U.S. stocks were mixed on Friday, as the overall market ended the week close to where it started. Energy stocks are driving the markets lower and medical and biotech is exhibiting unusual strength. Blue chips are seeing minor selling pressure and we can expect more consolidation ahead.
Global Economy – A gain in Aug WTI crude oil prices is also lifting energy stocks in the pre-market. Mining stocks are higher as well with Aug COMEX gold up at a 1-week high and Jul COMEX copper up at a 2-week high.
European stocks are down after the Eurozone Jun Markit composite PMI weakened to its slowest pace in 5 months.
Brexit negotiations are under way with residency rights and clearing of euro-denominated financial instruments among the first issues being debated between the UK and the European Union.
China’s Shanghai Composite erased early losses and moved higher in the last hour of trading on reports that state-sponsored funds had stepped in to support stock prices.
The Eurozone Jun Markit composite PMI fell -1.1 to 55.7, weaker than expectations of -0.2 to 56.6 and the slowest pace of expansion in 5 months.
The Eurozone Jun Markit manufacturing PMI unexpectedly rose +0.3 to 57.3, stronger than expectations of -0.2 to 56.8 and the fastest pace of expansion since the data series began in 2014.
France Q1 GDP was revised upward to +0.5% q/q and +1.1% y/y from +0.4% q/q and +1.0% y/y.
The Japan Jun Nikkei manufacturing PMI fell -1.1 to 52.0, the slowest pace of expansion in 7-months.
U.S. Economy – Sales of new homes rebounded in May, helped by strong sales gains in the South and West.
The Commerce Department says sales of new single-family homes rose 2.9 percent last month to a seasonally adjusted annual rate of 610,000. That followed a 7.9 percent drop in sales in April which was the biggest monthly decline in eight months.
Sales gains of 6.2 percent in the South and 13.3 percent in the West overcame big declines of 25.7 percent in the Midwest and 10.8 percent in the Northeast.
The median price of a home sold last month rose to a record $345,800, up 16.8 percent from a year ago. Prices have been increasing as demand has outstripped supply, in part because of a shortage of available building lots.
Market Sentimet – The long bond stopped moving higher few days back and is clearly running out of upside momentum at this time. I’m expecting the downside pressure to increase in the short term and price to move back to the 50 day line to the downside.
The long term trend remains bearish and with FED anticipated to continue raising rates for the next few years, the prospect of seeing bonds trade higher is not feasible, since the long bond and interest rates trade inverse to each other over time.
Stock Market Analysis – The sector that’s been driving the market higher past week is healthcare and biotech sectors, which have been bucking the overall trend of the market in the past several days.
The overall market is staggnate and consolidating, while medical stocks have been moving higher and making aggressive gains in the past few sessions.
At the present time, both healthcare and biotech are grossly overbougth, with 10 day RSI moving into the 80th level, which tells us that the most likely scenario will be pause in the trend, consolidation or most likely a pullback taking us back to the 50 day line to the downside.
As you can see from the chart above, volatility levels have been rising in the past few days, which is negative for stock prices and typically causes stocks to experience mild pullback or retracement against the trend.
Most traders don’t pay attention to increase in volatility or trading range which is a big mistake. Massive rise in volatility or trading range is the biggest indication that price is about to stagnate or reverse and that’s what we are seeing in both healthcare and biotech at this time.
I’m also seeing increased selling pressure in industrial and broader blue chip stocks as Dow Jones begins trading lower and losing upside momentum in the short term. We anticipated this would occur, since Dow reached steep overbought price levels in the short term earlier in the week, which typically leads to minor corrective pressure to the downside.
At one point the 10 day RSI actually reached close to 80th level, which confirms that Dow Jones industrial is running out of momentum and with energy stocks increasing downside pressure, the odds of seeing directinal upside momentum in the Dow Jones OR the NYSE is highly unlikely, till we see some degree of balance throughout individual sectors over time.
In summary – don’t expect major upside till stocks see some degree of corrective pressure and unity from various key sectors. Blue chips are not seeing accumulation and investors are waiting to see if funds begin accumulating tech once again.
Major funds are out of the market in July and I’m volatility levels are near historic lows. We can anticipate less volatility as we head into July and more consolidation and corrective pressure from the overall stock market in the next few sessions, unless there’s Global uncertainty develops, which will only increase selling pressure and cause spike in VIX.
I will update you tomorrow as usual.