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U.S. markets traded mostly lower on Monday with the rotation out of Tech and into the small-caps (and mid-caps) a continuing theme. The Dow and S&P 500 finished with minor losses while the Nasdaq fell below its 50-day moving average intraday before holding this level into the close.

Meanwhile, the Russell 2000 traded to a fresh all-time of 1,255 intraday while holding the 1,250 level. Sector leaders included Energy and Utilities after gains of 1.4% and 0.9%, respectively. Technology was the weakest link after tumbling 1.2%.

Global Economy – European markets were mixed after surprising election results in Germany tempered a tight trading range. The Stoxx Europe 600 added 0.2% while the Belgium20 climbed 0.1%. Germany’s DAX 30 was basically flat after gaining 2 points, or 0.02%.

France’s CAC 40 fell 0.3% and the UK’s FTSE 100 slipped 0.1%.

In Germany, Chancellor Angela Merkel’s party lost more seats than expected but she will continue to lead the government.

The German Sep IFO business climate unexpectedly fell -0.7 to 115.2, weaker than expectations of a gain of 0.1 to 116.

ECB Executive Board member Mersch made policy comments, saying that once they have seen a sufficiently sustained adjustment in the path of inflation, they will continue to prudently adjust their tool-box of monetary policy instruments, as they have been doing since December last year.

Asian markets were mostly lower following continued saber-rattling chatter over the weekend. Hong Kong’s Hang Seng Index tanked 1.4% while South Korea’s Kospi and China’s Shanghai index dropped 0.4%. Japan’s Nikkei bucked the trend after jumping 0.5%. Australia’s S&P/ASX 200 was unchanged.

The Japan September Nikkei manufacturing PMI rose 0.4 to 52.6, the strongest pace of growth in 4 months.

New Zealand’s National Party came three seats short of an outright legislative majority, outperforming after polls suggested the result would be too close to call.

U.S. Chicago Fed National Activity index fell to -0.31 in August after slipping to 0.03 in July.

The Dallas Fed manufacturing index climbed 4.3 points to 21.3 in September after edging higher by 0.2 points to 17 in August.

Market Sentiment- New York Fed President William Dudley said firmer import prices, as well as the fading effect from a number of temporary and idiosyncratic factors, would boost inflation over the next year or so.

In his speech, Dudley said he expected inflation would rise and stabilize around the Fed’s 2% target and that the Fed will likely continue to remove monetary policy accommodation.

Chicago Fed President Fed’s Charles Evans said he remains concerned over still low inflation expectations in his comments on monetary policy and the economy. He added he needs to see clearer signs of higher inflation before boosting rates again as he has been worried in recent months over the slowing in price pressures.

Evans said he currently doesn’t see much risk of an outsized breakout in inflation.

Neel Kashkari is speaking later this evening.

The iShares 20+ Year Treasury Bond ETF (TLT) continues to show strength after making a higher high and higher low for the third-straight session. Fresh resistance is at $127.25-$127.50 with the close above $127 a bullish signal. A move above the latter will likely lead to another run at $129.

Rising support is at $126.25-$126. RSI is back in an uptrend on the close above 50 and was a bullish signal with resistance at 55-60.

 

 

Market Analysis- The Spiders S&P MidCap 400 ETF (MDY) is on the verge of breaking out to fresh all-time highs and above current resistance at $322-$322.25. A run towards $324-$325 could be in play on continued closes above the latter.

Fresh support is at $320.50-$320 with a move below $319.50 signaling a short-term top. RSI seems to be curling higher but faces major resistance near the 70 level that has held throughout the year.

 

 

The Financial Select Sector Spiders (XLF) is trying to clear near-term resistance at $25.50 following the recent breakout above the 50-day moving average six trading sessions ago.

This area of resistance also marked the early August high before the pullback to the 200-day moving average earlier this month. Continued closes above $25.50 should lead to a retest to $26.50-$26.75 and where there is shaky 10-year support but represent the next levels of resistance.

Current support is at $25.25-$25.20 with a move below $25-$24.75 and the 50-day moving average being a bearish development.

RSI seems to be leveling off near the 65 level with 70 representing tops since February’s pop just above this level. This area also represents the breakout above 65-70 in early November 2016 and a level that failed to hold in late December.

RSI peaked near 85 in mid-November but Wall Street’s enthusiasm hasn’t returned for the sector despite this month’s momentum to fresh multi-year highs.

 

 

Existing / New Position Update

I believe the downside we are seeing in the tech is leading broader market, which means by the time tech bottoms out – the overall market will begin moving lower.

You can see why I was so patient to put on positions last week and I’m expecting slightly more downside across the board, before we bottom out once again.

The increase in volatility is a positive sign that stocks are not going much lower.

You have to worry more when volatility is not increasing, that tells us that directional movement will continue.

But rise in volatility usually tells me that trends are coming to an end.

Let’s be patient and wait on the sidelines for bottoming and a slight reversal to occur.

Roger Scott