U.S. markets traded in tight ranges throughout Wednesday’s action following negative trade news concerning China and disappointing economic data.
The signing of the phase one trade deal between the U.S. and China could be pushed out to December as the sides continue to negotiate terms and a signing venue.
The major indexes recovered much of the opening losses but still settled mostly lower for the session. The consolidation was healthy as volatility stayed calm and continues to hold a key level of resistance.
The Russell 2000 fell 0.6% following the intraday backtest to 1,587.
Current and upper support at 1,585-1,570 was challenged but held. A close below the latter would be a slightly bearish signal with risk towards the 1,550 level.
The Nasdaq had its 3-session winning streak snapped after falling 0.3% on the intraday pullback to 8,379.
Upper support at 8,400-8,350 was breached but held with a close below the latter getting 8,300-8,250 back in play.
The Dow declined 0.1% after trading to an intraday low of 27,407.
Near-term and upper support at 27,400-27,200 was challenged but held with a close below the latter being a slightly bearish signal for a retest towards 27,000-26,800 and the 50-day moving average.
The S&P 500 was higher by 0.1% despite the intraday backtest to 3,065.
Current and upper support at 3,075-3,050 was recovered from the previous session on the afternoon rebound to 3,078.
Financials were the strongest sector strength after rising 0.5% while Consumer Staples, Real Estate and Utilities were up 0.4%.
Energy was the weakest sector after tanking 2% while Communication Services were down 0.4%.
Global Economy – European markets closed higher on improving economic news as the Eurozone IHS Markit PMI rose to 50.6 in October from 50.1 in September.
France’s CAC 40 gained 0.3% while the Belgium20, the Stoxx 600 and Germany’s DAX 30 edged up 0.2%. UK’s FTSE 100 climbed 0.1%.
Asian markets closed mixed on Wednesday as traders monitored developments on the U.S./ China trade front.
China is pushing President Trump to remove more tariffs on $125 billion worth of Chinese goods imposed in September as part of the phase one trade deal.
Japan’s Nikkei added 0.2% and Hong Kong’s Hang Seng nudged up 5 points, or 0.02%.
Australia’s S&P/ASX 200 gave back 0.6% and China’s Shanghai fell 0.4%. South Korea’s Kospi slipped 0.1% while
MBA Mortgage Applications dipped -0.1% after rebounding 0.6% in the prior week. All of the current weakness was in the purchase index, which dropped -2.5% after rising 2.3% in the prior week, while the refi index rose 1.8% after dipping -0.5%. The 30-year fixed mortgage rate dropped back below the 4% mark, sliding to 3.98%.
The 5-year ARM was steady at 3.43%, and was at 4.36% last year at this time. Refi’s accounted for 59.5% of the loans, from 58% previously.
Productivity posted a -0.3% decline in Q3 that sharply undershot estimates for an advance of 0.8%, though Q2 was revised higher to a 2.5% growth pace.
Unit labor costs rose 3.6% in Q3 after a downwardly revised 2.4% Q2 gain. Output posted a firm 2.1% gain while hours worked rose 2.4%.
Compensation per hour was up 3.3% after the 5% Q2 gain.
The price deflator was up 1.1% versus Q2’s 3.1% clip. On a 12-month basis, productivity growth slowed to a 1.4% year-over-year rate versus Q2’s 1.8%, with unit labor costs at 3.1% from 2.6% year-over-year.
Market Sentiment – New York Fed John Williams said the FOMC moved policy to a slightly accommodative stance and believes the three cuts were very effective in offsetting risks.
He said the jobs data has been very strong, but low unemployment need not create imbalances or inflation. He’s not worried about the latest round of productivity data that came in below expectations. He believes the data is consistent with the moderate trend that’s been in place.
Chicago Fed Charles Evans said the Fed has moved to a slightly accommodative stance but it’s hard to say how accommodative it is. He continues to argue that the FOMC needs to hit 2% inflation to validate its view that there is a symmetric 2% goal.
He would be comfortable with an overshoot on inflation, with about a 2.5% pace, to make up for the below target rate.
The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 3-session slide after trading to a high of $138.40.
Near-term and lower resistance is $138.50-$139 was challenged but held. A close above the $140 level would be a more bullish signal selling pressure has abated.
Current support is at $137.50-$137.
A close below the latter and the late October low at $136.99 would be a renewed bearish signal with risk towards $136.50-$136 and mid-September levels.
Market Analysis – The Spider S&P 500 ETF (SPY) was marginally lower for the 2nd-straight session after tapping a morning low of $306.06. Near-term and upper support at $306-$305.50 was challenged but held.
A move below the $305 level would be a slightly bearish signal for a possible backtest towards $303-$302.50.
Current resistance at $307.50-$308 with the latter representing Monday’s all-time high. A move above $308 would be a renewed bullish signal with fresh hurdles at $309.50-$310.
RSI has flatlined after failing resistance at 70 and the June/ July highs.
A close above this level would signal additional strength towards 75 and the late April high but also signaling overbought levels. Support is at 65-60.
The Materials Select Sector (XLB) had its 3-session winning streak snapped following the pullback to $59.31. Near-term and upper support at $59.25-$59 held.
A close below the latter reopens downside risk towards $58.50-$58 and late October levels.
Resistance is at $59.75-$60 with Tuesday’s 52-week peak at $59.90.
Continued closes above the $60 level would be a renewed bullish signal with upside potential towards $60.50-$61 and resistance levels from September 2018.
RSI has leveled out with support at 65-60. A move below the latter could lead to additional weakness towards the 55-50 area. Resistance is at 70 and the early July high.
We are allocating the portfolio as follows:
Long 25% in XLP closed on Wednesday at 61.01
Long 25% in XLU closed on Wednesday at 62.86
Long 25% in XLV closed on Wednesday at 94.23
Short 25% in XLE closed on Wednesday at 60.04
Option Traders… the following regular MONTHLY options meet our criteria:
XLP – 17JAN $61 Strike Price CALL (Expires January 17, 2020)
XLU – 17JAN $64 Strike Price CALL (Expires January 17, 2020)
XLV – 17JAN $95 Strike Price CALL (Expires January 17, 2020)
XLE – 17JAN $58 Strike Price PUT (Expires December 20, 2019)
All the best,