U.S. markets were tepid ahead of the Fed’s decision on interest rates with the major averages showing weakness on the open but some strength ahead of the news. As expected, a quarter-point reduction was announced with the action muted as Wall Street awaited further developments.
Fed Chairman Jay Powell’s comments afterwards were once again scrutinized but this time helped sentiment as the major indexes pushed session highs in the final hour of trading.
More importantly, volatility closed below another key level of support and is confirming a continued breakout to fresh all-time highs for the market.
The Dow added 0.4% following the late day push to 27,204.
Lower resistance at 27,200-27,400 was cleared but held for the 3rd-straight session with a close above the latter and the all-time high at 27,398 signaling blue-sky territory towards 27,600-27,800.
The Nasdaq climbed 0.3% after testing a 2nd half high of 8,315. Current and lower resistance at 8,300-8,350 was cleared and held with a close above the latter and the all-time high at 8,339 getting 8,450-8,500 in play.
The S&P 500 was also up 0.3% after trading in a 25-point range while tapping a fresh all-time high of 3,050 ahead of the closing bell.
Lower resistance at 3,050-3,075 was cleared by a tenth-point but held with a upside potential towards 3,100-3,125 on a close above the latter.
The Russell 2000 lost 0.3% while trading in negative territory throughout the session with the low reaching 1,562. Near-term and upper support at 1,565-1,550 was breached but held with a move below the latter being a slightly bearish development for additional weakness towards 1,540-1,525 and the 200-day moving average.
Utilities and Real Estate paced sector leaders with gains of 0.9% and 0.7%, respectively.
Energy and Financials were the only sector laggard after falling 2% and 0.1%, respectively.
Global Economy – European markets closed mostly higher with the UK confirming it will hold a general election on December 12th after Prime Minister Boris Johnson gained approval from Parliament.
France’s CAC 40 gained 0.5% and UK’s FTSE 100 was up 0.3%. The Belgium20 and the Stoxx 600 edged up 0.1%. Germany’s DAX 30 declined 0.2%.
Economic Sentiment Indicator (ESI) fell by 0.9 points to 100.8, and by a similar amount in the EU to 99.
France’s economy expanded by 0.3% in the third quarter of 2019, faster than the 0.2% expected, and matches the 0.3% recorded in 2Q.
Germany’s unemployment total rose by 6,000, versus expectations for an increase of 2,000 to 3,000.
Asian markets settled lower across the board on reports that China and the U.S. may not sign a partial trade deal next month.
South Korea’s Kospi sank 0.8% while Japan’s Nikkei and Australia’s S&P/ASX 200 fell 0.6%. China’s Shanghai dropped 0.5% and Hong Kong’s Hang Seng was off 0.4%.
MBA Mortgage Applications rebounded 0.6% from -11.9% in the prior week while the purchase index rose 2.3%, breaking a three week slide. Refinancings continued to decline, however, falling -0.5% after dropping -17.1% previously.
The 30-year fixed rate edged up to 4.05% for the 2nd-straight week after 3 weeks below 4%. However, it was at 5.11% a year ago. The 5-year adjustable firmed a bit to 3.43% from 3.29%.
ADP Employment Report revealed private payrolls increased 125,000 in October, a little better than expectations of 115,000, following the revised 93,000 increase in September.
Service sector jobs increased 138,000 with gains in education and health at 41k,000, and 32,000 in trade/transport. The goods producing sector saw a -13,000 decline, including a -4,000 drops in manufacturing, construction, and mining.
GDP growth slowed to a 1.9% pace in Q3, stronger than expectations for a print of 1.7%, after slipping to a 2% clip in Q2 and from 3.1% in Q1. Consumption was up 2.9%, topping forecasts of 2.7%, bit down from the robust 4.6% reading in Q2.
Fixed investment dropped -1.3% from -1.4%, with nonresidential spending falling -3% and residential spending rising 5.1%. Government consumption was up 2%.
Inventories subtracted $9.4 billion following the -$46.6 billion subtraction in Q2.
