U.S. markets showed strength for the 2nd-straight session while setting fresh all-time highs following hints of a quarter-point rate cut later this month.

Fed Chairman Jerome Powell stressed the various uncertainties that were weighing on the outlook, and worried that weak inflation will be even more persistent supported expectations for an easing.

While the market liked what was stated, Powell did not really suggest a bigger 50 basis point rate reduction was in the offing, though he did say the Fed has the tools needed and could use them aggressively, if necessary.

Volatility cooled but held near-term support levels and could signal some choppiness the rest of the week.

The Nasdaq led the way higher after jumping 0.8% while trading to a record intraday high of 8,228.

Blue-sky resistance is at 8,250-8,325 on continued closes above the 8,200 level.

The S&P 500 gained 0.5% after testing an all-time high of 3,002 shortly after the opening bell.

Fresh and lower resistance at 3,000-3,025 was tripped but held with a close above these levels signaling additional strength.

The Dow rose 0.3% following the morning push to 26,983 and new all-time high.

Near-term and upper resistance at 26,750-27,000 held on the close above the latter.

The Russell 2000 edged up 0.2% after trading to an opening high of 1,572.

Near-term and lower resistance at 1,570-1,575 was cleared but held with a close above the latter keeping 1,600 in play.

Energy rallied 1.3% to led sector strength while Communication Services soared 1.1%.

Financials paced sector laggards after falling 0.4% while Industrials and Materials were down 0.2%.

Global Economy – European markets were mildly weaker as tension between the U.S. and Britain simmered after its ambassador to the White House resigned.

Germany’s DAX 30 dropped 0.5% and the Stoxx 600 was off 0.2%.

France’s CAC 40 and UK’s FTSE 100 dipped 0.1%. The Belgium20 edged up 0.1%.

Asian markets settled mixed.

Australia’s S&P/ASX 200 was higher by 0.4% while Hong Kong’s Hang Seng and South Korea’s Kospi added 0.3%.

China’s Shanghai slipped 0.4% and Japan’s Nikkei declined 0.2%.

China’s consumer price index for June rose 2.7% year-on-year, matching expectations.

MBA Mortgage Applications fell 2.4% versus a 0.1% slip in the prior week. The 6.5% drop in the refinancing index outweighed the 2.3% increase in the purchase index.

The 30-year fixed rate mortgage declined to 4.04%, the lowest September 2017. The 5-year adjustable rate rose to 3.56% from 3.46%. Refinancing’s accounted for 48.7% of loans, down from 51% previously.

Wholesale Inventories for May rose 0.4%, matching forecasts, and follows an 0.8% gain in April. Sales inched up 0.1% after last month’s 0.4% decrease.

The I/S ratio ticked up to 1.35 from 1.34 previously. Factory inventories were up 0.2%, retail inventories were higher by 0.5%, and business inventories rose 0.4% in May.

The Federal Reserve’s Semiannual Monetary Policy Report stated the economy performed reasonably well over the 1st half of 2019, with the current expansion in its 11th year.

However, inflation has been running below the FOMC’s symmetric 2% objective, and crosscurrents, such as trade tensions and concerns about global growth, have been weighing on economic activity and the outlook.

The Fed’s baseline outlook is for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the its 2% objective.

However, uncertainties about the outlook have increased in recent months. In particular, the report said economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy.

Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.

The Fed said there is a risk that weak inflation will be even more persistent than they currently anticipate.

They are carefully monitoring these developments, and we will continue to assess their implications for the U.S economic outlook and inflation.

Market Sentiment – In answering questions, Powell said the Fed isn’t looking at any one thing as it assesses its policy stance, but monitors a broad range of data and financial conditions.

The data have continued to disappoint across the globe, and he specifically mentioned trade and manufacturing weighing on outlooks.

On low inflation, he said the Fed needs to make a stand and keep inflation symmetrically at 2% so that the U.S. doesn’t fall into Japan’s deflation environment.

He said there is no evidence for calling the current labor market hot, saying to call something hot, you need to see some heat. On wages, Powell said they are moving up, but not sharply so and enough to put upward pressure on prices.

As far as the debt limit, Powell said he expects it will be raised in timely fashion but can’t even contemplate, or capture the range of negative outcomes, were Congress to fail to pass the ceiling and allow the government to continue to borrow to pay its debts.

He reiterated the most important factors weighing on the outlook are the crosscurrents of trade tensions and slowing growth, which are interrelated, and are manifesting in weakness in manufacturing and investment.

He puts those at the top of the worry list, but also mentioned low inflation.

Fortunately, he added, the consumer part is doing well and the Fed will continue to use its tools to keep the expansion going to the maximum extent analysts can.

Powell also said uncertainty is showing up in business fixed investments after being very strong in 2017 and 2018. He said it is slowing down and connects it to trade policy uncertainties, global growth uncertainty, and weak manufacturing around the world.

On trade, the Fed chief said when the supply chain is called into question, businesses pull back on investment, and may have to change their plans away from sources such as China

Fed Vice Chairman for Supervision Randal Quarles says tests of whether big banks can withstand a future economic crisis must be easier for banks to pass and more predictable.

Quarles said we don’t want banks to fail; we want them to learn, adding that failing banks is not the purpose of stress testing, and it never has been.

The iShares 20+ Year Treasury Bond ETF (TLT) was weak for the 2nd-straight session after testing an intraday low of $131.51.

Key support at $131.50 held by a penny with a close below this level likely leading to a further pullback towards $130.50-$130.

Lowered resistance is at $132-$132.50.

Market Analysis – The Russell 3000 Index ($RUA) closed in the green for the 2nd-straight session after reaching an all-time intraday peak of 1,765. Prior and lower resistance from last week at 1,760-1,775 was cleared but held by a point.

Continued closes above the latter keeps 1,800 in the picture.

Near-term and current support is at 1,750-1,735.

A close below the latter would be a bearish development with risk towards 1,720-1,700 and the 50-day moving average.

RSI is back in an uptrend with resistance at 70.

A close above this level would signal additional strength towards 75 and the February top.

Support is at 65-60 with a close below the latter being a bearish signal for additional weakness.

The Industrials Select Sector Spider (XLI) extended its losing streak to 4-straight session despite tapping an intraday high of $77.26. Lower resistance at $77-$77.50 was cleared and held.

Continued closes above $78 would be a more bullish signal for a possible run towards $79.50-$80.

Near-term support is at $76.50-$76.

A close below the latter would be a slightly bearish development with risk towards $75.50 and the 50-day moving average.

RSI remains in a downtrend with support at 50.

There is risk towards 45-40 on a move below this level. Resistance is at 55-60.

A move above the latter would be a bullish signal for additional strength towards 65-70 with the latter representing the April high.

We are allocating the portfolio as follows:

30% in AMD closed on Wednesday at 33.77
30% in CDNS closed on Wednesday at 75.10
30% in JD closed on Wednesday at 30.70
10% in TMF closed on Wednesday at 24.47

Option Traders – the following (regular monthly) options meet our criteria:

AMD 18OCT $32 Strike Price CALL (Expires October 18, 2019)
CDNS 20DEC $75 Strike Price CALL (Expires December 20, 2019)
JD 20SEP $32 Strike Price CALL (Expires September 20, 2019)
TMF15NOV $25 Strike Price CALL (Expires November 15, 2019)

All the best,
Roger Scott.