AT A CROSSROAD FOR STOCKS - Jim Farrsh It's Coming (Bite Me Biden)

 

AT A CROSSROAD FOR STOCKS  Wkend 01/15

The new year has not been what many expected as we start the first two weeks on a down note. The Fed gets most of the blame along with the White House for the economic and inflation worries. Both have been driving the mindset of investors short term. The NASDAQ has been the downside leader giving up 4.8% for the year. The volatility has risen as well with the VIX topping 20 and closing the week at 19.1 remaining elevated. The rise shows the increased anxiety among investors about the outlook for stocks. Thus, we come to a crossroads in our approach to longer-term positions. Why the shift? Basically the fundamental, economic, and technical data are all pointing to a potential correction. Not just your garden variety kind, but the kind that changes everything financially as we know it today. Corrections don’t happen overnight they build on themselves over time and then what seems like overnight they take away long-term purchasing power. Yes, I am negative about the current environment. After four decades of managing money, you learn what a correction is by having experienced it first hand. I am not speculating doom-and-gloom, I am just focused on the data points as they relate to the economic data the last three months, the reality of a Fed delaying hiking interest rates too long, again, and a political front that is focused on passing executive orders, fear-mongering, and stifling growth all based on political agendas, not the countries best interest. That said, investors beware of your surroundings, know where the exits are before the fire begins. As we progress forward the goal is to manage money, not the markets, and to manage our emotions related to the actions of the markets. Stay focused.

Notes, News & Trades of interest…

Interest rates have moved higher to 1.77% from the start of the year close at 1.51%. The move has rattled the bond market moving TLT lower in response. The move offered a short position in TBT if you were so inclined to believe rates will continue higher. My target for yields over the next 90 days would be 1.95%… That would result in a target of $26.60 on TBT. The entry was $17.60. Worth watching near term to see how it unfolds. The Fed minutes from the last FOMC meeting rattled investors as the Fed shows a strong bias towards raising rates sooner in the first half of the year. Spoiler alert, one key piece of data in the FOMC minutes was the Fed wanting to sell part of the 8.8 trillion dollars of bonds they bought during the pandemic. That will push bond prices lower as supply rises. Higher interest rates have set up opportunities in banks as well on the upside.

Banks were another issue we addressed into the year-end as an opportunity if interest rates were to start rising. So, you had an opportunity in KBE & KRE to trade the move higher as well. $55.65 entry was hit and added. I like banks longer-term especially if the Fed remains in play relative to hiking rates. Watching the individual plays in the sector as well. BAC, RF, FITB, WFC, etc. all stand to move higher with rates. One caveat in the news is banks warning about higher wages impacting earnings. Worth our attention near term.

Technology stocks are slumping on rates moving higher… think the cost of borrowing money… think of bond offerings to fund expansion and development… cost go higher and they are one of the largest at doing both. Add in some large moves in salary increases and you can surmise why Wall Street is selling. This has my attention near term as we watch how the reaction unfolds. XLK support is $164.87 currently and watching how it unfolds. IGV has suffered the most of late and is a concern moving forward as well. Short opportunities in software have played out well. SOXX is heading lower and there are concerns relative to wage costs. Watching as supply is reported to be picking up. Take what is offered short or long.

Energy (XLE) bounced on crude prices moving towards the $80 level. The sector was oversold bounced off the 200 DMA and has been on a steady rise with a gap higher on the week. I like the sector looking forward and we have added to it twice since the lows at the 200 DMA. USO, UGA, IEO all moving nicely of late. Taking what is offered near term.

Economic data as we stated would set the tone… ISM data showed manufacturing slipping in December to 58.7% from 61.1% in November. The slowing was weather and holiday-related but it add some worries to the outlook. It is still strong and I am not overly concerned about the slump if you want to call it that. The ISM services report equally dropped in December to 67.6% from 69.1% in November. Slowing relative to inflation and other issues facing the economies globally get some benefit of the doubt here with the new virus strain impacting production and travel.

