The U.S. stock market settled mostly lower Monday on the final trading day for August despite better-than-expected economic news and the official reshuffling of the Dow. Despite the pullback, the major indexes extended their monthly winning streak to five straight after recording the best August since 1984.
The Nasdaq rose 0.7% after recording a fresh all-time high of 11,829. Uncharted territory and lower resistance at 11,750-11,850 was cleared and held. A close above the latter would indicate additional momentum toward 11,900-12,000.
The S&P 500 had its seven-session win streak snapped after slipping 0.2% with the morning low reaching 3,493. Near-term and upper support at 3,500-3,475 was breached but held. A drop below the latter would signal a further backtest toward 3,450-3,425.
The Dow had its three-session winning streak snapped after falling 0.8%, with the intraday low tapping 28,363. New and upper support at 28,500-28,250 was tripped and failed to hold. A close below the latter would signal further downside risk toward 28,000-27,750.
The Russell 2000 sank 1% following the first-half pullback to 1,562. Current and upper support at 1,565-1,550 was breached and failed to hold. A move below the latter would suggest additional weakness toward 1,540-1,525.
Technology and Utilities led sector strength after rising 0.3%. Energy and Materials were the leading laggards after falling 2.2% and 1.5%, respectively.
Global Economy
European stock markets were weak across the board following disappointing German and Italian inflation data.
The Belgium20 lost 1.4% and France’s CAC 40 declined 1.1%. Germany’s DAX 30 dropped 0.7% and the Stoxx 600 was off 0.6%. UK’s FTSE 100 was closed for a holiday.
Asian markets closed mostly lower following slightly disappointing economic news out of China.
South Korea’s Kospi sank 1.2% and Hong Kong’s Hang Seng fell 1%. Australia’s S&P/ASX 200 and China’s Shanghai slipped 0.2%. Japan’s Nikkei jumped 1.1%.
China’s PMI for August checked in at 51, versus forecasts of 51.2, and 51.1 in July.
US Economy
Dallas Fed Manufacturing Business Index jumped 11 points to 8 in August, versus forecasts for a print of -1. That followed a 3.1-point improvement to -3 in July.
The employment component climbed from 3.1 to 10.6 after five months in contraction. The workweek nearly doubled from July’s 5.8 while wages increased from 9 last month to 15.2. New orders rose to 9.8 from 6.9. Prices paid surged to 19.4 from 9.7 and prices received edged up to 0.9 from -1.5.
The six-month general business activity index improved to 20.4 from 10.6. The future employment index surged to 27.6 from 11.1, with new orders at 42.5 from 38.6. Prices paid dipped to 22.1 from 22.3, with prices received slipping to 7.8 from 10.9. The capex index increased to 13.0 from 11.6.
Market Sentiment
Fed Vice Chairman Richard Clarida defended a major shift in how the central bank sets interest rates by pointing to the failure of long-standing models to accurately predict the path of inflation. He laid out the reasons why the bank broke with decades of tradition to adopt an inflation-averaging strategy that could result in interest rates staying lower for longer periods of time.
Clarida noted the link between inflation and the unemployment rate — known to economists as the Phillips Curve — began to lose its predictive power more than a decade ago. He said even as unemployment declined to modern lows, inflation barely budged and remained low.
As a result, the Fed repeatedly had to alter its economic forecasts and reduce its estimate of the so-called neutral interest rate well below its historical level. Clarida said the neutral rate, in theory, reflects the interest rate at which inflation is neither rising nor falling.
Clarida said the Fed’s new inflation-averaging strategy will give the central bank more flexibility to respond to inflation and not tie its hands, especially during times of economic crisis. Had the Fed strictly followed old models, he noted, the central bank would have raised interest rates when the economy was still weak, thereby harming growth.
Atlanta Fed President Raphael Bostic said he could accept an inflation overshoot as long as it’s steady, adding that it’s too soon for the Fed to make any changes to forward guidance. He said fiscal support has been very important so far, and he worried that ending it could bring risks to the economy’s recovery.
The iShares 20+ Year Treasury Bond ETF (TLT) snapped a five-session losing streak after trading to a morning high of $163.25. Prior and lower resistance at $163-$163.50 was cleared but held. A close above the latter would signal additional strength toward $164.50-$165.
New support is at $161.50-$161. A close below the $160 level would be a renewed bearish signal with additional weakness towards $159-$158.50.
Volatility Index
The S&P 500 Volatility Index ($VIX) tested an opening low of 21.77 before closing higher for the third time in four sessions. Current and upper support at 22-21.50 was breached but held.
The bounce to 26.50 afterward breached lower resistance at 26-26.50, and the 50-day moving average failed to hold. A close above the latter would signal additional upside risk toward 27.50-28 and the 200-day moving average.
Stock Market Analysis
The Spider S&P 500 ETF (SPY) had its seven-session winning streak snapped despite testing an intraday and all-time high of $351.30. Uncharted territory and lower resistance at $351-$351.50 was cleared but held. A close above the latter would indicate additional momentum toward the $352.50-$353 area.
Current and upper support at $349-$348.50 was challenged but held on the fade to $349.06. A close below the $347.50 level would suggest a possible near-term top with additional backtest potential toward $345.50-$345.
RSI is back in a slight downtrend with upper support at 75-70 holding. Resistance is at 80-85 and overbought levels from January 2018.
Sector
The Financial Select Sector Spiders (XLF) fell for the first time in three sessions after closing on the session low of $25.06. Current and upper support at $25-$24.75 was challenged but held. A close below the latter could signal a further pullback toward $24.25-$24 and the 50-day moving average.
Lowered resistance is at $25.25-$25.50 and the 200-day moving average.
RSI is back in a downtrend with upper support at 55-50 holding. A close below the latter would signal weakness toward 45 and a level that has been holding since mid-June. Resistance is at 60-65.
