U.S. markets finished higher on Friday despite a disappointing jobs report with the major indexes once again near all-time record highs. The Dow, S&P 500, and Nasdaq are less than 1% away from triggering fresh lifetime peaks with the latter closing at a record all-time high for the 46th time year.

The Russell 2000 is roughly 3% away from joining the crowd after being the most volatile index following a whipsaw August.

The first trading day for September showed continued momentum with the Material and Energy sectors leading the charge higher. The Utility sector finished in the red along with Healthcare and Technology also showing slight losses.

The Dow and S&P 500 are on five-month winning streaks while the Nasdaq has closed higher for 2-straight months following a lower June. The small-caps fell nearly 2% in August and have some catching up to do on some paper. Technically, last week’s strong recovery off the Tuesday’s lows and close above all the major moving averages was a very bullish development.

In other words, the bearish pattern improved in four trading sessions.

The battle between the bulls and bears was intense last month with the VIX soaring to 17.28 in mid-August. Just like the technical damage turned bullish in less than a week for the major indexes, the VIX also went through a bullish pattern turnaround over the same time period.

The whipsaw action is historically typical for August and why it was important to keep your emotions in check. However, active traders love this type of volatility but it can be very tricky to trade, especially if you are on the wrong side.

September could bring the same type of heat with the end of summer and Congress coming back to work. Geopolitical tensions will likely intensify along with rhetoric over tax cuts, the debt ceiling,  and the economic affects Hurricane Harvey could have on the economy.

Despite mentioning the massive amount of money that has been moving out of the market over the past 10 months, it doesn’t mean it’s a bad omen for the market. It just means there could be investors that miss another breakout to record highs into yearend.

Wall Street, along with many notorious analysts and wealth moguls, have predicted a 10% pullback and 20% corrections throughout this year and last. The 100-point pullback on the Russell 2000 from the 1,450 level in July to 1,350 last month was close to the former and good for 7% but panic hasn’t set in, yet.

While there has been some nervousness, and continued doubt higher all-time highs are possible, sometimes it can be hard to see the forest through the trees. This can happen when there is sector rotation with money moving out of weak ones and into stronger sectors.

Global Economy – European markets were higher on Friday following news the ECB would likely wait until December to unveil a plan to taper its asset purchases. France’s CAC 40 index and the DAX 30 added 0.7%. The Stoxx Europe 600 gained 0.6% and the Belgium20 gained 0.4%. The FTSE 100 advanced 0.1%.

Europe’s final manufacturing PMI for August came in at 57.4, matching expectations, and up from 56.6 in July.

The U.K.’s manufacturing PMI unexpectedly jumped to a four-month high at 56.9, up from a revised 55.3 in July.

Asian markets were mixed despite a private gauge of Chinese factory activity rising for the third straight month in August. China’s Shanghai index, Japan’s Nikkei, South Korea’s Kospi and Australia’s S&P/ASX 200 climbed 0.2%. Hong Kong’s Hang Seng Index slipped 0.1%.

The August reading of China’s Caixin’s manufacturing PMI checked in at 51.6, up 0.5, and represented the second-highest level of the year. Expectations were for a dip of 0.1 to 51.

U.S., nonfarm payrolls increased 156,000 in August, missing expectations for 170,000-180,000 job additions. The unemployment rate ticked up to 4.4% from 4.3% in the prior month, where it had been forecast to remain.

The final Markit manufacturing index dipped 0.5 points to 52.8 in August from 53.3 in July.

The ISM manufacturing index rose 2.5 points to 58.8 in August from 56.3 in July, which was much better than expected.

Construction spending fell 0.6% in July following a revised 1.4% drop reported for June. Expectations were for a gain of 0.6%.

The final University of Michigan sentiment reading for August came in at 96.8, below forecasts for a print of 97.6.

Market Sentiment – Fed funds futures rallied Friday on the tepid employment report, suggesting reduced risk for a third rate hike this year. Implied rates have slipped to about a 25% risk for a 25 basis point increase, from 30% previously, after hovering in the 33% level for much of August.

Treasury Secretary Steve Mnunchin said there is absolutely a tax package in play and he’s been working with economic advisor Gary Cohn and other lawmakers to develop a very detailed tax plan. A blueprint will be released for Congressional review and said he still expects tax reform to get done this year.

Reform is not just about big business, he stressed, but about small business too, and the objective is to get a competitive rate, with 15% a working estimate.

As far as the U.S. dollar, a weaker currency is better for trade, but he added a stronger dollar in the longer run is inevitable due to confidence in the in the United States. Mnuchin declined to comment on the decision over the Fed chair and added it’s the president’s decision.

He didn’t say anything new concerning NAFTA, noting that President Trump has been consistent with his desire to renegotiate but hopeful for a win-win outcome.

On the debt limit, he said September 29th is still the hard date for the debt ceiling, though the next big date is the September 15th tax date, at which point the government would get a better feel for the late-month timing. Mnuchin remains firm that the limit will be passed and that the U.S. would not default.

His hope is for a clean bill, but in the end, it’s passage of a ceiling which is key.

The iShares 20+ Year Treasury Bond ETF (TLT) pulled back 0.8% after testing a low of $126.43 while closing below the $127 level. A double-top formation could be forming after representing a short-term peak in late June and longer-term resistance that was challenged in mid-August.

The jump above this level last week to $128.03 seems to be fading and would be confirmed on a move below $126-$125.50. A close under $125 and a flattening 50-day moving average would be a bearish development.

 

Market Analysis- The Spiders Dow Jones Industrial Average ETF (DIA) traded to a high of $220.41 to clear upper resistance at $219-$220 that held throughout the first half of August. A move above $220.50-$221 could lead to a breakout towards $224-$225.

The lifetime high is at $221.68 that triggered early last month. Rising support is at $219.50-$218.50 with a move, or close, below $218 likely signaling a short-term top.

The 50-day moving average remains in a solid uptrend with RSI near 62 with room to easily run to 70 on continued strength.

 

The Health Care Select Sector Spider (XLV) traded to a fresh 52-week and all-time high on Friday and is showing signs of a triple-top breakout. The previous peaks just north of $81 stalled in June and July with multiple closes above this level possibly leading to $83-$85 on continued momentum.

However, RSI is nearing the 70 level and  an area representing strong resistance. There was stretch above this level to the low 80’s in June with 70 holding in early May and June and again in July.

Current support is at 60-55 with a move below the later signaling a triple-top breakdown.

 

All the best,
Roger Scott