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Monday, May 13, 2019

Market Action

U.S. markets resumed their recent downtrend while trading to fresh monthly lows following news China will hike tariffs on $60 billion worth of U.S. imports that include a broad range of agricultural products.

China said in a statement that the U.S.′ decision jeopardized the interests of both countries and does not meet the general expectations of the international community.

The Nasdaq plummeted 3.4% following the intraday backtest to 7,627. Late March and upper support at 7,650-7,600 was split on the close below the latter and the 50-day moving average.

The Russell 2000 tanked 3.2% after tapping an afternoon low of 1,520. Major and upper support at 1,525-1,500 was breached and failed to hold with the close below the 50/200-day moving averages signaling additional weakness towards the latter.

The S&P 500 sank 2.4% following the 2nd-half test to 2,801. Prior and upper support from late March at 2,800-2,775 held with the close below the 50-day moving average being a continuing bearish development.

The Dow also dropped 2.4%, after trading to a midday low of 25,222. Prior and upper support from mid-March at 25,250-25,000 was breached but held although the close below the 200-day moving average remains an ongoing bearish development.

Utilities surged 1.1% and was the only sector that closed higher.

Technology and Communication Services tumbled 3.8% and 3.1%, respectively, to led sector laggards while and Consumer Discretionary stumbled 3%.

Global Economy 

European markets closed lower across the board as the China and U.S. trade talks appeared to be at an impasse, with Washington demanded promises of concrete changes to Chinese law and China saying it would not swallow any bitter fruit that harmed its interests.

The Belgium20 and Germany's DAX 30 gave back 1.5% while the Stoxx 600 Europe and France's CAC 40 fell 1.2%. UK's FTSE 100 declined 0.6%.

Asian markets settled in the red after China hit back at a tariff hike by the U.S. in retaliation.

South Korea's Kospi was lower by 1.4% and China's Shanghai was down 1.2%. Japan's Nikkei was off 0.7% and Australia's S&P/ASX 200 slipped 0.2%. Hong Kong's Hang Seng was closed for The Birth of the Buddha holiday.

U.S. Economy

New York Fed's April 2019 Survey of Consumer Expectations showed a slide in short and medium-term inflation expectations. The median inflation expectations fell to 2.6% from 2.8% for the 1-year horizon, and to 2.7% from 2.9% for the 3-year time frame, representing the lowest readings since late 2017.

Market Sentiment

Fed Vice Chairman Richard Clarida said the review of monetary policy strategies is more likely to be an evolution rather than a revolution in the conduct of policy. He said given that the neutral rate appears to have fallen, there is increased likelihood that the lower rate bound is again hit in future economic downturns, was a motivating factor behind this study.

Clarida also noted the reduced responsiveness of inflation to resource slack, and he reminded it is all the more important that longer run inflation expectations are anchored at levels consistent with the 2% inflation goal.

Minneapolis Fed Neel Kashkari is in a wait-and-see mode regarding the tariffs and their impacts. He said is not too concerned about a tit-for-tat response to the tariffs given the strength of the U.S. economy and as it is less susceptible trade.

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Kashkari said the economy and the job market are quite healthy. He is not so much in the transitory camp on inflation, given the persistence of sub 2% prices. He talked about allowing inflation to run above the 2% goal for sometime to prove the seriousness of the Fed's commitment to the target.

Kashkari added some of the lack of wage pressure, and subsequent price pressures are due to slack in the labor market. As to what he's focusing on in terms of policy, it's wage growth.

The iShares 20+ Year Treasury Bond ETF (TLT) traded to a fresh monthly high of $125.93 with late March and lower resistance at $125.50-$126 getting cleared and holding. Continued closes above the latter gets $126.50-$127 and fresh 52-week peaks in play.

Rising support at $125-$124.50.

Volatility Index

The S&P 500 Volatility Index ($VIX) soared to a 2nd-half high of 21.32 with prior resistance at 21-21.50 holding. There is risk to 22.50-23 on a move above the latter following the close above the 20 level. This is a very negative development for the market as it represented the first close above the 20 level for the VIX since early January.

Fresh support is at 18.50-18 with a close below 17.50 signaling some near-term relief.

Market Analysis

The Spider S&P 500 ETF (SPY) was down for the 5th time in 6 sessions following the backtest to $279.93. Prior and upper support at $280-$279.50 was breached but held. A move below $278-$277.50 would be a continuing bearish signal with risk towards $275.50-$275 and the 200-day moving average.

Lowered resistance is at $281-$281.50. Continued closes above $285-$285.50 and the 50-day moving average would be a more bullish signal of a near-term bottom.

RSI is is a downtrend and is starting to signal oversold levels with support at 30. A close below this level would be an ongoing bearish signal for additional weakness towards 25-20 and the mid-December low. Resistance is at 35-40.

Sector

The Energy Select Sector Spider (XLE) has been in a 5-session trading range after trading to a low of $62.65. Near-term and upper support at $63-$62.50 was breached and failed to hold. A close below the latter would be a slightly bearish development with downside risk towards $62-$61.50 and early February lows. 

Current resistance is at $63.50-$64. Continued closes above the $64.50 would be a more bullish development for continued strength and a possible rebound towards $65.50-$66 and the 50-day moving average.

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RSI has been range bound with support at 30 and the monthly low. A move below this level would signal additional weakness towards 25-20 and December lows. Resistance is at 35 with a close above this level possibly leading towards a run to 40-45.