U.S. markets showed some strength on Tuesday following 2 days of selling pressure on reports the U.S. may be easing back some of the pressure concerning China.
A softening of restrictions on American companies dealing with Chinese telecom companies for up to 90 days helped sentiment while disappointing Retail earnings weighed on gains.
The Russell 2000 rallied 1.3% while closing at its session high of 1,545.
Near-term and lower resistance at 1,550-1,565 was challenged but held with a close above the latter and the 50/200-day moving averages being a more bullish signal for higher highs.
The Nasdaq jumped 1.1% following the intraday high of 7,804.
Prior and lower resistance from late March at 7,800-7,875 was challenged but held with a close above the latter and the 50-day moving average possibly leading to additional momentum.
The S&P 500 gained 0.9% after tapping a morning high of 2,868.
Fresh and lower resistance at 2,875-2,900 and the 50-day moving average held with a close above the latter signaling a possible near-term bottom.
The Dow was up 0.8% following the run to 25,898 ahead of the closing bell.
Prior and lower resistance at 25,800-26,050 was cleared and held with a close above the latter and the 50-day moving average being a more bullish signal.
Materials were the sector standout after jumping 1.5% while Technology and Industrials jumped 1.2%.
Consumer Staples slipped 0.2% were the only sector that showed weakness.
Global Economy – European markets closed higher across the board following Prime Minister May’s proposed vote on a 2nd Brexit referendum.
Germany’s DAX 30 was higher by 0.9% while France’s CAC 40, the Belgium20 and the Stoxx 600 Europe advanced 0.5%. UK’s FTSE 100 added 0.3%.
The OECD projected global economic growth of 3.2% in 2019, down 0.1% from its March forecast, and an unchanged 3.4% in 2020. OECD chief economist Laurence Boone stated the U.S.-China trade tensions have derailed global growth and need to be dealt with at a multilateral level.
Asian markets settled mixed with the reprieve in U.S.-China trade tensions although China warned it would retaliate if U.S. actions undermine Chinese companies’ interests.
China’s Shanghai surged 1.3% and Australia’s S&P/ASX 200 rose 0.4%.
South Korea’s Kospi climbed 0.3%. Hong Kong’s Hang Seng fell 0.5% and Japan’s Nikkei dipped 0.1%.
Existing Home Sales slipped 0.4% to a 5,190,000 rate in April, missing expectations for a strong rebound to 5,350,000. The weakness was in single family sales which declined 1.1% after March’s 4.9% tumble.
Condo/coop sales jumped 5.6%, more than erasing the prior month’s 5.3% decline. Regionally, sales were down 4.5% in the Northeast and 0.4% in the South, but rose 1.8% in the West and were unchanged in the Midwest.
The months’ supply increased to 4.2 from 3.8. The median sales price increased to $267,300 versus $259,700.
Weekly chain store sales inched up 0.1% in the week ended May 18th, following back-to-back 1.3% declines.
The 12-month pace accelerated to 2.8% year-over-year, from 2.1%.
Redbook Store Sales were up 5.2% for the year in the week ending May 18th.
Market Sentiment – Fed Chairman Jerome Powell said business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate.
He added at the same time, the level of debt certainly could stress borrowers if the economy weakens, though banks are in the position to handle any sudden problems.
Powell said the Fed continues to assess the potential amplification of such stresses on borrowers but called those risks moderate at this point. Moreover, he added banks and other financial institutions have sizable loss-absorbing buffers.
Chicago Fed Charles Evans said the Fed needs to plan for the likelihood that the zero interest rate bound is again reached, and added it’s likely to happen more frequently in the future.
He went on to say the balance sheet must remain a consideration as a policy tool but interest rates are the preferred strategy, and QE would only be used again if rates were at or near zero.
Evans commented that an inflation make-up strategy could mean short run price increases well above the 2% mark. He said for credibility, the FOMC will have to follow-through on that strategy if it is adopted.
Federal Reserve President Eric Rosengren said given that inflation has underrun the target over the last several years, it is wise to admit to some uncertainty about this part of the forecast.
It is his view that the Fed can afford to wait to see if that forecast does indeed materialize. In addition, the presence of a prominent downside risk, more disruptive trade negotiations, seems to him to be another important reason for policymaker patience until this source of uncertainty is more resolved.
Rosengren does not see a clarion call to alter current policy in the near term. He currently views policy as slightly accommodative and likely consistent with inflation returning to the 2% target.
He warned about reacting to temporary misses, but it would also not be desirable to continue consistently undershooting inflation as that could cause inflation expectations to decline, and is difficult to reverse.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 2nd-straight session after testing an intraday low of $125.30. Upper support at $125.50-$125 was breached but held with a close below $124.50 signaling a possible near-term top.
Resistance is at $126-$126.50 with the 52-week peak at $126.69.
Market Analysis
The Spiders Dow Jones Industrial Average ETF (DIA) snapped a 2-session slide after trading to a 2nd-half peak of $258.88. Near-term and lower resistance at $259-$259.50 was challenged but held.
Continued closes above the $260 level and the 50-day moving average would confirm a possible near-term bottom and additional strength.
Current support is at $258-$257.50.
A close below the latter would be a renewed bearish signal with risk towards the $255.50-$255 area.
RSI is in a slight uptrend with resistance at 50 and represents prior support from earlier this month. A move above this level would signal additional momentum towards 55-60.
Support is at 45-40 with a move below the latter signaling additional weakness.
iShares MSCI Emerging Markets (EEM) closed higher for the first time in 4 sessions after making a run to $40.64. Near-term and lower resistance at $40.50-$40.75 was cleared and held.
A close above $41 would be a slightly bullish signal with more important hurdles at $41.25-$41.50 and the 200-day moving average.
Current support is at $40.25-$40.
A close below the latter and prior resistance from early January would be a renewed bearish development with risk towards the $39.50 level.
RSI is trying to form a near-term bottom while holding support at 30.
A close back below this level keeps risk towards 25-20 and October 2018 lows in play.
Resistance is at 35 with strength towards 40-45 on a move above this level.
We are holding the following positions:
LRCX: +25% Allocation | $180.40 Protective Stop Loss | $209.23 Profit Objective
ADBE: +25% Allocation | $256.54 Protective Stop Loss | $306.29 Profit Objective
CELG: +25% Allocation | $87.00 Protective Stop Loss | $106.15 Profit Objective
FB: +25% Allocation | $171.38 Protective Stop Loss | $207.05 Profit Objective
Option Traders – the following (regular monthly) options meet our criteria:
LRCX – 20SEP $205 Strike Price CALL (Expires September 20, 2019)
ADBE – 19JUL $290 Strike Price CALL (Expires July 19, 2019)
CELG – 19JUL $95 Strike Price CALL (Expires July 19, 2019)
FB – 19JUL $190 Strike Price CALL (Expires July 19, 2019)
All the best,
Roger Scott.