U.S. markets continued their month long see-saw action after tapping fresh weekly lows before closing higher despite moves in the U.S. bond market highlighting ongoing fears of a recession.
The 10/2-year Treasury yield inverted to levels not seen since 2007 with the rate on the benchmark 30-year Treasury bond also hitting a new all-time low.
Despite the worries, the major indexes showed strength throughout the second half of action to reclaim near-term resistance levels.
Volatility eased after closing back below a key level of support but remains at a high risk level winding down the week and month.
The Russell 2000 rallied 1.2% despite testing a fresh monthly low of 1,450 on the open.
Current and lower resistance at 1,475-1,490 was cleared but held on the rebound to 1,478 afterwards with more important hurdles at 1,500-1,515 and 200-day moving average.
The Dow gained 1% following the midday push to 26,041. Prior and lower resistance at 26,000-26,200 was cleared and held with more important hurdles at 26,400-26,600 and the 50-day moving average.
The S&P 500 added 0.7% after trading in a 37-point range while trading to an intraday high of 2,890. Lower resistance at 2,875-2,900 was recovered with a move above the latter getting 2,925-2,950 and the 50-day moving average back in play.
The Nasdaq rose 0.4% after testing an intraday high of 7,866. Near-term and lower resistance at 7,850-7,900 was cleared and held with a close above the 7,950 level getting 8,000-8,050 and the 50-day moving average back in focus.
Energy and Consumer Discretionary were the strongest sectors after rising 1.4% and 1.3%, respectively, while Industrials jumped 1.2%. Utilities were the only sector that showed weakness after falling 0.3%.
Global Economy – European markets settled mostly in the red after Prime Minister Boris Johnson moved to suspend parliament ahead of Brexit, which would make it more difficult for lawmakers to block a no-deal Brexit.
The Belgium20, France’s CAC 40 and Germany’s DAX 30 were down 0.3% while the Stoxx 600 slipped 0.2%. UK’s FTSE 100 was higher by 0.4%.
Asian markets were mixed despite China announcing measures to help boost consumption and flagged the possible removal of restrictions on car purchases.
South Korea’s Kospi soared 0.9% and Australia’s S&P/ASX 200 advanced 0.5%. Japan’s Nikkei nudged up 0.1%. China’s Shanghai was off 0.3% and Hong Kong’s Hang Seng was lower by 0.2%.
MBA Mortgage Applications fell 6.2% after dipping 0.6% in the prior week. The refinancing index dropped 7.6% and represented the first decline since July 19th.
The purchase index sank 4% following a 3.5% decline previously. The 30-year fixed rate mortgage edged up to 3.94% following the drop to 3.9% in the prior week, which was the lowest since early November 2016. The 5-year ARM rose to 3.42% from 3.35%.
State Street Investor Confidence for August was at 75.9.
Survey of Business Uncertainty Index for August checked in at 97.8.
Market Sentiment – Richmond Fed Tom Barkin said U.S. economic data appears great but international economics are weaker and uncertainty remains high, especially around trade.
He reiterated that last month’s rate cut was a mid-cycle reduction designed to provide a little insurance and that policymakers are monitoring the impact of the latest cut.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 3rd time in 4 sessions after trading to a fresh all-time high of $148.90. New and lower resistance at $148.50-$149 was challenged but held.
A close above the latter could lead to upside momentum towards $150-$152.50.
Current and rising support is at $147.50-$147 followed by $146.50-$146.
RSI has cleared 70 and prior support from mid-month. This is signaling additional strength towards 75-80 but slightly overbought levels. Current support is at 65-60.
Market Analysis – The S&P 400 Mid Cap Index ($MID) kissed a fresh monthly low of 1,825 before rebounding to settle higher. Prior and upper support from late May at 1,825-1,800 held by a half-point.
The trudge to 1,854 afterwards and close just below 1,850 was a slightly bullish signal. Continued closes above this level keeps near-term resistance at 1,875-1,900 and the 200-day moving average on the radar.
Continued closes above the 1,900 level would suggest a retest towards 1,925 and the 50-day moving average.
RSI is back in an uptrend with resistance at 45 and the monthly peak.
A close above 50 would be a more bullish signal for additional strength towards 55-60 and prior highs throughout July.
Support is at 40 with risk towards 35-30 and the latter representing this month’s low on a close below this level.
The Industrials Select Sector Spider (XLI) matched last Friday’s low of $72.77 shortly after the open before closing in positive territory and reclaiming its 200-day moving average.
Upper support at $72.75-$72.25 held. A close below $72 and the monthly low of $72.19 would be a bearish development with risk towards $72-$71.50 and the early June low at $71.91.
Lower resistance at $74-$74.50 was cleared and held on the bounce to $74.18 and close on the session peak.
Continued closes above $75.50 would be a more bullish signal for a continued run towards $76-$76.50 and the 50-day moving average.
RSI is in a slight uptrend with resistance at 50.
Continued closes above this level would signal additional strength towards 55-60 and July highs.
Support is at 40 with weakness towards 35-30 and the monthly lows on a close back below this level.
We are allocating the portfolio as follows:
30% in FISV closed on Wednesday at 106.75
30% in SBUX closed on Wednesday at 97.07
30% in TTWO closed on Wednesday at 131.22
10% in TMF closed on Wednesday at 34.12
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)
TMF – 21FEB $35 Strike Price CALL (Expires February 21, 2020)
All the best,