Market Update: Wednesday, July 15, 2020

Wednesday, July 15, 2020

Market Action

U.S. markets surged on Wednesday’s open following news of an experimental coronavirus vaccine that showed it was safe and provoked immune responses in an ongoing early-stage study. Phase 3 results will begin later this month after the vaccine produced neutralizing antibodies in all 45 patients included in an early-stage human safety trial.

The majority of the gains fizzled with Tech trading lower by midday despite better-than-expected economic news and blowout 2Q earnings from the Financial sector for the 2nd-straight session. However, the small-caps showed strong momentum throughout the session with the other major indexes blowing by Monday’s previous peaks, as well.

The Russell 2000 zoomed 3.5% after tagging an opening high of 1,482 while closing back above its 200-day moving average. Early June and lower resistance at 1,470-1,485 was cleared and held with a close above the latter signaling a retest towards 1,500-1,515.

The Dow extended its winning streak to 4-straight sessions after adding 0.9% and testing a morning high of 27,071. Prior and lower resistance from the start of June at 27,000-27,250 was breached but held with a close above the latter getting 27,500-27,750 back in play.

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The S&P 500 also advanced 0.9% with the first half peak reaching 3,238. Longer-term and lower resistance at 3,225-3,250 was recovered with a close above the latter signaling additional strength towards 3,250-3,275.

The Nasdaq was higher by 0.6% following the intraday run to 10,604. Lower resistance at 10,600-10,700 was cleared but held with a move above the latter signaling a retest towards 10,800-10,900 and fresh all-time highs.

Industrials were the strongest sector after rallying 2.6% while Energy and Financials soared 2.2% and 2%, respectively. There were no sector laggards for the 2nd-straight session.

Global Economy

European markets closed higher across the board following positive news on a possible coronavirus vaccine.

France’s CAC 40 popped 2% while the Stoxx 600, Germany’s DAX 30 and UK’s FTSE 100 were up 1.8%. The Belgium20 was higher by 1.3%.

Asian markets settled mostly higher with China’s Shanghai slumping after President Trump on Tuesday ordered an end to Hong Kong’s special status under U.S. law to punish China for what he called oppressive actions. He also signed a bill approved by the U.S. Congress to penalize banks doing business with Chinese officials who implement the new security law.

Australia’s S&P/ASX 200 jumped 1.9% and Japan’s Nikkei soared 1.6%. South Korea’s Kospi gained 0.8% and Hong Kong’s Hang Seng was up 3 points, or 0.01%. China’s Shanghai fell 1.6%.

The Bank of Japan lowered its economic growth forecast between minus 4.5%-5.7% versus a previous report that had projected a contraction of between 3-5%. It predicted core inflation excluding fresh food at minus 0.5%-0.7%. The BOJ’s policy board maintained its target for short-term interest rates at -0.1% and its target for the 10-year Japanese government-bond yield around zero.

U.S. Economy

MBA Mortgage Applications rose 5.1% following the prior week’s 2.2% gain. All of the strength was in refinancings where the index jumped 11.9% as mortgage rates declined further into record territory. The purchase index dropped -6.1%. The pace of applications on a 12-month basis slowed, however, to a 61.1% year-over-year rate versus 71.1% previously. Refis slipped to a 106.5% year-over-year pace from 110.9% while purchases tumbled to 15.5% versus 33.2% previously. The 30-year mortgage rate declined to 3.19% from the prior record low of 3.26% and was at 4.12% a year ago. The 5-year ARM rose to 3% from 2.98%.

New York Empire State Manufacturing Survey increased 17.4 points to 17.2 in June, topping forecasts for a print of 8.9, after surging 48.3 points to -0.2 previously. The index is recovering from the record -56.7 plunge to an all-time low of -78.2 in April, while ending four months in contractionary territory. The employment component moved up to 0.4 from -3.5 and is off the historic low of -55.3 in April. The workweek improved to -2.6 from -12. New orders rallied to 13.9 from -0.6 previously and is up from April’s all-time low of -66.3. Prices paid slipped to 14.9 from 16.9, with prices received at -4.5 from -0.6. The 6-month gauges were mixed with the outlook index falling to 38.4 from 56.5. The future employment gauge rose to 21.1 from 19 while future new orders slid to 41.9 from 52.9. Prices paid edged up to 28.6 from 25.6 and prices received increased to 10.4 from 7.5. Capex nearly tripled to 9.1 from 3.1.

