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Thursday, May 16, 2019

Market Action

U.S. markets showed strength for the 3rd-straight session following upbeat economic news and strong company profits as the 1Q continues to wind down. The gains pushed all of the major moving averages back into positive territory for the week with volatility also settling below key levels of support.

The Nasdaq jumped 1% following the intraday high of 7,946. Prior and lower resistance from early April at 7,950-8,000 was challenged but held on the close back above the 50-day moving average.

The S&P 500 soared 0.9% after testing a 2nd half high of 2,892. Fresh and lower resistance at 2,900-2,925 held with the index also recovery its 50-day moving average.

The Dow rose 0.8% following the late day run to 25,957. Late March and lower resistance at 25,800-26,000 was cleared and held with a close above the latter and the 50-day moving average being a more bullish signal for continued momentum.

The Russell 2000 rallied 0.6% after trading to an intraday high of 1,567. Near-term and lower resistance at 1,550-1,575 was cleared and held with a close above the latter and the 50/200-day moving averages being a more bullish signal for higher highs.

Materials led sector strength after jumping 1.4% while Financials were up 1%. Technology, Industrials, Consumer Discretionary and Communication Services all added 0.9%.

There were no sector laggards.

Global Economy 

European markets settled higher across the board despite fresh Brexit news that some supporters within Prime Minister Theresa May's Conservative Party said they would vote down her European Union divorce deal, due to be put before parliament for the 4th time next month.

Germany's DAX 30 zoomed 1.7% while the Belgium20 and France's CAC 40 surged 1.4%. The Stoxx 600 Europe advanced 1.3% and UK's FTSE 100 was up 0.8%.

Asian markets closed mixed after President Donald Trump declared a national emergency over threats against American technology.

Australia's S&P/ASX 200 rose 0.7% and China's Shanghai gained 0.6%. Hong Kong's Hang Seng added 6 points, or 0.02%. South Korea's Kospi sank 1.2% and Japan's Nikkei declined 0.6%.

U.S. Economy

Jobless Claims fell 16,000 to 212,000, versus forecasts for 219,000. This brought the 4-week moving average to 220,250 from 225,000. Continuing claims fell 28,000 to 1,660,000 after rising 17,000 to 1,688,000 previously.

Housing Starts rebounded 5.7% to 1,235,000 in April, topping expectations of 1,200,000, after rising 1.7% to 1,168,000 in March. Single family starts were up 6.2% following the prior 1.5% gain. Multifamily starts increased 4.7% versus the prior 2% increase. Permits were up 0.6% to 1,296,000, also beating forecasts of 1,250,000, and follows March's 0.2% slip to 1,288,000.

Philadelphia Fed Business Outlook Survey rose 8.1 points to 16.6 in May, topping forecasts for a print of 9.3, and follows the 5.2 point drop to 8.5 in April. The employment component improved to 18.2 from 14.7, with the workweek slipping to 10.9 from 11.2. New orders dipped to 11 from 15.7. Shipments climbed to 27.6 from 18.4. Prices paid edged up to 23.1 from 21.6, with prices received falling to 17.5 from 20. The 6-month outlook was at 19.7 from 19.1. The future employment gauge nearly doubled to 27.3 from 14.9, with new orders at 21.3 from 23.9. Prices paid jumped to 42.3 from 26 while capital expenditures fell to 23.3 form 30.9.

Market Sentiment

Minneapolis Fed Neel Kashkari reiterated that policy has been too tight in the economic recovery and said the stance has resulted in a slower economic recovery than necessary and low inflation expectations, which directly saps the Fed's ability to respond to a future downturn.

Kashkari went on to say that modest growth in wages, despite strong job growth, tells him analysts are not yet at maximum employment. He also challenged the FOMC's 9 rate hikes, during which time inflation was always at or below target. In his view, the rate increases were not called for by the Fed's symmetric framework. He said for the Fed's framework to be effective and credible, policymakers must walk the walk and actually allow inflation to climb modestly above 2% in order to demonstrate that analysts are serious about symmetry.

Fed Governor Lael Brainard sees some benefit in letting inflation run a little hot and argued the Fed's goal now is to get underlying trend inflation around their target on a sustained basis. She suggested the possibility for opportunistic inflation that is allowing a modest increase in actual to demonstrate to the public the Fed's commitment to its inflation goal on a symmetric basis.

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Brainard also warned that the Fed must be mindful of the risks of financial imbalances that could amplify any shock and help tip the economy into recession. In contrast to Fed Chairman Jay Powell, however, she sugested below target inflation may not be entirely due to labor market slack or to transitory shocks and that it also likely reflects some softening in inflation's underlying trend.

The iShares 20+ Year Treasury Bond ETF (TLT) retreated following the pullback to $125.53. Fresh and upper support at $125.50-$125 held with a move below $124.50 signaling additional weakness.

Current resistance is at $126-$126.50 with the 52-week high at $126.69.

Volatility Index

The S&P 500 Volatility Index ($VIX) stayed deflated throughout the session to extend its losing streak to 3-straight sessions while reaching an intraday low of 15.16. Fresh and upper support at 15-14.50 held on the 2nd-straight close below the 200-day moving average. A close below the latter and the 50-day moving average would be a continuing bullish signal for the market.

Lowered resistance at 16.50-17. A close back above the 17.50 level would be another warning signal for the market.

Market Analysis

The S&P 400 Mid Cap Index ($MID) extended its winning streak to 3-straight sessions following the intraday push to 1,922. Late March and lower resistance at 1,925-1,950 and the 50-day moving average held. A close above the latter would signal a return of strength and setup another run at 1,975-2,000 and fresh 2019 highs.

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Rising and current support is at 1,900-1,875 and the 200-day moving average. A close below the latter would be a clear signal for lower lows with risk towards the 1,850 level.

RSI is in a nice uptrend with resistance at 50 and prior support from earlier this month. A move above this level would signal additional momentum towards 55-60. Support is at 40.

Sector

The Materials Select Sector (XLB) showed strength for the 2nd time in 3 sessions after trading to an intraday high of $55.16. Near-term and lower resistance at $55-$55.50 was cleared but held on the close back above the 200-day moving average. A move back above $56 and the 50-day moving average would be a more bullish signal for continued momentum.

Current support is at $54.50-$54. A close below $53.50 would be a bearish development and signal a false breakout.

RSI is back in an uptrend with resistance at 45-50. Continued closes above the latter would be a bullish signal for additional strength towards 55-60 with the latter representing the monthly peak. Support is at 40 with risk to 35-30 on a move back below this level.

All the best,

Roger Scott
WealthPress