U.S. markets were sluggish throughout the first half of Tuesday’s action as the major indexes danced on both side of the ledger and within tight ranges. Much of the nervousness comes ahead of the Fed’s decision on interest rates Wednesday afternoon with Wall Street in a wait-and-see-mode heading into the event.
Second half weakness ensued following news the U.S. and China’s phase one trade deal may not be signed at the APEC meeting in November as more time may be needed. The report added if the deal is not signed it is not a signal that talks have fallen apart, but simply that more time is required.
The mostly lower close held near-term support and resistance levels although volatility was slightly up for the 2nd-straight session. The VIX index continues to give excellent market clues and should be monitored closely during and after the Fed minutes are released.
The Nasdaq had it 4-session winning streak snapped after falling 0.6% while trading to an intraday low of 8,275. Near-term and upper support at 8,300-8,250 was breached and failed to hold with a close below the latter reopening risk towards 8,200-8,150.
The S&P 500 slipped 0.1% to end a 4-session winning streak, as well, after tapping a fresh all-time high of 3,047 shortly after the opening bell. New and lower resistance at 3,050-3,075 was challenged for the 2nd-straight session with upside potential towards 3,100-3,125 on a close above the latter.
The Dow dipped 0.1% despite trading to a morning high of 27,165 while holding the 27,000 level for the 2nd-straight session. Lower resistance at 27,200-27,400 was challenged but also held for the 2nd-straight session with a close above the latter and the all-time high at 27,398 getting 27,600-27,800 in focus.
The Russell 2000 was higher by 0.3% following the midday run 1,581. Lower resistance at 1,585-1,600 was challenged but held with a close above the latter and the late July high at 1,599 being an ongoing bullish signal.
Healthcare and Materials were the strongest sectors after rising 1.4% and 0.6%, respectively, while Energy advanced 0.4%. Communications Services and Technology paced sector laggards with losses of 0.9% while Consumer Discretionary was lower by 0.6%.
Global Economy – European markets closed mostly lower following news the Labour Party, the principal opposition in the UK, will back a general election in early December, injecting fresh uncertainty into the already fluid Brexit process.
UK’s FTSE 100 was down 0.3%. The Belgium20 and the Stoxx 600 gave back 0.2% while Germany’s DAX 30 dipped 2 points, or 0.02%. France’s CAC 40 edged up 0.2%.
Asian markets settled mixed despite news the Office of the U.S. Trade Representative said the U.S. is considering extending certain tariff exclusions on $34 billion worth of imports from China.
China’s Shanghai fell 0.9% and Hong Kong’s Hang Seng dropped 0.4%. South Korea’s Kospi slipped a point, or 0.04%. Japan’s Nikkei was up 0.5% and Australia’s S&P/ASX 200 nudged up 0.1%.
Hong Kong leader Carrie Lam said she expects the Asian financial hub to record negative economic growth this year, in part as a result of the unrest and ongoing protests.
S&P Corelogic Case-Shiller home price index edged up 0.04% to 218.14 in August, after rising 0.16% to 218.05 in July. The 12-month pace was steady at 2.03% year-over-year versus 2% for August.
The August 10-City index was unchanged at 230.83 following the 0.07% gain in July. Nineteen of the 20 cities surveyed posted 12-month gains, led by Phoenix at 6.29% year-over-year.
Home prices in San Francisco posted a -0.06% decline year-over-year.
Consumer Sentiment fell -0.4 points to 125.9 in October versus estimates for a print of 128.8, and below September’s reading of 126.3. All of the weakness was in the expectations index which slipped to 94.9 in October from 96.8 in September. The present situation component rose to 172.3 after falling to 170.6.
The labor market index bounced back to 35.1 following the slid to 33.5 in September. The 12-month inflation index was steady at 4.8%.
Pending Home Sales for September rose 1.5% to 108.7 in September, missing forecasts for a rise of 0.7%. However, the index is up 6.3% year-over-year with the annual gain the largest in 4 years.
