The positive momentum for the start of the year continued for stocks. The question is will it last? Many seem to be of the opinion that it will at least for now. Why the optimism? Simply put the markets were in oversold conditions and money wanted to find a home… thus, some buying. There is the underlying belief the Fed will stop hiking rates soon based on improving data relative to inflation. While inflation has slowed, the economic data is far from improving. So, what is a positive on one hand, is a negative on the other. If the economy slows so do earnings… which translates into lower stock prices. We saw in bank earnings plenty of warnings last week with the higher reserves for loan defaults and missed earnings by the larger banks. We will have to see how this unfolds… eventually, reality plays out, but in the meantime, we will be happy to make money going with the momentum and the trend. The economic news all week continued to show a slowing in growth and contraction as a key component of the economy. All said the markets had a positive week with money flow moving higher. The volume was higher, the VIX dropped below the August lows showing little in terms of anxiety, and the sentiment was positive. The short-term downtrend reversed last week, but the downtrend off the August highs remains in play. The S&P 500 index closed up 2.9% for the week and up 4.2% for the year. The NASDAQ was up 4.8% for the week and is up 5.9% for the week. Small Caps (Russell 2000) is up 7.1% showing positive leadership in the move. That is a key indicator for the markets showing anticipation of growth to return. The ten-year treasury yield closed at 3.51% down 6 bps on the week as TLT bounced higher on the lower rates. Important to note the dip near the 3.4% support level for the bond… a break below would be of interest. The volatility index moved to 19.4 to end the week and moved below the lows of August. Crude (USO) was 8% for the week. Gasoline (UGA) was up 12.3% for the week… not a good sign for inflation if that continues. Natural gas (UNG) was down 7.2% for the week hitting levels not seen since June 2021. The dollar was down 1.5% failing to reverse with the bounce to start the year. The goal is to see how this plays out as we move forward. We added some long side trades the last two weeks… watch and manage the immediate risk daily.
Things to Watch on This Week: 1) Does the bounce continue? 2) SPY @ $399.50 and QQQ @ $281.50 levels to clear. 3) TLT continuation with TMF. 4) SOXX $390.40 level to clear. 5) Adjusted stops on all positions to start the week.
Charts to Watch: SPY, QQQ, SOXX, IWM – need to clear the next level of resistance if they are to continue the upside move.
Previous Charts of Interest Still in Play: FCX (test support, raised stop), KWEB (breaking higher “V” bottom). UGA (double bottom). Adjusted stops as necessary. GOLD (saucer breakout). RIG (cup and handle breakout). SOXX (break upside through resistance). SPY (reversal). QQQ (reversal). IWM (Reversal).
Stops Hit: None
This Week’s Data Reports:
Quote of the Day: “Money can’t buy happiness, but neither can poverty.” – Leo Rosten
The S&P 500 index closed up 15.9 points to 3999 the index was up 0.4% with above-average volume. The index managed to hold support at 3805 and bounce above resistance at the 3895 level. The shift from a negative sentiment now faces the next resistance level at 4086. Eight of the eleven sectors closed higher on the day with consumer discretionary as the leader up 0.9%. The worst performer of the day was REITs down 0.5%. The VIX index closed at 19.4 as sentiment shifted to positive. Adjusted stops and watching.
Sector Rotation and the S&P 500 Index:
XLB – Basic Materials broke from the trading range back to the previous highs. The sector was up 4.2% for the week. Entry $79.
XLU – Utilities struggling with the 200 DMA putting the uptrend in question. The sector was up 0.4% for the week. Letting it play out.
IYZ – Telecom bottom reversal follow through and back above the previous highs. The sector was up 2.4% for the week. Solid break on the upside for the week. Entry $22.50.
XLP – Consumer Staples developing a trading range. The sector was down 1.3% for the week. Looking for a decision on direction.
XLI – Industrials bottom reversal and cleared resistance at the $99 level. The sector was up 1.5% for the week. Entry $99.20.
XLV – Healthcare Struggling to find direction needs to clear $136.50 resistance. The sector was down 0.1% for the week. Remains in a trading range.
XLE – Energy established a trading range and broke higher. The sector was up 2.7% for the week. Entry hit $89. USO and UGA are in play currently.
XLK – Technology The sector reversed off the lows finally breaking through the $127 level. This will be a key component if the upside is to continue. The sector was up 4.6% for the week. Entry at $127.50.
