U.S. markets showed some strength on Friday’s open following solid economic news but turned south midday following reports the White House is in the preliminary stages of weighing a block on all U.S. investments in China.

The goal of the potential block is to protect American investors with the Trump administration considering delisting Chinese companies from American stock exchanges and putting a limit on U.S. government pension funds’ exposure to the Chinese market.

While this scenario is highly unlikely, the fresh weekly lows and breach of the major moving averages sets up risk towards beginning of the month support levels.

Volatility held a key level of resistance for the 4th-straight session after testing a 3-week peak but is also signaling near-term and possible lower lows for the overall market.

The Nasdaq was down for the 5th time in 6 sessions after dropping 1.1% and testing an intraday low of 7,890. Prior and upper support from the start of the month at 7,900-7,850 was breached but held on the 2nd-straight close below the 50-day moving average.

The Russell 2000 fell for the 8th time in 9 sessions after sinking 0.8% while tapping a late day low of 1,515. Fresh and upper support at 1,515-1,500 and the 200-day moving average held but the close below the 50-day moving average was an ongoing bearish signal.

The S&P 500 stumbled 0.5% after tapping a low of 2,945 ahead of the closing bell. Key support at 2,975 failed to hold with a close below 2,950 and the 50-day moving average being a fresh sell signal.

The Dow declined 0.3% after trading to a 1st half high of 27, 012 but failing to hold key resistance at the 27,000 level for the 5th-straight session.

Upper support at 26,800 was challenged but also held for the 5th-straight session on the backtest to 26,715 with a close below 26,600 and the 50-day moving average signaling additional weakness.

For the week, the Russell 2000 plummeted 2.7% and the Nasdaq sank 2.2%. The S&P 500 gave back 1% and the Dow was lower by 0.4%.

Financials were the only sector that showed strength after adding 0.4%.

Technology and Communication Services were the leading sector laggards after tumbling -1.3% and -1.1%, respectively.

The best performing sectors for the week and the only ones to settle higher were Utilities (1.3%) and Consumer Staples (0.5%). Sector weakness was paced by Energy (-3.5%), Communication Services (-2.6%) and Healthcare (-2.3%).

Global Economy – European markets closed higher across the board following speculation the BoE will be next to cut rates.

UK’s FTSE 100 jumped 1% and Germany’s DAX 30 rallied 0.8%. The Stoxx 600 added 0.5% while France’s CAC 40 and the Belgium20 rose 0.4%.

Bank of England policymaker Michael Saunders said the U.K. could be looking at an interest rate cut if uncertainty around Brexit continues to persist.

Asian markets settled mixed on concerns about the pace of trade talks and weaker-than-expected economic news out of China.

South Korea’s Kospi tumbled 1.2% and Japan’s Nikkei fell 0.8%. Hong Kong’s Hang Seng slipped 0.3%. Australia’s S&P/ASX 200 advanced 0.6% and China’s Shanghai edged up 0.1%.

China’s industrial profits for August dropped 2% from a year earlier, versus a 2.6% gain in July and a 3.1% jump in June.

Durable Goods Orders rose 0.2% in August, matching forecasts, and follows the 2% increase in July and the 1.8% gain in June. Transportation orders dipped 0.4% after popping 7.2% previously.

Excluding transportation, orders were up 0.5% from -0.5% while non-defense capital goods orders excluding aircraft slid 0.2% after a prior unchanged reading. Shipments inched up 0.1% from -1.2%.

Nondefense capital goods shipments excluding aircraft were up 0.4% from -0.6% previously. Inventories increased 0.3% from 0.4%.

Personal Income for August was up 0.4%, with spending 0.1% higher, and both matching expectations. Compensation increased 0.6%, versus the prior 0.2% gain. Wages and salaries climbed 0.6%, after the 0.2% gain previously.

Disposable income rose 0.5% versus 0.3%. The savings rate jumped 8.1% versus 7.8% while real personal spending was up 0.1% versus the prior 0.3% gain.

The PCE chain price index was unchanged versus 0.2%, with the core rate up 0.1% versus 0.2%. On a 12-month basis, the headline was steady at 1.4% year-over-year, while the core rate rose to a 1.8% clip from 1.7% previously.

Consumer Sentiment climbed 3.4 points to 93.2 in the final September reading, topping forecasts of 92, while recouping some of the 8.6 point drop to 89.8 in August.

The current conditions index increased to 108.5 versus August’s 105.3. The expectations index rose to 83.4 from the prior 79.9. The 12-month inflation index edged up to 2.8% from the prior 2.7% while the 5-year index slipped to 2.4% from 2.6% in August.

