U.S. markets were showing strength ahead of Thursday’s open amid continued hopes that the U.S./ China trade war will deescalate along with optimism that a 2nd partial government shutdown would be averted.

However, a lousy retail sales report derailed momentum with futures turning from green to red.

The weakness lasted throughout much of the morning before a rebound ahead of Wall Street’s lunch break.

The broader market’s strength was short lived with Tech and the small-caps holding gains throughout the second half on the mixed finish.

The Russell 2000 rallied 0.1% to extend its winning streak to 5-straight sessions despite the opening fade to 1,534.

Rising support at 1,530-1,520 held before the bounce to 1,551 ahead of the closing bell.

The Nasdaq also climbed 0.1% to make it 5-straight, as well, despite testing an opening low of 7,375.

Upper support at 7,350-7,300 was tripped but held on the 3rd-straight close above the 7,400 level.

The S&P 500 fell 0.3% after trading to a low of 2,731 shortly after the opening bell.

Current and upper support at 2,725-2,700 held along with the 200-day moving average.

The Dow declined 0.4% following intraday pullback to 25,308. Prior and upper support at 25,250-25,000 held with a close below the latter and the 200-day moving average being a slightly bearish development.

Consumer Services, Real Estate and Energy led sector strength after adding 0.6%.

Healthcare and Technology rose 0.2% to round out the winners.

Financials and Consumer Staples paced sector laggard after sliding 1.2% and 1.1%, respectively.

Global Economy – European markets settled mostly in the red after lawmakers in the U.K. voted against a government motion to back support for Prime Minister Theresa May’s plan to seek changes to her Brexit deal.

Germany’s DAX 30 fell 0.7% and the Belgium20 was off 0.4%.

The Stoxx 600 Europe was down 0.3% and France’s CAC 40 dipped 0.2%. UK’s FTSE 100 was up 0.1%.

Germany’s economy just avoided falling into recession during the final three months of last year after registering zero growth during the fourth quarter of 2018.

The country avoided two consecutive quarters of contraction, which is the usual definition of a recession.

Asian markets closed mostly lower as China and the U.S. kicked off two days of trade negotiations with China looking to ease tensions on possible big purchases of semiconductors and other U.S. goods.

Hong Kong’s Hang Seng was off 0.2% while China’s Shanghai Australia’s S&P/ASX 200 edged down 0.1%.

Japan’s Nikkei gave back 5 points, or 0.02%. South Korea’s Kospi bucked the trend after jumping 1.1%.

Japan’s economy rebounded 1.4% in annualized growth for October-December contrasted with a revised 2.6% contraction in the previous quarter. The report showed a recovery in consumer demand, investment and government spending.

China exports surged 9.1% in January, reversing a 4.4% decline in December, and topping estimates for shipments to sink 4.1%.

Imports dropped 1.5% in January, following a 7.6% decrease in December, and dropping forecasts for a drop of 11%.

China’s trade surplus with all trading partners stood at $39.16 billion in January, much smaller than the $57.06 billion surplus recorded in December, but exceeding estimates of $25.45 billion.

Initial Jobless Claims rose 4,000 to 239,000 versus forecasts for a print of 225,000. This left the 4-week moving average at 231,750 versus the prior 225,000. Continuing claims dipped 3,000 to 1,773,000.

December Retail Sales sank dropped 1.2% with ex-autos plunging 1.8%. Expectations were for a rise of 0.1% for both. Sales excluding autos, gas, and building materials tumbled 1.6% versus the prior 0.7% jump.

Motor vehicle sales climbed 1% after a 0.7% prior gain while gas station sales declined 5.1%. Food and beverage prices were down 0.4% compared to 0.1% previously. Building materials edged up 0.3% from -1.5%.

Furniture sales dropped 1.3% while clothing sales fell 0.7%. Non-store retailers were down 3.9% and miscellaneous sales tumbled 4.1%.

