U.S. markets showed strength throughout much of Thursday’s session on lowered trade rhetoric.
China instructed its media to simmer down on the topic while encouraging words from the country’s Vice Minister of Commerce also helped boost sentiment.
Although NATO relations remain a little testy, the major indexes rebounded to push multi-month resistance with fresh all-time highs back in play.
Volatility continues to push key support and levels that held ahead of Friday”s parade of earnings from the Financial sector.
The Nasdaq surged 1.4% after trading to an all-time high of 7,825. Resistance at 7,800 was cleared with continued closes above this level keeping blue-sky territory open towards 7,950-8,000.
The Dow gained 0.9% after testing an intraday peak of 24,939.
Resistance from mid-June at 25,000 held with continued closes above this level being a very bullish development.
The S&P 500 was higher by 0.9% following the push to 2,799. Resistance at 2,800 continues to be a brick wall and a level that hasn’t been cleared since mid-March.
The Russell 2000 spiked to a high of 1,692 shortly after the open before fading and rebounding again in the second half of action The small-caps were up 0.4% after failing resistance at 1,700.
Technology and Communication Services were up 1.6% and were the strongest sectors.
Industrials and Health Care were higher by 1.2% and 1.1%, respectively.
Consumer Staples were the only other sector that closed in the red after slipping 0.1%.
Global Economy – European markets rebounded from their worst losses in more than two weeks and ahead of Britain’s Brexit plans to extricate itself from the European Union.
France’s CAC 40 jumped 1% while the Stoxx 600 Europe and UK’s FTSE 100 rose 0.8%. The Belgium20 and Germany’s DAX 30 advanced 0.6%.
Eurozone May industrial production was up 1.3%, topping expectations by 0.1%.
The European Commission cut its Eurozone 2018 GDP forecast to 2.1% from a prior estimate of 2.3%.
The EU said if trade tensions with the U.S. were to escalate further, it could dampen confidence more permanently, weighing on global investment and trade flows, and likely disrupting the current global cyclical upswing.
Asian markets were strong across the board after China’s Vice Minister of Commerce, Wang Shouwen, said they should sit down and try to find a solution to the trade problem.
China’s Shanghai surged 2.2% and Japan’s Nikkei rallied 1.2%. Australia’s S&P/ASX 200 soared 0.9% and Hong Kong’s Hang Seng climbed 0.6%. South Korea’s Kospi added 0.2%.
China’s Commerce Ministry reported $15.66 billion in foreign direct investments in June, up 5.8% from a year earlier. Over the first six months of 2018, China’s FDI rose 4.1% from a year ago to $68.32 billion.
Foreign investment from the U.S. accounted for 29% of the total in the January-June period.
The Bank of Korea held its policy rate unchanged at 1.50%. The central bank also trimmed its gross domestic product forecast and now sees the country’s economy expanding 2.9% in 2018, slightly lower than April’s estimate of 3%.
The bank expects consumer prices will rise 1.6% this year, unchanged from its earlier projection.
Initial Jobless Claims fell 18,000 to 214,000 versus expectations cor a print of 225,000.
Consumer Price Index was slightly softer-than-expected with a 0.1% gain, but an as-expected 0.2% increase in core prices.
The year-over-year increase of 2.9% in CPI was the strongest since February 2012, and the 2.3% reading for the core index matched the January 2017 reading.
Bloomberg Consumer Comfort Index posted a reading of 58 for the week ending July 8th.
Market Sentiment – In an interview, Fed Chairman Powell said low wage growth is a bit of a puzzle, though analysts are starting to see wages go up as markets tighten and the economy is in a really good place.
He also has had no indication from the Trump Administration that the Fed’s independence is at risk.
Powell is also not yet declaring victory on achieving the 2% inflation goal. He said the labor market is strong by any measure and the Fed is close to its dual mandate.
If added lower tariffs are achieved with trade policy, and that’s good for the economy, but if higher tariffs remain, that’s bad. Indeed, it would be very challenging if inflation rises while the economy weakens as it would lead to stagflation.
Philadelphia Fed Patrick Harker said his baseline case is still for 3 hikes this year, but were inflation to pick-up, he could support 4 tightenings.
He said the Fed could lift the policy rate to 3%-3.25%. Inflation is moving toward the 2% target, he added, and stressed the inflation goal is symmetric as the gains in services price bear watching. On tariffs, he said they could sap business confidence and investment.
Harker added the Fed should take if slow and steady, avoiding the risk of inverting of the yield curve But said if inflation accelerated past 2.5%, the Fed would likely have to act.
He believes there are lots of good reasons to hold off and the neutral rate may remain low until productivity picks up.
Cleveland Fed President Mester said the U.S. economy could handle two more rate increases this year to raise the fed funds rate to 3% to reach a neutral level.
U.S. Treasury’s Mnuchin does not think yield curve flattening is indicative of a recession and continues to monitor the impact of its trade policies.
He also said the U.S. is very focused on the retaliatory trade measures from other countries and resolving them. Mnuchin said there are no plans to loosen sanctions on North Korea.
The iShares 20+ Year Treasury Bond ETF (TLT) traded in a tight range with lower resistance at $122.50-$123 holding on the intraday run to $122.47.
Support remains at $122-$121.50 with the midday low low tapping $122.14.
Market Analysis – The Spider S&P 500 ETF (SPY) was up for the 5th time in 6 sessions after reaching a late day peak of $279.43.
January resistance at $279.50-$280 held with a close above the latter being a bullish signal for a possible run towards $282-$282.50.
Short-term and crucial support is at $276.50 with a move below this level signaling additional weakness towards $275.
The 50/200-day moving averages are in solid uptrends and are signaling higher highs. RSI is back in a uptrend with current resistance in the 65-70 area and mid-June peaks.
A close above the latter would signal additional strength for a run towards 75-80. Near-term support is at 60-55.
The Health Care Select Sector Spider (XLV) closed in positive territory for the 9th time in 10 sessions after tapping a high of $87.29. January resistance is at $87.50-$88 with a move above the latter being a bullish development for a run towards $90.
The all-time high is at $91.79.
Current support is at $86.50-$86 with backup help at $85.
We mentioned in mid-June a golden cross was in the process of forming with the 50-day moving average on track to clear the 200-day moving average.
This typically signals higher highs with the 50-day MA remaining in a nice uptrend.
RSI is closing in resistance is at 70 with a move above the latter signaling additional strength.
Key support is at 60 with a move below this level signaling additional weakness and a near-term top in XLV.
Current Position Update
Energies traded slightly higher. Expect more upside next few sessions.
Consumer discretionary stocks are reaching for new highs.
Financial stocks were flat for the session. I’m seeing more downside ahead.
Industrial stocks bucked the trend. Expect reversion to lower trend – since price appears to be above fair value at this time.
We are allocating the portfolio as follows:
Buying 25% in XLE closed on Thusday at 75.86
Buying 25% in XLY closed on Thursday at 112.34
Selling 25% in XLF closed on Thursday at 27.10
Selling 25% in XLI closed on Thursday at 73.37
Option Traders… the following regular MONTHLY options meet our criteria:
XLE – SEP 73 CALLS (Expiration Date September 21, 2018)
XLY – SEP 110 CALLS (Expiration Date September 21, 2018)
XLF – SEP 27 PUTS (Expiration Date September 21, 2018)
XLI – SEP 73 PUTS (Expiration Date September 21, 2018)
All The Best,
Roger Scott