U.S. markets were weak throughout Thursday’s action following comments from NEC Director Larry Kudlow who warned that there is a pretty sizable distance to go on China trade negotiations.
There were also chatter that Presidents Trump and Xi are highly unlikely to meet before the March trade/tariff deadline, which added to the nervousness.
The major indexes were able to hold near-term support levels, for the most part, while volatility spiked 6% but held a key level of resistance.
The Nasdaq gave back 1.2% after testing an opening low of 7,235.
Fresh support at 7,250-7,200 was split on the close above the former with a move below the latter signaling lower lows.
The S&P 500 sank 0.9% after trading to a midday low of 2,687.
Lower support at 2,725-2,700 was breached but held with a close below this level being a slightly bearish signal.
The Dow also dropped 0.9% following the intraday backtest to 25,000.
Lower support at 25,250-25,000 and the 200-day moving average held on the close below the former.
The Russell 2000 declined 0.8% following the morning dip to 1,494.
Major and lower support at 1,510-1,500 was breached but held with risk towards 1,485-1,475 on a close below this level.
Utilities and Real Estate were the only sectors to show strength after advancing 1.3% and 0.9%, respectively.
Energy led sector weakness after plummeting 2.2%. Materials and Technology stumbled 1.4%.
Global Economy – European markets closed lower across the board with heavy losses following more disappointing economic news.
Germany’s DAX 30 tumbled 2.7% while the Belgium20 and France’s CAC 40 crumbled 1.8%. The Stoxx 600 Europe tanked 1.5% and UK’s FTSE 100 sank 1.1%.
The European Commission cut its Eurozone 2019 growth forecast to 1.3% from 1.9%, while highlighting the large uncertainty that is still surrounding Brexit.
German industrial production unexpectedly fell 0.4% in December, the fourth consecutive decline, and missed forecasts for a gain of 0.8%.
UK housing prices sank 2.9% in January.
Asian markets settled mixed in limited action on news that the Reserve Bank of Australia may cut interest rates.
Markets in China, Hong Kong and Taiwan remained closed for Lunar New Year.
Australia’s S&P/ASX 200 surged 1.1% while Japan’s Nikkei dropped 0.6%.
Australia’s central bank kept its official interest rate at a record-low 1.5% but it downgraded its 2019 growth forecast to around 3% from 3.5%.
Additionally, the central bank said lower interest rates might be appropriate at some point if the country’s unemployment rate keeps rising and inflation targets aren’t achieved.
Initial Jobless Claims fell 19,000 to 234,000, topping forecasts for a print of 223,000. The 4-week moving average rose to 224,750 from 220,250.
Continuing claims dropped 42,000 to 1,736,000 after rising 64,000 to 1,778,000. Initial filings by Federal workers fell 8,100 to 6,700.
Consumer Credit increased $16.6 billion in December following the revised $22.4 billion gain in November and below expectations of $17.5 billion.
Non-revolving credit paced the uptick, rising $14.8 billion after November’s $17.6 billion increase. Revolving credit was up $1.7 billion versus $4.8 billion previously. For Q4, credit was up $64.8 billion versus Q3’s $54.2 billion.
Market Sentiment – Dallas Fed’s Kaplan said the U.S. economy is not an island and slowing global growth is likely to spill over. He said that fiscal stimulus reached its zenith in 2018 with the spending bill alone adding 0.5% to GDP growth.
It was hoped that tax cuts would boost productivity, but that is unlikely to bump up.
Kaplan went to add analysts are in the neighborhood of neutral and the Fed should not be stimulating the economy at this stage, while the high national debt will be a headwind for growth in the longer term.
The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight sessions after trading to a high of $121.91. Resistance at $121.50-$122 was split on the close above the former.
Continued closes above $122 would be a bullish development for higher highs.
Rising support is at $121.25-$120.75 with backup help at $120-$119.50 and a rising 50-day moving average.
Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) closed lower for the 2nd-straight session following the intraday $250.17.
Fresh support at $250-$249.50 held with a move below the latter getting $248.50-$248 and the 200-day moving average back in play.
Lowered resistance is at $252-$252.50 following the near-term double-top in the $254.25 area from the previous 2 sessions.
RSI is in a downtrend with current support at 60.
A move below this level would signal additional weakness towards 55-50 and mid-January support levels. Resistance is at 65-70.
The Industrials Select Sector Spider (XLI) had its 7-session winning streak snapped following the pullback to $72.39. Fresh and upper support at $72.50-$72 and the 200-day moving average was breached but held into the closing bell.
A move below the latter would be a slightly bearish signal with risk towards $71-$70.
Near-term resistance is at $73-$73.50. Continued closes above $74 would signal a return of momentum.
RSI is in a downtrend after failing to hold September resistance just above the 70 level.
Current support is at 65-60. A move below the latter would be a slightly bearish signal with risk towards 55-50.
Existing Position Update
As expected, markets turned south.
Negative news from Europe is slowing down the bull run we’ve had for 5 sessions straight.
Expect more volatility as markets consolidate next few sessions.
In light of economic data we’ve seen, markets could sit near the current price level for while longer.
Earnings are fragmented without much consistency at this point and FED data is better than expected.
China is going to be the tie breaker next few weeks.
We are allocating the portfolio as follows:
Long 25% in XLU closed on Thursday at 55.44
Long 25% in XLV closed on Thursday at 89.94
Long 25% in XLY closed on Thursday at 107.56
Short 25% in XLE closed on Thursday at 63.21
Option Traders… the following regular MONTHLY options meet our criteria:
XLU – JUN 55 CALL (Expiration Date June 21, 2019)
XLV – JUN 90 CALL (Expiration Date June 21, 2019)
XLY – JUN 107 CALL (Expiration Date June 21, 2019)
XLE – JUN 65 PUT (Expiration Date June 21, 2019)
All the best,
Roger Scott.