Stock Market Update: Wednesday, September 2, 2020

Stock Market Action

U.S. markets opened with strong gains on Wednesday despite a lousy private payroll report that came in well below expectations. Another round of all-time highs were made before weakness pushed Tech and the small-caps into the red with volatility once again rising. However, strength returned in the second half of action and got stronger ahead of the closing bell to keep near-term momentum intact.

The Dow jumped 1.6% with the late day peak reaching 29,162. Prior and lower resistance from mid-January at 29,000-29,250 was cleared and held. A close above the latter would indicate further upside towards 29,500-29,750 with all-time from February at 29,568.

The S&P 500 extended its winning streak to 2-straight sessions after rising 1.5% while tapping a lifetime high of 3,588. Blue-sky and lower resistance at 3,575-3,600 was cleared and held. A close above the latter would indicate additional momentum towards 3,625-3,650.

The Nasdaq extended its winning streak to 4-straight sessions after soaring 1% with the record high reaching 12,074 ahead of the closing bell. Uncharted territory and lower resistance at 12,000-12,100 was cleared and held. A close above the latter would signal additional strength towards 12,200-12,300.

The Russell 2000 advanced 0.9% while testing an afternoon high of 1,595. Current and lower resistance at 1,585-1,600 was cleared and held. A pop above the latter and the mid-August high of 1,603 would suggest further strength towards 1,610-1,625.

Utilities led sector strength after zooming 3.1% while Materials and Real Estate rallied 2.3% and 2.2%, respectively. Energy was the only sector laggard after giving back 0.5%.

Global Economy

European markets posted strong gains despite slightly disappointing retail news out of Germany.

Germany’s DAX 30 surged 2.1% and France’s CAC 40 was higher by 1.9%. The Stoxx 600 jumped 1.7% and UK’s FTSE 100 soared 1.4%. The Belgium20 rose 1.3%.

German retail sales unexpectedly fell 0.8% in July, from a revised drop of 1.9% in June, with forecasts looking for a 0.5% increase.

Asian markets were mixed following news the U.S. Trade Representative’s office said it extended China tariff exclusions for several goods, including smart watches and certain medical masks, through the end of 2020, rather than renewing the previous one-year extensions.

Australia’s S&P/ASX 200 rose 1.8% and South Korea’s Kospi gained 0.6%. Japan’s Nikkei added 0.5%. Hong Kong’s Hang Seng was lower by 0.3% and China’s Shanghai slipped 0.2%.

Australia’s economy plunged into its first recession in nearly 30 years, as GDP shrank 7% in the April-to-June quarter compared to the previous three months. This represented the biggest fall since records began back in 1959 and comes after a decline of 0.3% in the first quarter.

U.S. Economy

MBA Mortgage Applications fell -2%, following a -6.5% drop previously. This represented 3rd-straight drop, and is the 5th weekly decline out of the last 6 weeks. Most of the weakness was in the refi index which slid -3.1% after the prior -10.2% plunge. The purchase index dipped -0.2%. On a 12-month basis, the application index was at a 35.4% year-over-year clip, slightly faster than last week’s 34% rate. The refi index edged up to 40.1% year-over-year from 34.5%, while the purchase index slowed to 28.3% versus 33.1%. The 30-year fixed rate dipped to 3.08% versus 3.11% previously. The 5-year ARM slipped to 3.08% from 3.14%. Record low mortgage rates, along with changing consumer preferences toward home ownership, are helping fuel the strength in the housing market.

ADP reported private payrolls increased 428,000 in August, well below expectations of 900,000, and follows July’s 212,000 gain. Much of the improvement was in the services sector where jobs were up 389,000. The goods producing sector added 40,000. Manufacturing jobs increased 9,000. The leisure/hospitality sector and education/health areas led the way, climbing over 100,000. Professional/business services added 66,000 jobs. Trade/transport jobs increased 58,000, and finance related jobs were up 11,000.

