U.S. markets showed strength throughout Wednesday on reports China is open to a partial trade deal despite the recent blacklisting of Chinese companies.
However, some of the stipulations were no more tariffs being imposed by the Trump administration, including duties scheduled this month and in December.
While nothing is certain, the positive chatter comes ahead of the upcoming 13th round of negotiations between top U.S. and Chinese officials.
The major indexes made a run at near-term resistance levels but remain in a sideways trading range and trapped between their 50/200-day moving averages.
The Nasdaq rose 1% after tapping a midday high of 7,930. Current and lower resistance at 7,900-7,950 was cleared and held with a close above the latter getting 8,000 and the 50-day moving average back in play.
The S&P 500 was up 0.9% following the intraday push to 2,929. Prior and lower resistance at 2,900-2,925 was cleared and held with more important hurdles at 2,950 and the 50-day moving average.
The Dow gained 0.7% after trading to a 2nd half high of 26,424.
Near-term and lower resistance at 26,400-26,600 and the 50-day moving average was challenged but held with a close above the 26,800 level being a more bullish signal selling pressure has abated.
The Russell 2000 advanced 0.5% following the opening pop to 1,484.
Prior and lower resistance at 1,475-1,490 was recovered with a close above the 1,500 level getting at 1,510-1,525 and the 50/200-day moving averages back in focus.
Technology was the strongest sector after soaring 1.5% while Materials and Financials jumped 1.1% and 0.9%, respectively. There were no sector laggards.
Global Economy – European markets closed higher across the board as Brexit worries eased. PM Boris Johnson’s latest ongoing threat to leave without a deal on October 31st is being viewed as a grand bluff with a delay until January 31st, 2020 all but certain.
Germany’s DAX 30 rallied 1% and the Stoxx 600 rose 0.8%. The Belgium20 and France’s CAC 40 climbed 0.4% while UK’s FTSE 100 was higher by 0.3%.
Asian markets settled mostly lower after China’s Ministry of Commerce said the U.S. should stop interfering in the country’s internal affairs and remove the relevant entities from the recent U.S. trade blacklist as soon as possible.
Hong Kong’s Hang Seng fell 0.8% and Australia’s S&P/ASX 200 declined 0.7%.
Japan’s Nikkei was down 0.6% while China’s Shanghai added 0.4%. South Korea’s Kospi was closed for a holiday.
MBA Mortgage Applications rose 5.2%, after jumping 8.1% the prior week, with the index up 69.3% year-over-year. Strength on the week was in the refinancing index which increased another 9.8% after the 14.2% prior bounce.
The purchase index declined -0.9%, erasing the 0.9% gain in the prior week.
Refinancings comprised 60.4% of the applications, with an average loan size of $327,300.
The 30-year fixed rate mortgage rate dropped to 3.9%, versus 3.99% previously. The 5-year ARM slid to 3.25% from 3.42%.
Jolts reported job openings dropped 123,000 to 7,051,000 in August after falling 74,000 to 7,174,000 in July. Expectations were at 7,186,000.
The rate dipped back to 4.4% from 4.5%.
Hirings declined 199k,000 to 5,779,000 following the 262,000 July climb to 5,978,000. The rate fell to 3.8% from 3.9%. Quitters slid 142,000 to 3,526,000 after rising 206,000 to 3,668,000 previously. The rate slumped to 2.3% versus 2.4%.
Wholesale Trade Inventories rose 0.2% in August versus forecasts for a rise of 0.4%, with sales unchanged.
July’s 0.2% inventory gain was not revised, while the 0.3% increase in sales was bumped down to 0.2%.
The inventory-sales ratio was steady at the cycle high of 1.36 for a 4th-straight month.
Market Sentiment – Fed Chairman Jerome Powell repeated in brief opening remarks that the economy was in a good place, and the Fed’s job is to keep it there as long as possible.
Powell went on to say significant protection the U.S. Federal Reserve has from short-term political pressures also gives it an obligation to clearly explain monetary policy.
