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Thursday, February 7, 2019 

Market Action

U.S. markets showed weakness for the 4th-straight session while holding early February support levels that served as previous resistance. The losses further worried Wall Street but the technical damage remains healthy as long as the lower end of the current trading ranges hold.

The losses extended the worst week of the year for the major indexes with Friday's session being a big clue on how next week might unfold. Volatility will also be key as the VIX is once again dancing with disaster after spiking to a fresh monthly high.

The Nasdaq fell 1.1% following the pullback to 7,397. Prior and upper support at 7,425-7,375 was tripped and failed to hold with the close below the 7,450 level the 200-day moving average being a slightly bearish signal.

The Russell 2000 fell 0.9% while tapping a late session low of 1,521. Early February and upper support at 1,525-1,510 was breached and failed to hold with a move below the latter getting 1,500-1,475 and the 50-day moving average in play.

The S&P 500 was lower by 0.8% after trading to a low of 2,739 ahead of the closing bell. Near-term and major support at 2,750 and the 200-day moving average failed to hold by a point with risk to 2,725-2,700 on continued weakness.

The Dow was also down 0.8% after bottoming at 25,352. Mid-February and lower support at 25,500-25,250 held with a close below 25,000 and the 200-day moving average confirming a near-term top.

Utilities were the only sector that closed higher after climbing 0.3%.

Consumer Discretionary led sector weakness after sinking 1.2%. Financials and Technology fell 1% while Communication Services sank 0.9%.

Global Economy 

European markets closed lower across the board after the ECB trimmed its growth forecast and announced fresh long-term loans as a bid by the central bank to prop up Europe's stalling economy.

The Belgium20 dropped 0.9% and Germany's DAX 30 fell 0.6%. UK's FTSE 100 was off 0.5% while France's CAC 40 and the Stoxx 600 Europe declined 0.4%.

The ECB slashed its growth forecast for 2019 to 1.1% from an earlier forecast of 1.7% made in December.

ECB President Mario Draghi that there had been a sizable moderation in economic expansion that will extend into the current year. He went on to say the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment.

Asian markets settled mixed as trade tensions between the U.S. and China escalated, with a major cHinese Tech company suing the U.S., claiming that the law which bans it from selling equipment to government agencies is unconstitutional.

Australia's S&P/ASX 200 gained 0.3% and China's Shanghai edged up 0.1%. Hong Kong's Hang Seng sank 0.9% and Japan's Nikkei was down 0.7%. South Korea's Kospi gave back 0.5%.

U.S. Economy

Initial Jobless Claims fell 3,000 to 223,000 versus expectations for a print of 220,000. The 4-week moving average slipped to 226,250 versus 229,250. Continuing claims dropped 50,000 to 1,755,000 after rebounding 79,000 to 1,805,000 previously.

February Challenger Job-Cut Report announced layoffs of 76,835.

Q4 Productivity growth rose at a 1.9% pace, topping forecasts of 1x, and the 1.8% clip from Q3. However, the 3% rise from Q2 was nudged down to 2.8%. Unit labor costs rose 2% versus 1.6% previously. Q4 output grew at a 2% rate, versus Q3's 1.6%. Employee hours were up 1.2% last quarter versus 2.1% in Q3. Compensation per hour climbed 3.9% versus Q3's 3.5%. Real compensation per hour posted a 2.4% rate in Q4, from 1.4% in Q3. The Q4 price deflator was up to 1.7% from 1.4% in Q3. On a 12-month basis, productivity grew at a 1.8% year-over-year rate from the prior 1.2% clip, while unit labor costs were up 1% year-over-year from 1.1% in Q3.

Consumer Credit expanded by $17 billion in January, above forecasts of $16.8 billion. Non-revolving credit increased $14.5 billion after rising $14.4 billion to end 2018. Revolving credit was up $2.6 billion versus $900 million previously. Consumer Credit climbed $61 billion in Q4, and was up $65.9 billion in Q3.

Market Sentiment

Fed Governor Lawl Brainard said an increase in risks warranted the downward revision in the rate path and the goal now is to preserve progress made on maximum employment and target inflation. She said the best way to safeguard that is by navigating cautiously on rates, given downside risks for output and employment arguing for a softer rate path, even if the economic outlook remains the same. 

Brainard sees balance sheet normalization as well advanced and should wind down later this year. She argued against cutting rates and shrinking the balance sheet at the same time, while being attentive to downside risks on inflation expectations, given below-trend inflation. She views trade disputes, Brexit and the U.S. government debt ceiling among the main risks to the forecast.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 4th-straight session after reaching an intraday peak of $121.26. Prior and lower resistance at $121-$121.50 was cleared and held. Continued closes above $122 would be a more bullish development and signal additional strength.

Fresh support is at $120.75-$120.50 and the 50-day moving average with a close back below $120 signaling a near-term top.

Volatility Index

The S&P 500 Volatility Index ($VIX) was up for the 4th-straight session after tapping a high of 17.81. Major resistance at 17.50 was breached but held into the closing bell with risk to 18.50-19 and the 50-day moving average on continued strength

The early February peak reached 17.89 and it's too early to tell if a possible near-term double-top has been formed. However, if the 17.50 level can hold into the weekend, it would be a slightly bullish signal for the market next week.

The close above 16.50 and the 200-day moving average pushed higher support levels to 15.50-15. Continued closes back below the latter would help confirm another flush-out and signal a possible near-term top for the VIX.

Market Analysis

The Spider S&P 500 ETF (SPY) fell for the 4th-straight session following the intraday backtest to $274.07. Current support is at $274-$273.50 held. A move below $273 and the 200-day moving average would be a slightly bearish development with risk towards $272.50-$270.

Near-term resistance is at $276.50-$277 with more important hurdles at $279.50-$280. A close above the latter would signal a return of momentum for a possible run towards $282.50-$285.

RSI is pushing 50 and mid-January support. A move below this level would be a bearish signal with additional weakness towards 45-40. Resistance is at 55-60 with the latter representing early February support.

Sector

iShares MSCI Emerging Markets (EEM) fell for the 2nd-straight session after trading down to $41.87. Near-term and upper support at $41.75-$41.50 and the 200-day moving average held. A close below the latter and the 50-day moving average would be a slightly bearish signal. The 2 aforementioned MA's remain on track to form a golden cross and is typically a bullish signal for higher highs.

Resistance is at $42.50-$42.75. The index has gotten a lot of help from a rising Chinese stock market with continued closes above the latter signaling a return of momentum.

RSI is in a slight downtrend with support at 45-40. A move below the latter and the late December low would be a bearish signal for additional weakness. Resistance is at 50.


All the best,

Roger Scott
WealthPress