U.S. markets were mixed on Thursday after making higher highs while trading in tighter ranges ahead of Friday’s Employment Report. Other economic news concerning jobs came in soft and led to the opening choppiness along with ongoing trade concerns with Mexico over the near-term.
Mexican President Obrador believes a deal could be achieved with more talks scheduled on Friday and ahead of a 5% tariff set to be imposed on Monday.
Ongoing frictions with China also remain in play, though President Trump said he wouldn’t decide until after the G20 on additional tariffs.
The Dow closed in positive territory for the 4th-straight session after adding 0.7% and tapping an intraday peak of 25,800.
Near-term and lower resistance at 25,750-26,000 was cleared but held on the 2nd-straight close above the 200-day moving average.
The S&P 500 gained 0.6% to extend its winning streak to 3-straight sessions while tapping an intraday high of 2,852.
Fresh and lower resistance at 2,850-2,875 held with a close above the latter and the 50-day moving average signaling additional strength.
The Nasdaq was higher by 0.5% after testing a 2nd-half high of 7,634.
Current and lower resistance at 7,600-7,650 was cleared and held with a close above the latter signaling additional strength towards 7,700-7,750.
The Russell 2000 fell for the 2nd-straight session after giving back 0.2% with the intraday low reaching of 1,490.
Near-term and upper support at 1,500-1,485 was breached but held with a close below the latter reopening risk towards 1,475-1,460.
Energy led sector strength after rallying 1.9% while Materials and
Technology jumped 1.2%.
There were no sector laggards.
Global Economy – European markets were mostly lower after the ECB left interest rates at their present levels and said that it could be this way at least through the first half of 2020.
The Belgium20 was down 0.4% and France’s CAC 40 was off 0.3%. Germany’s DAX 30 gave back 0.2% while the Stoxx 600 slipped less than a point, or 0.02%. UK’s FTSE 100 rose 0.6%
The European Central Bank said the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40%, respectively.
Asian markets settled mixed.
Australia’s S&P/ASX 200 advanced 0.4% and Hong Kong’s Hang Seng climbed 0.3%. South Korea’s Kospi nudged up 0.1%. China’s Shanghai fell 1.2% and Japan’s Nikkei dipped 2 points, or 0.01%.
Challenger Job-Cut Report announced job cuts rose 18,600 to 58,600 in May, after falling 20,600 to 40,000 in April.
Industrial, manufacturing, and auto companies have been announcing an increasing number of layoffs, while cuts in the retail sector have been slowing. Challenger noted trade frictions might add to job cuts in the former industries.
Announced hirings fell 7,700 to 8,700 after rising 1,000 to 16,400 in April.
Initial Jobless Claims were unchanged at 218,000 versus forecasts of 215,000. This brought the 4-week moving average down to 215,000 versus 217,500.
Continuing claims rose 20,000 to 1,682,000 after dropping 21,000 to 1,662,000 the prior week.
April International Trade deficit narrowed to -$50.8 Billion, close to expectations for a print of -$50.6 billion. Exports declined 2.2% to $206.8 billion after rising 0.8% to $211.4 billion.
Imports fell 2.2% to $257.6 billion following the prior 1.4% gain to $263.3 billion.
The real goods trade balance dipped to -$81.9 billion from -$83 billion, with real exports 3.4% lower from the 0.4% gain and real imports 2.6% lower from 1.1%.
The trade deficit with China widened to -$26.9 billion versus -$20.7 billion, and it was -$1.6 billion in Canada versus -$1.3 billion previously.
Q1 Productivity growth was revised to 3.4%, versus the 3.6% pace in the Advance report, and 1.3% in Q4, and 1.9% in Q3.
Unit labor cost growth was revised lower to -1.6% versus -0.9%, along with Q4 as it was revised to -0.4% from 2.5%. Output was revised down to a 3.9% clip from 4.1% previously and 2.6% in Q4.
The price deflator was -0.5% versus the -0.1% in the prior report and 1.6% in Q4. On a 12-month basis, productivity held at a 2.4% year-over-year growth rate, the same as the Advance report, and versus 1.7% in Q4.
The Quarterly Services Survey revealed a 5.7% (was 5.6%) Q1 year-over-year gain in the aggregate selected services measure.
