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Wednesday, May 20, 2020

Market Action

U.S. markets rebounded on Wednesday with the major indexes closing in positive territory for the 4th time in 5 sessions after setting fresh monthly highs. The opening gains held steady into the FOMC Minutes which had little impact with no change in policy.

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News that the U.S. Senate passed a bill that could exclude Chinese firms from U.S. exchanges also had little effect with Chinese companies now having to show that they are not controlled by a foreign government. Meanwhile, volatility traded in another tight range while closing below a key level of support to possibly confirm additional near-term market strength.

The Russell 2000 surged 3% with the session high reaching 1,353. Current and lower resistance at 1,350-1,365 was cleared but held with a close above the the latter signaling additional strength towards 1,370-1,385.

The Nasdaq rallied 2.1% after testing a midday high of 9,392. Near-term and lower resistance 9,350-9,400 was breached and held with a move above the latter getting 9,450-9,500 in focus.

The S&P 500 rose 1.7% with the session high reaching 2,980. Prior and lower resistance at 2,975-3,000 was cleared but held with a close above the latter and the 200-day moving average signaling additional upside towards 3,025-3,050.

The Dow jumped 1.5% following the first half run to 24,649. Current and lower resistance at 24,500-24,750 was recovered with a move above the latter leading to a retest towards 24,250-24,500.

Energy led sector strength after rising 4% while Communication Services and Financials advanced 2.8% and 2.2%, respectively. There was no sector weakness.

Global Economy

European markets settled higher across the board after posting their best session in 3 weeks.

Germany's DAX 30 rose 1.3% while the Belgium20 and UK's FTSE 100 were up 1.1%. The Stoxx 600 was higher by 1% and France’s CAC 40 advanced 0.9%.

Asian markets closed mostly higher after Singapore looks to restart its economy with a phased easing of restrictions.

Japan’s Nikkei rose 0.8% and South Korea’s Kospi gained 0.5%. Australia’s S&P/ASX 200 added 0.2% and Hong Kong's Hang Seng edged up 0.1%. China's Shanghai fell 0.5%.

U.S. Economy

MBA Mortgage Applications dropped -2.6% after small gains in the prior rwo weeks. A -6.3% drop in the refinancing index weighed and overshadowed a 6.4% increase in the purchase index. On a 12-month basis, applications are up 64.0% year-over-year, slowing from the 70.3% clip last week. Refis are still up solidly at a 160.3% year-over-year pace though it's down from 200.9% previously. The contraction rate for purchases has slowed to -1.5% year-over-year compared to the -9.5% rate previously. The 30-year fixed mortgage rate dipped to 3.41%, just shy of the 3.40% all-time low from two weeks ago. The 5-year ARM fell to 3.19% from 3.26%.

Market Sentiment

The FOMC Minutes did not suggest any changes to the policy stance in the foreseeable futures after highlighting the economic and human hardships, and worries about potential risks to financial stability. There was the usual run-down on what's been done in terms of the rate cut and QE. The minutes reiterated that while the current stance was seen as appropriate, the Committee could clarify its forward guidance.

Some Fed members thought they could make guidance more explicit by either adopting an outcome-based approach that specified macro outcomes including a certain level of unemployment or and inflation rate. A date-based approach could also be used considered and would specify that the target range could be raised after a certain time had elapsed.

Several members also thought the Fed might also have to further clarify its asset purchase plans, as without which there could be increased uncertainty over time. An ongoing program of Treasury purchases could also be used to keep long term rates low that boarders on yield curve control.

A few Fed heads suggested the balance sheet could be used to to cap shorter and medium term yields. And of interest, the Open Market Desk surveys showed respondents attached almost no probability to the FOMC implementing negative policy rates.

Dallas Fed Robert Kaplan doubts the recovery will be strong consumers until feel more confident, adding the degree to which consumers will become more fully engage is behavioral at this point and will require appropriate testing and contact tracing. He said it can't be legislated or stimulated with with more money.

Kaplan said the Fed is probably going to have to do more, but it will also take more fiscal action to grind down the unemployment rate, which will likely hit 20% near-term. He also said at least some of that aid likely will need to go to state and local governments, which have been hampered by lost revenue during the coronavirus pandemic.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session after testing an intraday high of $164.70. Upper resistance at $164-$164.50 and the 50-day moving average were cleared but levels that held on the close above the former. A close above the $165 level would be an ongoing bullish signal for a trip towards $166.50-$167.

Support remains at $163-$162.50 with a close below the $162 level signaling additional weakness towards $160.50-$160.

Volatility Index

The S&P 500 Volatility Index ($VIX) fell for the 4th time in 5 sessions with the late session low tapping 27.83. Current and upper support at 28-27.50 was recovered. A close below the latter would signal further weakness towards 26-25.50 with the former representing the monthly low.

Lowered resistance is at 29.50-30 a close back above the 30.50 level would be a slightly bearish development for the market.

Market Analysis

The Wilshire 5000 Composite Index ($WLSH) showed strength for the 4th time in 5 sessions after trading to a fresh monthly high of 30,213. Near-term and lower resistance 30,000-30,250 was cleared and held. A close above the latter would be a bullish signal for a possible push towards 30,500-30,750 and the 200-day moving average.

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Current support is at 29,750-29,500. A move back below the latter would be a slightly bearish signal with backtest potential 29,250-29,000.

RSI is in an uptrend with key resistance and the late April peak at 60 getting cleared and holding. Continued closes above this level keeps additional strength towards 65-70 and prior peaks from February in play. Support is at 55-50.

Sector

The Energy Select Sector Spider (XLE) has been in a 3-session trading range with Wednesday’s fresh monthly high hitting $39.42. Near-term and lower resistance at $39-$39.50 was cleared and held. A close above the $39.75 level would be a bullish signal with gap-up potential towards $41.50-$42 and prior levels from early March.

Support is at $39-$38.50 followed by $37.50-$37.

RSI is back in an uptrend with lower resistance at 60-65 holding into the closing bell and the latter representing the late April peak. Support is at 55-50 with a close below the latter, and a level that has been holding since mid-April, signaling weakness towards 45-40.

All the best,

Roger Scott
WealthPress