Baker-Hughes reported the U.S. rig count was down 8 rigs to 860, with oil rigs declining 6 to 713, gas rigs slipping 2 to 146, and miscellaneous rigs unchanged at 1.

The U.S. Rig Count is down 194 rigs from last year’s count of 1,054, with oil rigs off 150, gas rigs down 43, and miscellaneous rigs down 1 rig to 1. The The U.S. Offshore Rig Count is down 1 rig to 24 and up 4 rigs year-over-year.

Farm Prices for August were up 0.9%.

Market Sentiment – Philadelphia Fed Patrick Harker said the Fed should be on hold for now after noting consumer spending was a little on the weak side, though the consumer is holding up well even as the economy faces headwinds. He said he would worry if inflation expectations drifted down.

Harker was not in favor of the most recent rate cut and he didn’t think the move would have much impact, adding business decisions not to invest in the current environment has nothing to do with the cost of capital.

He downplayed the recent rise in volatility in the money markets, saying it does not affect monetary policy nor does it impact the economy.

However, he said it may signal something on reserves and the size of the Fed’s balance sheet, and questions the FOMC has been contemplating.

As far as reserves, Harker said if they are near or approaching appropriate levels, then the Fed may have to resume the organic growth of the balance sheet. Concurrently, the Fed has been discussing the implementing a standing repo facility to help address unusual spikes or dislocations.

On monetary policy, Harker sees inflation as on track to meet the FOMC’s goal, and while the economy has been doing well, there are clear downside risks.

In closing, he acknowledged monetary policy has limited power against uncertainty. Also, cutting rates to align with foreign rates comes with a cost.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 3rd time in 4 sessions and 2-straight after trading to an intraday high of $142.98.

Lower resistance at $142.50-$143 was cleared and held. Additional hurdles are at $143.50-$144 with a close above the latter signaling a breakout of the current 5-session trading range.

Support remains at $142-$141.50 with a close below the latter likely leading to a further backtest towards $140-$139.50 and the 50-day moving average.

RSI is holding support at 50 with a move below this level signaling additional weakness towards 45-40. Resistance is at 55-60.

Market Analysis – The Wilshire 5000 Composite Index ($WLSH) closed in the red for the 7th time in 8 sessions after trading to an intraday low of 30,043. Prior and upper support from early September at 30,250-30,000 held on the close back below the 50-day moving average.

A move below the latter would signal additional weakness towards the 29,750 level.

Lowered resistance is at 30,500- 30,750. Continued closes above the latter would signal a possible near-term bottom.

RSI is back in a downtrend with support at 45-40.

A close below the latter reopens risk towards 35-30 and the latter representing the early August low. Resistance is at 50-55.

The Spider Gold Shares (GLD) extended its losing streak to 3-straight after testing a session low of $140.16. Lower support throughout the month at $140.50-$140 and the 50-day moving average held with the September low at $139.81 and the mid-August intraday plunge at $139.35. A close below $140, or a move below $139.50-$139, would be a bearish development and likely confirm lower lows towards $138-$137.50.

Lowered resistance is at $141.50-$142 with more important hurdles at $143.50-$144.

RSI is in a downtrend with support at 45-40 and the April low at 35. Resistance is at 50 with upside potential towards 55-60 on a move back above this level.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 46.6% on Friday, down 9.71%, with the session low reaching 40.77%.

Near-term support levels from the first week of September at 45%-42.5% were stretched but held. A close below the 40% level would be an ongoing bearish signal for weakness towards 35%-30% and late August lows.

Current resistance is at 47.5%-50%. A close above the 52.5% level would be a more bullish signal strength has returned with upside potential towards 55%-60%.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at 67.26%, down 0.2%, with the session low at 65.87%. Upper support at 67.5%-65% failed to hold.

A move below the latter would signal additional weakness towards 62.5%-60%. A breakout occurred at the 60% level earlier this month and represents crucial support. Lowered resistance is at 70%-72.5% with more important hurdles at the 75% level and the monthly peak at 75.44%.

We are holding the following positions:


  1. LCI
  2. SITC 6. ZUMZ 

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

AMBA – 17JAN Expiration $67.5 Strike Price Call

ENPH – 17JAN Expiration $30 Strike Price Call

HIBB – 20DEC Expiration $22.5 Strike Price Call

LCI – 17JAN Expiration $15 Strike Price Call

SITC – 17JAN Expiration $15 Strike Price Call

ZUMZ – 21FEB Expiration $35 Strike Price Call

All the best,
Roger Scott.