U.S. markets rebounded on Wednesday despite some weakness on the open and the official announcement of an impeachment inquiry against President Trump.
The major indexes showed steady momentum afterwards and into the close following the release of the transcripts of the call between Trump and Ukraine’s President Volodymy Zelensky.
While the chances of an actual impeachment are small, the drama over the phone call will likely dominate Washington and thus limit work on any significant legislation.
Despite the turmoil, the overall market gains held into the close with the major indexes pushing prior resistance levels.
The Russell 2000 rallied 1.1% following the opening run to 1,552. Prior and upper resistance at 1,535-1,550 was cleared and held with more important hurdles at 1,560-1,575.
The Nasdaq also added 1.1% after testing a morning high of 8,095.
Previous and lower resistance at 8,100-8,150 was challenged but held on the close back above the 50-day moving average.
The Dow rose 0.6% after trading to a 1st half high of 27,016.
Near-term and lower resistance at 26,800-27,000 was cleared and held with continued closes back above the latter keeping 27,250-27,500 in play.
The S&P 500 was also up 0.6% following the push to 2,989 ahead of the closing bell.
Prior and lower resistance at 2,975-3,000 was cleared and held with a move above the latter getting 3,025 and all-time highs back in focus.
Technology and Communication Services paced sector strength after jumping 1.2% while Consumer Discretionary rose 0.9%.
Healthcare was the weakest sector after sliding 0.5% while Real Estate and Utilities edged down 0.1%.
Global Economy – European markets settled mostly lower as Brexit concerns returned with U.K. Prime Minister Boris Johnson disagreeing with the recent verdict against his decision to suspend Parliament and increased calls from lawmakers to resign following the ruling.
Germany’s DAX 30 dropped 0.8% while the Stoxx 600 and France’s CAC 40 fell 0.6%. UK’s FTSE 100 dipped over a point, or 0.02%, and the Belgium20 was up less than a point, or 0.02%.
Asian markets closed lower across the board following the political developments in the U.S. and impeachment inquiry President Trump is now facing.
News that China is preparing to buy more American pork did not help sentiment as ongoing trade talks continue.
South Korea’s Kospi and Hong Kong’s Hang Seng tanked 1.3% while China’s Shanghai sank 1%.
Australia’s S&P/ASX 200 declined 0.6% and
Japan’s Nikkei was lower by 0.4%.
MBA Mortgage Applications dropped 10.1% versus a 0.1% dip in the prior week. Refinancings paced the decline, falling 15.2% on the week, while the purchase index slid 3.1% lower.
The 30-year fixed mortgage rate edged back above 4% last week and inched up further to 4.02% in the most recent week, but well below the 4.97% rate from a year ago.
The 5-year adjustable fell to 3.39% from 3.54%.
New Home Sales rebounded 7.1% to a 713,000 pace in August, better than expectations of 662,000, and follows the 8.6% drop to 666,000 for July.
Regionally, it was the strength in sales in the South and West that paced the monthly gain, while sales slowed slightly in the Midwest and Northeast.
The months’ supply of homes fell to 5.5 from 5.9. The median sales price jumped 7.5% to $328,400 after dipping 0.3% to $305,400 in June and represents a 2.2% year-over-year pace.
State Street Investor Confidence Index was at 80.1 for September.
September Survey of Business Uncertainty Index checked in at 90.2 with the Survey of Business Uncertainty Expectations Index at 86.5.
Market Sentiment – St. Louis Fed James Bullard said his argument for more stimulus is all about risk management, especially since inflation is below target.
He said prudent risk management would be to take account of the downside risks, including the ongoing trade war, the slowing in global economy and manufacturing.
Bullard went on to say that overall the Committee has made major changes in 2019, going from expected rate hikes, to patient, to easing.
He attributes some of the strength in the economy to the Fed’s accommodative policies but added trade is the biggest issue confronting the economy and it will take time to reach an agreement.
Bullard believes the Chinese might have incentive to delay until after the 2020 elections. While trade has impacted the U.S., he added it has had a more chilling effect globally, and that could come back and bite the U.S. economy.
As far as U.S. yields, Bullard said they are influenced by global rates, though the shape of the U.S. curve is sending a signal that the markets are less sanguine on growth than is the FOMC.
As of today, he said he would vote for another 25 basis point cut before the end of the year though he doesn’t want to pre-judge the Committee’s decision.
He said the biggest threat is that analysts fall into a negative rate environment as in Japan or Europe.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for just the 2nd time in 8 sessions following the late day pullback to $141.14. Upper support at $141.50-$141 was breached and failed to hold.
A close below the latter would signal additional weakness towards $140-$139.50 and the 50-day moving average.
Lowered resistance is at $143.50-$144 with additional hurdles at $145.50-$146 on a close above the latter.
Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) rebounded to close higher for the 2nd time in 3 sessions after reaching an intraday peak of $270.13.
Near-term and lower resistance at $269.50-$270 was cleared and held. Continued closes above the latter would be a renewed bullish signal for a retest towards $272-$272.50.
Current support is at $268-$267.50. A close below the latter would be a fresh bearish signal with risk towards $266.50-$266.
RSI is back in a slight uptrend with resistance at 60-65 and the latter representing the monthly peak.
Support is at 50 with downside potential towards 45-40 on a move below this level and the latter representing the mid-August low.
The Technology Select Sector Spiders (XLK) closed higher despite testing a morning low of $78.89. Upper support from earlier this month at $79.25-$78.75 and the 50-day moving average was breached but held.
A move below the $78.50 level would be a fresh sell signal with additional risk towards $77.50-$77.
Lower resistance at $80.50-$81 was recovered on the late day run to $80.90.
Continued closes above $82 would be a more bullish development for additional strength towards $82.50-$83 with the all-time peak currently at $82.78.
RSI has been holding support at 50. A move below this level would signal additional weakness towards 45-40.
Resistance at 55-60 with a close above the latter getting 65-70 and July highs in play.
We are allocating the portfolio as follows:
Long 30% in XLF closed on Wednesday at 28.09
Long 20% in XLK closed on Wednesday at 80.68
Long 30% in XLU closed on Wednesday at 64.59
Short 20% in XLE closed on Wednesday at 60.43
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,
Roger Scott.