.4% for the week. Holding move above the resistance at $37.95. NYCB regional bank worries is worthy of our attention moving forward.

XLV – Healthcare remains in an uptrend from the October lows. Solid upside for the week confirming the move above the previous high. Entry $129. Stop $141. The sector was up 1.1% for the week.

XLP – Consumer Staples Uptrend remains in place with sideways trading the last few weeks. No Positions. The sector was up 0.2% for the week. $71.58 support.

XLI – Industrials Uptrend remains in play moving higher on the week. No Positions. The sector was up 0.9% for the week. GE and LDOS adding leadership.

Laggards:

XLU – Utilities Moved back to the $60.10 support level. In a downtrend from the December highs. Watching how this unfolds. The sector was up 1.6% for the week.

XLE – Energy Cleared $84.33 resistance breaking from the trading range with crude oil moving higher helping the stocks. Entry ERX $52.15. Stop $54.20 (adjusted). Let it play out. The chart remains in a downtrend from the September highs.

IYZ – Telecom Broke below support at $22.93 offering a downside opportunity. Added to the downside to end the week. The sector was down 2.1% for the week. Solid gain on the short trade.

XLB – Basic Materials bottom reversal in play with key support at $81. Resuming the uptrend with solid mover for the week was up 2.4% for the week. Activity picking up in the materials VMC and EXP.

Losers:

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 0.05% for the week. Watching Interest rates near term. Remains in a short-term downtrend from the December highs.

Summary:

The index index is testing the third leg of the uptrend. Money flow got some mild distribution last few days. XLE, XLF, XLB, IYR, and XLV posted solid moves higher for the week. Technology lagged closing in negative territory. Technically the uptrend remains in play and the buyers are present, but seeing some shifting. 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 Indexes & Sectors To Watch

The NASDAQ index closed down 130 points to 15,775 as the index was down 0.8% for the day. Some weakness in both semiconductors and software held the index lower on the day. Commodities and biotech helped the upside efforts. The uptrend remains in play managing the risk that is and watching the leadership.

NASDAQ 100 (QQQ) was down 0.9% for the day as the mega-caps tested support again. The uptrend remains on the chart. Manage stops and let it play out. Entry $354.20. Stop $425. Patience.

Semiconductors (SOXX) Added position at $601. Stop $612. Tested lower… and looking for buyers… NVDA earnings next week will give insight. The sector was down 0.6% for the week. The uptrend from the November lows remains in play.

Software (IGV) continued the uptrend from the January test. Broke higher from the topping on the chart and testing. The sector was down 3.2% for the week. Adjusted stop on the move higher.

Biotech (IBB) Topping pattern on the chart and a modest downtrend from the January highs. The sector was up 0.8% for the week. $136.50 level to clear on the upside.

Small-Cap Index (IWM) downtrend reversal with a move back toward the December highs. Added at $192.13 upside move. Stop $192.13. Cleared $198.64 bar. The flag pattern on the chart broke to the upside. Letting it unfold with a breakeven stop.

Transports (IYT) Broke higher from the sideways trading range and confirmed. Despite the Red Sea issues continuing to escalate the sector is moving higher. BDRY has done well in response, bouncing back from the test at $8.95. The sector was up 1.2% for the week. Entry $266. Stop $263.

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 through to consumers… this is a growing issue so look for disruption to the supply chains. BDRY entry $9.70. Stop $11.40

The Dollar (UUP) The dollar bounced off the December lows and has not looked back. Stronger dollar in January. Fed talks on higher interest rates are keeping the dollar higher. The buck was up 0.3% for the week.

Treasury Yield 10-Year Bond (TNX) The yield on the 10-year bond jumped following the CPI and PPI data. The yield moved from 4.19% to 4.29% this week up 106 bps. Higher rates are not good for bond prices or banks at this juncture. TLT was down 1.1% for the week. TMV has been the trade of late.

Crude oil (USO) bottom reversal last two weeks has moved to resistance at the $73.25 level. Production has been higher than expected as OPEC juggles its production outlook. Of interest to this conversation is the increased production in the US. OPEC has set a meeting for March to discuss extending their production cuts. As seen on the chart it is attempting to renew an uptrend from the December lows… plenty of volatility to go with it. The commodity was up 2.4% for the week. Entry UCO $26.70. Stop $28.65.

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. Not seeing any reversal to the downtrend currently. Managing our stops on KOLD. The commodity was down 12.5% for the week.

Gold (GLD) The commodity traded sideways with some volatility sparked by a stronger dollar the last month. The metal did bounce at support $183.72. The metal was down 0.6% for the week.

FINAL NOTES

Friday: The broad index held the longer-term uptrend and tested to close in negative territory for the week down 0.4%. Plenty of chatter and speculation on direction and leadership. Three of the eleven sectors closed higher with some in the leaders. For the week seven of the sectors were higher. VIX moved to 14.2 and still elevated as we continue to track the volatility levels. Plenty of distractions in the activity, but we remained focused on what is moving and whether the buyers remained in control showing some shift during the week on inflation data.

Longer-Term View: The uptrend from the October lows continues. They moved above the July and August highs and broke above the 2021 highs to a new high. This resumes the long-term uptrend from the lows of 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. 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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