Tuesday, February 25, 2020

Market Action

U.S. markets were down for the 4th-straight session despite a decent open on Tuesday that failed the 50-day moving averages. The technical damage from the previous session was too much to overcome with the major indexes remaining on track to test their 200-day day moving averages.

Sentiment remained fragile with the coronavirus the main focus and conflicting data on how well prepared the U.S. may or may not be. President Trump has asked Congress for $2.5 billion to fight the outbreak.

The recent selloff over the past 2 days has erased all of the 2020 gains for the major indexes. Volatility spiked to another 52-week peak and is still signaling market weakness over the near-term.

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The Russell 2000 was down 3.5% after testing a late day low of 1,568. Prior and upper support from mid-November at 1,575-1,560 and the 200-day moving average was breached and failed to hold with a close below the latter signaling a further pullback towards 1,550-1,535.

The Dow dropped 3.2% with the intraday low tapping 26,997. Late October and upper support at 27,000-26,800 was breached but held on the close back below the 200-day moving average.

The S&P 500 sank 3% following the intraday pullback to 3,118. New and upper support at 3,125-3,100 was breached but held with a close below the latter signaling additional weakness towards 3,075-3,050 and levels from early December.

The Nasdaq fell 2.8% after trading to a 2nd-half low of 8,940. Prior and upper support from late December at 8,950-8,900 was breached but held. A close below the latter would signal additional weakness towards 8,850-8,800 and prior levels from mid-December.

Energy and Materials were the hardest hit sectors after tanking 4.4% and 4.3%, respectively, while Industrials and Financials were down 4.1% and 3.4%. There was no sector strength for the 2nd-straight session.

Global Economy

European markets showed continued weakness following news the World Health Organization has sent a mission to Italy to support authorities in dealing with the coronavirus outbreak.

The Belgium20 fell 2.3% while Germany's DAX 30, France’s CAC 40 and UK's FTSE 100 were punished with losses of 1.9%. The Stoxx 600 gave back 1.8%.

Asian markets closed mixed as concerns over the rapid spread of the coronavirus remained in focus with Kuwait, Bahrain, Oman, Afghanistan and Iraq reporting their first cases.

South Korea’s Kospi rallied 1.2% and Hong Kong's Hang Seng climbed 0.3%. Japan’s Nikkei sank 3.3% after being closed for a holiday to start the week.

Australia’s S&P/ASX 200 tumbled 1.6% and China's Shanghai fell 0.6%.

U.S. Economy

S&P Corelogic Case-Shiller edged up 0.04% to 218.73 in December, following the 0.1% increase in November to 218.65. The 12-month index accelerated to a 2.9% year-over-year pace versus 2.5%. The 10-city index was up 0.05% to 231.55 following a 0.1% gain to 231.43. The index rose to a 2.4% year-over-year rate versus 2% previously. All 20 cities surveyed posted annual gains, led by Phoenix (6.5% year-over-year), Charlotte (5.3%), and Tampa (5.2%). New York brought up the rear with a 0.95% year-over-year clip.

December FHFA Home Price Index rose 0.6% to 283 after November's 0.3% gain to 281.3. The price index edged up to a 5.2% year-over-year rate, versus November's 5% print. Price indexes were 1% higher in the Mountain, East South Central, and South Atlantic, with soild gains in most other regions. The Pacific lagged with a 0.4% rise, while the East North Central was the only region where prices declines. For Q4, prices posted a 1.3% gain and were up 5.1% year-over-year.

Richmond Fed Manufacturing Index tumbled -22 points to -2 in February, missing forecasts for a reading of 13, after surging 25 points to 20 in January. The employment index dropped to 8 from 20, while wages rose to 26 from 21. The new order volume component plunged to -10 from 13. Prices paid rose to a 1.95% rate from 1.21%, with prices received at 1.54% from 1.31%. The 6-month shipment index declined to 28 from 41, with employment at 11 from 19 and wages at 31 from 46. The future outlook for new orders improved to 40 from 37. The 6-month price index jumped to 2.26% from 1.51%, with prices received at 1.46% from 1.29%.

Consumer Confidence rose 0.3 ticks to 130.7 in February, versus forecasts of 132.5, and January's 2.2 point rise to 130.4. Strength was in the expectations index which climbed to 107.8 from 101.4. The current conditions index fell to 165.1 from 173.9. The labor market differential dropped to 29.8 from 35.3. The 12-month inflation gauge rose to 4.6% versus 4.4%.

Market Sentiment

Fed Vice Chairman Richard Clarida said central bankers are closely monitoring the spreading coronavirus, but it is still too soon to say whether it will result a material change to the outlook. He added monetary policy is in a good place and should continue to support sustained growth, a strong labor market, and inflation returning to our symmetric 2% objective.

Clarida went on to say as long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.

Larry Kudlow, was asked about whispers that the Federal Reserve might be contemplating an emergency rate cut amid the coronavirus outbreak, but said he has not been hearing about that, either publicly or privately. Kudlow said he thinks the Fed should be a little bolder, as he has said previously, but he does not believe the central bank will do anything rash.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 4th-straight session and 7 of the past 8 after trading to a fresh all-time high of $151.76. New resistance at $151.50-$152 was cleared but held with a close above the latter signaling additional strength towards $153-$153.50.

Current support at $150.50-$150. A close below the latter would signal a possible near-term top with additional weakness towards $148.50-$148.

Volatility Index

The S&P 500 Volatility Index ($VIX) extended its winning streak to 4-straight sessions after zooming to a high of 30.25. Prior and longer-term resistance from December 2018 at 30-30.50 was breached but held. A close above the 32 level would signal a continued breakout towards the 34-36 area.

Rising support is at 27.50-27 followed by 25.50-25.

Market Analysis

The Spider Small-Cap 600 ETF (SLY) was down for the 3rd-straight session after tumbling to a late day low of $67.10. Prior and upper support from mid-October at $67.50-$67 was breached and failed to hold. A close below the latter would be an ongoing bearish development with risk towards $65.50-$65.

Lowered resistance is at $68-$68.50 and the 200-day moving average. Continued closes above the $70 level would be a slightly bullish signal of a possible near-term bottom.

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RSI remains in a downtrend after failing key support at 30. There is risk towards 25-20 and oversold levels from October 2018 on continued closes below the 30 level. Resistance is at 35-40.


The Real Estate Select Sector Spider (XLRE) was down for the 2nd-straight session after plunging to an intraday low of $40.18 while falling out of a 7-session trading range. Fresh and upper support at $40.25-$40 was breached but held. A close below the latter would be an ongoing bearish development with additional downside risk towards $39.50-$39.25 and the 50-day moving average.

Near-term and lower resistance is at $40.75-$41.

RSI is in a downtrend with key support is at 50 getting breached and failing to hold. Continued closes below this level would signal additional weakness towards 45-40 and levels from mid-December. Resistance is at 55-60.

All the best,

Roger Scott