U.S. markets showed weakness from the open on Thursday following a couple of major revenue warnings out of the Tech and Airline sectors. The news comes ahead of the “official” start of 4Q earnings season and upcoming comments from Fed Chairman Jerome Powell on Friday.
With mid-December support levels back in play, the market will want to hear the Fed will be pausing its tightening posture and may be done with hikes for awhile.
The dots are showing 2 possible rate hike this year but concerns over signs of slowing growth, weakness in interest sensitive sectors, and tightening financial conditions could box the Fed in a corner.
The Nasdaq had its 5-session winning streak snapped after tumbling 3% while tapping an intraday low of 6,457.
Prior support at 6,450-6,400 held with a move below the latter signaling additional weakness.
The Dow dropped 2.8% following the pullback to 22,638.
Fresh and upper support at 22,600-22,400 held with close below the latter signaling additional risk towards 22,200-22,000 and possible fresh 52-week lows.
The S&P 500 stumbled 2.5% after trading to a second-half low of 2,443. Fresh and upper support at 2,450-2,425 was breached with a move below the latter being a bearish signal for a continued backtest towards 2,400-2,350.
The Russell 2000 was down 1.3% after testing a late session low of 1,325.
Major support at 1,325 held for the 4th-straight session with a move below this level opening up risk towards 1,315-1,300.
Real Estate was up 0.5% and was the only sector that showed strength.
Technology plunged 5.1% and led sector weakness. Industrials and Materials sank 3% and 2.8%, respectively.
Global Economy – European markets closed lower across the board following disappointing economic news.
France’s CAC 40 dropped 1.7% and Germany’s DAX 30 dropped 1.6%. The Stoxx 600 Europe fell 1% and UK’s FTSE 100 declined 0.6%. The Belgium20 slipped 0.1%.
German Economy Minister Peter Altmaier the U.K.’s withdrawal from the EU poses an economic risk, although he added that he expected growth in Germany to continue.
The British Chambers of Commerce said the percentage of services firms reporting a rise in domestic sales fell to the lowest level in 2 years in the fourth quarter.
UK IHS Markit/CIPS Construction PMI fell to 52.8 in December, down from 53.4 in the previous month.
Asian markets were mostly lower with Australia’s S&P/ASX 200 bucking the trend after advancing 1.4%.
South Korea’s Kospi declined 0.8% while Hong Kong’s Hang Seng and Japan’s Nikkei were lower by 0.3%. China’s Shanghai dipped a point.
MBA Mortgage Applications tumbled 8.5%, along with a 7.6% drop in the purchase index and a 10.6% plunge in the refinancing index for the week ending December 28th. The negative report came despite a mild 2 basis point dip in the average mortgage rate to 4.84%.
Challenger Job-Cut Report announced layoffs fell 9,200 in December to 43,900, following the 22,600 drop in November to 53,100. Compared to last December, planned job cuts are at a 35.3% year-over-year clip, versus the 51.5% pace from November.
For all of 2018, announced layoffs totaled 538,700, the highest since the 598,500 clip from 2015.
ADP Employment Report rose 271,000 in December, well above expectation of 175,000, and up from a revised 157,000 gain in November. The services sector added 224,000 jobs, with the goods sector contributing 47,000.
A 61,000 jump in education and health jobs led the strength in services, with 39,000 more jobs in leisure, and trade/transport up 33,000. Construction employment rose 37,000 while manufacturing was up 12,000.
Jobless Claims were up 10,000 to 231,000, topping forecasts of 217,000. This brought the 4-week moving average to 218,750 from 219,250. Continuing claims bounced 32,000 to 1,740,000 following the 3,000 increase the prior week.
ISM Manufacturing Index plunged to a 2-year low of 54.1 from 59.3 in November, and missing forecasts of 57.9. The employment gauge slid 2.2 points to 56.2 following the 1.6 increase to 58.4 the prior month.
New orders sank 11 points, more than erasing November’s 4.7 point pop to 62.1.
New export orders edged up to 52.8 from 52.2. Imports fell 0.9 to 52.7 from 53.6. Prices paid tumbled another 5.8 points to 54.9 after diving 10.9 points 60.7 last month.
Construction Spending was postponed due to the government shutdown.
Market Sentiment – Dallas Fed Robert Kaplan believes the Fed should hold off on a rate hike for at least several quarters. He said there are 3 big issues reflected by the markets and they were global growth decelerating, interest sensitive industries showing weakness, and financial conditions tightening.
Kaplan said the Fed should be patient and see what unfolds.
He went on to say the Fed has been trying to balance a very strong labor market and a strong consumer, while monitoring what the markets are saying. He said he is fearful some of these financial factors could spillover and hurt the real economy.
In closing, Kaplan said he does see GDP slipping and he added it is unlikely the U.S. will be immune to the slowing in China.
The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 5th-straight session after zooming to a high of $123.86. December 2017 resistance at $124-$124.50 was challenged but held into the closing bell.
A close above the latter gets $125.50-$126 in play although RSI is once again signaling o overbought levels.
Rising support is at $122.50-$122.
Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) has]d its 2-session winning streak snapped following the pullback to $226.36. Prior support at $226-$225.50 held with a close below $225 signaling additional risk towards $222.50-$220.
A death-cross has officially formed with the 50-day moving average falling below the 200-day-day moving average.This technical pattern often signals lower lows down the road.
Lowered resistance at $227-$227.50.
RSI is is back in a downtrend with support at 35-30.
A move below the latter would be a continuing bearish signal. Near-term resistance is at 40-45 with a move above the latter signaling additional momentum and a relief from the current selling pressure.
The Spiders S&P Homebuilders ETF (XHB) was down for just the 2nd time in 6 session following the backtest to $32.21.
Upper support at $32.25-$32 was breached but held with a move below the latter signaling additional weakness.
Resistance is at $33-$33.25 with additional hurdles at $33.50-$33.75 and the 50-day moving average.
RSI is approaching support at 40 with a close below this level signaling additional weakness.
Resistance is at 45-50.
All the best,
Roger Scott.