U.S. markets traded in a tighter range on Thursday and showed some strength following better-than-expected economic news ahead of and after the open.
News that Presidents Xi and Trump are communicating by phones and letters provided some relief ongoing trade talks are continuing with China’s Foreign Ministry confirming hopes to resolve trade disputes via negotiations.
The late day weakness was a result of the major indexes failing to hold near-term resistance levels and comes ahead of recent selling pressure on Friday’s and ahead of the weekends.
Monday’s have been weak as well in recent weeks and if the pattern continues, fresh multi-month lows will be in play.
The Dow was up 0.4% following the run to 25,639 while failing to hold key resistance at 25,600 and the 200-day moving average into the close.
The 2nd-half backtest to 25,339 breached but held near-term and upper support at 25,400 with a close below this level opening downside risk towards 25,200-25,000.
The S&P 500 was higher by 0.3% despite failing to hold prior resistance at 2,850 on the pop to 2,856 shortly after the open and into the closing bell.
The intraday pullback to 2,825 held major support at 2,825 by a half-point with a move below this level getting 2,800 and the 200-day moving average in play.
The Nasdaq was lower for the 4th time in 5 sessions after slipping 0.1% and failing to hold resistance at 7,800 on the opening run to 7,805.
Near-term and upper support at 7,750-7,700 was breached but held on the late day fade to 7,716 afterwards with a close below the latter signaling additional selling pressure towards 7,650-7,600 and the 200-day moving average.
The Russell 2000 gave back 0.4% following the tumble to 1,456 and fresh multi-month intraday low.
Major support at 1,460 held for the 2nd-straight session with risk to 1,450-1,435 and mid-January levels on a close below this level.
Consumer Staples and Real Estate led sector strength with gains of 1.5% while Utilities added 1.3%. Energy led sector laggards for the 2nd-straight session after giving back 0.6% while Consumer Discretionary and Technology were down 0.2%.
Global Economy – European markets settled lower across the board despite better-than-expected economic news our of Britain.
UK’s FTSE 100 fell 1.1% and Germany’s DAX 30 was down 0.7%. France’s CAC 40, the Stoxx 600, and the Belgium20 declined 0.3%.
UK retail sales rose 0.2% in July versus forecasts for a decline of 0.2%.
Asian markets were mixed after Honk Kong unveiled a $2.4 billion stimulus plan to lower income taxes and to help stimulate its economy.
Hong Kong’s Hang Seng rose 0.8% and South Korea’s Kospi added 0.7%.
China’s Shanghai climbed 0.3%. Australia’s S&P/ASX 200 sank 2.9% and Japan’s Nikkei slumped 1.2%.
Initial Jobless Claims rose 9,000 to 220,000 versus expectations for 208,000. The 4-week moving average checked in at 213,750 versus 212,750 previously.
Continuing claims were 39,000 higher at 1,726,000 following the 12,000 drop to 1,687,000 the prior week.
Philadelphia Fed Business Outlook Survey fell 5 points to 16.8 in August following the rebound to 21.8 in July. Estimates were at 11.1.
The employment component plunged to 3.6 from 30, but new orders rose to 25.8 from 18.9, with prices paid dipping to 12.8 from 16.1. The 6-month index declined to 32.6 from 38, with the employment index at 25 from 24.9. New orders slipped to 44.1 from 45.7 while prices paid rose to 39 from 35.3.
Retail Sales rose 0.7% in July, topping forecasts for a rise of 0.4%, with the ex-auto component up 1%. The June 0.4% increases in the headline and core indexes were revised down to 0.3%. Sales excluding autos, gas, and building materials were up 1% after the 0.7% June gain.
Motor vehicle sales declined 0.6% after the prior 0.3% bump while gas station sales rebounded 1.8% from -2.3%. Non-store retailers rose 2.8% after a revised 1.9% gain and department store sales rebounded 1.2% from -1.1%.
The Empire State Index for August inched up 0.5 ticks to 4.8, topping forecasts of 2.5, and follows July’s 4.3 print. The employment component improved to -1.6 from -9.6.
New orders rose to 6.7 versus -1.5 previously, while prices paid dipped to 23.2 from 25.5. The 6-month index declined to 25.7 versus 30.8, with employment rising to 21.1 from 14.2.
New orders were at 31.7 from 35.4 while the future prices paid index came in at 38.1 from 39.4.
