U.S. markets reversed course on Wednesday after giving back the prior session gains as another sharp drop in yields sent investors back to the sidelines.

Specifically, the 2-year and 10-year spread inverted for the first time since 2007 with inversions traditionally seen as indicators of impending recessions.

Although it can be debated if the U.S. is indeed headed for a near-term recession, or not, it is clear fears of a global slowdown are real. The headline news had a negative impact on the major indexes, either way, with prior support levels back in play.

It is important to note, the market experienced this scenario a few months ago and bounced back after the 10-year yield fell below the 3-month yield.

The Russell 2000 dropped 2.9% after tapping a late day low of 1,465. Prior and upper support at 1,460-1,450 held with the late May and early June lows at 1,461 and 1,460, respectively.

The Nasdaq plummeted 3% following the midday backtest to 7,762 and close back below the 7,800 level.

Current and upper support at 7,750-7,700 held with the monthly low at 7,662.

The S&P 500 sank 2.9% after trading to an intraday low of 2,841. The close below the 2,850 level reopens risk towards upper support at 2,825-2,800 and the 200-day moving average with last week’s low at 2,822.

The Dow stumbled 3.1% following the backtest to 25,521 while closing back below the 26,000 level. Upper support at 25,600-25,400 and the 200-day moving average was breached but held? with the August low at 25,440.

There was no sector strength. Energy led sector laggards after sinking 3.9% while Financials and Communication Services skidded 3.7% and 3.6%, respectively.

Global Economy – European markets settled with heavy losses after the UK’s 2-year/10-year yield curve also inverted, along with weaker-than-expected economic news.

Germany’s DAX 30 tanked 2.2% and France’s CAC 40 sank 2.1%. The Belgium20 dropped 1.9% and the Stoxx 600 was off 1.7%. The UK’s FTSE 100 tumbled 1.4%.

German’s Q2 GDP slipped 0.1% compared to the previous quarter, matching expectations, but down from 0.4% growth in Q1.

Eurozone Q2 GDP rose by just 0.2%, also down from the 0.4% growth reported in Q1.

Asian markets showed strength following the delay in the implementation of U.S. tariffs on some Chinese goods from the beginning of September to mid-December.

Japan’s Nikkei rallied 1% and South Korea’s Kospi was higher by 0.9%. China’s Shanghai and Australia’s S&P/ASX 200 rose 0.4% while Hong Kong’s Hang Seng nudged up 0.1%.

MBA Mortgage Applications jumped 21.7% to a 3-year high after rebounding 5.3% the prior week. On a 12-month basis, the index is 81.2% higher.

The refinancing index surged 36.9% with purchases rising 1.9%. On a year-over-year basis, refis are up 195.7% and purchases are higher by 12.1%.

The drop in the 30-year mortgage rate was the catalyst, as it fell below 4% to 3.93%, the lowest since November 2016. However, the 5-year ARM rose to 3.43% from 3.36%.

Import Prices rose 0.2% in July, with Exports Prices unchanged. Estimates were for a drop of -0.3% for imports, while exports were expected to be flat.

The -0.9% drop in import prices was revised lower to -1.1%, and the -0.7% decline in June export prices was bumped up to -0.6%. On a 12-month basis, import prices posted a -1.8% year-over-year pace versus -2%, while export prices were -0.9% versus June’s -1.6%.

For import prices, petroleum bounced 1.9% versus June’s -7% decline. Excluding petroleum, import prices were flat after falling -0.4%. Industrial supplies prices rebounded 0.9% versus -3.7% previously.

Import prices of foods/beverages fell 0.5% versus -1.4%. Import prices with China were down -0.1%, the same as June, and with Canada rose 0.2% versus -3.3%. As for export prices, agricultural was up 0.4% versus 2.5%.

Excluding ag, export prices were 0.2% higher from -1%.

Market Sentiment – St. Louis Fed James Bullard assured the U.S. is not in recession, while adding that good macro outcomes for the U.S., including a near 50-year low on unemployment and low inflation, makes for a good time to review the strategic thinking of the future and framework.

Bullard noted Japan’s case where the policy rate hasn’t been above 50 basis points over the last 20 years, while inflation has been low or negative, with the question whether inflation gets stuck below target, or not. How to stay out of that trap is the key issue.

Bullard said there are a range of policy tools that can be examined, including negative rates. His comments come ahead of a somewhat blackout period ahead of next week’s Jackson Hole Symposium.

Meanwhile, for Fed Chair Janet Yellen said the U.S. is most likely not entering a recession as she believes the U.S. economy has enough strength to avoid one. However, she added the odds have clearly risen and they are higher than she is frankly comfortable with.

Yellen said the dip in long-term U.S. bond yields that has raised fears of a coming economic slowdown may be driven by a number of factors and not necessarily a good signal of future economic activity.

The iShares 20+ Year Treasury Bond ETF (TLT) resumed its parabolic run after zooming to $145.73 and another fresh all-time high. Blue-sky and lower resistance at $145-$145.50 was cleared and held.

Continued closes above the latter could lead to upside potential towards $147-$147.50.

Rising and near-term support is at $145-$144.50. A close below $144 could lead to a quick backtest towards $142.50-$142.

Market Analysis – The Invesco QQQ Trust (QQQ) fell for the 3rd time in 4 sessions following the intraday pullback to $182.42. Near-term and upper support at $182.50-$182 was breached but held.

A move below the latter would be an ongoing bearish signal for a further backtest towards $180-$179.50 with the monthly low at $179.20.

Lowered resistance is at $183.50-$184 with additional hurdles at $185.50-$186.

RSI is back in a downtrend with support is at 40.

A close below this level would signal additional weakness towards 35-30 with the latter representing last week’s and the May low. Resistance is at 50.

The Consumer Discretionary Select Spiders (XLY) was also down for the
3rd time in 4 sessions after trading to a late day low of $114.72.

Shaky and upper support at $114.50-$114 held.

A close below the latter and last week’s low of $114.09 opens up risk towards the $$112.50-$112 and prior support from early June.

Lowered resistance is at $115.50-$116 with additional barriers at $117.50-$118.

RSI is in a downtrend with support at 35. A move below reopens risk towards 30-25 and fresh lows.

Current resistance is at 40.

We are holding the following positions:


4. LOB
5. LZB
6. WNC

Options Traders – the following regular MONTHLY options meet our criteria:

BCOV – 18OCT Expiration $12.5 Strike Price Call

CRUS – 17JAN Expiration $55 Strike Price Call

EDIT – 15NOV Expiration $25 Strike Price Call

LOB – 20DEC Expiration $20 Strike Price Call

LZB – 18OCT Expiration $35 Strike Price Call

WNC – 18OCT Expiration $15 Strike Price Call

All the best,
Roger Scott