U.S. markets showed slight weakness on Thursday’s open before regaining momentum shortly afterwards to push higher highs and near-term resistance levels.
The major indexes got an added spike in the final hour of action on reports the U.S was weighing lifting China tariffs to hasten a trade deal.
The overall gains and continued closes above the 50-day moving averages remain a bullish signal for higher highs over the near-term. Volatility continues to ease with the VIX falling for the 11th time in the past 15 sessions.
The Russell 2000 rose 0.9% after trading a late day high 1,470.
Fresh and lower resistance at 1,465-1,480 was cleared and held on the 2nd-straight close above the 50-day moving average.
The S&P 500 soared 0.8% after testing a session high of 2,645.
Lower resistance at 2,625-2,650 and the 50-day moving average was cleared and held with a move above the latter signaling additional strength.
The Dow jumped 0.7% following the push run to 24,474.
Lower resistance at 24,250-24,500 was cleared and held with the close above the 50-day moving being a continuing bullish signal.
The Nasdaq was also higher by 0.7% following the second half push to 7,113.
Fresh and lower resistance 7,100-7,150 held for the 2nd-straight session with a move above the latter getting 7,200-7,250 in play.
Materials and Industrials led sector strength after zooming 1.8% and and 1.7%, respectively. Healthcare and Energy were up 0.9%.
There were no sector laggards.
Global Economy – European markets closed mostly in the red after Prime Minister Theresa May narrowly won a no-confidence vote and urged other party leaders to hold cross-party talks in an effort to break the current deadlock on a Brexit deal.
An outline for a backup plan is due by Monday, with expectations of Westminster to push for an extension of Article 50 past March 29th.
The Belgium20 fell 0.5% and UK’s FTSE 100 declined 0.4%. France’s CAC 40 was down 0.3% and Germany’s DAX 30 slipped 0.1%. The Stoxx 600 Europe was up a tenth-point, or 0.04%.
Eurozone inflation slowed in December to 1.6% on the year, while core indicators remained at stable low levels. This is well below the ECB’s target of a rate below, but close to 2%.
The news could complicate the central bank’s path for a possible interest rate hike over the coming months.
Asian markets were mixed following comments from the Peoples Bank of China. The PBOC said total liquidity of the banking system is declining rather quickly and why they added $83 billion to offset the peak of tax season.
Hong Kong’s Hang Seng dropped 0.5% and China’s Shanghai gave back 0.4%.
Japan’s Nikkei dipped 0.2%. Australia’s S&P/ASX 200 gained 0.3% and South Korea’s Kospi climbed a point, or 0.1%.
Initial Jobless Claims fell 3,000 to 213,000, below estimates for a print of 220,000. The 4-week moving average slipped to 220,750 versus the prior 221,750.
Continuing claims rebounded 18,000 to 1,737,000 while claims filed by Federal employees rose 6,000.
January Philadelphia Fed Business Outlook Survey bounced 7.9 points to 17, topping forecasts of 10. The employment index fell to 9.6 from 19.1 while new orders jumped to 21.3 versus 13.3.
Prices paid declined to 32.7 from 38.9 with prices received slipping to 24.8 from 29. The 6-month outlook index improved to 31.2 versus 29.9, with the employment index at 34.7 from 33.5, and new orders index at 32.2 from 38.5.
The future prices paid plunged to 39.9 from 60.9 with prices received at 34.1 from 47.9, while capex fell to 31.6 from 34.5.
Housing Starts were postponed due to the partial government shutdown.
Market Sentiment – Vice Chairman of Supervision Randal Quarles said the economy is very strong, noting that job creation in December was a very big number.
He said inflation is very well contained, especially with oil prices falling. He suggested that financial markets have recently been reacting to doubts about the strength of global growth, including in China and Europe.
Quarles went on to add markets are more attuned to downside risks, but the core base case scenario for the U.S. economy is very strong. While he sees some stretched valuations in equities and commercial real estate, he views overall risk to U.S. financial stability as moderate.
The iShares 20+ Year Treasury Bond ETF (TLT) tested an intraday high of $120.53 while closing higher for the 2nd-straight session.
Lower resistance at $120.50-$121 held with a move above the latter being a slightly bullish signal.
Support remains at $120-$119.50 and levels that have been holding the past 3 sessions.
A close the latter opens up risk towards $119-$118.50.
Market Analysis – The Russell 3000 Index ($RUA) closed higher for the 2nd-straight session, and for 8th time in the past 9, after making an intraday run to 1,560.
Fresh and major resistance at 1,550 and the 50-day moving average was cleared and held.
This level served as prior support from early December with continued closes above 1,550 keeping 1,575-1,580 in the mix.
Rising support is at 1,540-1,525. A close below the latter over the near-term would be a bearish development and signal a possible near-term top.
RSI is back in an uptrend with resistance at 60 and the late November peak.
A move above this level would signal additional strength towards 65-70 and September and August highs. Support is at 55-50.
The Real Estate Select Sector Spider (XLRE) closed in the green for the 3rd-straight session and for the 5th time in 6 after tapping a high of $32.58.
Fresh resistance at $32.50-$32.75 held on the 2nd-straight close above the 50-day moving average.
A close above the latter, and prior support from early December, would be a bullish signal for higher highs.
Rising support is at $32.25-$32 with a move below the latter signaling additional weakness and a possible near-term top.
RSI is in an uptrend with resistance at 60.
A move above this level would signal additional strength towards 65-70 with the latter representing the early December peak. Support is at 55-50.
Current Position Update
More upside as expected.
Our leverage to the upside is helping the rotation profit.
We should realistically expect minor downside in the next few sessions as stocks make their way and reach for the 200 day line to the upside.
Earnings are the major driver at this time…the negative performance is being brushed off by Wall Street – which is unusual considering the market vulnerability from China.
Most practical scenario is congestion with increased volatility once again.
We are allocating the portfolio as follows:
Long 25% in XLY closed on Thursday at 105.35
Long 25% in XLV closed on Thursday at 89.09
Long 25% in XLRE closed on Thursday at 32.56
Short 25% in XLK closed on Thursday at 64.37
Option Traders… the following regular MONTHLY options meet our criteria:
XLY – MAR 105 CALL (Expiration Date March 15, 2019)
XLV – MAR 87 CALL (Expiration Date March 15, 2019)
XLRE – MAY 32 CALL (Expiration Date May 17, 2019)
XLK – MAR 64 PUT (Expiration Date March 15, 2019)
All the best,
Roger Scott.