U.S. markets were sluggish for the 6th-straight session after trading on both sides of the ledger following another update from Fed Chairman Jay Powell and other Fed heads. Powell once again talked up the economy while saying Fed policy is in a good place.
The rhetoric wasn’t enough to lift the major indexes to fresh all-time highs but the broader market showed strength in an otherwise lackluster session.
Volatility stayed slightly elevated and is showing some signs of upcoming nervousness but was able to hold a key level of resistance into the closing bell.
The S&P 500 edged up 0.1% while tapping a late day high of 3,098. Major resistance at 3,100 was challenged but held for the 3rd-straight session with upside potential towards 3,125-3,150 on a close above this level.
The Dow declined just over a point, or 0.01% after trading to an intraday low of 27,676. Near-term and upper support at 27,600-27,400 held with a close below the latter being a slightly bearish signal.
The Nasdaq slipped 3 points, or 0.04%, following the first half pullback to 8,441. Current and upper support at 8,450-8,400 held with a close below the latter opening up risk towards 8,350-8,300.
The Russell 2000 was off nearly a half-point, or 0.02%, with the second half low reaching 1,586. Current and upper support at 1,585-1,570 was breached but held.
Real Estate and Materials were the strongest sectors after advancing 1% and 0.6%, respectively. Energy and Technology were the leading sector laggards after giving back 0.3% and 0.1%, respectively, while Consumer Staples edged down 0.03% to round out the losers.
Global Economy – European markets closed lower despite good news Germany technically avoided a recession.
UK’s FTSE 100 dropped 0.8% while Germany’s DAX 30 and the Stoxx 600 lost 0.4%. The Belgium20 was off 0.2% and France’s CAC 40 dipped 0.1%.
Germany’s GDP grew by 0.1% in the third quarter, versus forecasts for a decline of -0.1%. Second quarter GDP growth was revised down from -0.1% to -0.2%. Meanwhile, the eurozone economy grew by 0.2% quarter-on-quarter in the third quarter, in line with expectations and marking a 1.2% increase year-over-year.
Asian markets were mixed following disappointing economic news out of Japan and China along with escalating political unrest in Hong Kong.
Hong Kong’s Hang Seng fell 0.9% and Japan’s Nikkei stumbled 0.8%.
South Korea’s Kospi rallied 0.8% and Australia’s S&P/ASX 200 rose 0.6%. China’s Shanghai climbed 0.2%.
China industrial production for October grew 4.7% year-on-year, versus expectations of 5.4%.
Japan’s GDP grew 0.2% on an annualized rate in the third quarter, well below forecasts for a rise of 0.8%.
Australia’s unemployment rate edged up to 5.3% with new jobs down 19,000 in October, the largest decline since late 2016.
Initial Jobless Claims jumped 14,000 to 225,000, topping forecasts for a print of 215,000, after dropping 8,000 to 211,000 in the prior week. This left the 4-week average at 217,000 versus 215,250, previously.
Continuing claims declined 10,000 to 1,683,000 following the 1,000 increase to 1,693,000 in the last week of October.
PPI rose 0.4% in October, with the core rate up 0.3%, topping forecasts for a rise of 0.2%, and follows -0.3% declines for both in September. The 12-month rates cooled to 1.1% year-over-year, for the headline, and 1.6% for the core, versus September’s 1.4% and 2% readings, respectively.
Goods prices were up 0.7% versus -0.4% in the prior month, with energy climbing 2.8% versus -2.5%, and food prices rising 1.3% from 0.3%. Services prices were up 0.3% from -0.2%.
Market Sentiment – Fed Chairman Jay Powell concluded his 2-day testimony before the House Budget Committee and mostly repeated his thoughts from the Wednesday and common themes over the last couple of months.
He said the U.S. economy is good shape, and indeed said it’s the star economy. He also said he sees no reason why the expansion should come to an end.
