U.S. markets avoided a continued selloff on Monday as U.S.-China trade tensions eased following the escalation on Friday.
In speaking from the G-7 in France, President Trump appeared to dial back the rhetoric, saying talks with China were much more meaningful than at any time while saying that anything’s possible when asked if he would delay or cancel planned tariffs on China.
The positive close helped the major indexes push near-term support levels but the inside session, meaning no higher highs or lower lows, remains a slightly bearish signal.
Volatility closed above a key level of resistance and is also signaling caution over the near-term.
The Nasdaq gained 1.3% after testing an intraday high of 7,856.
Prior and lower resistance at 7,850-7,900 was cleared and held with continued closes above 7,950 signaling additional strength towards 8,000-8,050 and the 50-day moving average.
The Russell 2000 advanced 1.1% following the close at 1,476 and the high for the day.
Near-term and lower resistance at 1,475-1,490 was cleared and held with more important hurdles at 1,500-1,515 and 200-day moving average.
The S&P 500 rose 1.1% while closing a point off the session peak of 2,879.
Current and lower resistance at 2,875-2,900 was reclaimed with a move above the latter setting up a possible retest towards 2,925-2,950 and the 50-day moving average.
The Dow was also higher by 1.1% following the late day run to 25,941.
Lower resistance at 25,800-26,000 was breached and held with additional hurdles at 26,200-26,400 followed by 26,600 and the 50-day moving average.
Communications Services and Technology paced sector strength after jumping 1.5% and 1.4%, respectively, while Consumer Staples and Utilities rallied 1.2%.
There was no sector weakness.
Global Economy – European markets closed mixed on weaker-than-expected economic news out of Germany and worries the country could be headed for a recession.
France’s CAC 40 rose 0.5% and Germany’s DAX 30 climbed 0.4%. The Belgium20 added 0.2%. UK’s FTSE 100 fell 0.5% and the Stoxx 600 was down a tenth-point, or 0.02%.
Germany’s Ifo Institute business climate index for August was at 94.3, versus forecasts for a print of 95.1.
Asian markets suffered losses following the ongoing, and confusing at times, U.S./ China trade updates over the weekend.
Japan’s Nikkei stumbled 2.2% and Hong Kong’s Hang Seng crumbled 1.9%. South Korea’s Kospi sank 1.6% and Australia’s S&P/ASX 200 tanked 1.3%.
China’s Shanghai dropped 1.2%.
The editor-in-chief of China’s Global Times, Hu Xijin, tweeted that based on what he knows, Chinese and U.S. top negotiators didn’t hold phone talks in recent days.
However, he did say the two sides have been keeping contact at the technical level, but that it doesn’t have the significance that President Trump suggested.
Chicago Fed National Activity Index fell 0.39 points to -0.36 in July after improving 0.13 ticks to 0.03 in June. The 3-month moving average improved to -0.14 from -0.30 the prior month. All four of the broad categories declined and made negative contributions.
Dallas Fed Manufacturing Survey rose 10 points to 2.7 in August, after rising 5.8 ticks to -6.3 in July, and topping expectations for an improvement to -3 while breaking a string of 3-straight months in contractionary territory. Strength was in production, rising to 17.9 from 9.3, and capacity at 15.7 from 11.2.
The employment component fell to 5.5 from 16, with the workweek at 4 from 6.6 and wages at 27.3 versus 20.1. New orders improved to 9.3 from 5.5.
The prices paid index softened to 9.8 from 17, with prices received at -2.6 from -1.7. The 6-month general business index tumbled to 1.4 versus 6.
The future employment component declined to 22.9 from 28.2, and new orders dropped to 23.7 from 31.8, with prices paid sinking to 11.8 from 23.5, and prices received at 9.1 from 14.7.
Durable Goods Orders climbed 2.1% in July, topping forecasts for a gain of 1.1%, and follows June’s 1.8% rebound. Transportation orders surged 7% after the prior 4.1% gain.
Excluding transportation, orders declined 0.4% following the prior 0.8% rise. Nondefense capital goods orders excluding aircraft edged up 0.4% versus 0.9% in June.
Shipments fell -1.1%, reversing June’s 1% gain. Nondefense capital goods shipments ex-aircraft slid -0.7% from unchanged. Inventories rose 0.4% from 0.3% previously.
The inventory-shipment ratio rose to 1.68 from 1.66.
Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 3rd time in 4 sessions despite testing intraday high of $146.29. Prior and lower resistance at $146-$146.50 was cleared but held.
Current support at $145.50-$145 was tripped and failed to hold on the fade to $145.29 afterwards.
A close below the latter would be a slightly bearish development for a backtest towards $143.50-$143.
A close below the $142.50 level would signal a possible near-term top.
Market Analysis – The Invesco QQQ Trust (QQQ) snapped a 2-session slide after trading to a second half high of $184.87. Prior and lower resistance at $184.50-$185 was cleared and held with additional hurdles at $185.50-$186.
Continued closes above $186.50 would be a more bullish signal for a retest towards $188.50-$189 and the 50-day moving average.
Current support is at $183.50-$183. A move below the latter would be an slightly bearish signal for a further backtest towards $182-$181.50 with the monthly low at $179.20.
RSI is back in a uptrend with resistance is at 50 and the monthly peak. A close above this level would signal additional strength towards 55-60 and prior July support levels.
Current support is at 45-40.
A move below 40 would be a slightly bearish signal with risk towards 35-30 and the latter representing the August low.
The Materials Select Sector (XLB) was up for the first time in 3 sessions after tapping an opening high of $55.48. Lower resistance at $55.50-$55.75 was challenged but held.
Continued closes above the $56 level would be a slightly bullish signal with upside potential towards $56.50-$57.
Current and shaky support is at $54.75-$54.50 and the 200-day moving average.
A close below these levels would be a bearish development with. Ear-term risk towards $53.50-$53.
RSI is flatlining with support is at 35.
A close below this level would be an ongoing bearish signal for additional weakness towards 30-25 and December 2018 lows. Resistance is at 40-45.
We are allocating the portfolio as follows:
Long 20% in XLK closed on Monday at 78.24
Long 30% in XLP closed on Monday at 60.38
Long 30% in XLU closed on Monday at 62.22
Short 20% in XLE closed on Monday at 56.20
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,
Roger Scott.