Net trade took off -$5.7 billion from growth versus the -$36.7 billion in Q2. The chain price index slipped to 1.7% versus the prior 2.4% rate while the core rate rose to 2.2% from 1.9%.
State Street Investor Confidence Index was at 79.2 for October.
Survey of Business Uncertainty Index for October checked in at 95.
Market Sentiment – The Fed cut rates 25 basis points as widely expected, lowering the policy band to 1.5%-1.75% and the 3rd-straight quarter point reduction.
The big change in the statement was the removal of “act as appropriate,” while the Fed now says it will “assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation target” as it determiners the timing and size of future adjustments.
On the economy, the statement was close to September’s, as the Fed sees a strong labor market and moderate growth in the economy, with household spending rising at a strong pace, while business fixed investment and exports remain weak.
The Fed’s statement on assessing the outlook gives policymakers the optionality ahead, with no commitment to act again later this year.
Voting for the monetary policy action were: Jerome Powell, Chair; John Williams, Vice Chair; Michelle Bowman; Lael Brainard; James Bullard; Richard Clarida; Charles Evans; and Randal Quarles.
Voting against this action were: Esther George and Eric Rosengren, who preferred to maintain the target range at 1-3/4%-2%.
Fed Chairman Jay Powell said the Fed’s action was taken to help keep the U.S. economy strong in face of global developments and to provide insurance against.
Monetary policy is in a good place he reiterated as the Fed continues to see a sustained expansion of the economy, a strong labor market, with inflation moving up toward the objective.
While this has been the outlook for sometime, Powell noted the rate path has changed significantly. He reiterated policy is not on a preset course, and if there’s are developments that cause a material reassessment of the outlook the Fed would respond accordingly.
In Q&A’s, Powell didn’t answer directly to a question about was this it for rate cuts, but said the current stance is likely to remain appropriate for now, and reiterated it would take a material reassessment of our outlook to get a change in rates.
Powell said principal risks have been slowing global growth, trade developments, and inflation, and suggested some of the risks have subsided.
Powell specifically noted that the potential signing of the Phase 1 trade deal, and that would be a positive development, while the risks of a no-deal Brexit have declined. He said so far it doesn’t look as though the strong consumer has been affected by other weakness.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session after trading to a high of $139.45. Lower resistance at $139.50-$140 was challenged but held.
Continued closes above the latter would be a more bullish signal of a possible near-term bottom with retest potential towards $141.50-$142 and the 50-day moving average.
Rising support is at $139-$138.50 with backup help at $137.50-$137.
Market Analysis – The Invesco QQQ Trust (QQQ) closed in positive territory despite the intraday tumble to $195.29. Upper support at $195-$194.50 was challenged but held.
A close below the $194 level would be a slightly bearish development and signal a possible near-term top with additional risk towards $193-$192.50.
Lower resistance at $197-$197.50 was cleared but held on the late day bounce to $197.32. Continued closes above the latter and Monday’s all-time high at $197.83 would be an ongoing bullish signal with upside potential towards $198.50-$200.
RSI is back in a slight uptrend after holding upper support at 60-55. A move below the latter reopens weakness towards 50-45.
Resistance is at 65 with a move above this level signaling additional strength towards 70 and the mid-July peak.
The iShares PHLX Semiconductor ETF (SOXX) is in a 3-session trading range following Wednesday’s pullback to $224 but slightly higher close.
Current and upper support at $224-$223.50 was kissed but held with a close below the latter signaling additional weakness towards $222.50-$222.
Near-term resistance is at $227-$227.50. Continued closes above the latter keeps new hurdles at $229.50-$230 in focus with Tuesday’s all-time high at $229.51.
RSI has flattened out with resistance at 65 and the monthly peak.
A close above this level would be a bullish signal for additional strength towards 70-75 and July highs. Support is at 60 with risk to 55-50 on a move back below this level.
We are allocating the portfolio as follows:
Long 30% in XLF closed on Wednesday at 28.89
Long 20% in XLK closed on Wednesday at 83.72
Long 30% in XLU closed on Wednesday at 63.90
Short 20% in XLE closed on Wednesday at 58.16
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,