Industrial Production fell 0.2% in July from a revised 0.2% increase in June, and missing estimates for a rise of 0.1%. Manufacturing production declined 0.4% following the prior 0.6% gain.
Motor vehicles and parts production slipped 0.2% after surging 2.5% previously. Machinery production dropped 1.1% from -0.3% and computer production was flat from a prior 1.1% gain. Utilities surged 3.1% from -3.3% while mining slumped -1.8% from 0.6%.
Nonfarm productivity grew at a 2.3% pace in the preliminary Q2 reading versus a 3.5% gain in Q1.
Unit labor costs increased 2.4% versus a 5.5% surge in Q1. Output rose 1.9% versus Q1’s 3.9% print, while hours worked fell 0.4% after a 0.4% gain. Compensation per hour was 4.8% higher from a 9.2% gain and real compensation was up 1.8% from 0.9%.
Business Inventories were unchanged in June, versus estimates for a rise of 0.1%, with sales up 0.1%. This follows a 0.3% gain in May inventories and a -0.1% decline in sales. Retailer inventories declined 0.3% in May with the inventory-sales ratio slipping to 1.39 from 1.40.
The NAHB Housing Market Index edged up 1 point to 66 in August, matching forecasts, and above the 65 print in July. This represented the high for the year, thanks largely to the drop in mortgage rates.
The present single family index increased 2 points to 73 while the future sales index slipped 1 point to 70. The index of future traffic rose 2 ticks to 50 from 48 and is the highest since October.
Market Sentiment – St. Louis Fed James Bullard the trade war between the U.S. and China is fueling uncertainty about the economic outlook but stressed that the domestic economy appears to be on sound footing.
He also downplayed the recent market weakness, noting that stock prices might be more affected by trade-related uncertainty than American consumers.
When asked whether the Fed should implement a bigger cut of a half-point at the next meeting, Bullard said he didn’t want to prejudge the outcome.
He also added he doesn’t think the Fed needs to call an extraordinary meeting to potentially lower interest rates sooner than planned.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 3rd-time in 4 sessions after surging to an intraday peak of $148.60 and 4th-straight all-time intraday high.
Fresh and upper resistance at $148-$148.50 was cleared but held. Continued closes above the latter could lead to upside potential towards $149.50-$150.
Rising and near-term support is at $146.50-$146. A close below the latter would be a slightly bearish signal for additional weakness towards $145-$144.50.
Market Analysis – The Russell 2000 ETF (IWM) was down for the 2nd-straight session and 4 of the past 5 following the pullback to $144.79. Late-May and upper support at $145-$144.50 was breached but held.
A close back below the latter would be an ongoing bearish signal with risk towards $143-$142.50 and mid-January levels.
Lower resistance is at $146.50-$147.
Continued closes above $148 would be a more bullish signal of a near-term bottom with a possible retest towards $150.50-$151 and the 200-day moving average.
RSI is in a downtrend with support at 35 and the monthly low.
There is risk to 30 and the late May low on a move below this level. Resistance is at 40-45 with a close above 50 being a more bullish signal of a possible near-term bottom.
The Health Care Select Sector Spider (XLV) closed in positive territory after tapping an intraday high of $89.71. Near-term resistance at $89.50-$90 was split but held.
Continued closes above the latter and the 200-day moving average would be a slightly bullish signal for a possible retest towards $91.50-$92 and the 50-day moving average.
Current support is at $89-$88.50.
A close below $88 would likely signal additional selling pressure towards $87-$86.50 and prior support levels that held throughout May.
RSI is trying to level out and show strength with support at 40. A close below this level would signal additional weakness towards 35-30 with the latter representing the monthly bottom.
Resistance is at 45-50 with continued closes above the latter being a slightly bullish signal for additional strength.
We are allocating the portfolio as follows:
Long 20% in XLK closed on Thursday at 76.82
Long 30% in XLP closed on Thursday at 59.53
Long 30% in XLU closed on Thursday at 61.07
Short 20% in XLE closed on Thursday at 56.28
Option Traders… the following regular MONTHLY options meet our criteria:
XLK – 20DEC $80 Strike Price CALL (Expires December 20, 2019)
XLP – 20DEC $60 Strike Price CALL (Expires December 20, 2019)
XLU – 20DEC $61 Strike Price CALL (Expires December 20, 2019)
XLE – 18OCT $56 Strike Price PUT (Expires October 18, 2019)
All the best,