U.S. chain store sales dropped 3.8%, after climbing 3.1% previously.
The 12-month pace tumbled to a 1.9% year-over-year rate from 2.7% in the prior week. The report noted a shift toward discretionary spending at department stores and apparel-specialty stores in the latest week, and a good sign for the consumer.
Redbook Store Sales were up 4.5% for the year in the week ending October 26th.
Market Sentiment – The 2-day FOMC meeting is underway and the decision will be announced Wednesday at 2pm (EST) with a 25 basis point rate cut all but certain.
The big question mark is what is said about the future course of policy. Wall Street doesn’t expect anything explicit on guidance and whether this will be the end of its rate moves.
Most of the talking heads believe Fed Chairman Jay Powell will indicate this is another insurance action as the various factors that underpinned the July and September reductions are still in place, including uncertainties over trade and Brexit, softer growth abroad, concerns over spillover to the U.S., and low inflation.
The statement should reiterate that policy is not on a preset course and that the Fed will act as appropriate to sustain the expansion. This could leave the FOMC’s future course up to interpretation.
The market seems to have lowered its outlook for more accommodation beyond Wednesday’s cut and chances for another easing have fallen below 50-50. Also, the Fed may address the conditions in the money markets and could announce it’s going to implement a permanent repo facility.
The iShares 20+ Year Treasury Bond ETF (TLT) rebounded from the prior session’s plunge to reach a peak of $137.74. Near-term and lower resistance at $137.50-$138 was cleared but failed to hold.
Continued closes back above the $138.50 level would be a more bullish signal for a retest towards $139.50-$140.
Current support remains at $137-$136.50.
A close below the latter and the September low at $136.54 would be an ongoing bearish signal with additional weakness towards $134.50-$134 and prior support levels from early August.
Market Analysis – The Wilshire 5000 Composite Index ($WLSH) fell for the 1st time in 5 sessions despite trading to an intraday high of 31,078. Prior and lower resistance from mid-July at 31,100-31,200 was challenged but held.
A close above the latter and the all-time high of 31,168 would signal additional strength towards 31,300-31,400.
Current and upper support at 30,900-30,800 was split on the fade to 30,952 afterwards.
A close below the latter would be a slightly bearish development and signal a possible near-term top with additional weakness towards 30,700-30,600.
RSI has leveled out with resistance at 65. A close above this level would signal additional strength towards 70 and the high throughout the first half of July.
Support is at 60 with a move below this level signaling weakness towards 55-50.
The Spiders S&P Homebuilders ETF (XHB) was down for the 2nd-straight session after peaking at $45.87 intraday. Near-term and lower resistance from last week at $46-$46.50 was challenged but held.
Continued closes above the latter would be a renewed bullish signal for additional strength towards $47-$47.50 with last Friday’s 52-week and all-time high at $46.48.
Current and upper support at $45.50-$45 tried to hold but failed on the late day fade to $45.38. A close below the latter would signal a near-term top with additional weakness towards $44.50-$44.
RSI is back in a downtrend following the close below,upper support at 65-60.
A move below the latter would signal additional weakness towards 55-50 with the latter representing the monthly low. Resistance is at 70-75 on a recovery of the 65 level and the latter representing last week’s peak.
We are allocating the portfolio as follows:
Long 30% in XLF closed on Tuesday at 28.86
Long 20% in XLK closed on Tuesday at 83.21
Long 30% in XLU closed on Tuesday at 63.34
Short 20% in XLE closed on Tuesday at 59.42
Option Traders… the following regular MONTHLY options meet our criteria:
XLF – 20DEC $28 Strike Price CALL (Expires December 20, 2019)
XLK – 20DEC $82 Strike Price CALL (Expires December 20, 2019)
XLU – 17JAN $63 Strike Price CALL (Expires January 17, 2020)
XLE – 17JAN $58 Strike Price PUT (Expires December 20, 2019)
All the best,