U.S. markets showed strength throughout much of Wednesday’s action in anticipation of a 25 basis point cut from the FOMC. However, the selloff afterwards showed disappoint as the Fed Chairman Powell was unable to deliver the dovish policy guidance that Wall Street had been anticipating.
U.S./ China trade talks concluded in Shanghai with no progress reported and kept a lid on the opening gains.
China is said to be taking a wait-and-see approach to talks, adopting the view that such a tactic will produce a more beneficial agreement.
Volatility spiked to late June highs but was able to hold key resistance levels ahead of the closing bell.
The Dow dropped 1.2% after testing an afternoon low of 26,719 while closing below the 27,000 level for the 1st time in 15 sessions.
Upper support at 26,750 held with risk to 26,500 and the 50-day moving average on a close below this level.
The Nasdaq was also lower by 1.2% after tapping a 2nd-half low of 8,110.
Major and upper support at 8,100-8,050 held with a close below the latter and the July low of 8,059 would be a bearish development with high risk towards 8,000-7,950 and the 50-day moving average in play.
The S&P 500 sank 1.1% following the late day plummet to 2,958 on the close back below the 3,000 level.
Prior and upper support from mid-July at 2,975-2,950 was breached but held with a move below the latter getting 2,925 and the 50-day moving average in play.
The Russell 2000 fell 0.7% despite testing a midday peak of 1,599 and showing strength in the final hour of action.
The plummet to 1,568 after the Fed news breached near-term and upper support at 1,575-1,560 and a level that failed to hold by a half-point.
There was no sector strength. Consumer Staples was the hardest hit sector after tanking 2%.
Technology and Materials tumbled 1.5% while Consumer Discretionary and Industrials were off 1.2% and 1.1%, respectively.
Global Economy – European markets settled mostly higher following better-than-expected news out of Germany.
The Belgium20 rallied 0.8% and Germany’s DAX 30 rose 0.3%. The Stoxx 600 added 0.2% and France’s CAC 40 nudged up 0.1%. UK’s FTSE 100 was down 0.8%.
Germany’s Federal Labour Office reported the number of people out of work edged up by only 1,000 to 2,283,000, versus expectations for a rise of 2,000.
The jobless rate held steady at 5%, slightly above the record-low 4.9% reached earlier this year.
German retail sales for June were up by 3.5%, after a revised 1.7% drop in May, and easily topping forecasts for a rise of 0.5%.
Asian markets were lower across the board following the lack of a breakthrough on trade talks between the U.S. and China.
Hong Kong’s Hang Seng sank 1.3% while South Korea’s Kospi and China’s Shanghai stumbled 0.7%.
Japan’s Nikkei declined 0.9% and Australia’s S&P/ASX 200 gave back 0.5%.
China PMI for July came in at 49.7, topping forecasts of 49.6, but representing the 3rd-straight month of contraction.
MBA Mortgage Applications fell 1.4%, following a 1.9% drop in the prior week, and represents a 5th consecutive weekly decline. However, the index is still up 35.3% year-over-year.
All of the weakness was in the purchase index, which dropped 3% after sliding 1.6% in the prior week. The refinancing index inched up 0.1% following a prior 2.1% drop.
The 30-year fixed rate mortgage was unchanged at 4.08% while the 5-year ARM dipped to 3.52% versus 3.57%, last week.
ADP Employment Report added 156,000 job in July, topping expectations of 155,000, and follows an upwardly revised 112,000 gain in June. This left the 3-month average at 105,000, down from 138,000 in June and 211,000 in April. The service sector added 146,000 jobs with the goods sector up 9,000.
Within the former, education/health was up 37,000, while trade/transport jobs increased 27,000 followed by a 26,000 gain in leisure/hospitality, and an 11,000 gain in financial/business services.
Large firms added 78,000 workers, with medium sized increasing 67,000, while small firms added 11,000.
Employment Cost Index increased 0.6% in Q2, well below expectations of 2.8%, and the 0.7% gain in Q1.
Wages and salaries were up 0.7%, the same as in Q1, while benefits increased 0.5%, down from 0.7% in Q1. On a 12-month basis, ECI posted a 2.7% year-over-year growth rate, down from 2.8% previously.