Powell added, because Congress has granted the Federal Reserve significant protections from short-term political pressures, the Fed has an obligation to clearly explain what they are doing and why.
He said the Fed has an obligation to actively engage the people and serve so that they and their elected representatives can hold them accountable.
The comments were tied to the Fed’s year-long series of such events to its standing as a politically independent organization and a status it has fought to ensure despite the steady criticism from President Trump.
As far as the release of the FOMC Minutes, the report reflected the split seen in the policy stance at the mid-September meeting that resulted in 3 dissents.
There was a divide over how to communicate the future path, and several members suggested the end of easing should be clarified. The general view of policymakers was a positive outlook.
Many members, however, thought that low inflation justified the rate cut last month, alongside the risks from trade and global weakness.
Several Fed members suggested adopting an inflation range, although many saw only modest benefit from inflation make-up strategies.
Meanwhile, a few officials worried that the market was pricing too much easing, and several wanted the statement to have more clarity on when the easing would likely end.
In discussing the reasons for last month’s cut, Fed members pointed to considerations related to the economic outlook, risk management, and the need to center inflation and inflation expectations on the Fed’s longer-run objective of 2%.
Fed members noted that there had been little change in their economic outlook since the July meeting and that incoming data had continued to suggest that the pace of economic expansion was consistent with the maintenance of strong labor market conditions.
However, a couple of participants pointed out that data revisions announced in recent months implied that the economy had likely entered the year with somewhat less momentum than previously thought.
In addition, Fed members said data received since July had confirmed the weakening in business fixed investment and exports.
One risk that the economy faced was that the softness recorded of late in firms’ capital formation, manufacturing, and exporting activities might spread to their hiring decisions, with adverse implications for household income and spending.
Fed members observed that such an eventuality was not embedded in their baseline outlook. However, a couple of them indicated that this was partly because they assumed that an appropriate adjustment to the policy rate path would help forestall that eventuality.
Several also noted that, because monetary policy actions affected economic activity with a lag, it was appropriate to provide the requisite policy accommodation now to support economic activity over coming quarters.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 2nd time in 3 sessions and remains in a 5-day trading range following the intraday pullback to $143.80. Near-term and upper support is at $144-$143.50 was breached but held.
A close below the latter would signal a breakdown out of the range with risk towards $142.50-$142 and the 50-day moving average.
Lowered resistance is at $144.50-$145 with additional hurdles at $145.50-$146 and the latter representing the top of the current trading range.
Market Analysis – The Wilshire 5000 Composite Index ($WLSH) snapped a 2-session slide after trading to an intraday high of 29,853. Lower resistance is at 29,750- 30,000 was cleared and held.
Continued closes above the latter a downward sloping 50-day moving would be more bullish signals for additional strength.
Current support is at 29,500-29,250.
A close below the latter and the 200-day moving average would signal additional weakness towards the 29,000 level with the August intraday low at 28,938.
RSI is back in an uptrend with resistance at 45-50.
A close above 50 would be a bullish signal for additional strength towards 55-60 and the latter representing the September highs. Support is at 40-35 and the latter representing the monthly low.
The Energy Select Sector Spider (XLE) snapped a 2-session slide after surging to a high of $56.72. Near-term and lower resistance at $56.50-$57 was cleared but held.
A close above the $57.50 level would be a more bullish signal for a retest towards $58-$58.50 and the 50-day moving average.
Current support is at $56-$55.50. A close below the latter and the monthly low at $55.64 would be a renewed bearish development with backtest potential towards the $55 level and August lows.
RSI is in an uptrend with resistance at 40.
A close above this level would be a slightly bullish signal for additional strength towards 45-50.
Support is at 35-30 with risk towards the 25 area and the early August lows on a move below the latter.
We are allocating the portfolio as follows:
Long 25% in XLP closed on Wednesday at 60.78
Long 25% in XLRE closed on Wednesday at 39.26
Long 25% in XLU closed on Wednesday at 64.23
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,
Roger Scott.