June import and export prices each rose 1.4%. Those increases follow May revised gains of 0.8% for imports and 0.4% for exports. On a 12-month basis, import prices were contracting at a -3.8 % year-over-year clip versus -6.2% previously, while export prices were falling at a -4.4% year-over-year rate versus -6.2%. For import prices, petroleum prices climbed another 23% after bouncing 16.1% in May. Prices are still off -38.6% year-over-year, however. Excluding petroleum, prices rose 0.3% from 0.2%. For export prices, agricultural prices increased 1.4% versus -0.5%. Excluding ag, prices were up 1.4% from 0.5%.

Industrial Production rose 5.4% in June, lifting capacity utilization to 68.6%, with both above forecast. There was no revision to the 1.4% bounce in May production while capacity utilization for May was nudged up to 65.1%. Manufacturing production was up 7.2% after bouncing 3.8% in May. Motor vehicle and parts manufacturing rose another 105% after the 120% surge previously. Excluding vehicles and parts, manufacturing was up 3.9% versus the prior 1.9% gain. Utility production rebounded 4.2% from -3.5% while mining production dropped -2.9% from -6.1%.

The Fed’s Beige Book noted economic activity increased in almost all of the 12 Districts, but remained “well below” pre-pandemic levels. Consumer spending picked up as businesses reopened, and retail sales rose in all Districts, led by a bounce in vehicle sales, along with sustained growth in food, beverage, and home improvement. Manufacturing moved up, but from very low levels. Leisure and hospitality spending improved but was far below year-ago levels. Demand for professional and business services increased, but was still weak. Transportation activity rose overall. Construction remained subdued, but picked up in some Districts.

The Beige Book also said Home sales picked up moderately but commercial real estate activity remained low. Employment increased on net in nearly all Districts, but payrolls in all Districts were well below pre-pandemic levels. And job turnover remained high. “Contacts in nearly every District noted difficulty in bringing back workers because of health and safety concerns, childcare needs, and generous unemployment insurance benefits. Many contacts who have been retaining workers with help from the PPP said that going forward, the strength of demand would determine whether they can avoid layoffs.”

Market Sentiment

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Philly Fed Patrick Harker is a revising his outlook as coronavirus infections spike. He is a little more worried about the recovery, which is going to be a slow one and is now skeptical that the July jobs report will be as good as those from May and June. He argued for more fiscal support given concerns over the cliff effect of expiring unemployment insurance, along with the cliff effect from state and local governments.

Harker said he’s is concerned over small businesses and is concerned about the psychological impact on consumer confidence. He is supportive of letting inflation rise above the 2% target before lifting rates.

The iShares 20+ Year Treasury Bond ETF (TLT) fell for the first time in 3 sessions following the intraday pullback to $165.83. Current and upper support at $166-$165.50 was breached but held. A close below the latter would suggest a retest towards $163.50-$163 and the 50-day moving average.

Lowered resistance is at $167-$167.50. A close above the $168 level would be a bullish signal for a run towards $169.50-$170.

Volatility Index

The S&P 500 Volatility Index ($VIX) fell for the 2nd-straight session with the late day low tapping 27.17. Prior and upper support at 27.50-27 was tripped but held. A close below the latter would signal additional weakness towards 26.50-26 and the 200-day moving average.

Lowered resistance is at 30-30.50 and the 50-day moving average. A close above the latter would be a renewed cautious signal for the market.

Market Analysis

The Spiders Dow Jones Industrial Average ETF (DIA) extended its winning streak to 4-straight sessions after testing an opening peak of $270.54. Prior and lower resistance from early June at $270.50-$271 was cleared but held. A close above the latter would signal additional momentum towards $272-$272.50.

Current support is at $268-$267.50. A close below the $267 level would signal an ongoing backtest towards $265.50-$275.

RSI remains in an uptrend with lower resistance at 60-65 getting cleared and holding. A close above the latter would signal additional strength towards 70-75 with the latter representing and the June peak. Support is at 55-50.

Sector

The Financial Select Sector Spiders (XLF) was also,up for the 4th-straight session with the intraday top at $24.26. Prior and lower resistance from mid-June at $24.25-$24.50 was cleared but held. A move above the $25 level would be a more bullish signal for a possible retest towards $25.75-$26 and the 200-day moving average.

New support is at $24-$23.75. A close below the latter would likely signal a further pullback towards $23-$22.75 and the 50-day moving average.

RSI is in an uptrend with key resistance at 55 getting reclaimed. Continued closes above this level would signal additional strength towards 60-65 with the latter representing the May high. Support is at 50-45 with the latter holding since late June.

All the best,

Roger ScottWealthPress