U.S. markets slumped on Tuesday following news China is threatening retaliation following the Senate’s passage of a bill expressing support for Hong Kong’s autonomy.
The House will vote on the measure, which could complicate trade talks with China, and weighed on market sentiment.
Mixed numbers from the Retail sector was also a drag as the 3Q earnings season continues to wind down. The major indexes easily held the first wave of support levels although volatility spiked to its highest level of the month but was able to hold a key level of resistance.
The Nasdaq was down for the 1st time in 4 sessions after giving back 0.5% while trading to an intraday low of 8,468. Fresh and upper support at 8,450-8,400 was challenged but held with a close below the latter opening up risk towards 8,350-8,300.
The Russell 2000 was lower by 0.4% following the 2nd half pullback to 1,581. Current and upper support at 1,585-1,570 was breached but held with risk towards 1,560-1,545 and the 50-day moving average on a move below the latter.
The S&P 500 was down for the 2nd-straight session after falling 0.4% and testing an intraday low of 3,091. Near-term and upper support at 3,100-3,075 was tripped but held with a close below the latter getting 3,050-3,025 and the 50-day moving average in focus.
The Dow also declined 0.4% while bottoming at a late day low of 27,675.
New and upper support at 27,750-27,500 was breached but held with a close below the latter opening up risk towards 27,250-27,000 and the 50-day moving average.
Energy and Utilities paced sector leaders after rising 1.1% and 0.6%, respectively. Materials and Industrials were the leading laggards after sinking 1.3% and 0.7%, respectively.
Global Economy – European markets showed weakness after the ECB warned that excessive financial risk-taking and a slowdown in bank profitability posed substantial challenges to the euro area economy.
UK’s FTSE 100 lost 0.8% and Germany’s DAX 30 gave back 0.5%. The Stoxx 600 fell 0.4% and France’s CAC 40 was off 0.3%. The Belgium20 was down just over a point, or 0.03%.
Asian markets closed lower across the board on trade worries and weaker-than-expected Japanese trade news.
Australia’s S&P/ASX 200 stumbled 1.4% and South Korea’s Kospi sank 1.3%. Hong Kong’s Hang Seng and China’s Shanghai fell 0.8% while Japan’s Nikkei gave back 0.6%.
Japan exports for the month fell 9.2% year-on-year, well below forecasts for a drop of 7.6%.
The People’s Bank of China cut the 1-year and 5-year loan prime rates by 0.05% each from a month earlier to 4.15% and 4.8%, respectively.
MBA Mortgage Applications fell -2.2% last week, after surging 9.6% in the prior week, and is higher by 62.9% on a 12-month basis. The weakness was in the refi index which dropped -7.7% following the prior 12.9% increase.
The purchase index was up 6.7%, extending the 5.1% gain from the prior week. Mortgage rates dipped back below 4% again, sliding to 3.99% from 4.03% previously.
The 5-year ARM rose to 3.51% from the prior 3.40%. Refinancings made up 59.5% of mortgage applications.
FOMC Minutes from the October 29th, 30th meeting said Fed officials saw rates as well calibrated following the easing.
Most members believed rates would be appropriate after the cut unless there was a material change in the outlook, as described by Chair Powell in his press conference.
Many Fed officials saw downside risks as elevated, and that the rate cut was justified by low inflation, with several worried expectations could slide further.
A couple of participants thought the Committee should reinforce its postmeeting statement with additional communications indicating that another reduction in rates was unlikely in the near-term unless incoming information was consistent with a significant slowdown in the pace of economic activity.
Market Sentiment – Fed Governor Lael Brainard noted the Fed has taken out insurance against risks of a trade conflict, and that she has seen some slowing in growth, but as expected. She said the consumer remains resilient and feels good about job prospects as more people are coming into the labor market.
Brainard noted the Committee has made a pretty substantial adjustment in the path of rates. She said there has been some improvement in residential investment and wants to monitor and wait for a little bit while she assesses how the outlook is adjusting.
Brainard is worried about financial imbalances rising, including a grab for yield, as well as rising business debt and narrow credit spreads which have tended to amplify downward shocks. She wants to use macro-prudential tools to address those areas, not monetary policy.
The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight sessions after closing on its session high of $140.60. Fresh and lower resistance at $140.50-$141 was cleared and held. A close above the latter would signal additional momentum towards $142-$142.50.
Rising support is now at $140-$139.50 following the close back above the 50-day moving average.
Market Analysis – The Russell 2000 ETF (IWM) continued its whipsaw action following the intraday pullback to $157.26. Current and upper support at $157.50-$157 was breached but held.
A close below the latter and the monthly low at $157.19 would be a slightly bearish signal with backtest potential towards $156-$155.50.
Current resistance is at $159.50-$160. Continued closes above the latter would be a renewed bullish development for a retest towards $161-$161.50 and fresh 52-week highs.
RSI is in a slight downtrend with support at 60. A close below this level would signal additional weakness towards 55-50 with the latter representing mid-October support.
Resistance is at 65-70 with the latter representing the monthly peak.
The Consumer Discretionary Select Spiders (XLY) was down for the 2nd-straight session following the backtest to $119.60. Prior and upper support from late October at $120-$119.50 was breached but held.
A close below the $119 level would signal additional weakness towards $117.50-$117 and the 200-day moving average.
Near-term and lowered resistance is at $120.50-$121 following the 2nd-straight close below the 50-day moving average.
RSI is in a downtrend with support at 40.
A close below this level reopens risk towards 35-30 with the latter serving as the early August low. Resistance is at 45-50.
We are allocating the portfolio as follows:
Long 25% in XLP closed on Wednesday at 61.71
Long 25% in XLU closed on Wednesday at 63.21
Long 25% in XLI closed on Wednesday at 81.32
Short 25% in XLE closed on Wednesday at 59.14
Option Traders… the following regular MONTHLY options meet our criteria:
XLP – 17JAN $60 Strike Price CALL
XLU – 17JAN $62 Strike Price CALL
XLI – 17JAN $82 Strike Price CALL
XLE – 17JAN $59 Strike Price PUT
All the best,