U.S. markets showed continued momentum with the broader clearing May resistance levels while Tech and the small-caps continued their run into blue-sky territory.

Ongoing trade talks helped the rally after China offered to import $70 billion in U.S. goods. However, Mexico revealed it is targeting $3 billion for import tariffs, including apples and bourbon, in retaliation for U.S. duties on Mexican steel and aluminum.

Volatility continued to ease despite the ongoing geopolitical environment and ahead of next week’s Fed and ECB news.

The Dow showed the most strength after surging 1.45 and tapping an closing high of 25,146 while easily clearing and holding the 25,000 level for the first time since late May.

The S&P 500 soared 0.9% after trading to a high of 2,772 to clear major resistance at 2,750. The index is 100 points away from its all-time high of 2,872 from late January.

The Russell 2000 gained 0.7% to set its 3rd-straight all-time intraday high of 1,676 into the closing bell.

Continued momentum could carry the small-caps towards 1,690-1,700 after splitting our near-term target of 1,670-1,680.

The Nasdaq was up 0.7% after setting its 2nd-straight all-time intraday high of 7,691. The index is on track to easily clear 7,700-7,750 over the near-term.

Materials led sector strength after rising 1.9% while Financials were higher by 1.8%. Consumer Discretionary jumped 1% and Industrials were higher by 0.9%.

Utilities were the only sector laggard after sinking 2.3% while Financials.

Global Economy – European markets were mixed after European Central Bank officials indicated policy makers will begin to focus on ending the central bank’s bond-buying program.

Germany’s DAX 30 and UK’s FTSE 100 was up 0.3%. The Belgium20 dipped 0.2% and France’s CAC 40 was down 0.1% higher. The Stoxx 600 Europe slipped less than a point, or 0.0%.

ECB Governing Council member Knot said inflation has been stable for a while, and less dependent on the monetary stimulus. He added it’s reasonable to announce the end of the net asset purchases soon.

ECB Chief Economist Peter Praet sent a strong signal that the bank could decide as soon as next week to wind down its 30 billion-a-month euro (or just over $35 billion) bond-buying program.

The German May Markit construction PMI rose 3 to 53.9 and represented the fastest pace of expansion in 4 months.

Asian markets settled higher with South Korea’s Kospi closed for a holiday. Australia’s S&P/ASX 200 and Hong Kong’s Hang Seng added 0.5%
Japan’s Nikkei rose 0.4%. China’s Shanghai climbed 0.1%.

Japan April labor cash earnings rose 0.8% year-over-year, weaker than expectations for a rise of 1.3%.

April real cash earnings were unchanged year-over-year, below forecasts of for a rise of 0.1%.

Australia’s GDP grew 1% in the first quarter, and 3.1% from a year earlier, topping forecasts of 0.9%, and 2.9%, respectively.

Atlanta Fed’s GDP Nowcast model estimates a 4.5% real growth rate for Q2 following the April trade report. The nowcast contribution of net exports to real growth in Q2 inched down to 0.31% from 0.42% previously.

MBA Mortgage Applications were up 4.1% for the week ending June 1st.

International Trade in Goods narrowed 2.1% in April to $46.2 billion from a revised $47.2 billion in March.

Imports fell 0.2% after dropping 1.4% previously, while exports were up 0.3% following March’s 2.2% gain.

Productivity and Costs for the first quarter was revised to a 0.4% growth rate, down from the previously estimated growth rate of 0.7%.

Market Sentiment – The FOMC meeting is just one week away with Wall Street unanimously expecting the Fed to announce a 25 basis-point tightening, moving the band up to 1.75%-2%. The main focus will be on the interest rate on excess reserves (IOER rate).

The FOMC minutes from the May meeting indicated a possible small technical realignment of the IOER rate relative to the top of the target range, with the suggestion of a 20 basis-point increase when the policy rate was boosted by 25 basis-points.

The other focal point will be on the dot-plot, which analysts suspect will be maintained at the current estimate of three tightenings for 2018. The June move would be the second this year.

Top Economic advisor Larry Kudlow previewed the upcoming G-7 meeting this weekend and endorsed fast U.S. growth, while noting that trade issues will be discussed, including bilateral meetings with Canadian and French leaders.

He also expects shared security issues like North Korea to be discussed. He attributed U.S. success to tax policy and regulatory rollback, along with trade advocacy by the president.

Kudlow touted record small business confidence and low unemployment, which show that U.S. policies are working and he hopes that our economic partners join with the U.S. in embracing growth. He likened any tension to a family disagreement, but he remains optimistic.

The iShares 20+ Year Treasury Bond ETF (TLT) reversed course after stumbling to a low of $118.42 intraday.

Prior support at $119-$118.50 and the 50-day moving average was breached with a move below the latter signaling additional weakness. Lowered resistance is at $119-$119.50.

Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) was up for the 3rd-time in 4 sessions after testing a high of $251.53. Fresh resistance at $252-$252.50 with continued closes above the latter signaling a possible push towards $254-$255.

Rising support is at $250.50-$250 and prior late May resistance.

The 50-day moving average is starting to curl higher following a downtrend from mid-March and a flattening period throughout May.

RSI has been in a nice uptrend with late February and May resistance at 60-65 in play.

Continued closes above the latter could signal additional strength towards 70-75. Support is at 55-50.

The Materials Select Sector (XLB) was higher for the 4th-straight session after reaching an intraday peak of $60.99. The move above the April and May highs gets longer-term resistance from February and March at $61.25-$61.50 in the mix.

Rising support is at $60.50-$60.25 with a move back below $60 signaling a false breakout. The 50-day moving average is back on track to clear the 200-day moving average and would confirm a golden cross.

This technical development tends to lead to higher highs. This would also come after the major MA’s formed a recent death cross that lead to lower lows into the end of May.

RSI is pushing mid-May resistance at 65.

Continued closes back above this level would be a bullish development for run towards 70. Support is at 60-55.

Current Position Update

Both PYPL and TSLA are overbought according to 10 day RSI.

I’m expecting pullback in both stocks before expiration.

The overall market is starting to get a bit ahead of itself.

The relative strength on both stocks is in the lower 30th percentile.

I’m expecting sharp pullback over the near term.

I will have another position before end of the week.

Roger Scott