XLF – Financials established a bottom reversal and moved through resistance at $35.20. Added to the upside on earnings for the week. The sector was up 2.1% for the week. Entry $34.50.
XLY – Consumer Discretionary bottom reversal in play. The sector was up 5.8% for the week. After leading the downside see solid upside bounce. Entry $132.
IYR – REITs bottom reversal in play. The sector was up 4.4% for the week. Lower rates could offer some upside to the sector near term.
Summary: The index was up 2.9% for the week. It has established a bottom reversal with some positive momentum near term… the big question is can it follow through on the rally. We will watch how trading unfolds next week. 4086 is the next target level for the index as we watch and manage the risk. We added long positions over the last two weeks and remain focused short term for now. 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 78 points to 11,079 as the index was up 0.71% for the day. The chart found support at the October lows again and bounce again with a follow-through above 10,941 resistance. Technology remains the key question should the upside continue near term.
NASDAQ 100 (QQQ) was up 0.69% with the large caps bouncing off the October lows and clearing $274 resistance. $281.50 is the next level to clear. Technically the momentum shifted, but plenty of questions remain. The sector had an upside bias with 76 of the 100 stocks closing in positive territory for the week. The chart saw the money flow move higher but needs to find more momentum short term.
Semiconductors (SOXX) made a move higher to break from the bottoming range and added nicely to the upside for the week. The sector was up 6.2% for the week. $390.40 next level of resistance. Entry $355.
Software (IGV) Attempted a bottom reversal on the week but still needs some upside momentum. The sector was up 4.9% for the week. Watching how the week begins.
Biotech (IBB) The sector managed to break to the upside to end the week and needs to follow through. The sector was up 2.3% for the week. Entry $134.10.
Small-Cap Index (IWM) bottom reversal with leadership overall showing a positive trend. The sector was up 5.3% for the week. Entry $177.
Transports (IYT) Bottom reversal and positive upside momentum. The sector was up 3.73% for the week. Need to clear $234 resistance. Entry $218.
The Dollar (UUP) The dollar moved lower on economic data dropping 1% Thursday and breaking the previous lows. The dollar was up 1.5% for the week. The outlook remains negative.
Treasury Yield 10-Year Bond (TNX) The yield closed the week at 3.51% down from 3.57% last week. The yields reversed adding to the upside trade in bonds. TLT was up 1.5% for the week. Entry TLT $102.35.
Crude oil (USO) Reversal in trend for crude last week pushing back to the previous highs. Supply-demand speculation as China opens its economy and borders. USO was up 8% for the week. Entry $67.
Gold (GLD) The commodity has been trading higher as the dollar declines. The metal was up 2.9% for the week. GLD entry $154.90. Stop $174. Moved to resistance at $174.30 and got the break higher. Entry AGQ $23.50. Stop $31. Letting it run and adjusting stops.
Put/Call ratio was 0.93 on Friday… SVXY trade setup ($57.50 entry, stop $62). Positive bias.
Questions to Ponder: Navigating Uncertainty
Remember the infrastructure spending bill that Congress passed last year? $1 trillion is to be spent on refurbishing and establishing new infrastructure… it has started impacting stocks like Caterpillar (CAT) and Freeport McMoRan (FCX)… This is a sector that will be a benefactor in years to come. We own FCX and watching others as opportunities relative to the spending unfold. URI, TEX, RIO, BHP, DE… some to track.
Friday: The markets added to the upside momentum for the week. This puts SPY, IWM, and QQQ in positive territory to start the year showing positive momentum as investor sentiment shifts to positive. The economic data however remains in a downtrend. The hope is for the Fed to rest relative to rates and maybe offer stimulus looking forward… this is a long and winding road that will take time to resolve. In the meantime, we will take what is offered and manage the day-to-day activity accordingly. Watching how this unfolds relative to sentiment and outlook. We are a far way from seeing growth… my opinion. That said, we have added positions short-term on the upside move (see above). The dollar broke below the 200 DMA as lower rates help the global financial markets ease. The October lows held as support for the NASDAQ and the upside move is in play. How far does this move? Good question! We have posted the next resistance points above along with stops on every position. Take what is offered and manage the risk accordingly. Volatility closed at 19.4 as anxiety levels remain low. The money supply is shifting towards positive. Volume moved 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 negative trend… with a potential reversal… technology and consumer discretionary show negative trends. Financials reversed along with major indexes. 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.