For the larger components, there was a 7% (was 7.1%) year-over-year surge in the finance and insurance component, and a 4.9% (was 4.5%) rise for the healthcare and social assistance component.
Market Sentiment – Dallas Fed Robert Kaplan said he’s watching trade developments very carefully and that he is worried trade uncertainties could have a chilling effect on business investment, which could feed into hiring.
He said tensions could improve in coming weeks, however, so it’s wise now to watch and wait and see what happens. As far as policy, he said it is in the neighborhood of neutral for now and that he is looking more at credit spreads versus the stock market.
Kaplan went on to say downside risks have increased but it’s too soon to make judgment on whether any actions would be appropriate.
He believes the yield curve is signaling expectations for sluggish growth, adding the inversion needs to have some size and some duration, and wants to give a little more time for conditions to play out.
New York Fed John Williams said inflation is an important goal, noting it’s half of the dual mandate and hence it is something the Fed needs to think about.
He said he is watching how inflation behaves to help determine whether policy is in the right place, and if it is moving on a sustained basis back toward the symmetric 2% goal.”
He will also be monitoring the economy and whether it is consistent with maximum employment and a sustainable expansion.
As for his outlook, Williams is still optimistic and is still forecasting above trend growth for the first half, with inflation moving gradually back up toward 2%.
Looking ahead, he said there are more uncertainties around the global economic outlook, including trade, and there are signs that those uncertainties are resulting in some hesitancy on business spending.
Williams dodged questions on whether he’s comfortable with the markets pricing in strong probability for rate cuts this year and that it doesn’t worry him that there are various outlooks on the FOMC’s stance.
He said he does monitor the yield curve and he acknowledged it’s a strong signal for the markets. He added it is an input into this thinking with respect to the distribution of risks, but he doesn’t see it as an oracle of a recession.
The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 2-session losing streak after bouncing to a high of $131.59.
Prior and upper resistance at $131.50-$132 was cleared but held with continued closes above the latter being a more bullish signal for higher highs.
Current support remains at $131-$130.50.
A move below the latter would be a bearish signal with additional weakness towards $128.50-$128.
Market Analysis – The S&P 400 Mid Cap Index ($MID) extended its winning streak to 4-straight sessions after reaching an intraday peak of 1,885.
Near-term resistance at 1,875-1,900 was cleared and held with a close above the latter and the 200-day moving average being an ongoing bullish signal.
Near-term and major support is at 1,850. A close below this level would likely lead to a further backtest towards 1,825-1,800 and late May lows.
RSI has leveled out with resistance at 50.
A move above the this level would signaling ongoing strength with fresh hurdles at 55-60 and the latter representing the early May top. Support is at 45-40.
The Energy Select Sector Spider (XLE) was up for the 3rd time in the past 4 sessions after trading to a high of $61.22. Current resistance at $61-$61.50 was cleared but held by a penny.
Continued closes above the latter would be a more bullish development for continued strength towards $62-$62.50.
However, continued closes above the $63 is needed to possible confirm a near-term bottom.
Near-term and support is at $60.50-$60. A
close below the latter would be a renewed bearish development with downside risk towards $59-$58.50 and late May lows.
RSI is in a slight uptrend with resistance at 45 and the late May peak.
A close above this level would be a bullish signal with additional strength towards 50-55 with the former representing prior support throughout much of 2019.
Support is at 40-35 with risk towards 30-25 on a move below the latter.
Existing Position Update
Market coming back.
FED showing extreme flexibility.
Mexico is not as big of a threat as China.
Expect more upside if FED data tomorrow cooperates.
We are allocating the portfolio as follows:
Long 30% in XLRE closed on Thursday at 37.31
Long 20% in XLU closed on Thursday at 60.51
Short 30% in XLF closed on Thursday at 27.17
Short 20% in XLB closed on Thursday at 57.06
Option Traders… the following regular MONTHLY options meet our criteria:
XLRE – 16AUG $36 Strike Price CALL (Expires August 16, 2019)
XLU – 20SEP $58 Strike Price CALL (Expires September 20, 2019)
XLF – 20SEP $26 Strike Price PUT (Expires September 20, 2019)
XLB – 20SEP $52 Strike Price PUT (Expires September 20, 2019)
All the best,