Factory Orders rose 6.4% in July, topping expectations of 6%, after rising 6.4% in June, as well, and representing a 3rd-straight monthly gain. Durable orders were bumped to an 11.4% July gain from the 11.2% pop in the Advance report and compares to the 15% bounce in June. Transportation orders were up 35.7%, following the 19.5% June gain. Excluding transportation, orders were up 2.1% versus the 4.8% gain in June. Defense orders bounced 30% versus -16.7% in the prior month. Nondefense capital goods orders excluding aircraft rose 1.9% versus the prior 4.3% gain. Shipments climbed 4.6% from the 10% jump in June. Nondefense capital goods shipments excluding aircraft were up 2.4% versus the prior 3.7% gain. Inventories fell -0.5% after rising 0.5% previously. The inventory-shipment ratio eased to 1.43 from 1.51.

Fed’s Beige Book noted some improvements and some erosion in the economy, not surprisingly given the data analysts have seen over the last six weeks. The overall outlook among contacts was “modestly optimistic,” but a few Districts reported some pessimism. And of course, the general theme was one of “uncertainty and volatility” due to the virus and its negative effect on consumer and business activity.

The report went on to say economic activity increased among most Districts, but added “gains were generally modest and activity remained well below levels prior to” the pandemic. “Employment increased overall among Districts, with gains in manufacturing cited most often. However, some Districts also reported slowing job growth and increased hiring volatility, particularly in service industries, with rising instances of furloughed workers being laid off permanently.” Wages were flat to slightly higher in most Districts. Price pressures increased but remained modest. Manufacturing generally improved and coincided with increased activity at ports and among transportation and distribution firms. Consumer spending continued to pick up, “sparked by strong vehicle sales and some improvements in tourism and retail sectors.” However, many Districts noted slowing growth in those areas. Total spending was still “far below pre-pandemic levels.” Residential construction was a “bright spot,” with residential real estate sales “notably higher.” But commercial construction was down widely, and commercial real estate remained in contraction.

Market Sentiment

New York Fed John Williams underscored the FOMC view that the new policy framework will help meet the dual mandate and will make it easier to meet the goals. The changes codify the Fed’s existing practices, and mutually reinforce the pursuit of the job and inflation goals, he added. He went on to say a moderate overshoot of the 2% target is desirable and said the Fed’s actions helped reduce tail risks, including downside risks to the financial system. He also suggested risk that people think the Fed can do more than it can.

The iShares 20+ Year Treasury Bond ETF (TLT) extended its winning streak to 3-straight sessions with the midday peak hitting $165.56. Near-term and lower resistance at $165.50-$166 was breached but held. A close above the latter and the 50-day moving average would indicate additional strength towards $167-$167.50.

Rising support is at $164.50-$164 followed by $163-$162.50.

Volatility Index

The S&P 500 Volatility Index ($VIX) was up for the 2nd-straight session after testing an afternoon high of 27.07. Lower resistance at 27-27.50 was breached but held. A close above the latter would signal additional upside risk towards 28-28.50 and the 200-day moving average.

Upper support at 25.75-25.25 and the 50-day moving average were breached but held on the midday pullback to 25.55. Continued closes below the 25 level would be a more bullish signal for the market.

Market Analysis

The iShares Russell 1000 (IWF) was up for the 4th-straight session and 9 of the past 10 after tapping a fresh all-time high of $234.27. New and lower resistance is at $234-$234.50 was cleared but held. A move above the latter would suggest additional momentum towards the $236-$236.50 area.

Current support is at $230-$229.50 with Wednesday’s intraday low tagging $229.60. A close below the $227.50 level would signal a possible near-term top.

RSI remains in a slight uptrend with key and overbought resistance from January 2018 at 85 holding. Support is at 80 with a close below this level signaling additional weakness towards 75-70.

Sector

The iShares MSCI Emerging Markets Fund (EEM) was down for the 2nd-time in 3 sessions despite reaching a first half high of $45.37. Lower resistance at $45.50-$46 was challenged but held. A close above the latter would be a bullish signal for a run towards $46-$46.50 and levels from mid-January with the 52-week peak at $46.32.

Current and upper support at $45-$44.50 was breached but held on the fade to $44.78 afterwards. A close back below the $44 level would be a slightly bearish development with backtest potential towards $43.50 and the 50-day moving average.

RSI is back in a downtrend with upper support at 55-50 holding and the latter holding since mid-April. Resistance is at 60.