U.S. markets showed slight weakness throughout the first half of Wednesday’s action as Wall Street awaited the Fed’s update on interest rates.
The announcement of a quarter-point rate cut was widely anticipated but was no help for the bulls as fresh lows were tapped afterwards as the Fed gave no clear signal on further rate cuts.
Meanwhile, the fallout from the Saudi drone attacks from the weekend continued after President Trump tweeted he has instructed the Secretary of the Treasury to substantially increase sanctions on the country of Iran.
Despite the nervousness, the strong rebound into the close was an ongoing bullish signal for the major indexes with volatility spiking to its highest level in 6 sessions before settling lower.
The Russell 2000 stumbled 0.6% following the late day backtest to 1,557.
Prior and key support at 1,560 from last week, and late July, was breached but held with risk towards 1,540-1,525 and the 50-day moving average on a close below this level.
The Nasdaq was down 0.1% after tapping a low of 8,086 after the Fed news.
Near-term and lower support at 8,150-8,100 was breached but held on the close above the former with a move below 8,050 and the 50-day moving average signaling additional weakness towards 8,000-7,950.
The Dow nudged up 0.1% despite testing a intraday low of 26,899.
Current support at 27,000-26,800 was split but held with a move below the latter getting 26,600 and the 50-day moving average back in play.
The S&P 500 added a point, 0.03%, after trading in a 30-point range and testing a 2nd half low of 2,978.
Upper support at 2,975-2,950 held before the late day bounce to 3,007 and close above the 3,000 level for the 5th time in 6 sessions.
Utilities and Financials led sector strength after rising 0.4% while Consumers Staples and Materials inched up 0.2% and 0.1%, respectively. Energy and Real Estate were the leading laggards after falling 0.5% and 0.3%.
Global Economy – European markets settled on both sides of the ledger after trading in tight ranges.
The Belgium20 lost 0.3% and UK’s FTSE 100 edged down 0.1%. Germany’s DAX 30 and France’s CAC 40 gained 0.1% while the Stoxx 600 was up less than a tenth-point, or 0.02%.
Asian markets also closed mixed following news that the National Development and Reform Commission of the People’s Republic of China (NDRC) announced infrastructure investment with hopes of providing stimulus to a slowing economy.
South Korea’s Kospi rose 0.4% and China’s Shanghai climbed 0.3%. Australia’s S&P/ASX 200 and Japan’s Nikkei slipped 0.2% while Hong Kong’s Hang Seng was off 0.1%.
MBA Mortgage Applications dipped 0.1% after rebounding 2% in the prior week. The refi index dropped 4.3%, while the purchase index rose 6.4%. The 30-year mortgage rate moved up to 4.01% from 3.82% while the 5-year ARM increased to 3.54% from 3.42% previously.
Housing Starts surged 12.3% to 1,364,000 August, versus forecasts for a print of 1,240,000, and follows the 1.5% decline to 1,215,000 million in July.
More importantly, the rebound snapped 3-straight monthly declines and is the fastest pace since June 2007. Starts climbed to a 6.6% year-over-year pace versus 2.6% previously.
Single family starts increased 4.4% after the prior 1.9% gain while multifamily starts zoomed 32.8% following the 9.2% drop in July.
Building permits increased 7.7% to 1,419,000, a 12-year high, after rising 6.9% to 1.317 million.
Market Sentiment – The Fed cut interest rates by a 25 basis points with the Federal Funds Rate at 1.75%-2% versus consensus of 1.875%. The statement said the Fed will act as appropriate to sustain the expansion.
Also, the Fed’s 2019 median came down to 1.9%, as expected, from 2.4%, suggesting no additional easings this year. The long run rate is at 2.5%, while no Fed member sees the rate falling below 1.625% through 2022.
The Fed also cut interest on excess reserves (IOER) by 30 basis points.
