U.S. markets continued their v-shape recovery off the late December lows as the major indexes closed mostly higher on Tuesday.
Optimism surrounding the Fed’s monetary policy following a dinner between Fed Chair Powell and President Trump helped furl the gains.
Powell said he did not discuss expectations for monetary policy, except to stress that the path of policy would depend entirely on economic data.
Near-term overbought levels are starting to come into play as the major indexes have recovered 2/3rd’s of the losses off the December bottom.
However, it is important to remember markets can stay overbought for weeks and even months as long as near-term support levels hold.
The Nasdaq closed higher for the 4th time in 5 sessions after rising 0.7% while testing an intraday high of 7,408. Upper resistance at 7,350-7,400 was cleared and held to keep 7,450 and the 200-day moving average in focus.
The Dow was also up 0.7% following the second half push to 25,427.
Lower resistance at 25,250-25,500 was cleared and held with a close above the latter possibly leading to a run towards 25,750-26,000.
The S&P 500 rose 0.5% after reaching a peak of 2,738 ahead of the closing bell.
Lower resistance at 2,725-2,750 was cleared and held with a close above the latter and the 200-day moving average being a continuing bullish signal.
The Russell 2000 edged up 0.2% following the morning push to 1,524.
Fresh and lower resistance at 1,525-1,535 held for the 2nd-straight session with a move above the latter keeping 1,550-1,560 in play.
Communication Services rallied 1% to led sector strength. Consumer Discretionary and Technology added 0.9% and 0.8%, respectively.
Financials gave back 0.2% to pace sector laggards. Healthcare and Consumer Staples were lower by 0.1% to round out the losers.
Global Economy – European markets settled with strong gains while pushing 7-week peaks.
UK’s FTSE 100 zoomed 2% while France’s CAC 40 and Germany’s DAX 30 surged 1.7%. The Belgium20 soared 1.5% and the Stoxx 600 Europe edged up 1.4%.
December Eurozone retail sales fell 1.6%, matching estimates.
Asian markets settled mixed in limited action as Australia’s S&P/ASX 200 surged 2% while Japan’s Nikkei slipped 0.2%.
South Korea’s Kospi, Hong Kong’s Hang Seng and China’s Shanghai remained closed for holidays.
The Reserve Bank of Australia kept its cash rate unchanged at 1.5%. Meanwhile, a special government-appointed inquiry into the country’s financial sector did not recommend breaking up any of the banks or interfering in the way they lend money.
January PMI Services Index posted a 0.2 point decline to 54.2 after slipping 0.3 points to 54.4 in December. The employment and input price indexes each fell, with the latter to the lowest since March 2017.
The composite was unchanged at 54.4.
The employment component slipped to 53.2 from 53.4 in December while input prices were down as well, to the weakest since July 2017.
ISM Non-Manufacturing Index fell to a 13-month low of 56.7, missing forecasts for a print of 57.1. The ISM-adjusted ISM-NMI fell to a 22-month low of 55.1 that was last recorded in August of 2017.
The employment component improved to 57.8 from 56.6, and was about the only good news in the report. New orders tumbled to 57.7 from 62.7.
New export orders plunged to 50.5 from 59.5 while Imports slipped to 52 from 53.5. Prices paid edged up to 59.4 from 58. Despite the declines, levels remain high for the headline and all major components except inventories.
The IBD/TIPP February Economic Optimism Index fell 3.8% points to 50.3 after sliding 0.6% points to 52.3 in January, in part of the government shutdown.
This represented the 4th-straight monthly drop and the lowest since October 2017. However, it’s still continuing its record run in positive territory, according to the report, with 29 consecutive months above 50, supported by a strong job market and low gas prices.
Along with the slide in the Economic Optimism Index, the Presidential Leadership Index and National Outlook Index, as well as the Financial Related Stress Index, all took a hit.
The report noted a rare occurrence where every component across every index dropped, the second occurrence over the Trump presidency. The Presidential Leadership Index declined 4.8% to 41.9 from 44 in January.
The Job Approval component of the index fell by a substantial 8%, while the National Outlook Index dropped 5.6%. The Direction of the Country Index plunged 12.3% while Morals and Ethics tumbled 13.9%.
The Financial Related Stress Index rose 6.8% to 55.3, the highest since October 2017. The 6-month Economic Outlook Index fell 4.9% to 44.5 and is in negative territory (below 50) for the 3rd-straight month
Redbook Store Sales were up 5.7% for the year in the week ending February 2nd.
Chain Store Sales fell 1.5% in the week ending February 2nd, after jumping 2.5% in the prior week. The 12-month pace accelerated slightly to 2.6% year-over-year versus 2.1%.
The polar vortex was reportedly responsible for the decline in sales as shoppers stayed home.
Market Sentiment – Cleveland Fed President Loretta Mester said the central bank may need to raise interest rates a bit further if the economy does as well as she expects.
At the same time she added that if some of the downside risks to the forecast manifest themselves and the economy turns out to be weaker than expected and jeopardizes our dual mandates goal, should would need to adjust her outlook and policy views.
Mester went on to say the economy, in her view, is in a very good spot, and is likely to grow at between 2%-2.5% this year, slower than last year but still fast enough to keep unemployment at its current level of 4% or lower. Inflation, she predicted, would be close to the Fed’s 2% target.
Dallas Fed Robert Kaplan said Fed should be patient, and the Fed should do nothing on rates until there is greater clarity on the economic outlook and financial conditions.
He expects some further clarity to emerge in the first half of 2019 and agreed that it is highly appropriate to be open to adjusting the balance sheet plan, and something he said the Fed will be working on over the coming months.
Kaplan noted that the labor market is extremely tight, while the Fed is meeting its inflation goal and inflationary pressures are set to remain somewhat muted.
He also warned that slowing global growth may hurt U.S. growth with weakening housing and manufacturing sectors also posing risks.
The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 2-session slide after rebounding to test a high of $121.23.
Prior resistance at $121-$121.50 was split but levels that held into the closing bell.
A move back above $122 would be a more bullish signal for higher highs.
Support remains at $120.50-$120.
Market Analysis – The Russell 3000 Index ($RUA) closed higher for the 5th-straight session following the intraday run to 1,618. Late November and lower resistance at 1,625-1,635 and the 200-day moving average was held.
Continued closes above the latter would be a bullish signal for a possible push towards 1,650-1,660 with the latter representing late October and early November resistance.
Current support is at 1,610-1,600. A close below the latter would be a bearish development with risk towards 1,585-1,575.
RSI remains in an uptrend with August resistance at 70 now in play.
Continued closes above this level would be a bullish signal for a possible run towards 75-80 and January 2018 highs.
Current levels are also signaling slightly overbought territory. Support is at 65-60 with a move below the latter signaling additional weakness.
The Materials Select Sector (XLB) was up for the 3rd time in 4 sessions after maki g an intraday run to $53.94. Lower and near-term resistance at $53.50-$54 was cleared and held.
Continued closes back above $54.50 and last week’s peak at $54.59 would be a more bullish signal for higher highs.
Current support is at $53.50-$53 with close below the latter getting $52 and the 50-day moving average back in the mix.
RSI is in a slight uptrend with resistance at 60.
A close above this level and a multi-month hurdle would be a bullish signal for additional strength towards 70 and the September peak.
Support is at 55-50 with a move below the latter being a slightly bearish signal for additional weakness.
All the best,
Roger Scott.