U.S. markets showed some strength on Monday after Chinese officials described trade talks over the weekend as constructive. China’s Commerce Ministry said there were good discussions on detailed arrangements for high level talks in October.
However, news that the U.S. will be sending troops to the Gulf was a session overhang and caused some opening weakness before the midday turnaround but mostly lower close.
Volatility remains slightly elevated but closed below a key level of support to start the week.
The Dow added 0.1% after making a push 27,011 in the final hour of action. Near-term and lower resistance at 27,000-27,250 was breached but held with the July all-time high at 27,398.
The S&P 500 was lower by a third-point, or 0.01%, despite the late day run to 2,999. It was the 2nd-straight close below the 3,000 level with lower resistance at 3,000-3,025 holding and the all-time peak at 3,027.
The Nasdaq slipped 5 points, or 0.1%, after trading in a 50-point range while testing an intraday high of 8,135.
Prior and lower support at 8,150-8,200 was challenged but held with a move above the latter leading to a possible retest towards 8,250-8,300 and the all-time high at 8,339.
The Russell 2000 extended its losing streak to 5-straight sessions after slipping 0.1%, while trading to a late day high of 1,563.
Lower resistance at 1,560-1,575 was cleared but held with a above the latter getting 1,585-1,600 back in play.
Consumer Staples, Consumer Discretionary and Real Estate showed the most sector strength after rising 0.4% while Technology was up 0.3%.
Healthcare and Communications Services were the weakest sectors after giving back 0.5% and 0.4%, respectively.
European markets settled lower after eurozone business growth slowed along with disappointing PMI data out of Germany and France.
The Belgium20 tanked 1.2% and France’s CAC 40 tumbled 1.1%. Germany’s DAX 30 sank 1% and the Stoxx 600 lost 0.8%. UK’s FTSE 100 was down 0.3%.
Eurozone September Flash Composite PMI came in at 50.4 versus expectations of 52 while the Flash Manufacturing PMI was at 45.6 versus forecasts of 47.3. Eurozone September Flash Services PMI checked in at 52, missing estimates of 53.3.
France PMI Manufacturing dropped to 50.3 in September, down from 51.1 in August, and missing expectation of 51.2. PMI Manufacturing Output dropped to 49.7, down from 50.7.
France PMI Services dropped to 51.6, down form 53.4, and below forecasts of 51.2. The PMI Composite dropped to 51.3, down from 52.9, a 4-month low
Germany’s PMI checked in in at 49.1 in September, down from 51.7 the previous month.
The manufacturing element was particularly troubling, coming in 41.4 and the lowest gauge of German factory sentiment for more than a decade.
Asian markets were mixed with Japan’s Nikkei closed for a holiday.
Australia’s S&P/ASX 200 climbed 0.3% and South Korea’s Kospi added a fifth-point, 0.01%. China’s Shanghai fell 1% and Hong Kong’s Hang Seng dropped 0.8%.
Chicago Fed National Activity Index rose 0.51 points to 0.10 in August, topping estimates of 0.06. The 3-month moving average improved slightly to -0.06 from -0.14. Of the 85 indicators that make up the index, 44 made positive contributions.
PMI Composite Flash for September nudged up 0.7 points to 51, topping forecasts of 50.1. The employment component improved to 50.9 from 50.1 previously and is the 2nd-straight monthly gain.
The service index edged up to 50.9 from 50.7. The composite improved to 51 from 50.7 previously although employment dropped to 49.9 and is the worst since January 2010.
New orders also declined and hit a record low.
Market Sentiment – New York Fed John Williams said the money markets are being closely monitored and the recent turmoil raises questions on the appropriate level of reserves.
He said the Fed is continuing to study what is the right level need for the market and the recent short-term market moves weren’t fully expected, but the Fed was prepared and acted quickly to ease market strains.
Williams also suggested the problem was more an uneven distribution of reserves rather than a system liquidity problem.
St. Louis Fed James Bullard said the Committee might opt to ease again, but concurred with Chair Powell’s comments that it’s a meeting-by-meeting decision.
He believes the key risk is for slower than expected U.S. growth and doesn’t believe trade uncertainties will go away any time soon.
Bullard also worries about low inflation and thinks an insurance easing will help re-center inflation. However, he is not seeing an intensification of the yield curve inversion and acknowledged that the policy stance is more accommodative than it was in late 2018.
The iShares 20+ Year Treasury Bond ETF (TLT) had its 5-session winning streak halted despite tapping an intraday high of $143.15. Near-term and lower resistance at $143-$143.50 was breached but held.
A close above the $144 level and prior support from earlier in the month would signal continued momentum.
Current support is at $141.50-$141 with additional help at $140-$139.50 and the 50-day moving average.
Market Analysis – The Russell 3000 Index ($RUA) fell for the 4th-straight session despite trading to a 2nd-half high of 1,758. Prior and lower resistance at 1,760-1,775 was nearly cleared but held.
Continued closes above the latter would be an ongoing bullish signal with upside potential towards 1,780-1,800 with July’s all-time high just south of 1,781.
Near-term support is at 1,735-1,720 and the 50-day moving average on a move below last week’s low of 1,747 and the 1,745 level.
RSI is flatlining with resistance at 60.
Continued closes above this level would signal additional strength towards 65-70 with the latter representing the July and April highs.
Support is at 55-50 with a move below the latter reopening weakness towards 45-40.
The Industrials Select Sector Spider (XLI) extended its losing streak to 7-straight sessions following the opening slide to $77.22. Upper support at $77.50-$77 was split but held. A close below the latter would be an ongoing bearish signal with risk towards at $76.50-$76 and the 50-day moving average.
Lower resistance at $78-$78.50 held on the intraday rebound to $77.94.
Continued closes above the latter and prior resistance from July and earlier this month would be a more bullish signal that a near-term bottom has formed.
RSI is trying to level out with support at 55-50.
A move below the latter would signal additional weakness towards 45-40 and the latter representing the late August low.
Resistance is at 60. Continued closes above this level would signal additional strength towards 65-70 with the later representing the late April peak and a level that failed earlier this month.
We are allocating the portfolio as follows:
Long 30% in XLF closed on Monday at 28.17
Long 20% in XLK closed on Monday at 80.51
Long 30% in XLU closed on Monday at 63.88
Short 20% in XLE closed on Monday at 61.30
Option Traders… the following regular MONTHLY options meet our criteria:
XLF – 20DEC $29 Strike Price CALL (Expires December 20, 2019)
XLK – 17JAN $85 Strike Price CALL (Expires January 17, 2020)
XLU – 17JAN $63 Strike Price CALL (Expires January 17, 2020)
XLE – 20DEC $57 Strike Price PUT (Expires December 20, 2019)
All the best,