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Wednesday, February 12, 2020

Market Action

U.S. markets traded to new record highs amid a global rally that is being driven by the easing in worries about the coronavirus. While the rate of transmission and new infection in China may be slowing, companies are still sorting through how their earnings results will be impacted.

The Dow rallied 0.9%, after trading to a record high of 29,568 ahead of the closing bell. Near-term and lower resistance at 29,400-29,600 was cleared and held with a close above the latter keeping upside potential towards 29,800-30,000 in play.

The Nasdaq was also up 0.9% with the late day all-time high reaching 9,728. Current and lower resistance at 9,700-9,750 was cleared and held with a close above the latter signaling additional strength towards 9,800-9,850.

The Russell 2000 was higher by 0.7% following the afternoon run to 1,690. Key resistance at 1,685 was cleared and held with continued closes above this level keeping the 1,700 level in focus.

The S&P 500 also rose 0.7% after testing an all-time high of 3,381. Current and lower resistance at 3,375-3,400 was cleared and held with upside potential towards 3,425-3,450 on a close above the latter.

Energy and Communication Services led sector strength after jumping 1.4% and 1.3%, respectively, while Technology soared 1%. There were no sector laggards.

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Global Economy

European markets closed higher despite disappointing economic news.

Germany's DAX 30 soared 0.9% while the Belgium20 and France’s CAC 40 rose 0.8%. The Stoxx 600 was up 0.6% and UK's FTSE 100 and 0.5%.

Eurozone manufacturing output for December plunged 2.1% month-on-month, versus expectations for a 1.6% slide.

Asian markets also showed continued strength on hopes that the worst of the coronavirus outbreak in China might be over.

Hong Kong's Hang Seng and China's Shanghai added 0.9%. Japan’s Nikkei and South Korea’s Kospi were up 0.7%. Australia’s S&P/ASX 200 advanced 0.5%.

U.S. Economy

MBA Mortgage Applications increased 1.1% last week following a 5% jump in the prior week, and a 7.2% bounce in the week before that. Applications are up 95.5% year-over-year. All of the strength was in the refinancing index which rallied 5% after surging 15.3% previously, and is up 206.5% year-over-year. The purchase index declined -5.8% after dropping -9.5% in the prior week, and is at a 15.9% year-over-year pace. The 30-year fixed rate was little changed at 3.72%, and remains well below the year-ago figure of 4.65%. The 5-year ARM dipped to 3.21% from 3.23% previously.

Market Sentiment

Fed Chairman Jay Powell said the traditional policy tool is interest rates but in this environment, low rates aren't really a choice anymore, and so the Fed likely will have to turn to forward guidance and large scale asset purchases again. He stressed the Fed will use those tools aggressively if there is a downturn and it's important that fiscal policy be in position to support the economy. He said there are a bunch of factors behind the weakness in business spending, including trade policy as well as just the slowing in global growth, and lower oil prices. Uncertainty around trade has declined, and that may mean an upside to business investment.

Powell was asked about the Fed's maximum employment mandate and said the Fed’s tools are not focused on distributional effects, but rather aggregate effects. He said it is Congress who has the tools for the former but said the Fed's framework review is aimed toward ensuring the Fed has the tools to meet its dual mandate

Powell said changes in the energy markets with the U.S. shale revolution leave us in a better place. He added energy price changes don't have the sustained impacts on inflation anymore as the supply responses from the U.S. are rapid. Additionally, there is less of a damping effect on the economy as more people are put to work. He responded to a question on labor force participation, by saying it has been greatly surprised to the upside and he believes there is more upside with more workers entering the workforce in this tight labor market.

Powell noted that most of the inflow from the labor force has come from people outside of the labor market, and indicated it's a good dynamic. He added the Fed wants to do whatever it can to continue to foster this trend. He also said a surprise to the Fed has been the lack of upside pressure on real unit labor costs in what should be a tight labor market.

Philly Fed Patrick Harker said the economy is in good shape and that policy should be on hold. He expects trend-like growth around 2%, and said that view is widely shared, and added inflation will eventually hit the Fed's target. He cautioned it's too early to say what impact the spread of the coronavirus will have on the global economy, but the negative effects on the Chinese economy and international travel are something to watch.

The iShares 20+ Year Treasury Bond ETF (TLT) was down for the 2nd-straight session after trading to a low of $142.99. Prior and upper support is at $143-$142.50 was breached but held. A close below the latter would signal a further backtest towards $142-$141.50.

Current and lowered resistance is at $143.50-$144.

Volatility Index

The S&P 500 Volatility Index ($VIX) stayed deflated throughout the session with the late day low reaching 13.73. Fresh and upper support at 14-13.50 was recovered on the close back below the 50-day moving average.

Lower resistance is at 14.50-15 and the 200-day moving average.

RSI is in a downtrend with support at 45-40 and the latter representing the January low. Resistance is at 50.

Market Analysis

The Spider Small-Cap 600 ETF (SLY) extended its winning streak to 3-straight sessions following the late day push to $72.50. Current and lower resistance at $72.50-$73 was tapped but held. Continued closes above the latter would signal additional strength towards $73.50-$74.

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Current support is at $72-$71.50 and the 50-day moving average. A close below the $71 level would be a bearish development with backtest potential towards $70-$69.50 with the late January low at $69.45.

RSI is in an uptrend with key resistance at 55 and the monthly high. A close above this level would signal additional strength towards 60-65. Support is at 50-45.


The Energy Select Sector Spider (XLE) was up for the 2nd-straight session after trading to an intraday high of $55.35. Near-term resistance at $55.50-$56 was challenged but held. A close above the latter would be a bullish signal with additional hurdles at $56.50-$57.

Key support is at $54.50. A close below this level would be a renewed bearish signal with risk towards $54-$53.50.

RSI is in an uptrend with near-term resistance at 45-50. A close above the latter would signal additional strength towards 55-60. Support is at 40-35.

All the best,

Roger Scott