After the ADP employment data showed a big jump in the private sector it didn’t translate to the December jobs report which showed only 199k new jobs added for the month. The expectations were 408,000. The unemployment rate fell to 3.9% versus 4.1% in November. Earnings rose 0.6% ahead of the 0.4% in November. Wage inflation is a concern for me as we look forward. They will be directly priced into goods and services. Look at restaurant prices over the last six months due to wage increases along with food prices rising. A $10 hamburger is now $13. This is all part of the game looking forward.

The S&P 500 index closed up 3.8 points to 4662. It was up 0.08% with an above-average volume. The index held above 4536 support and shows a topping pattern on the chart. The upside remains in play for the major index but it shows signs of weakness overall. The index opened lower and closed higher on the day. Four of the eleven sectors closed in positive territory with the energy sector leading up 2.35%. The weakest sector was financials down 1.04%. The VIX index closed at 19.1 elevated with continued anxiety from investors. Need to see some buyers step in if we are to curtail the recent downside activity.

Sector Rotation and the S&P 500 Index:

Friday: The index was flat on the day closing the week in negative territory. The topping pattern on the chart is of concern as we watch patiently for how the direction flows near term.

XLB – Basic Materials held $86.63 support. Watching as it unfolds.

XLU – Utilities testing the run higher as natural gas prices bounce. Entry $65.70. Stop $68.50.

IYZ – Telecom ran to $33.26 resistance and tested back to the 200 DMA hitting our stop.

XLP – Consumer Staples bounced as cyclicals move on inflation worries. Broke above the previous highs tested and letting it play out for now.

XLI – Industrials are testing the upper end of the trading range and holding for now.

XLE – Energy tested the 200 DMA support and has been moving higher since. The upside opportunity remains but it will require patience looking longer term. Entry $56.33 & $54.75. Stop $60.50. Letting it run.

XLV – Healthcare testing lower hit our stops and watching how it unfolds near term.

XLK – Technology found support at $164. If we break lower add to our short positions.

XLF – Financials rallied on higher interest rates. Comments about earnings tweaking in rising expenses (wages) pushed the sector lower on Friday. KBE entry $52.37. Stop $58.25. Be patient for now.

XLY – Consumer Discretionary broke lower on economic outlook relative to the virus and inflation. Testing in a big triangle pattern.

IYR – REITs made a run to new highs and gave it back and watching the downside pressure currently.

Summary: The new year brought some selling and negative sentiment from investors. The challenge now is to be patient and let the current anxiety determine the future trend. We entered some short positions and we hit stops on long positions. Taking what is offered with a bias on the downside currently.

(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 86.9 points to 14,893 as the index was up 0.59% for the day. The index opened lower and closed higher as the index struggled with the negative sentiment. Money flow has been on the decline since mid-November with the sideways movement of late. Volume is below average. The NASDAQ 100 index (QQQ) was up 0.62% as the sector holds support at $378.10. Semiconductors (SOXX) closed up 2.39% moving off support. Technology (XLK) moved up 0.85% after testing support at $164.87. Watching and managing our risk accordingly along with opportunities.

NASDAQ 100 The index tested support at the $378.10 level and held on Friday. The move lower has been prompted by higher interest rates and speculation. Watching how this unfolds near term. The downside trade in the sector has played out well and raised our stop on Friday’s move. Holiday on Monday and we will see how the new trading week unfolds. The positive move in semiconductors is offering some optimism. Patience as it unfolds.

Semiconductors (SOXX) The sector has held up well during the selling as the hope of more supply hitting the US will help. The challenge is China shutting down again due to the virus will stall production. Watching how this unfolds following the positive move higher on Friday.

Software (IGV) The sector tested the bottom again… the double bottom pattern is in play. Looking for a defined direction. $368 is the level to clear for Upside opportunities. Raised stop on short side trades.

Biotech (IBB) The sector has struggled on the outlook for drug development and the distraction with the vaccines versus the virus chatter. Speculation is alive and well. Needs to establish a bottom. Short side trades raised stops.

Small-Cap Index (IWM) The sector held the $211.32 support again. Watching the sector for some indication of investors embracing growth again… but, you can see that isn’t happening currently.

MidCap (IJH) The sector is in a big wedge pattern of consolidation. Watching for the opportunities.

Transports (IYT) The sector is struggling with the airlines as well as other components due to labor shortages relative to the virus. This will pass as the cases decline, but for now, causing havoc for all.

