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This week, Fed Chair Jerome Powell gave his semiannual testimony before the Senate Banking Committee. The biggest takeaway from his first day at the podium?
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
Powell said that inflation remains high and the labor market is strong and that, even though inflation has been moderating in recent months, it still has a long way to go before it reaches 2%.
These comments triggered a 1.5% selloff across the market on Tuesday, with every sector finishing lower.
On Wednesday, Powell repeated his message that the U.S. central bank is likely to take rates higher than previously anticipated, but went off-script to stress that policymakers had not yet made up their minds on the size of their interest-rate increase later this month.
“If — and I stress that no decision has been made on this — but if the totality of the data were to indicate that faster tightening is warranted, we’d be prepared to increase the pace of rate hikes.”
The market fared a little better Wednesday, with the three major indexes mixed for the day. But then things collapsed Thursday with everyone anxiously awaiting the next economic report that could tilt the Fed’s choice.
Investors have increased their bets that the central bank could raise interest rates by 50 basis points when it gathers later this month instead of continuing the quarter-point pace from the previous meeting. They also project that the Fed’s policy benchmark will peak at around 5.6% this year, up from 5.5% on Monday.
I think the most interesting takeaway from all of this is the potential for the Federal Reserve to go back up to a 50-bps hike after slowing to 25 basis points in the latest meeting.
Why did that catch my attention? Because the Fed hasn’t stutter-stepped at the end of a rate hiking cycle since 1990.
While the jump back to 50 points is by no way a done deal — as Powell took the time to stress — it does make me feel like maybe the Fed’s path to 2% isn’t quite as well planned as anyone originally assumed. The messaging is definitely less straightforward than it was last year.
That messaging has reignited the warning of a looming recession. So today, let’s take a look at stocks that tend to do well in that kind of market environment.
During a recession, stocks that tend to perform well are those in defensive sectors, such as healthcare, consumer staples, and utilities.
These sectors are considered defensive because they offer products and services that are in demand regardless of the state of the economy, like food, household products, and medicines. Since people will still need to buy these things even in a recession, these companies tend to be more stable than others.
Some funds I’m adding to my Magnifi watchlist include Health Care Select Sector SPDR Fund (XLV), Consumer Staples Select Sector SPDR Fund (XLP), and Vanguard Utilities Index Fund ETF (VPU).
All three of these funds outperformed the broader market indexes last year — a time when many investors believed there was a recession looming in our future. Each of the price charts below is for the full year 2022.
Health Care Select Sector SPDR Fund (XLV)
This is an exchange-traded fund that tracks the performance of companies in the healthcare sector of the S&P 500 index. The fund invests in a diversified portfolio of companies that provide products and services related to healthcare, including pharmaceuticals, biotechnology, medical devices, and health care providers.
The fund currently holds 65 stocks, with some of the largest holdings including Johnson & Johnson, Pfizer, UnitedHealth Group, and Merck. These companies are leaders in their respective fields and have a history of providing strong financial performance.
Healthcare is a necessity, regardless of the state of the economy, so companies in this sector are less susceptible to economic downturns than those in more cyclical sectors. As a result, XLV is often considered a good choice for investors seeking out a defensive investment that can provide stability during market turbulence.

XLV charges an expense ratio of 0.10%, which is relatively low compared to other healthcare funds ETFs.
Consumer Staples Select Sector SPDR Fund (XLP)
This exchange-traded fund tracks the performance of companies in the consumer staples sector of the S&P 500 index. The consumer staples sector includes companies that produce and sell everyday household items, such as food, beverages, tobacco, and personal care products.
XLP is one of the largest and most liquid ETFs in the consumer staples sector, with over $16 billion in assets under management. The fund seeks to provide investment results that, before expenses, correspond to the price and yield performance of the Consumer Staples Select Sector Index.
The fund holds 34 stocks in its portfolio, with the top holdings including well-known companies such as Procter & Gamble, Coca-Cola, and PepsiCo. These companies are often considered to be “defensive” stocks, as demand for their products tends to be relatively stable even during economic downturns.
This defensive nature of consumer staples companies is why XLP is often a popular investment choice for investors looking for stability and income during market downturns.

XLP charges an expense ratio of 0.10%, which is relatively low compared to other consumer staples ETFs. The fund also pays a dividend yield of around 2.5%, which can be attractive for income-seeking investors.
Vanguard Utilities Index Fund (VPU)
This is a mutual fund that seeks to track the performance of the MSCI US Investable Market Utilities Index. This index includes companies that provide essential services like electricity, gas, and water, as well as companies involved in infrastructure operations and communications.
These companies can do well during recessions because they tend to have steady cash flows and are less affected by economic ups and downs.
The fund aims to provide investors with exposure to the utilities sector, which is often considered a defensive sector because demand for utilities tends to be relatively stable regardless of the economic cycle. As a result, utilities stocks are often sought after by investors looking for stable returns and lower volatility during times of economic uncertainty or recession.

