U.S. markets were showing some strength ahead of Friday’s open but reversed course following news China will implement 5% to 10% tariffs on a further $75 billion of U.S. goods.

Fed Chair Jerome Powell’s speech shortly after the open wasn’t much help as he was coy on interest rates with President Trump fuming afterwards, saying Powell did NOTHING.

The major indexes worsened after President Trump promised an announcement regarding his plans in response to China’s tariff reaction while ordering U.S. companies to find alternatives to producing goods in China.

The heated chatter extended the overall market’s losing streak to 4-straight weeks with volatility spiking, but holding a key level of resistance.

The Russell 2000 tumbled 3.1% after tapping a late day low of 1,456.

Prior and major support from early June at 1,460 and earlier this month was stretched but failed to hold with fresh risk to 1,440-1,425 on continued weakness.

The Nasdaq plummeted 3% following the afternoon pullback to 7,730.

Near-term and upper support at 7,750-7,700 was breached but held with a close below the latter opening up risk towards 7,650-7,600 and the 200-day moving average.

The S&P 500 sank 2.6% after testing a low of 2,834 ahead of the closing bell.

Current and upper support at 2,850-2,825 failed to hold with a move below the latter and the monthly low at 2,822 getting 2,800 and the 200-day moving average in play.

The Dow was rocked for 2.4% following the second half pullback to 25,507.

Upper support at 25,600-25,400 and the 200-day moving average was breached but held with a close below the latter and the monthly low at 25,339 signaling additional weakness.

For the week, the Russell 2000 was down 2.2% and the Nasdaq declined 1.8%. The S&P 500 fell 1.4% and the Dow dropped 1%.

There was no sector strength on Friday. Energy and Technology were the leading sector laggards after tanking 3.4% and 3.3%, respectively.

The best performing sectors for the week were Consumer Discretionary (0.5%) and Utilities (0.2%).

Materials (-3%) was the leading sector laggard, followed by Healthcare (-2%), Energy (-1.9%), and Financials (-1.8%).

Global Economy – European markets settled lower as the escalating trade tensions between the U.S. and China were unfolding.

Germany’s DAX 30 stumbled 1.2% and France’s CAC 40 fell 1.1%. The Belgium20 gave back 0.9% and the Stoxx 600 was down 0.8%. UK’s FTSE 100 was off 0.5%.

Asian markets were mixed as tension between Japan and South Korea escalated after Seoul said it was cancelling an intelligence-sharing pact with Tokyo amid a bitter trade dispute.

China’s Shanghai and Hong Kong’s Hang Seng rose 0.5%. Japan’s Nikkei gained 0.4% and Australia’s S&P/ASX 200 climbed 0.3%. South Korea’s Kospi slipped 0.1%.

The Chinese State Council announced tariffs ranging from 5% to 10% on additional U.S. imports in two batches, effective on September 1st and December 15th.

A 25% tariff will also be placed on U.S. cars and 5% on auto parts, also starting December 15th.

New Home Sales fell 12.8% to 635,000 in July, missing expectations for a print of 645,000. Regionally, sales declined in the West, South, and Midwest, with the Northeast rising.

The months’ supply rose to 6.4 versus 5.5.

The median sales price increased 2.2% to $312,800 after falling -1.6% to $306,000. Compared to last year, the price has fallen to a -4.5% year-over-year rate versus -1.4%.

Baker-Hughes Rig Count reported the U.S. rig count was down 19 rigs to 916, with oil rigs off 16 to 754, gas rigs slipping 3 to 162, and miscellaneous rigs unchanged at 0.

The U.S. Rig Count is down 128 rigs from last year’s count of 1,044, with oil rigs down 106, gas rigs lower by 20, and miscellaneous rigs down 2. The U.S. Offshore Rig Count was up 1 rig to 28 and is higher by 10 rigs year-over-year.

Market Sentiment – Fed Chair Jerome Powell was pretty coy in his policy comments and provided no clear clues on the rate course ahead while maintaining the FOMC’s optionality with respect to the September meeting.

He reiterated the Fed will act as appropriate to sustain the expansion and that the economy is in a favorable place, but faces significant risks, including Brexit and Hong Kong, along with weakness in China and Germany.

Powell said recent developments have been eventful with further evidence of a global slowing and said he is closely watching developments for their impact on the U.S. economy.

However, he also sees some signs that inflation is moving closer to the 2% goal.

St. Louis Fed James Bullard remains worried about low inflation and downside risks to the economy, and wants to take out more insurance, adding that if nothing happens, the Fed can take it back.

He believes lowering rates would help hit the inflation target and the TIPS market isn’t giving him a lot of confidence.

Bullard said the labor market has been doing well with retail sales very good but the global manufacturing contraction is a concern.

He added the trade war is a concern but it’s impacting countries outside of the U.S. more, though there are feedback loops.

