U.S. markets were in a holding pattern on Wednesday following the latest round of earnings reports and slightly weaker-than-expected economic news. The major indexes traded in tight ranges before closing mostly lower with the small-caps showing strength.

The slack session was a slightly bullish signal as Financials and the Transports closed higher and are important sectors that will need to lead the next leg higher for the market. Volatility rose slightly but is still giving a bullish reading after holding near-term resistance levels.

The Russell 2000 gained 0.1% after testing an intraday high of 1,529 while closing above its 50-day moving average for the 2nd-straight session. Lower resistance at 1,530-1,345 and the 200-day moving average was challenged but held with a close above the latter signaling additional strength towards 1,560-1,575.

The Nasdaq fell 0.3% after trading in the red throughout the session while bottoming at 8,103. Upper support at 8,100-8,050 held with a close below the latter getting 8,000 and the 50-day moving average back in play.

The S&P 500 traded in a 12-point range before slipping 0.2% and failing key resistance at the 3,000 level by 3 points. Upper support at 2,975-2,950 held on the opening fade to 2,985 with a move below the latter and the 50-day moving average at 2,941 opening up risk towards 2,925-2,900.

The Dow was lower by 0.1% following the intraday pullback to 26,943. Upper support at 27,000-26,800 was breached but held by a 2 points below with a close below the latter leading to a possible retest towards 26,600-26,400 and the 50-day moving average.

Consumer Discretionary paced sector leaders after rising 0.4% while Materials, Utilities, and Communications nudged up 0.2%. Energy and Technology were the leading sector laggards with declines of 1.4% and 0.7%, respectively.

MBA Mortgage Applications rose 0.5% following prior week gains of 0.5% and 8.1%. Refinancings continued to propel the index, increasing another 3.6% from the previous 9.8% and 14.2% surges. The purchase rate declined 4.1% following the prior 0.9% slip. The 30-year fixed mortgage rate edged up to 3.92% from 3.9% previously, but has been below 4% for 3-straight weeks.

Retail Sales for September fell 0.3%, with the ex-autos component down 0.1%. Expectations were for a rise of 0.2% for both. The 0.4% increase in the August headline was revised high to 0.6%, while the prior flat ex-auto reading was bumped up to 0.2%. Sales excluding autos, gas, and building materials were 0.1% higher versus a prior 0.3% gain. Auto sales declined 0.9% after the prior 1.9% jump. Gas station sales were 0.7% lower from -1.3%. Building materials dropped 1% after climbing 2.3%. Clothing rebounded 1.3% from -0.7%. General merchandise sales dipped 0.3% from -0.2%, with department store sales down 1.4%. Nonstore retailers sales slipped 0.3% from 1.2%.

Business Inventories were unchanged in August, matching forecasts, with sales up 0.2% and just below expectations for a rise of 0.3%. The 0.4% increase in July inventories was revised to 0.3%, with the 0.3% sales gain bumped down to 0.2%. Inventories are up 4.2% year-over-year, with sales up 1.1%. The inventory-sales ratio steady at 1.40, where it’s been since May.

NAHB Housing Market Index rose 3 points to 71 in October, topping expectations of 68, after rising 1 point to 68 in September. The current single family sales index improved to 78 from 75. The future sales index climbed to 76 from 70. The index of prospective buyer traffic rose to 54 from 50.

Atlantic Fed Business Inflation Expectations for October was up 1.8% year-over-year.

The Fed’s Beige Book reported the expansion was at a slight to modest pace, a little tepid versus the prior outlook that merely said activity expanded at a modest pace. The conditions were mixed, with Districts representing the Southern and Western regions generally more upbeat than the Midwest and Great Plains. Household spending was solid on balance. Retail sales increased modestly, and nonauto sales were up modestly and light vehicle sales generally robust. Manufacturing continued to ege lower, with some comments saying persistent trade tensions and slower global growth weighed on activity. Freight shipments had stabilized after declining in the prior reporting period while activity in nonfinancial services increased solidly. Nonresidential construction increased at a slightly slower yet still modest pace. Ag conditions deteriorated further due to the impacts of adverse weather, weak commodity prices and trade disruptions. Employment rose modestly and there was ongoing tightness in labor market conditions. Wages rose moderately. Prices increased modestly, with both retailers and manufacturers noting rising input costs, and often for items subject to the new tariffs. Retailers had relatively more success in passing on costs to customers.

