[MM_Member_Data name=’firstName’],
U.S. stock indexes drifted higher on Monday, led by technology companies which followed the lead of European markets, which jumped after French election results raised expectations for more pro-business economic reforms.
Global Economy – European stocks are up as gains in French stocks are leading European stocks higher after Sunday’s second-round of French elections showed French President Macron’s party won about 350 seats in France’s 577-member National Assembly, the largest majority in 15-years.
Jul WTI crude oil is up and is giving a boost to energy stocks after data from OPEC showed that compliance with OPEC crude production cuts was 110% in May.
Japan’s Nikkei Stock Index rose to a 1-week high on signs of strength in the Japanese economy after trade data showed Japan May exports rose at the fastest pace in 2-1/3 years and Japan May imports climbed at the fastest pace in 3-years.
Hong Kong stocks rallied over 1% before a decision Tuesday on whether MSCI will include China shares in global indexes.
China May new home prices rose in 56 of 70 cities tracked by the government, down from 58 cities that gained in April, due to the government’s measures to tighten liquidity and cool the housing market.
The Japan May trade balance unexpectedly fell into deficit by -203.4 billion yen, when expectations were for a 43.3-billion-yen surplus.
May exports rose +14.9% y/y, weaker than expectations of +16.0% y/y, but still the largest increase in 2-1/3 years. May imports rose +17.8% y/y, stronger than expectations of +14.5% y/y and the largest increase in 3 years.
U.S. Economy – There’s no major FED data out today. However, the big news for the week includes Wednesday’s existing home sale report, Thursday’s Jobless claims and Friday’s new home sales data.
I’m not expecting any major deviations from the FED since economic data between June and August tends to be more inline with expectations, since there’s less activity during summer months.
Expect volatility to rise over the near term, since institutional traders tend to become more active when indices are near all time highs, which is the scenario at the present time.
Market Sentiment – The probability that the Federal Open Market Committee will increase its fed funds rate at the December 13 meeting is 50%, which compares to 46% on Friday.
Technically, bonds are stagnating near the current price level and appear to be losing momentum to the upside. RSI remains close to overbought price level and odds of seeing further upside is improbable, since there’s no major catalyst at this time.
Bonds are “pricing into their value” current uncertainty surrounding President Trump and unless something completely unforseeable develops over the near term, we can expect price to decline over the near term.
Stock Market Analysis – Semiconductors which have been leading the market over the past few months are slowing down and internet services sector is now leading the overall market higher.
The internet service sector includes stocks such as Amazin, Ebay, Alibaba as well as other large cap online merchants.
We need to monitor this sector closely, since it’s not as narrow as the semiconductor sector and has wider influence over SP 500 stocks than the chips do.
Tech is no longer leading ahead of blue chips, mostly due to corrective pressure in chip stocks over the past several sessions.
I’m expecting price to stagnate once we reach for the 52 week high price on QQQ in the coming days and pull back down towards the 50 day line, since there’s no major catalyst to drive semiconductors higher at this time and that’s the primary sector that’s been causing QQQ to rally over the past few months.
One major concern that I have with the current short term market cycle is the medium term momentum levels on the SPY. This is exactly the same scenario we witnessed with tech before selling pressure took chips lower over the near term and I’m seeing it again with the major indices as this time.
If you look at the price of the SP 500, you will notice that it’s at all time highs, while RSI is now reaching overbought price levels.
Notice RSI is diveging from price action and also overbought at current price levels. What’s really bothering me however, is the narrowing of momentum, which is exactly what happened to the tech sector before we experienced the highest downside volatility just over 1 week ago.
Notice price is trading higher at all time highs, but the percentage of stocks trading higher is actually lower than the last swing high in the market. When percentage of stocks rising is declining and price continues to trade higher, the market becomes vulnerable to downside pressure, since it’s causing fewer number of stocks to cause increased momentum, which can only sustain for limited period of time.
Expect stocks to see minor selling pressure and volatility rise in the near term. Summer is not particularly bullish time for U.S. markets and if momentum levels continue to narrow, we will see SPY behave similarly to what we witnessed from NASDAQ less than 2 weeks ago.
I will update you tomorrow as usual.
Roger Scott