U.S. markets closed in positive territory on Thursday following reports China has offered unprecedented proposals to ease U.S. concerns over forced technology transfers.
Additionally, Director of the National Economic Council, Larry Kudlow, said some tariffs could be potentially dropped as part of China trade negotiations and China considering some concessions on IP and cloud computing.
The Russell 2000 showed the most strength after rallying 0.9% while tapping a high of 1,536.
Prior and lower resistance at 1,535-1,550 was cleared and held on the close back above the 50-day moving average.
The Dow rose 0.4% after testing a morning high of 25,743.
Near-tern and lower resistance at 25,750-26,000 held with continued closes above the latter signaling additional strength towards 26,250-26,500.
The S&P 500 also added 0.4% following the intraday run to 2,819. Current and lower resistance at 2,825-2,850 was challenged but held with a move above the latter being a more bullish signal.
The Nasdaq was higher by 0.3% after reaching an intraday peak of 7,689.
Near-term and lower resistance at 7,650-7,700 was cleared and held with a move above the latter signaling additional strength towards 7,750-7,800.
Materials and Financials were sector leaders after rising 1% and 0.9%, respectively.
Real Estate and Industrials were up 0.8% and 0.7%.
Utilities and Communication Services were the only sector laggards with declines of 1.2% and 0.2%, respectively.
Global Economy – European markets closed mixed after UK lawmakers voted on a number of Brexit alternatives, none of which gained majority support.
France’s CAC 40 rose 0.6% and Germany’s DAX 30 edged up 0.1%. The Belgium20 fell 0.4% while UK’s FTSE 100 and the Stoxx 600 Europe dipped 0.1%.
Economic sentiment in the euro zone eased to 105.5 in March from 106.2 in February, weaker than forecasts for a reading of 105.9.
Asian markets also settled mixed ahead of the start of the U.S. and China trade negotiations. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will be meeting with Chinese Vice Premier Liu He on Thursday night in Beijing.
Japan’s Nikkei sank 1.6%. China’s Shanghai dropped 0.9% and South Korea’s Kospi gave back 0.8%. Australia’s S&P/ASX 200 gained 0.6% and Hong Kong’s Hang Seng rose 0.2%.
Q4 GDP came in at 2.2%, matching expectations.
This was down from the previous estimate of 2.6% and leaves full-year growth at 2.9%. The economy grew 3% when compared with the fourth quarter of 2017.
Nonresidential fixed investment for Q4 rose 5.4%, up from 2.5% in Q3. Equipment spending increased 6.6% but investment in structures fell 3.9%.
Residential investment declined 4.7% for its fourth straight negative quarter. Exports increased by 1.8% while imports were up 2%.
Initial Jobless Claims fell 5,000 to 211,000, missing estimates for a print of 225,000. This brought the 4-week moving average down to 217,250 from 220,500.
Continuing claims increased 13,000 to 1,756,000. While there have been many distortions and some big swings in claims over the last several months, they have been averaging around 225,000 so far in 2019.
Corporate Profits edged lower in the fourth quarter but finished the year up 7.8%, compared with 3.2% in 2017.
February Pending Home Sales Index declined -1% versus estimates for a drop of -0.8% for the month. On a 12-month basis the index is down -5% year-over-year versus -3.3%.
Regionally, pending home sales were lower in the Midwest (-7.2%) and the Northeast (-0.8%), but firmer in the South (1.7%) and the West (0.5%). The NAR continues to blame a lot of the weakness on lack of supply.
Kansas City Fed Manufacturing Index for March checked in at 10.
Market Sentiment – Kansas City Fed Esther George supported the Fed’s pause in hiking interest rates while noting the current benign inflation environment along with downside risks to the economy.
She expects growth to slow to trend, or about 2%, with moderating job gains.
George also sees slowing growth abroad, especially in China, the Eurozone, and the UK, which is the biggest risk over the medium term.
She doubts adopting a price target would work to bring inflation up to the 2% target, and the time frame for achieving an average inflation target would be difficult to determine and communicate.
Fed Vice Chair Richard Clarida preached patience as deepened U.S. exposure to overseas shocks, which he said can’t be ignored in setting policy. He cited global risks as one reason the Fed can afford to be patient in deciding any further rate moves.
Among them, trade, financial, and FX channels can spill over trouble in other countries into the U.S.
Clarida stated three of our most recent FOMC statements have highlighted concerns about global economic and financial developments. He added in the presence of these risks with inflation pressures muted, analysts can afford to be patient.
New York Fed John Williams said the economy is in a very good place and though it is slowing, it is slowing to a sustainable pace.
He said he is not as worried about the chance of recession as some in the private sector.
He noted that he watches the Treasury yield curve very carefully and the yield curve inversion has historically pointed to recession, but that may not be the case today.
The iShares 20+ Year Treasury Bond ETF (TLT) closed in positive territory for the 6th time in 7 sessions after trading to another fresh 52-week high of $126.69.
Lower and multi-year resistance from October 2016 at $126.50-$127 was cleared and held. Continued closes above this level keeps a possible top near $128-$130 in play.
Rising support is at $126-$125.50. A move back below $125 would be a slightly bearish signal.
Market Analysis – The Russell 3000 Index ($RUA) has been in a mini 4-session trading range with Thursday high tapping 1,662.
Near-term and lower resistance at 1,660-1,675 was breached and held with a close above the latter getting 1,685-1,700 back in play.
A golden cross is in the process of forming with the 50-day moving average on track to clear the 200-day moving average.
This is typically a bullish signal for higher highs.
Current support at 1,645-1,630. A close below the 1,625 level would be a slightly bearish development with risk towards 1,615-1,600.
RSI has been flatlining with near-term support at 50. A close below this level would be a bearish signal for additional weakness towards 45-40 and early January lows.
Resistance is at 60 with a move above this level signaling additional strength towards 65-70.
The Industrials Select Sector Spider (XLI) extended its winning streak to 4-straight sessions after reaching an intraday peak of $74.33. Near-term and lower resistance at $74-$74.50 was cleared and held.
Continued closes above $75 and the mid-month high would signal additional momentum.
Current support is at $73.50-$73 and the 50-day moving average.
A golden cross has formed with the 50-day clearing the 200-day moving average earlier this month.
RSI is in an uptrend with resistance at 55.
A move above this level would be a slightly bullish signal for a run towards 60-65. Support is at 50 with risk towards 45-40 on a move back below this level.
Current Position Update
Positions remain positive for the current rotation.
Energy taking some bite away.
Expect minor consolidation to continue.
Earnings should cause stocks to rise in the next few weeks…especially with bond yield falling.
We are allocating the portfolio as follows:
Long 25% in XLI closed on Thursday at 74.23
Long 25% in XLK closed on Thursday at 73.28
Long 25% in XLRE closed on Thursday at 36.23
Short 25% in XLE closed on Thursday at 66.24
Option Traders… the following regular MONTHLY options meet our criteria:
XLI – JUN 73 CALL (Expiration Date June 21, 2019)
XLK – JUN 71 CALL (Expiration Date June 21, 2019)
XLRE – MAY 35 CALL (Expiration Date May 17, 2019)
XLE – JUN 65 PUT (Expiration Date June 21, 2019)
All the best,
Roger Scott.