U.S. markets showed slight weakness on Tuesday’s open as relief over a new trade agreement in North America continues to benefit blue-chip stocks more than small-caps.
Economic news was light as the rebound on Fedspeak took center stage throughout the session.
The blue-chips managed to hold their gains while the other major indexes struggled with momentum throughout session.
The mixed finish wasn’t much of a surprise as volatility stayed rangebound ahead of 3Q earnings season that begins next week.
The Dow rose 0.5% while trading to a fresh all-time intraday high of 26,824.
Fresh and lower resistance at 26,800-27,000 held with continued closes above the former remaining a bullish signal.
The S&P 500 slipped a point, or 0.01% despite making an intraday push to 2,931.
The fade to 2,919 afterwards held near-term support at 2,910-2,900 with a move below the latter being a slightly bearish flag.
The Nasdaq was lower by 0.5% following the backtest to 7,983.
Upper support at 8,000-7,950 failed to hold by a half-point with a close below the latter being a slightly bearish development
The Russell 2000 sank 1% after making a steady decline to 1,653 into the closing bell.
July and fresh support at 1,650 held with risk to 1,630-1,625 on move below this level.
Utilities led sector strength after jumping 1.4%. Communication Staples and Materials gained 0.6% and 0.4%, respectively.
Consumer Discretionary was the weakest sectors after sinking 1.4% while Real Estate decline 0.3%.
The Financials finished flat after being down most of the session and a sector that has been struggling.
Global Economy – European markets closed lower across the board as Italy worries resurfaced.
European Commission President Juncker stated recent announcements by the Italian government have raised concerns about its budgetary course as he warned of a Greek-style crisis in the country.
France’s CAC 40 fell 0.7% and the Stoxx 600 Europe was off 0.5%. Germany’s DAX 30 gave back 0.4% while UK’s FTSE 100 and the Belgium20 were down 0.3%.
The UK September Markit/CIPS construction PMI unexpectedly dropped 0.8 to a 6-month low of 52.1, missing expectations for no change at 52.9.
Eurozone August PPI was up 0.3% month-over-month and 4.2% year-over-year, topping forecasts 0.2% and 3.8%, respectively.
Asian markets settled mostly lower with China’s Shanghai remaining closed for a holiday.
Hong Kong’s Hang Seng tumbled 2.4% and South Korea’s Kospi stumbled 1.3%. Australia’s S&P/ASX 200 fell 0.8% while Japan’s Nikkei climbed 0.1%.
Japan September consumer confidence rose 0.1 to 43.4, stronger than estimates for a slip of 0.2 to 43.1.
There was no major economic news.
Market Sentiment – Fed Chairman Powell reiterated support for gradual hikes, as the Fed looks to balance the risks of these extraordinary times of low inflation and very low unemployment.
He said the economy is seeing a remarkably positive outlook, and is operating with limited slack.
He sees no sign of a big change in long term inflation expectations, and a big shift is unlikely if expectations are anchored.
Powell said the recent rise in wages is welcome but higher wages alone need not be inflationary.
The Fed will act with authority if inflation expectations start to sift. The Phillips Curve is neither dead nor showing an inflation surge, he added.
He said a downward sloping yield curve might signal policy is tight. or it could mean term premiums are negative.
On fiscal policy, Powell said it is providing real support for demand and should continue to do so for a few years, but on a longer run perspective, it’s unsustainable.
On trade policy, he remarked potential tariffs could increase prices, but so far there’s no indication of an impact on prices. A
Dallas Fed hawk Kaplan commented China trade issues are worth getting into in a serious way.
Kaplan also sees more upside risk to oil prices, while forecasting 3% GDP this year fading to 2.5% next year with fiscal stimulus ebbing.
He warns cutting the number of immigrants does not go hand in hand with growing GDP and that the tailwind from debt-funding stimulus could turn into a headwind in the out years.
Fed Reserve Vice Chairman Randal Quarles said the Fed is working on a new stress test approach for mid-sized banks and plans to propose revisions soon.
He mentioned tailoring leverage ratios are also being worked on.
The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 2-session slide after trading to a high of $117.13.
Upper resistance at $116.75-$117 was cleared but held. Continued closes above $117.50 would be a more bullish development. Near-term support remains at $116.25-$116.
Market Analysis – The Russell 3000 Index ($RUA) has been in a mini trading range between 1,720-1,740 for the past 10 sessions.
A v-shape pattern was trying to form but the high of 1,731 failed the prior session high. The lower close didn’t help matters either.
Continued closes above the 1,740 level could lead to fresh all-time highs and blue-sky resistance towards 1,750-1,775 over the near-term.
A close below 1,720 could lead to prior and early September support at 1,710-1,700 and the 50-day moving average.
RSI is in a slight downtrend following the pullback. Support is at 55 with a move below 50 being a bearish signal for lower lows. Resistance at 60.
A close above this level would signal additional strength for a possible push towards September and August highs at 65-70.
Communication Services (XLC) fell for a 3rd-straight session after testing a low of $48.58. Support at $48.50-$48.25 held following the 2nd-straight close below the 50-day moving average.
A move below $48 could lead to a continued backtest towards $47.25-$47 and the 200-day moving average.
Near-term resistance is at $49-$49.25. A more bullish development would occur on continued closes above $49.50 and signal the return of an uptrend.
The index was recently reshuffled to change the representation of XLC’s weight as certain companies were added from the Technology sector.
This led to some of the late August and early September weakness.
RSI is hovering near support at 50 with a move below this level likely signaling additional weakness towards 45-40. Resistance is at 55-60.
All the best,
Roger Scott.