VPU is made up of approximately 73 holdings — including NextEra Energy, Dominion Energy, and American Electric Power Company — and has a low expense ratio of 0.10%, which means investors can benefit from broad exposure to the utilities sector while keeping costs low. The fund is primarily composed of large-cap companies, with the top 10 holdings accounting for approximately 56% of the fund’s assets.
It is important to remember that while these sectors are often considered to be defensive investments, they are not immune to market downturns. Economic factors, such as inflation, changes in the healthcare industry, changing consumer tastes, and changing energy prices can affect the performance of these companies. As with any investment, it is important for investors to carefully consider their investment objectives and risk tolerance before investing in any fund or ETF.
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If you read our ETF Watchlist for today, you have seen we are already bearish the Financial Sector, so we didn’t have much trouble finding a stock that could fit the description for a short trade.
Today, we have Goldman Sachs (GS) on our trade watch. The stock has fallen down to a key support level, around 340. The important piece here is a break and failure to reclaim that level likely means there will be further declines.
This is a trade we like because we are getting a couple different confirmations of this being a higher probability trade than a lot of other trades. First, we have the appearance of a pretty weak market. Second, we have the added benefit of the sector itself looking weak, as well. Finally, the stock itself looks weak and is also approaching a major level of support.
The S&P 500, XLF (our financial sector proxy), and GS are all approaching meaningful support levels. Watch the video below for more details on the GS trade.
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For even more about my favorite stocks, setups, and strategies, join my students and I in The Profit Machine. Every week, you will get exclusive access to all things option trading, from the stocks I trade the most, and the setups I look for when trading. The best part, you’ll receive all my trades every step of the learning process, so not only will you get a world-class education, but you’ll also earn while you learn.

Get a jump start on your options education and put yourself in position to win in 2023. Sign up today! Until then…
Good Luck With Your Trading!
Christian Tharp, CMT

ETF Watchlist
Yesterday, the S&P rejected pretty hard off the 4000-4010 area and it was a run on the market from there on. Now, it’s approaching yet another major support level, which if it were to break, would likely trigger more selling.
We aren’t very far from breaking this level on the S&P and it looks like this level could very well be in play for the final trading day of the week. The 3900 level on SPX has three trend lines all converging on it, so this is a major level my students and I will be watching very closely. A break of this level would make heading back into the jaws of a bear market all but a certainty.
This level is a major level. If it holds, we may just be testing a low, but if it doesn’t, don’t be surprised to see 3800 tested next.
Financial Select Sector SPDR ETF (XLF)
After the collapse of Silicon Valley Bank yesterday, watch out for a little run on the banks. Not that there will be much contagion, but if the levels from above do break, this may supply a little bit of a push to send this sector lower.
This comes with waiting for confirmation of course, but should the market maintain the weakness from yesterday, this sector may be in for lower prices.
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My Smart Trades options trading service is where I teach my students how I trade options on some of the largest ETFs on the exchange. As you learn, you’ll get exclusive access to all my trades with notifications any time one is put on. Now, you can learn how many use this high-income skill to achieve financial freedom. Join today!
I look forward to trading with you, but until then, as always…
Good Luck With Your Trading!
Christian Tharp, CMT

The S&P 500 and Nasdaq Composite were both down to start last week but closed on their highs to finish up 1.9% and 2.6%, respectively, keeping them well in positive territory on a year-to-date basis. Plus, despite the recent pullback, the bulls defended the S&P 500 near its 200-day moving average and the 50-day is still above the 200-day on the S&P 500 (bullish alignment), there is reason to be somewhat optimistic.
For now, the size of the pullback and the returns and drawdowns from this current breadth thrust signal have been in line with the averages, suggesting this new breadth thrust signal is not abnormal, and we can expect it to play out similarly to past precedents.

(Source: TC2000.com)
However, while the short-term picture has improved since the January lows, this recent strength has not yet translated to an improvement in the grand scheme of things. This is because both indexes remain below their 20-month moving averages (teal line). A confirmatory sign that would increase the success rate of this breadth thrust (achieving a 15%+ return from the signal at 3980 on the S&P 500) would be a monthly close back above the 20-month moving average for the S&P 500.
This level currently comes in at 4210 on the S&P 500, and a monthly close above here would push momentum to bullish on the longer-term chart, similar to what was achieved in April 2020 following the waterfall COVID-19 crash.
Digging into the breadth thrust signal a little closer, we can see that the market has been higher 88% of the time following a breadth thrust on a 12-month forward basis and 85% on a forward six-month basis. The average forward 6-month return is 11.7%, with an average 12-month return of 16.8%. This would place the S&P 500 at 4450 this summer and 4650 at year-end if it were to trade in line with the averages.
So far, as shown in the 5-day, 10-day and 1 month performance/drawdown columns, the market is trading in line with historical signals (above-average returns and very limited drawdowns).

