U.S. markets were sluggish on the open and throughout Thursday’s action following a number of disappointing economic reports.
The pullback ended 8-session and 3-session winning streaks for the major indexes but was much needed as overbought levels remain in play.
Near-term support levels easily held while volatility closed below current resistance levels with the major indexes now slightly lower for the week.
A weak session on Friday would the market’s overall 8-week winning streak but any possible news concerning the U.S./ China trade talks could lift spirits.
The Nasdaq fell 0.4% after testing an opening low of 7,431.
Upper support at 7,425-7,350 held on the close back below the 200-day moving average with a move below the latter signaling a possible near-term top.
The Russell 2000 was also lower by 0.4% following the late session dip to 1,569.
Fresh and upper support at 1,565-1,550 held with a move below the latter being a slightly bearish signal.
The S&P 500 slipped 0.4% after testing to a low of 2,764 an hour ahead of the closing bell.
Current and upper support at 2,750-2,725 and the 200-day moving average held with a move below 2,700 being a bearish development.
The Dow also declined 0.4% following intraday pullback to 25,762.
Fresh and upper support at 25,750-25,500 held with a close below the latter opening up risk towards 25,250-25,000 and the 200-day moving average.
Utilities led sector strength after rallying 0.8%. Consumer Staples added 0.2% while Real Estate edged up 0.1% to round out the winners.
Energy sank 1.7% to lead sector laggards while Communication Services and Healthcare dropped 1.2% and 1.1%, respectively.
Global Economy – European markets were mixed following weak economic data and corporate earnings.
Meanwhile, British Prime Minister Theresa May held constructive talks with European Commission president Jean-Claude Juncker, prompting speculation of some long-awaited progress in talks ahead of the March 29th split.
UK’s FTSE 100 fell 0.9% and the Belgium20 gave back 0.8%. The Stoxx 600 Europe was off 0.3%. Germany’s DAX 30 climbed 0.2% and France’s CAC 40 was up a fifth-point, or 0%.
February Eurozone flash manufacturing PMI slipped to 49.2, its lowest level since mid-2013 and below the 50-mark that separates growth and contraction.
Eurozone IHS Markit’s flash composite PMI, rose to 51.4 in February, from a final reading of 51 last month.
Asian markets were also mixed as traders awaited more definitive news from the ongoing China/ U.S. trade talks.
Australia’s S&P/ASX 200 gained 0.7% and Hong Kong’s Hang Seng rose 0.4%.
Japan’s Nikkei advanced 0.2%. China’s Shanghai was down 0.3% and South Korea’s Kospi dipped 0.1%.
The Leading Indicator index dipped 0.1% to 111.3 in January after an unchanged reading of 111.4 in December. Expectations were for a rise of 0.1%.
Weakness was in 3 of the 10 components, with declines in jobless claims (-0.09%), average consumer expectations (-0.08%), and the average workweek (-0.07%).
Gains in the other 7 components were paced by stocks prices (0.06%), the leading credit index (0,06%), and ISM new orders (0.05%).
Existing home sales dropped 1.2% in January to 4,940,000, missing forecasts for a print of 5,040,000. Single family sales declined 1.8% last month to 4,370,000 while condo/coop sales were up 3.6% to 570,000.
The supply of homes rose to 3.9 from 3.7. Regionally sales declined in the West (-2.9%), the Midwest (-2.5%) and the South (-1%), but were up in the Northeast (2.9%).
The median sales price dropped to $247,500 from $254,700.
Markit composite PMI improved to 55.8 in the preliminary February report versus 54.4 in January. The employment component rose to 55 versus 53.2 previously.
Input prices were also higher than last month while the composite was supported by a 2 point increase in the services index. The manufacturing index fell 1.2 points to 53.7 versus 54.9.
Durable Goods orders climbed 1.2% in December, versus expectations for a rise of 1.5%. Transportation orders helped pace the gain with a 3.3% increase.
Ex-transportation, orders edged up 0.1% versus -0.2% in November. Nondefense capital goods orders excluding aircraft dropped 0.7% while shipments were up 0.8% from 1%.
Nondefense capital goods shipments excluding aircraft increased 0.5%. Inventories were up 0.2% and the inventory-shipment ratio slipped to 1.60 from 1.61.
Initial jobless claims fell 23,000 to 216,000, below estimates for a print of 225,000. The 4-week moving average was at 235,700 versus 231,750. Continuing claims declined 55,000 to 1,725,000.
February Philly Fed manufacturing index plunged 21.1 points to -4.1, well below expectations of 14. New orders led the drop, tumbling to -2.4 from 21.3.
However, the employment component rose to 14.5 versus 9.6, while the workweek dipped to 4.7 from 6. Prices paid fell to 21.8 from 32.7, with prices received at 27.7 from 24.8.
The 6-month general business index was little changed at 31.3 from 31.2, with employment at 23.6 from 34.7 and new orders at 29.4 from 32.2. The future prices paid index dipped to 39.8 from 39.9, with prices received at 29.7 from 34.1, while cap-ex was 31.7 from 31.6.
Market Sentiment – St. Louis Fed James Bullard reiterated that policy is in a very good place right now and there’s no urgency to act as normalization is coming to an end.
He noted the Fed has raised rates quite a bit and are now high versus the global environment, adding they might have gone too far with December’s tightening, though, and he argued against the action.
Bullard said growth in the 2.25% area this year was a good number and his biggest worry is Europe. He said while there is a chance of a rate cut, that is not the baseline case, as the general view is rates should hold where they are.
He looks for some growth, albeit modest, resulting from the tax act.
Bullard suggested the Phillips Curve is starting to come back into focus and could carry the day. On the balance sheet, he said getting the right level of reserves will mean a bigger balance sheet than pre-crisis as the Fed is finding the demand for reserves is much higher than expected.
Atlanta Fed Raphael Bostic said the policy rate is close to neutral right now, in but the Fed needs to be careful not to overshoot and become too restrictive.
However, he noted further declines in the unemployment rate below what’s viewed as a sustainable level, could result in a high pressure economy where there is pressure on wages, pressure on employers to compete more aggressively.
Bostic went on to say there is a lot of uncertainty, especially where China is concerned and that it would be imprudent to project the rate path with those uncertainties.
The iShares 20+ Year Treasury Bond ETF (TLT) fell for the 2nd-straight session following the intraday fade to $120.70.
Fresh and upper support at $120.50-$120 and the 50-day moving average held with a close below the latter being a slightly bearish signal.
Lowered resistance remains at $121-$121.50.
Market Analysis – The Russell 2000 ETF (IWM) fell for the first time in 8 sessions following the late day pullback to $156.06.
Near-term support at $156-$155.50 held with a close below $155 being a slightly bearish development and signaling a possible near-term peak.
Current resistance is at $157-$157.50 and the 200-day moving average.
RSI is back in a slight downtrend with support at 70.
A move below this level opens up risk towards 65-60 with the latter representing the monthly low. Resistance is at 75-80.
The iShares PHLX Semiconductor ETF (SOXX) have been in a slight trading range over the past 4 session following Thursday’s backtest to $183.
Near-term support at $183-$182.50 held with a close below the latter signaling additional weakness towards $180.50-$180.
Current resistance is at $184.50-$185. Continued closes above the latter would signal renewed strength and would setup a possible push towards $187.50-$188 and peaks from late September/ early October.
RSI is in a slight downtrend with support at 65-60.
A close above the latter would be slightly bearish and signal additional weakness towards 55-50. Resistance is at 70 with a move above this level signaling additional momentum.
All the best,
Roger Scott.