January PPI dipped 0.1%, with the core rising 0.3%, versus estimates for 0.1% gains for both. The 12-month headline pace slumped to 2% year-over-year from 2.5%, with the core at 2.6% from 2.7%.

Goods prices were down 0.8% versus -0.3% from December, with energy at -3.8% versus -4.3%, and food costs at -1.7% from 2.6%.

Services prices were 0.3% higher from unchanged previously.

November Business Inventories dipped 0.1% versus forecasts for a rise of 0.1%, while sales fell 0.3% to matched forecasts. Retailer inventories slid 0.4% from 0.8% in October, and were down 1% ex-autos from 0.6%.

Wholesaler inventories were up 0.3% from 0.9%, with manufacturers at -0.1% from 0.2%. Retailer sales rose 0.2% from 1.1%. Wholesaler sales declined 0.6% from -0.6%, with manufacturers at -0.6% from -0.1%.

The inventory-sales ratio was flat at 1.35 for a 2nd-straight month.

Atlanta Fed’s Q4 GDPNow estimate was slammed down to 1.53% from 2.6%.

The report noted Q4 real personal consumption expenditures are now estimated at 2.6% versus 3.7% previously. Also, the contribution of inventory investment was bumped down to -0.55% from -0.27%.

Market Sentiment – Philadelphia Fed Lael Brainard said that the Fed’s balance sheet normalization should come to an end later in 2019.

She said the Fed was expecting some slowing this year from the solid growth in 2018 and noted various downside risks that included the slope of the yield curve, along with slowing in growth from Europe and China, as well as tighter financial conditions and still high policy uncertainties.

Brainard said she is very attentive to the international outlook but the domestic economy is still showing strength.

As to the Fed’s shift in tone, Brainard noticed in December the various crosscurrents and downside risks that were gathering. She said she is comfortable with the patience stance currently and says being on hold now is the right place to be.

However, she added, the modal outlook is generally for solid growth, but as risks to the downside have grown, she said she will have to wait and see how things work out.

Brainard didn’t want to assign odds to whether the next move is a rate cut or a hike, but says for now the Fed is in a good place.

As to the balance sheet normalization process, she said it should probably come to an end this year, but that the Fed wants to make sure there is an ample amount of reserves available, with a substantial buffer to avoid volatility.

Brainard said the drop in retail sales certainly caught her attention, though saying it is just one month’s data and doesn’t want to take too much of a signal from it. While acknowledging there is some down side risk, she countered by analysts are still getting good payrolls figures.

The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 3 session skid after trading to a high of $122.20.

Upper resistance at $121.75-$122.25 held on the close above the former with a move above $122.50 being a more bullish signal.

Support remains at $121.50-$121 with a move below the latter signaling additional weakness.

Market Analysis – The Spider Small-Cap 600 ETF (SLY) extended its winning streak to 4-straight sessions following the late day run to $68.59. Late and lower November resistance at $68.50-$69 held.

Continued closes above the latter and early November/ mid-October hurdles would be a bullish development for a possible run towards $70 and the 200-day moving average.

Current support is at $67.75-$67.25 with a move below $67 being a slightly bearish signal for lower lows.

RSI is flatlining with August resistance at 70.

A close above this level gets 75 and June 2018 peaks in play. Support is at 65-60 with a close below the latter signaling additional weakness.

The Dow Jones Transportation Average ($TRAN) closed higher for the 4th-straight session after testing an intraday peak of 10,572. Early November resistance at 10,500-10,600 was split on the close just below the 200-day moving average.

Continued closes above the latter would be a bullish signal for a possible push towards 10,750-11,000.

Current support at 10,400-10,300 with a move below 10,250 being a slightly bearish development and signaling a near-term top.

RSI is leveling out after clearing resistance at 70 over the past few sessions.

Continued closes above this level keeps January 2018 highs in the 75-80 area in play. Support is at 65-60.

All the best,
Roger Scott.