Chicago PMI fell another 5.3 points to 44.4 in July, much weaker than expectations for a print of 50.5, and represents the 2nd-straight month of contraction.
Last month’s print was the first time below 50 since January 2017. The 3-month average fell to 49.4 from 52.2.
State Street Investor Confidence Index for July came in at 84.9.
Market Sentiment – The FOMC lower the Federal Funds Rate by 25 basis points to 2%-2.25 while saying the labor market remains strong and that economic activity has been rising at a moderate rate.
The minutes said job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
The report also said although growth of household spending has picked up from earlier in the year, growth of business fixed investment has been soft. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2%.
Powell told reporters in a news conference following the rate decision that the central bank’s rate cut was a mid-cycle adjustment, hinting that further rate cuts later this year are not a sure thing.
He said this refers back to other times when the FOMC has cut rates in the middle of a cycle and he is not contrasting it with the beginning of a lengthy cutting cycle.
Powell added this is not what the Fed is seeing and that is not their perspective now, telling us to look at not just the 25 basis-point cut, but to look at the committee’s actions over the year.
Powell explained the Fed started off the year expecting some rate increases and then moved to a patient setting for a few months and now the Fed has moved here.
He said the Fed moved to more accommodative policy, and the economy has actually performed as expected with that gradual increase in support.
The trouble came when Powell tried clarifying his earlier statements about the current actions being seen as a mid-cycle adjustment, saying that he does not think this is the start of a long cutting cycle, but he also didn’t say it’s just one rate cut and the Fed could cut rates again.
The iShares 20+ Year Treasury Bond ETF (TLT) closed higher for the 4th-straight session after surging to an intraday high of $133.33. Prior and lower resistance from early July at $132.50-$133 was cleared and held.
A close above the latter would be an ongoing bullish signal for a possible push towards $133.50-$134 and the 52-week peak at $134.29.
Near-term and rising support is at $132-$131.50. A close below $131 and the 50-day moving average would be a bearish development.
Market Analysis – The Spider Small-Cap 600 ETF (SLY) flipped-flopped for the 6th-straight session despite breaking out to a fresh monthly high of $69.44. Prior and lower resistance from late May at $69-$69.50 was cleared and held.
Continued closes above the latter would be a bullish signal for a run towards $70-$70.50 and late February and early May peaks.
Near-term and rising support at $68-$67.50 held on the whipsaw to $68.14 afterwards with a close below the latter signaling a possible false breakout.
The 50-day moving average has cleared the 200-day moving average to form a golden cross and is typically a bullish signal for higher highs.
RSI has been zigzagging with resistance at 60-65.
Continued closes above the latter would signal additional strength towards 70-75 and February highs. Support is at 55-50 with a close below the latter and July low signaling additional weakness.
The Materials Select Sector (XLB) is showing signs of breaking down out of a 7-session trading range following the backtest to $57.81. Current and upper support from mid-July at $58-$57.75 was breached but held.
A close below the latter would likely lead to a further pullback towards $57.25-$57 and the 50-day moving average.
Near-term and lowered resistance is at $58.50-$58.75.
Continued closes above $59 would be a better setup for a retest towards $60 and prior resistance from September 2018. The 52-week high is at $61.16.
RSI is in a downtrend after falling below upper support at 55-50 and the latter representing the July low.
A close below 50 would be a bearish signal for additional weakness towards 45-40. Resistance is at 55-60.
We are holding the following positions:
1. CORE
2. HZNP
3. LZB
4. PAYS
5. RDUS
6. UPLD
Options Traders – the following regular MONTHLY options meet our criteria:
CORE – 15NOV Expiration $40 Strike Price Call
HZNP – 15NOV Expiration $26 Strike Price Call
LZB – 18OCT Expiration $35 Strike Price Call
PAYS – 20SEP Expiration $15 Strike Price Call
RDUS – 18OCT Expiration $22.5 Strike Price Call
UPLD – 18OCT Expiration $50 Strike Price Call
All the best,
Roger Scott.