Powell said inflation isn’t a problem such that the Fed would have to start tighten policy. Many of the questions were on the budget, with Powell once again stressing it’s important for Congress to be able to respond.
That will mean Congress will have to bring down the debt, but over the next several decades.
Powell said he’s not seeing the downturn in manufacturing spilling over into the rest of the economy. He acknowledged that the trade war has been weighing on manufacturing, but also added slowing in global activity has been a factor too.
As to the Fed’s tool set, there is less room to cut rates now given the low rate structure.
He added that over fiscal policy has been important during downturns, and over time, less fiscal policy space will make Congress less willing to support the economy when needed.
Powell said passing USMCA would benefit the economy while removing uncertainty and would give businesses a rule book on which to make decisions on how to go forward.
Fed Vice Chairman Richard Clarida said the economy is at or close to maximum employment and price stability. He agreed with sentiment that despite a 50-year low in the jobless rate, price pressures are not much of an issue.
He said there is no evidence that rising wages are putting upward pressure on prices and acknowledged that inflation expectations are at the low end of the ranges he considers consistent with the Fed’s mandate.
New York Fed John Williams repeated the new mantra that the economy and policy are in a good place, while supporting the current holding pattern.
He continues to expect moderate growth, a still strong labor market, and inflation moving up toward the 2% goal. He warned that things can change (of course) and said if there were a material change to the outlook, the Fed would adjust policy.
Williams added that trade uncertainties are impacting, and that businesses are holding off on making investment decisions until the landscape is clearer.
He said the Fed doesn’t want to get caught up in the day-to-day ups and downs or high frequency changes in trade policy. He said he wants to think of where the economy will be in one or two years.
The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 4-straight sessions after surging to a high of $138.44. Prior and lower resistance from late October at $138-$138.50 was cleared but held.
A close above the latter would signal additional strength towards $139.50-$140 and the 50-day moving average.
Rising support is at $137-$136.50 with a move below $136 signaling a false breakout and near-term top.
Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) was up for the 6th-straight session despite the intraday pullback to $277.09.
Fresh and upper support at $277-$276.50 held. A close below the $276 level would signal a possible near-term top with backtest potential towards $274.50-$274.
Current and lower resistance at $278-$278.50 held for the 2nd-straight session on the late day rebound to $278.32. A close above the latter and Wednesday’s all-time peak at $278.40 would be an ongoing bullish signal with additional momentum towards $279.50-$280.
RSI is remains in a slight uptrend but slightly overbought levels with resistance at 75 and the July high. Support is at 70. A close above this level would signal additional weakness towards 65-60.
The Real Estate Select Sector Spider (XLRE) extended its winning streak to 2-straight sessions after closing on the high of $38.36. Prior and lower resistance from mid-August at $38.25-$38.50 was cleared and held.
Continued closes above the latter and prior support from early October would be a more bullish setup for a possible push towards $38.75-$39 and the 50-day moving average.
Current support is at $38-$37.75. A close back below $37.50 would be a renewed bearish development with downside risk towards $37.25-$37 and the 200-day moving average.
RSI is back in an uptrend with resistance at 45-50 and the latter representing the late October peak.
Current support is at 40 with a move below this level signaling weakness towards 35-30 and the latter representing the monthly low.
We are allocating the portfolio as follows:
28% in AMGN closed on Thursday 218.50
28% in CTXS closed on Thursday 111.39
28% in KLAC closed on Thursday 177.87
16% in TMF closed on Thursday 27.33
Option Traders – the following (regular monthly) options meet our criteria:
28% in AMGN – 17JAN $215 Strike Price CALL (Expires January 17, 2020)
28% in CTXS – 17JAN $110 Strike Price CALL (Expires January 17, 2020)
28% in KLAC – 17JAN $170 Strike Price CALL (Expires January 17, 2020)
16% in TMF – 21FEB $30 Strike Price CALL (Expires February 21, 2020)
All the best,