Global Economy – European markets were mixed as traders awaited further guidance on the likelihood of an imminent Brexit deal between the UK and the EU. If a deal is not approved by October 19th, UK Prime Minister Boris Johnson is legally obliged to ask the EU for an extension to the current departure date of October 31st.

Germany’s DAX 30 added 0.3% and the Belgium20 edged up 0.1%. UK’s FTSE 100 fell 0.6% while France’s CAC 40 and the Stoxx 600 dipped 0.1%.

UK consumer price index for September was up 1.7% year-over-year, while eurozone CPI rose 0.4% on the month and 0.8% on the year.

Asian markets settled mostly higher after Korea’s central bank cut its policy interest rate for the 2nd time in 3 months.

Australia’s S&P/ASX 200 rallied 1.3% and Japan’s Nikkei jumped 1.2%. South Korea’s Kospi was up 0.7% and Hong Kong’s Hang Seng gained 0.6%. China’s Shanghai declined 0.4%.

The Bank of Korea’s monetary policy board trimmed the base rate by 25 basis points from 1.5% to 1.25%.

Market Sentiment – Federal Reserve Governor Lael Brainard said that central bank’s efforts to conduct monetary policy could be complicated by broad adoption of an external currency like Libra, though she indicated that the Fed is not in any rush to issue its own digital currency, saying it raises profound legal, policy and operational questions.

Brainard went on to say it should be no surprise that Libra is attracting a high level of scrutiny from lawmakers and authorities. She added that Libra, and any stablecoin project with global scale and scope, must address a core set of legal and regulatory challenges before it can facilitate a first payment.

The iShares 20+ Year Treasury Bond ETF (TLT) closed slightly higher despite the intraday pullback to $139.35. Prior and upper support at $139.50-$139 was breached but held with backup help at $138.50-$138.

Lowered resistance is at $140.50-$141 with more important hurdles remaining at $142.50-$143 and a 50-day moving average that is starting to level out.

Volatility Index – The S&P 500 Volatility Index ($VIX) snapped a 5-session losing streak after tapping a high of 14.26 shortly after the opening bell. Fresh and lower resistance at 14.50-15 easily held with a close back above the latter being a bearish development for the market.

Major support remains at 13.50 followed by 13-12.50 on a close below this level.

RSI has flatlined with support at 40. A move below this level would signal additional weakness towards 35 and the July low. Resistance is at 45-50 with the latter representing prior support from earlier this month. A close above the 50 level would be a bearish signal for the market.

Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) settled slightly in the red after trading in a tight $1.16 range and testing a morning morning low of $269.40. Upper support at $269.50-$269 was breached but held with backup help at $268-$267.50. A close below the latter would be a bearish signal and represents the gap higher from last week’s breakout.

Current resistance is at $271-$271.50. A close above the latter would signal renewed momentum with fresh hurdles at $272.50-$273 and the September all-time highs.

RSI is flatlining with support at 55-50. A move below the latter would be a bearish signal for a retest towards 45-40. Resistance is at 60 and the September peak with a close above this level signaling additional strength towards 65-70 and July highs.

Sector – The Industrials Select Sector Spider (XLI) settled in the red for just the 2nd time in the past 6 sessions following the intraday run to $77.62. Lower resistance at $77.50-$78 was breached but held. Continued closes above the latter and prior resistance from late September would be an ongoing bullish signal for a run towards $79-$79.50 and fresh 52-week peaks.

Current support is at $77-$76.50. A close below the latter would be a slightly bearish signal with risk towards $76-$75.50 and an up trending 50-day moving average.

RSI is has leveled out with support at 55-50. A move below the latter would signal additional weakness towards 45-40. Resistance is at 60. Continued closes above this level would signal additional strength towards 65-70 with the latter representing the late April peak.

We are allocating the portfolio as follows:

Long 30% in XLF closed on Wednesday at 28.02
Long 20% in XLK closed on Wednesday at 81.85
Long 30% in XLU closed on Wednesday at 63.45
Short 20% in XLE closed on Wednesday at 57.29

Option Traders… the following regular MONTHLY options meet our criteria:

XLF – 20DEC $28 Strike Price CALL (Expires December 20, 2019)
XLK20DEC $82 Strike Price CALL (Expires December 20, 2019)
XLU17JAN $63 Strike Price CALL (Expires January 17, 2020)
XLE17JAN $58 Strike Price PUT (Expires December 20, 2019)

All the best,
Roger Scott.