U.S. markets closed Wednesday’s session at their lowest levels since August as a weaker-than-expected report on private employers’ hiring stoked ongoing fears that economic growth is slowing.
Technical indicators also played a major role in the overall weakness with the major indexes testing key support levels and round psychological numbers.
Volatility rose to its highest levels in a month and is confirming additional risk for the market with a number of major economic reports due out the rest of the week.
The S&P 500 stumbled 1.8% after tapping a 2nd half low of 2,874. Prior and upper support at 2,875-2,850 was breached but held with a move below the latter and the 200-day moving average signaling additional weakness towards 2,825-2,800.
The Dow skidded 1.9% after tapping an intraday low of 25,974.
Major support at the 26,000 level was breached but held with a close below 25,800 and the 200-day moving average opening up risk towards 25,600-25,400.
The Nasdaq sank 1.6% following the midday backtest to 7,744.
Late August and upper support at 7,750-7,700 held with a close below the latter and the 200-day moving average getting 7,650-7,600 in focus.
The Russell 2000 gave back 1% following the intraday plunge to 1,469.
Early September and lower support at 1,480-1,470 was stretched but held with a move below 1,465 getting the late August low at 1,450 in play.
There was no sector strength for the 2nd-straight session.
Energy was the weakest sector after tanking 2.5% while Financials and Consumer Staples fell 2%.
Global Economy – European markets settled with heavy losses following disappointing economic news that showed the UK construction sector remains mired in a downturn.
UK’s FTSE 100 was down 3.2% and France’s CAC 40 was off 3.1%. Germany’s DAX 30 declined 2.8% while the Belgium20 and the Stoxx 600 were hammered with losses of 2.7%.
UK’s construction purchasing managers’ index dropped to 43.3 from 45 versus forecasts for an unchanged reading.
Asian markets closed lower following reports North Korea fired what seemed to be a submarine based ballistic missile, adding more geopolitical uncertainty to the global markets.
South Korea’s Kospi plummeted 2% and Australia’s S&P/ASX 200 lost 1.5%. Japan’s Nikkei declined 0.5% and Hong Kong’s Hang Seng slipped 0.2%. China’s Shanghai remained closed until next week for a holiday.
MBA Mortgage Applications rebounded 8.1% following the prior week’s 10.1% drop. Strength was in the refi index which climbed 14.2% after diving 15.2% previously.
The purchase index edged up 0.9% following the prior 3.1% slide. The 30-year fixed mortgage rate fell back below 4%, slipping to 3.99% after rising to 4.02% in the week before.
It was at 4.96% a year ago. The 5-year ARM increased to 3.42% versus 3.39% previously.
The ADP Employment Report showed private payrolls increased 135,000 in September versus expectations for a print of 152,000. The service sector added 127,000 workers while education/health jobs were up 42,000.
Trade/transport employment was up 28,000 and leisure was higher by 18,000.
The goods sector added 8,000, with construction up 9,000 and manufacturing 2,000 higher.
The 195,000 reading in August was revised down to 157,000.
Market Sentiment – Richmond Fed Thomas Barkin said his policy posture is very balanced and he is monitoring data on the economy and data on uncertainty. He said there is a lot of information to be seen before the next meeting at the end of October.
He said analysts have taken out insurance with the rate cuts and he wants to see how things develop, adding business confidence is being affected by the various uncertainties.
Barkin said getting inflation up to the 2% target is a challenge, and noted businesses are uncertain whether they can pass on prices. He doesn’t believe there’s a recession in the cards and repeated he has a balanced view on policy right now.
He did say the markets are too focused on small policy moves and that he is monitoring confidence very closely to see if the uncertainties that have weighed on businesses are spilling over to the household sector.
New York Fed John Williams said the current outlook is more mixed but the economy is very strong.
He said there is definitely a lot of uncertainties and risks out there and it is hard for officials to make sense of the impacts of uncertainties but financial conditions remain supportive for growth.
Williams added it is clear that tariffs are being passed on to producer and consumer prices while reiterating the FOMC has a symmetric 2% inflation goal and he expects prices to increase modestly.
He went on to say the yield curve is telling an important message on market sentiment while showing pessimism on the outlook.
Williams also added low long term rates are largely reflecting global monetary policies while the turmoil in the repo market at the turn reflected lower reserves and higher payments.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 5th-straight session after reaching an intraday peak of $144.27.
Lower resistance at $143.50-$144 was recovered with a close above the latter signaling additional strength towards $145.50-$146.
Rising support is at $143-$142.50 with backup help at $142-$141.50.
Market Analysis – The S&P 400 Mid Cap Index ($MID) fell for the 4th time in 5 sessions after trading to an intraday low of 1,861. Near-term and lower support from early September at 1,880-1,860 was breached but held on the close back below the 200-day moving average.
A move below the latter would signal additional weakness towards 1,850-1,830 with the late August low at 1,825.
Lowered resistance is at 1,890-1,900 with more important hurdles at 1,910 and the 50-day moving average.
RSI remains in an downtrend with support at 35-30 and the latter representing the early August and late May low.
Resistance is at 40-45.
The Consumer Discretionary Select Spiders (XLY) fell out of a 7-session holding pattern following Wednesday’s plunge to $116.95 and 2nd-straight lower close.
Fresh and upper support from late August at $117-$116.50 was stretched but held with the close below the 50-day moving average and breakdown out of the prior trading range being a bearish development.
A move below the $116.50 level would signal additional risk towards $116-$115.50.
Lowered resistance is at $118.50-$119. Continued closes back above $120 and the 50-day moving average would be a slightly bullish signal selling pressure has possibly abated.
RSI is in a downtrend after failing support at 40.
The close below this level reopened risk towards 35-30 with the latter serving as the early August low. Resistance is at 45-50 with the latter holding since mid-September.
We are allocating the portfolio as follows:
Long 25% in XLP closed on Wednesday at 60.03
Long 25% in XLRE closed on Wednesday at 38.76
Long 25% in XLU closed on Wednesday at 63.73
Short 25% in XLE closed on Wednesday at 56.41
Option Traders… the following regular MONTHLY options meet our criteria:
XLP – 20DEC $62 Strike Price CALL (Expires December 20, 2019)
XLRE – 21FEB $40 Strike Price CALL (Expires February 21, 2020)
XLU – 17JAN $65 Strike Price CALL (Expires January 17, 2020)
XLE – 20DEC $57 Strike Price PUT (Expires December 20, 2019)
All the best,