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Wednesday, February 6, 2019 

Market Action

U.S. markets were weak throughout much of Wednesday's session after showing some strength, briefly, at the opening bell. The slow drip lower lasted into the afternoon with the major slightly rebounding but extending their longer-term trading ranges for the 13th-straight session.

A closer look at the charts show the 20-day moving averages are in play and have been holding, for the most part, over the past 3-straight sessions. The small-caps and the blue-chips, however, have been lagging over the same time frame and were unable to hold this key level of support.

The Russell 2000 tanked 2% following the pullback to 1,536 and session low. Mid-February and upper support at 1,540-1,525 was breached and failed to hold with risk to 1,500-1,475 and the 50-day moving average on a move below the latter.

The S&P 500 fell 0.7% after tapping an intraday low of 2,768. Near-term and upper support at 2,775-2,750 failed to hold with a close below the latter and the 200-day moving average being a bearish development.

The Nasdaq tanked 0.9% after trading to an intraday low of 7,499. Near-term support at 7,525-7,475 was split on the close just above the 7,r00 level with a move below the latter and the 200-day moving average being a bearish signal.

The Dow dropped 0.5% following the midday backtest to 25,633. Current and upper support at 25,750-25,500 was tripped and failed to hold with risk towards 25,250-25,000 and the 200-day moving average on continued weakness.

Materials were the only sector that showed strength after rising 0.2% while Utilities finished flat.

Healthcare and Energy led sector weakness after tumbling 1.5% and 1.3%, respectively%. Industrials and Financials were lower by 0.9% and 0.6%.

Global Economy 

European markets settled mostly lower and ahead of the EU and U.S. trade talks that got underway after the close. The EU is expecting President Trump to honor the agreement not to impose auto tariffs on European cars coming into the United States.

The Belgium20 declined 1%. Germany's DAX 30 gave back 0.3% and France's CAC 40 was off 0.2%. The Stoxx 600 Europe slipped less than a point, or 0.04% while UK's FTSE 100 climbed 0.2%.

Asian markets closed mixed on promises Chinese legislature will enact measures to open the economy and cool trade tensions.

China's Shanghai jumped 1.6% and Australia's S&P/ASX 200 was higher by 0.6%. Hong Kong's Hang Seng added 0.3%. Japan's Nikkei was down 0.6% and South Korea's Kospi dipped 0.2%.

China will bar government authorities from demanding overseas companies hand over technology secrets in exchange for market share, addressing a key complaint at the center of the current U.S.-China trade dispute.

U.S. Economy

MBA Mortgage Applications were down -2.5% in the week ending March 1st, along with a 2.6% drop in the purchase index and a 2% dip in the refinancing index. The average 30-year fixed mortgage rate rose 2 basis points to 4.67%.

February ADP Employment Report checked in at 183,000, topping forecasts of 180,000. The services sector added 139,000 workers, with the goods producing up 44,000. For the former, education was up 37,000 with trade/transport adding 14,000 while leisure added 4,000. On the goods side, manufacturing was 17,000 higher with a 25,000 increase in construction.

International Trade in Goods Balance for December was at -$59.8 billion, missing estimates of -$57.6 billion. The trade balance with China narrowed a tad to -$36.8 billion in December from -$37.9 billion in November.

The Fed's Beige Book revealed economic activity continued to expand in late January and February but 10 Districts noted slight-to-moderate growth, with Philly and St Louis reporting flat conditions. This is the most tepid characterization in sometime, as the more normal description has been "moderate" to "modest." 

Nearly half of the Districts said the shutdown weighed on some sectors, including. Consumer spending was mixed, but in part due to harsh winter weather and higher costs of credit. Manufacturing generally strengthened but numerous contacts worries about weaker global growth, higher costs due to tariffs, and continued trade policy uncertainty. The service sector increased at a modest-to-moderate pace. Also, residential construction activity was steady or slightly higher in most of the U.S., but home sales were generally lower. 

The report went on to day labor markets remained tight for all skill levels, with wages continued to increasing for both low and high-skilled positions, and a majority of Districts reporting increases were moderate. As for prices, they continued to increase at a modest-to-moderate pace, with several Districts noting faster growth for input prices than selling prices. The ability to pass on higher input costs to consumers varied by region and industry.

Market Sentiment

New York Fed Williams said the current 2.4% funds rate is right at neutral and reiterated the baseline outlook is quite favorable, with a strong labor market, moderate growth, and no sign of any significant inflationary pressures. He said potential GDP growth should slow to about 2% as tailwinds have calmed and have in some cases reversed.

Williams noted the well-worn risks of the downturn in global growth, heightened geopolitical uncertainty and tighter financial conditions as weighing on growth. He also confirmed that given the various uncertainties, the FOMC can afford to be flexible and wait for the data to guide their approach.

The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight sessions after making a push to $120.52. Near-term and upper resistance at $120-$120.50 and the 50-day moving average held on the close above the former. Continued closes above $121 would be a more bullish development and signal additional strength.

Support is at $119.50-$119 with a close below the latter opening up risk towards $118-$117.50 and the 200-day moving average.

Volatility Index

The S&P 500 Volatility Index ($VIX) spiked to an intraday peak of 16.11 with prior and lower resistance at 16-16.50 and the 200-day moving average holding. The close above 15 keeps these levels in play with a move above 17.50 likely leading to a quick pop towards 18.50-19 and a downward sloping 50-day moving average.

Rising support is at 14.75-14.25 with a close back below the 13.50 level being a more bullish signal.

Market Analysis

The Spiders Dow Jones Industrial Average ETF (DIA) fell for the 3rd-straight session with the session low tapping $256.45. Mid-February support at $256.50-$256. This area also represents the prior breakout to higher highs with a move below $255 signaling additional weakness.

Lowered resistance is at $258-$258.50. Continued closes above $260 would be a more bullish signal and would get $262.50-$265 back in focus.

RSI is in a downtrend with support at 55-50. A close below the latter and a level that has been holding since mid-January would signal additional weakness. Resistance is at 60.

Sector

The Technology Select Sector Spiders (XLK) was down for the 3rd-straight session following the backtest to $70.40. Upper support at $70-$69.50 held for the 2nd-straight session. A close below the latter and the 200-day moving average would be a slightly bearish development and signal a possible near-term top.

Lowered resistance is at $71-$71.50. Continued closes above $72 prior support from early October would be a more bullish signal for higher highs.

RSI is trying to hold early February support at 60 with a close below this level signaling weakness towards 55-50. Near-term resistance is at 65-70.

All the best,

Roger Scott
WealthPress