He noted the inverted yield curve and said that’s not a good place to be while saying he does not see a financial bubble on the scale of the housing crisis.

Bullard expects a robust debate on 25 versus 50 basis point rate cut at the September meeting.

He said he looked at past examples of mid-cycle adjustments and noted that in the 90’s the adjustments generally resulted in about 75 basis points of easing. Bullard also said he doesn’t expect resolution to the trade war anytime soon.

Cleveland Fed Loretta Mester said she is going to closely monitor data between now and the September 18th Fed decision to assess conditions.

She supported no change in rates in July, wanting to see more data to determine whether analysts are in a weak growth scenario or in the trend growth scenario.

Mester said she is open minded and if the economy keeps going as it is, she would favor no change, but that she is very attuned to the downside risks.

She added the interest rate differentials are reflecting the differences in economies, but there are other factors too, with the U.S. a safe haven, and those flows are making the signals more murky.

Fed Vice Chair Richard Clarida said the global economy has worsened since the July 31st decision, but he reiterate the economy is in a good place and is a bright spot in the global economy. He does not believe there is a higher than normal probability of recession currently, adding, although financial indicators are moving in that direction, including the yield curve, he is not too concerned.

Clarida believes the inversion is driven more by foreign events and from the markdown reduction in global growth expectations, than is signaling U.S. growth.

He respects the curve but he is not handcuffed to it, but, he will continue to monitor the curve and conditions. He also noted that not all financial indicators are sending warning signals and that he expects growth at or above trend for 2020.

The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 2-session slide after trading to an intraday high of $146.27. Prior and lower resistance at $146-$146.50 was cleared but held.

A close above the latter would be a fresh bullish signal for a retest towards $147.50-$148 with the recent all-time peak at $148.60.

Current support is at $145.50-$145. A close below the latter would be a slightly bearish development for a backtest towards $143.50-$143.

RSI is back in an uptrend with resistance at 70.

A close above this level would signal additional strength towards 75-80 with the latter representing the monthly peak. Support is at 65-60.

Market Analysis – The Wilshire 5000 Composite Index ($WLSH) made a few attempts throughout last week to retake the psychological 30,000 level before Friday’s plunge to 29,048.

Prior and upper support at 29,150-28,900 was breached but held by a few points. A close below the latter and the 200-day moving average would be an ongoing bearish development with risk towards 28,750-28,500. The monthly low is at 28,950.

Lowered resistance is at 29,250-29,500.

Continued closes above the 29,750 level would be a more bullish signal the whipsaw action has subsided but not a guarantee. The index has been trading in a 1,000 point range over the past 10 sessions and pretty much throughout the month.

RSI is back in a downtrend with support at 40.

A close below this level would signal a retest towards 35-30 with the latter representing the monthly low. Resistance is at 45-50.

The Utilities Select Spider (XLU) settle in the red despite tapping a fresh all-time high of $62.46 shortly after the opening bell. Blue-sky and lower resistance at $62-$62.50 was cleared but held.

A close above the latter would be a renewed bullish signal for a run towards the $63.50-$65 area.

Prior and upper support at $61.50-$61 was breached and failed to hold on the tumble to $61.17 afterwards. A drop below the latter reopens risk towards $60.50-$60 and the 50-day moving average.

RSI is in a downtrend with support at 55-50. A move back below the latter would signal additional weakness towards 45-40 with the latter representing this month’s low. Resistance is at 60-65.

The percentage of Nasdaq 100 stocks trading above the 50-day moving average settled at 25.24% on Friday, down 20.39%, with the session low kissing 23.30%.

Prior and upper support at 25%-22.5% was tripped but held. The monthly low reached 21.35%, twice, and has signal oversold conditions. However, a close below the latter would be an ongoing bearish signal for additional weakness towards 20%-15% with the early June bottom reaching 15.53%.

Lowered resistance at 27.5%-30%.

The percentage of S&P 500 stocks trading above the 200-day moving average closed at 63.10%, down 4.86%, and the session low. Upper support at 62.5%-60% held.

A close below the latter would be a continuing bearish development with risk towards the 57.5%-55% and the monthly low at 56.31%. Lowered resistance is at 65%-67.5% following the previous session’s failed attempt to clear the 70% level.

We are allocating the portfolio as follows:

30% in FISV closed on Friday at 104.78
30% in SBUX closed on Friday at 95.14
30% in TTWO closed on Friday at 128.80
10% in TMF closed on Friday at 32.88

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

FISV 20DEC $110 Strike Price CALL (Expires December 20, 2019)
SBUX 18OCT $100 Strike Price CALL (Expires October 18, 2019)
TTWO 17JAN $140 Strike Price CALL (Expires January 17, 2020)
TMF21FEB $35 Strike Price CALL (Expires February 21, 2020)

All the best,
Roger Scott.