Investors and traders find themselves in somewhat of an epic time in the market and the economy. Rarely have we seen so many opposing opinions.
Last week, the US jobs report showed a relatively strong jobs market, albeit with millions of vacancies still open and an increasing number of people no longer looking for work. The global economy remains in an energy crisis, compounded by supply chain issues, and shortages of supply. Over the weekend, we saw civil unrest erupt in Sri Lanka, Kenya, Norway, and Libya, and that’s in addition to the ongoing Ukraine-Russia war.
This week, the US market is reconciling the upcoming consumer price index (CPI) reading, earnings season, the Twitter-Musk scandal, and an inverted yield curve. At the same time, junk bonds and high-grade corporate bonds look like they are trying to bottom, suggesting the market is expecting a more dovish stance from the US Federal Reserve. All the while, the US dollar remains strong, oil prices have fallen and gold tests major support near to 2021 lows.
These confoundingly diparate facts have analysts, fund managers, traders, economists and talking heads all in a tizzy. My Twitter feed is filled with economic catchphrases like recession, stagflation, deflation, and hyperinflation.
Making sense of the marco environment
My ’economic modern family’ is a guide to understanding how different sectors are performing, and how that impacts the economy and the overall stock market. Watching this family of one index and five key sectors could help us make more informed trading decisions.
The six indicators in the modern family are:
1. Russell 2000 (iShares Russell 2000 ETF [IWM]) – ‘Grandpa’. This index represents 2000 US domestic small cap stocks and is an excellent way to gauge the health of many companies.
Currently, IWM sits well below the 200-week moving average (WMA), yet above the recent lows. A move over 177-178 could be a bit of gamechanger, or at the very least imply more of a summer rally could be in store. A break under 170 and 160 as the next support looks more likely.
2. The retail sector (SPDR S&P Retail ETF [XRT]) – ‘Grandma’. Mainly bricks and mortar retail, grandma controls the family budget. Almost 70% of GDP is driven by consumer spending, so it’s an excellent measure of the strength of the US economy and consumer confidence.
XRT is in better shape than the Russell index, as it sits right at the 200-WMA. Retail sales are also coming up at the end of the week. Overall, as weak as the consumer is said to be, there is still lots of spending going on.
3. Transportation (iShares Transportation ETF [IYT]) – planes, trains and automobiles – the transportation sector is a mirror of the demand side of the economy.
IYT might be the most hopeful sign that we will avert a recession. Currently priced above the 200-WMA, the trend remains bearish. However, true to a more stagflationary environment, it can continue its countertrend rally even if commodity prices recover from here, until the point where demand once again outstrips supply and cost begin to rise again.
4. Regional banks (SPDR S&P Regional Banking ETF [KRE]) – the ‘prodigal son’. The banking sector, often lavish, then contrite when it oversteps, but often at a cost to US citizens.
KRE is classically range-bound. With bank earnings coming up, we would follow a break up or down between $56.00-$60.00.
5. Biotechnology (iShares Nasdaq Biotechnology ETF [IBB]) – the ‘big brother'. This highly speculated industry helps us to assess where money is flowing. If speculators are confident, they will park money here. Similar to healthcare, biotech can be more resistant to inflation and recession.
A leader thus far, IBB also has yet to clear its 200-WMA. That supports a bear market rally more than a bottom at this point.
6. Semiconductors (VanEck Semiconductor ETF [SMH]) – the ‘sister’. The semiconductor industry is at the forefront of innovation, and a major player in many of the strongest technology trends.
SMH – the ultimate growth sector – is above the 200-WMA. This tells us that, should the macroeconomic environment improve, this sector will lead, as it has done throughout the last decade and a half. It also implies the Fed might not be as aggressive as it’s suggesting. If this is the case, it should boost demand, and thereby inflation.
Each of the above indicators provides important information about the current state of the stock market and economy. By tracking these ETFs, it’s possible to get a clearer picture of where the market is heading, and how to position your portfolio. A sector rotation can provide opportunities in a changing macro landscape, and as a potential trade opportunity in a related ETF.
Mish’s ETF support and resistance levels
S&P 500 (SPY) 372-386 new trading range to watch
Russell 2000 (IWM) 170 support must hold
Dow (DIA) 307 support and needs to clear 315
Nasdaq (QQQ) Looking heavy unless it clears 297
KRE (Regional Banks) 56 the 200 WMA; 60 resistance
SMH (Semiconductors) 200 now interim support; 210 resistance
IYT (Transportation) 211.90 support, with resistance at 220
IBB (Biotechnology) 129.50 resistance; 117 support
XRT (Retail) 60.75 the 200-WMA; 57.50 support
Mish Schneider is MarketGauge’s director of trading education and research. Read more of her market analysis here
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