The Dollar (UUP) Watching as Powell blathers about the outlook for inflation and what the Fed will do… nothing. But, that aside dollar declining is not helping matters… think oil priced in dollar… think increased prices at the pump… acts as a tax more than inflation as it is immediate.

Treasury Yield 10 Year Bond (TNX) The yield closed the week at 1.77% up from 1.76% last week. Fed set to taper faster and looking for more rate hikes in 2022. Rates are rising and the Fed is in the middle of the move. TMV entry $51.55. Stop $58.50. (adjusted).

Crude oil (USO) Buying opportunity… Entry $51, $48, and $47.55 equal size. Stop $57 (adjusted). Managing the positions as this unfolds and we gain some clarity. We will add and manage this position relative to the longer-term view. The challenge with pricing is now being impacted by the weaker dollar. Directly translates to higher oil prices. Letting it run for now.

Demand is too large for alternative energy to take over completely, thus continued upside in crude. Gasoline (UGA) held at the 200 DMA and bounced. (Entry $37 & added at $37.50). Stop $43. UNG gapped higher hitting our stops. Looking at re-entry on the short side. Energy (XLE) moved higher helping our positions. Entry $54.75. Stop $53.20. (added to positions).

Gold (GLD) The commodity found a bottom at $163.68. Oversold look on the chart as we let this near-term bounce unfold. Building bottom on the chart. $167 Entry. Stop $168. Need to get through the $171.10 resistance.

OTHER SECTOR NOTES & DATA:

Put/Call ratio was 1.09 on Friday… volatility is near 20. Watching how this unfolds in the coming week.

(The Scans are done daily and left on the page to allow you to see the progression of the opportunities or warnings. Entries are moved to the sector they apply to when done.)

A Few Questions to Ponder:

Supply chain issues have taken a back seat to the inflation and interest rate concerns in play currently. The anticipation for some relief near term. The virus spread has been rapid but less harmful to workers’ health and the reduced time of quarantine will help as well. The near term is not so great. China shutting down key port areas again. Airlines are canceling flights. Workers are out for 7-10 days but it is the numbers that are out sick that will have an impact. The overall issues remain and may well get delayed further due to the numbers relative to the virus. Longer term views remain optimistic… but investors are focused on the short-term currently.

Crypto is down 40% from the highs and begs the question relative to the future values. Yes, money has been made on the downside, but the question begs, does it stay down?

I can’t shake one nagging thought… The Fed is potentially tightening into an economic slowing period. This puts the markets in a danger zone relative to reality and the talking heads. First, look for a bounce at support. if we get the bounce, look at the strength of the bounce, ie volume and breadth. Second, if we don’t bounce the news relative to the economy will likely be the driver… short side trades will play out. Third, if the bounce is weaker, look for short-side opportunities. Know what you believe and trade according to the charts.

Washington is in play… the White House mandates continue to play into the markets outlook. The Fed is the key driver currently and one thing we know to be true is “don’t fight the Fed”.

Remember the goal is to manage risk not the market. Stay focused on what you know and take what the markets offer. The opportunities will present themselves we just have to be ready to take advantage of them.

FINAL NOTES:

Friday: The markets continue to digest the issues with the virus, the economy, the Fed, and the Whites House. The S&P 500 is in an A, B, C, D pattern and we are watching how it unfolds near term. The start of the new year has been rough for the NASDAQ as it settles down 3.7% for the start of the year. Economic data shows weakening for the second month. We have to focus on what we know and let the outcome be what it may. The downside emotions are in play… don’t underestimate the Fed. They are set to hike rates way late in the cycle and thus, inflation will remain in play along with higher interest rates… the question will be how the economy and consumers respond. Patience.

The goal remains to manage money not the markets or the pundits in the media. Let the future unfold and manage the risk that is. Track the data. Know where the markets stand relative to the facts. Money rotates to where it will be treated the best. Watch the trend, know which side the Fed is on daily, and ultimately the data will establish the longer-term trend. We remain focused on what is working and what is failing. Therein lies the opportunities.

“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 your trading strategies with a disciplined approach to investing and managing the risk of our money.