The Fed continues to see a strong labor market and reiterated that economic activity has been rising at a moderate rate. Additionally, job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
There was still a split between solid household spending, but weakening in business fixed investment and exports. Inflation is still running below 2%, while market-based measures of remain low.
The Committee continued to appeal to implications of global developments for the economic outlook and low inflation as rationale for the easing.
Voting for the rate cute were Federal Reserve Chairman Jerome Powell, John Williams, Michelle Bowman, Lael Brainard, Richard Clarida, Charles Evans, and Randal Quarles.
Voting against the action were James Bullard, who preferred at the meeting to lower the target range for the federal funds rate to 1.5%-1.75%, and Esther George and Eric Rosengren, who preferred to maintain the target range at 2%-2.25%.
Fed Chair Jerome Powell said the Fed cut rates again to provide insurance against risks but added the economy continues to perform well and the outlook remains favorable.
He said the key driver of growth has been household spending But that manufacturing output has been falling and indicators are pointing to continued softness in investment.
Powell also said the global growth outlook has weakened. Specifically, though the general outlook on the economy has been unchanged, the outlook for monetary policy has changed, and has shifted toward a lower funds rate path over time.
On funding operations, Powell noted the increase in rates, but added that they have no implications for the stance of monetary policy or the economy.
In answering questions on the economy, Powell said that if the economy weakens, more extensive rate cuts may be needed. However, he added that the Fed continues to be highly data-dependent and that the rate path is not on a pre-set course.
Meanwhile, President Trump tweeted: Jay Powell and the Federal Reserve Fail Again. No ‘guts,’ no sense, no vision! A terrible communicator!
The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight sessions following the first half run to $140.66. Prior and lower resistance at $140-$140.50 was cleared but held with fresh hurdles at $141.50-$142.
The latter also represents mid-August support and a level that was breached earlier this month.
Rising but shaky support is at $139.50-$139 and the 50-day moving average.
A move below the latter would signal a false breakout with additional downside risk towards $138-$137.50.
Market Analysis – The Invesco QQQ Trust (QQQ) was down for the 3rd time in 4 sessions after trading in the red throughout the session and trading to a late day low of $190.11.
Current and upper support at $190.50-$190 was breached but held. A move below the latter would be a slightly bearish signal for a further pullback towards $189.50-$189 and the 50-day moving average.
Near-term and lower resistance at $192.50-$193 held for the 2nd-straight session on the late day rebound to $192.60 and breakeven level for the session.
Continued closes above $193.50 would be a more bullish signal for higher highs with upside potential towards $194.50-$195 and the July all-time peak at $195.55.
RSI is flatlining with support at 55-50.
A move below the latter would signal a retest towards 45-40 with the latter holding since mid-August.
Resistance is at 60 with upside potential towards 65-70 and July highs on a close above this level.
The Utilities Select Spider (XLU) extended its winning streak to 3-straight session after testing an intraday high of $64.01. Prior and major resistance at $64 was challenged but held.
A close above this level and the all-time high from earlier this month at $64.03 would be an ongoing bullish signal with blue-sky territory towards $65-$66.50, depending on momentum.
Rising support is at $63.50-$63.
RSI remains in an uptrend after clearing resistance at 65.
Continued closes above this level would signal additional strength towards 70-75 and prior peaks from earlier this month.
Support is at 60 with downside risk towards 55-50 on a move below this level.
We are allocating the portfolio as follows:
30% in JBHT closed on Wednesday at 114.92
30% in STX closed on Wednesday at 56.05
30% in TGT closed on Wednesday at 107.28
10% in TMF closed on Wednesday at 28.31
Option Traders – the following (regular monthly) options meet our criteria:
JBHT – 15NOV $115 Strike Price CALL (Expires November 15, 2019)
STX – 20DEC $57.5 Strike Price CALL (Expires December 20, 2019)
TGT – 17JAN $110 Strike Price CALL (Expires January 17, 2020)
TMF – 21FEB $28 Strike Price CALL (Expires February 21, 2020)
All the best,