U.S. markets showed overall strength for the 3rd-straight session despite mixed economic news as trade rhetoric showed signs of improving. Reports that U.S. Treasury Secretary Steve Mnuchin will meet with his Chinese counterpart at the G20 gathering late this month helped market sentiment while offsetting a surprisingly weak jobs number.

The S&P 500 rose 0.8% following the late day push to 2,827.

Prior and lower resistance at 2,825-2,850 was cleared and held with a move above 2,875 and the 50-day moving average signaling additional momentum.

The Dow also climbed 0.8% after testing a late day peak of 25,544.

Fresh and lower resistance at 25,500-25,750 was cleared and held on the close back above the 200-day moving average.

The Nasdaq added 0.6% following the opening pop to 7,589.

Prior and lower resistance at 7,550-7,600 was cleared and held with a move above the latter signaling additional strength towards 7,650-7,700.

The Russell 2000 slipped 0.1% despite tapping a morning high of 1,514.

Near-term and lower resistance at 1,515-1,525 was challenged but held with continued closes above 1,550 and the 200/50-day moving averages being a more bullish development.

Real Estate and Utilities led sector strength after surging 2.3% and 2.1%, respectively, while Technology and Consumer Staples rose 1.3% and 1.1%.

Energy was the only sector laggard after giving back 1.1%.

MBA Mortgage Applications rebounded 1.5%, following the 3.3% drop in the prior week. All of the improvement was in the refinancing index, which climbed 6.4%, and erasing the prior 6% decline.

The purchase index slid 2.4%, its 4th-straight decline while the 30-year fixed rate mortgage rate fell to 4.23% from 4.33%.

ADP Employment Report showed jobs increased only 27,000 in May, a big miss versus expectations of 175,000. This brought the 3-month average down to 152,000 versus the prior 216,000 pace.

The services sector added 71,000, including a 33,000 gain in education/health, a 16,000 gain in leisure/hospitality, and a 13,000 rise in financial activities. The goods producing sector dropped 43,000 with a 36,000 decline in construction and a 3,000 slide in manufacturing.

PMI Services Index was down 2.1 points to 50.9 in May, from 53 in April, and matching expectations.

The final composite index also declined 2.1 points to 50.9, versus 53 in April, and represented the weakest level since May 2016.

ISM Non-Manufacturing Index rose 1.4 points to 56.9 in May, topping forecasts of 55.8, and more than erasing the 0.6 point decline to 55.5 in April.

The employment index climbed to 58.1 from 53.7 while new orders edged up to 58.6 from 58.1. New export orders fell to 55.5 from 57 while imports dropped to 50 from 55. Supplier deliveries declined to 49.5 from 50.5 and prices paid slipped to 55.4 from 55.7.

The Federal Reserve’s latest Beige Book stated economic activity expanded at a modest pace overall from April through mid-May, a slight improvement over the previous period.

Almost all Districts reported some growth, and a few saw moderate gains in activity. Manufacturing reports were generally positive, but some Districts noted signs of slowing activity and a more uncertain outlook among contacts.

Residential construction and real estate both showed overall growth, but both sectors saw wide variation in sentiment across Districts.

Reports on consumer spending were generally positive but tempered.

Tourism activity was stronger, especially in the Southeast, but vehicle sales were lower, according to reporting Districts. Loan demand was mixed but indicated growth.

Agricultural conditions remained weak overall, but a few Districts reported some improvements.

The outlook for the coming months was solidly positive but modest, with little variation among reporting Districts.

Market Sentiment – Chicago Fed Charles Evans still thinks fundamentals are solid, but there is uncertainty and it is prudent to take a look at the monetary policy setting, as they at every meeting.

He is nervous over the low inflation rate and that in itself could be reason to trim rates. He thinks a more accommodative stance would be supportive for a pick up in inflation.

Evans went on to say it’s been one cycle of temporary downside risks to inflation after another, but at some point one has to wonder about the inflation process and whether analysts need more accommodation.

He said he is still forecasting 2% growth for the year, but he noted some slowing in the ISM, while agriculture tariffs could be a headwind, along with weather.

He thinks the Fed needs to strongly defend its 2% inflation goal and sees some pick up in productivity, but it’s not likely to be as strong as 1995 to 2005.

Dallas Fed Robert Kaplan said it’s to early to decide on rates and prefers a patient stance for now while letting events unfold.

He is open minded about the need to add more stimulus but added cutting rates now would mean he’s making a judgement on the economy.

However, he said risks to the economy have increased due to trade tensions with businesses more uncertain and holding off on capex.

Kaplan said he doesn’t want to over-read or over-react to the markets signals, because they can change on a dime.

He thinks the yield curve is reflecting heightened trade tensions and said the Fed’s forecast for the year is still for 2% to 2.25% growth, with core inflation around 2%, but he’s more cautious about how events will unfold.

Kaplan also added he thinks the Fed’s framework is working reasonably well, but there are issues being discussed, including low inflation.

He said the Fed is also looking at the various under-represented groups who haven’t joined in the economy’s success, and the Fed is thinking about letting the labor market run hot to support them.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 2nd-straight session following the backtest to $130.12.

Upper support at $130.50-$130 was breached and failed to hold. A move below the latter would be an ongoing bearish signal with risk towards $128.50-$128.

Resistance remains at $131-$131.50.

Market Analysis – The Russell 2000 ETF (IWM) had its 2-session winning streak snapped despite testing an intraday high of $150.88. Current and lower resistance at $151-$151.50 held.

Continued closes back above the $152.50 level would signal a possible run towards the 200/50-day moving averages that are showing signs of leveling out.

Near-term and shaky support at $149-$148.50 held on the fade to $148.61 afterwards. A close below the latter would signal a further backtest towards the $147.50-$147 area.

RSI has leveled out with resistance at 45-50.

A move above the latter and prior support from early May would be a bullish development for additional strength towards 55-60. Current support is at 40.

The Spider S&P Retail ETF (XRT) traded to a 2nd-straight higher high following the opening run to $41.86. Near-term resistance at $41.50-$42 held.

A close back above the latter would be a slightly bullish signal although the 50/200-day moving averages remain in a downtrend.

Near-term and upper support at $40.50-$40 held on the pullback to $40.64.

A close below the latter would be a renewed bearish development with risk towards $39.50 and last week’s low at $39.58.

RSI is back in a downtrend with support at 35-30.

A close below the latter reopens risk towards 25-20 and late December lows. Key resistance is at 40 and prior peaks from this week and mid-May.

Volatility Index – The S&P 500 Volatility Index ($VIX) tested a morning high of 17.49 despite the market’s opening strength.

Near-term and lower resistance at 17-17.50 and the 200-day moving average was breached but held. There is upside risk to 19.50-20 on a close above 18.

The late day fade to 16.04 afterwards and close below upper support at 16.50-16 was a slightly encouraging signal. A more bullish development would occur on continued closes back below 15 and the 50-day moving average.

We are allocating the portfolio as follows:

60% in ZIV closed on Wednesday at 72.22
40% in EDV closed on Wednesday at 124.60

All the best,
Roger Scott.