Is the market trusting the Fed or fading it? 

This week offered a revealing look at how different sectors are interpreting the Federal Reserve's tone.  

With JOLTS data showing a labor market cooling and inflation still hovering above comfort levels, the Economic Modern Family serves as a lens to evaluate whether investors believe in the Fed’s soft-landing narrative—or are quietly hedging against it. 

Transportation and Small Caps: Caught in the Crossfire

Transportation (IYT):

Price action improved, clearing the 200-week moving average. While concern over global demand and rising shipping/fuel costs remain, this week’s action was a lot better considering the worry that transport volume slows before summer. 

Small Caps (IWM):

Clearing key support over the 200-WMA, IWM hasn’t confirmed a breakout—we need 2 weekly closes over that key MA. Should IWM falter from here, we will see that market caution toward economic growth and borrowing conditions for smaller businesses prevail. 

On the Daily charts, IYT did not clear the 50-DMA while IWM did. 

That proves that stress in the transportation on a shorter timeframe still exists. 

We are looking for 2 days’ confirmation. There is no divergence in momentum and price.   

Interest-Rate Sensitive Sectors: Feeling the Heat

Regional Banks (KRE):

Still trading below key moving averages, KRE reflects persistent concerns over tightening credit and a cautious lending environment. The lack of follow-through in this space underscores skepticism about financial stability amid elevated rates. 

Retail (XRT):

Consumer strength, long a pillar of economic resilience, is beginning to show cracks. XRT’s rally this week suggests that the consumer is not as bad as one would think though households may be tightening wallets—a potential signal that rate hikes are indeed cooling demand. 

On the Daily chart, we can see shorter-term enthusiasm. 

KRE did get its first close over the 50-DMA. (Remember we need 2 closes). However, the momentum did not clear the 50-DMA. 

Retail also cleared over the 50-DMA. While momentum is better, XRT continues to underperform the SPY benchmark. 

SMH and IBB: Divergence or Denial?

Semiconductors (SMH):

Still riding AI tailwinds, SMH remains a market leader, suggesting risk appetite is alive—at least in tech. But is this strength masking underlying fragility in other parts of the market?  

The weekly chart, while in a better than phase than the other members of the Family, has yet to really impress. Close, but needs more. 

Biotech (IBB):

IBB saw modest gains as investors began to sniff out value. With less direct correlation to interest rates, biotech may be quietly attracting capital as growth investors rotate out of rate-sensitive plays. However, IBB still lags as it has yet to take out the April highs. 

On the Daily chart, SMH looks just like XRT IWM and IYT-not stronger or weaker in that it just cleared the 50-DMA and needs to confirm. 

Momentum and leadership look good. 

IBB though, like KRE, has yet to clear the 50-DMA. And it is underperforming the benchmark. 

In the Economic Modern Family, we always look to see who is leading and lagging. 

That IWM and IYT are now over their 200-WMAs means we have a guide. They must hold up. 

Likewise, that KRE and XRT are lagging means we have a guide. They must hang in there and not roll over. 

Is the Market Trusting the Fed… or Fading It?

Despite the Fed’s measured optimism, the Family could be on its way to a V recovery, but we need to see what happens this coming week.  

Sectors exposed to credit and the consumer are still flashing yellow, while speculative growth remains the refuge of hope. This divergence poses a critical question for investors: 

“Are we heading into a soft landing… or is this a setup for turbulence ahead?” 

This week’s Fed meeting and continued earnings reports may provide more clarity—but until then, the Family is telling us not to get too comfortable. 

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