(Source: Market Data, Author’s Table)
Valuation, Sentiment & News
While the S&P 500 remains nearly 20% below its 2022 highs, the market is far from cheap – trading at a Shiller PE ratio just below 30 – well above its long-term average. So, while some investors point to 20% plus corrections in the market as a buying opportunity, this ignores where the market began its correction from. In the case of the Q1 2022 highs, we were at a multi-decade high in terms of valuations, with the market only becoming more expensive in late 1999 and early 2000.
While the 20% market decline has helped to cool off valuations, I disagree with the market being cheap here, and I would argue it’s actually expensive.
As far as sentiment, while we entered January with levels of elevated pessimism that provided a tailwind for the market, we have seen a significant reversion to the mean since that time.
As the chart below shows, the put-call ratio has descended from readings above 1.0 (pessimism) to multiple readings below 0.60 (limited pessimism and minor complacency), suggesting that the setup is no longer favorable from a sentiment standpoint. This is corroborated by other sentiment indicators showing that while we don’t have complacency, we no longer have extreme pessimism.
This means sentiment has flipped to a neutral reading overall, with the edge no longer in favor of the bulls (as it was in January of this year).

(Source: CBOE Data, Author’s Chart)

(Source: Daily Sentiment Index Data, Author’s Chart)
Finally, with regard to the news, there wasn’t much to report over the last week. The market continues to digest the Q4 Earnings Season and prepare for what the Federal Reserve might have in store at its meeting later this month (21st, 22nd). Given the strength of the market in Q1 and the sticky nature of inflation, another 25 basis points looks to be the base case, with the potential for 50 basis points if the February inflation reading doesn’t dip below 6.5%. This will also come to suggest inflation is much harder to kill than what many originally expected. Based on this hawkish backdrop, which looked priced into the market at 3600 and not at 4050 where we sit currently, I continue to see some caution being warranted.
So, what’s the best course of action?
Heading into the week, the S&P 500 is back in the upper portion of its strong support/resistance range (3500 vs. 4315) at 4045 and near the mid-point of its range using short-term support at 3765 and resistance at 4315. This translates to a neutral reward/risk setup for the market short term.
Given that I have a low conviction short-term on market direction and we have neutral readings across the board (sentiment, valuation, technicals), I’ll stay picky when it comes to entering new positions in general market names. That’s why I remain 70% invested, and would only be interested in adding to my position if the S&P 500 were to dip closer to support at 3765.

(Source: TC2000.com)

As you read more of these articles and watch more trade breakdowns, you may begin to see some reoccurring themes. In this case, it’s a reoccurring pattern and one we have seen several times across a handful of different stocks. Seeing patterns over and over again helps in two ways:

It familiarizes you with commonly traded patterns
Gives you the confidence to act the pattern when you see it

Northrop Grumman (NOC) has formed a pattern that we have seen a couple times recently, a head and shoulders pattern, which implies a reversal from up trend to down. A break of the neckline, currently sitting just above 460, would confirm the pattern. It is important to wait for the confirmation because we don’t yet know if this pattern will fully form. If it doesn’t break the neckline and it actually reverses in the opposite direction, then it isn’t much of a head and shoulders anymore, is it?
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And for even more about my favorite stocks, setups, and strategies, join my students and I in The Profit Machine. Every week, you will get exclusive access to all things option trading, from the stocks I trade the most, and the setups I look for when trading. The best part, you’ll receive all my trades every step of the learning process, so not only will you get a world-class education, but you’ll also earn while you learn.

Get a jump start on your options education and put yourself in position to win in 2023. Sign up today! Until then…
Good Luck With Your Trading!
Christian Tharp, CMT

ETF Watchlist
The market is still going through a section of chop with prices fluctuating around between tight price ranges. Without clear direction, it’s not worth forcing trades and to look for confirmations that aren’t there. That is not our style and it shouldn’t be yours if you want to be able to trade options for a long time.
The best thing to do in times like these is to study. Watch videos, read, get extra screen time, these are all things you can do to make your trading better. Just because you can’t put on a trade doesn’t mean there aren’t ways to get better.
When you take a step back to avoid getting chopped up, you can also take a breath, reset, and try to find other setups in the market without the anxiety of also having a trade on.
Energy Select Sector SPDR ETF (XLE)
The trade we have been watching for a couple days now, being patient with our entry, comes from the energy space. As oil prices continue to stall, and with the lack luster performance of the sector yesterday, we are now looking for some confirmation of a short play.
Should this sector continue to see weakness, the XLE should see declines that will only be accelerated if the price of oil also loses ground. Keep an eye on this bearish setup and be sure to watch the video below for more!
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My Smart Trades options trading service is where I teach my students how I trade options on some of the largest ETFs on the exchange. As you learn, you’ll get exclusive access to all my trades with notifications any time one is put on. Now, you can learn how many use this high-income skill to achieve financial freedom. Join today!
I look forward to trading with you, but until then, as always…
Good Luck With Your Trading!
Christian Tharp, CMT