U.S. markets showed strength for a 3rd-straight session as U.S. and China trade talks resumed for a second day.

Comments from both sides have expressed cautious optimism that a deal can be reached ahead of the March 1st deadline.

Reports say both sides are making progress on narrowing the differences on trade issues, especially on purchases of U.S. goods and services and widening access to China’s markets.

Although the two sides are likely far from striking a deal, the developments remain bullish for market sentiment.

The Russell 2000 jumped 1.5% after closing at its session high of 1,426.

Major support from November at 1,425 was cleared and held with continued closes above this level leading to a possible run towards 1,450-1,465 and the 50-day moving average that is showing signs of leveling out.

The Nasdaq advanced 1.1% following the intraday push to 6,909 while closing 3 points below the 6,900 level.

Fresh and lower resistance at 6,900-6,950 was breached but held with a move above the latter getting 7,000-7,050 and the 50-day moving average in play.

The S&P 500 gained 1% after tapping a session high of 2,579 while closing above the 2,550 level for the first time since mid-December.

Continued closes above this level keeps 2,575-2,600 on the radar with additional hurdles at 2,625-2,650 and the 50-day moving average.

The Dow rose 1.1% following the morning test to 23,864.

Fresh and lower resistance at 23,800-24,000 was breached but held with a close above the latter getting 24,250-24,500 and the 50-day moving average in focus.

Real Estate and Communication Services led sector strength with both adding 1.7%.

Industrials and Utilities were up 1.4% and 1.3%, respectively.

The were no sector laggards.

Global Economy – European markets showed green on the screen despite another round of disappointing economic news out of Germany that showed Europe’s largest economy could have contracted in the fourth quarter of 2018.

The Belgium20 surged 1.3% and France’s CAC 40 rallied 1.2%. The Stoxx 600 Europe rose 0.9% and UK’s FTSE 100 was higher by 0.7%. Germany’s DAX 30 climbed 0.5%.

German industrial production declined 1.9% in November, well below estimates for growth of 0.3%.

The Eurozone business climate index dropped to 0.82 in December from November’s 1.04 print.

Asian markets settled mixed on as traders waited for developments from the second day of trade talks between the U.S. and China.

Japan’s Nikkei added 0.8% and Australia’s S&P/ASX 200 tacked on 0.7%.

Hong Kong’s Hang Seng edged up 0.2%. South Korea’s Kospi was off 0.6% and China’s Shanghai fell 0.3%.

December NFIB Small Business Optimism Index checked in at 104.4, topping estimates of 104. This represents the lowest reading since October 2017 and it is also the 4th consecutive decline, down from August’s 108.8 record peak.

The components were mostly weaker, with declines in expectations of a better economy, capital spending plans, and expectations of higher sales. Plans to higher increased, with ongoing difficulty in filling positions.

The net share of respondents expecting business conditions to improve dropped to 16%, the lowest since November 2016 and President Trump’s election.

The 104.4 level is still considerably higher than that which prevailed in the decade before the election as it stayed below 100.

Redbook Store Sales were up 8.9% for the year in the week ending January 5th.

Jolts openings dropped 243,000 to 6,888,000 in November following October’s 171,000 increase to 7,131,000. The latter was the second highest on record, bested only by the 7,293,000 from August.

The rate dipped to 4.4% from 4.5%. Hirings declined 218,000 to 5,710,000 following the prior 232,000 pop to 5,928,000. The rate slipped to 3.8% from 4%. Quitters fell 112,000 to 3,407,000 after falling 45,000 to 3,519,000.

The rate was steady at 2.3%.

November Consumer Credit came in at $22.1 billion, topping forecasts of $19 billion for the month. Strength continued in nonrevolving credit which increased $17.4 billion versus the prior $15.6 billion gain.

Revolving credit was up $4.8 billion versus $9.3 billion.

U.S. chain store sales edged up 0.1% in the week ending January 5th, following the prior week’s 1.3% drop.

The 12-month pace slowed to 2.6% year-over-year from the 4.6% clip previously.

International Trade in Goods was postponed due to the partial government shutdown.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) was down for the 3rd-straight session following the backtest to $121.439.

The close below upper support at $121.50-$121 was a slightly bearish development with risk towards $120-$119.50 on a move below the latter.

Resistance remains at $122-$122.50.

Market Analysis – The Russell 2000 ETF (IWM) was up for the 8th time in the past 9 sessions while extending its winning streak to 3-straight after tapping an intraday high of $141.79.

Fresh and lower resistance at $141.50-$142 was cleared and held with more important hurdles at $142-$142.50 and prior support from early to mid-December.

Continued closes above the latter would be a bullish development for a run towards $144.50-$145 and the 50-day moving average.

Near-term support is at $140-$139.50. A close below $137.50 would be slightly bearish and signal a possible near-term top.

RSI has is approaching late November resistance at 55 with a move above this level leading towards a run at 60 and nearly the August peak. Support is at 50-45.

The Energy Select Sector Spider (XLE) was up for the 3rd-straight session with the intraday high reaching $61.75. Fresh and lower resistance at $61.50-$62 was challenged but held.

The $62 level represents major support from mid-December.

Continued closes back above this level would be a slightly bullish development for a push towards $63-$63.50 and the 50-day moving average.

Current support is at $61-$60.50 with a close below $60 signaling a possible near-term top.

RSI is back in a slight uptrend after clearing and holding major resistance from November at 50.

This level will now try and hold as support. Continued closes above 55 would signal additional momentum towards 60-70 and September and October peaks.

All the best,
Roger Scott.