Happy Days!

Happy Days!  The S&P500 is back on top!  Fed Chief Jerome Powell said just enough to spur the large cap index to elevate itself to a new high close.  Interestingly, Powell really didn’t provide any new revelations.  He actually repeated his typical party line of methodical rate hikes with a slow normalization of the Fed balance sheet.  He did nothing to indicate that rate hikes would not occur in next month’s FOMC meeting nor did he mention anything to indicate any change in policy affecting a potential December rate hike.  The probability for a December hike still remains at 66%, which is where it was prior to the speech.  TO BE CLEAR: current rates are still technically accommodative.  “Accommodative” is Fed jargon for stimulative.  Let’s remember that the current rate target is 175 – 200 basis, which is lower than the rate of inflation.  Ok, so nothing new from the Fed and continued strong earnings are both positives for the market.  The only other high level factor affecting the markets is political risk, and there seemed to be quite a bit of that floating around last week as potential Presidential legal troubles seemed to further pile up. Additionally, trade negotiators were unable to accomplish anything with their Chinese counterparts last week.   Traders, however have seemed to become immune to the trade war and the Presidential legal drama.  To put this into a little bit of perspective, while the markets were under considerable amount of pressure leading up to the Nixon resignation (they fell 23%), the economy was experiencing hyper inflation, high interest rates, and recession.  In the months leading up to the Clinton impeachment, markets rallied around 25%.  So, perhaps traders took comfort in history, or perhaps it was just a slow late summer week with nothing new to fear.  Whatever the case, we are there!

The S&P 500 closed just below its daily high but at a new all time high.  The index will trade on momentum and more closes on or above Friday’s levels will confirm the move (see chart 4 in my attached daily chartbook).  The Dow Jones Industrial index traded up in Friday’s session as well, however it still remains around 3% below its all time high.  The index will get some resistance at the 26000 level just above and continue to receive support from its 25592 Fibonacci line (see chart 6 in my attached daily chartbook).  The Russell 2000 Index continued its early week momentum to make another new all time high close.  The NASDAQ 100 index traded up on Friday but closed short of making a new high, which is consistent with equity price action of the past 2 weeks.  The 7511 all time high and Fibonacci lines will be strong resistance for the NASDAQ and traders will surely test those levels in the sessions ahead. (see chart 8 in my attached daily chartbook).  The Chinese Central Bank stepped in to support the recently declining Yuan over the weekend and the move was well received by Asian equity markets, which traded up overnight taking US Equity futures along for the ride.  The weaker dollar resulting from the move would be viewed by some as a positive (the President likes a weak currency, and tweeted about it), because a weaker dollar could lead to more exports.  Ten year treasury yields start the week at 2.82% just above their 2.8% support level and the yield curve remains flat with the 2 year / 10 year swap hovering at 19 basis points, which is the flattest since 2007.  We still have some earnings to consider this week with several more retailers slated to report.  Recall that solid retail releases were one of the key factors in the past 2 weeks’ positive market moves.  On the economic release front,  we get Consumer Confidence tomorrow but the real fireworks come later in the week on Wednesday and Thursday when we get GDP figures along with a host of inflation indicators (see attached weekly economic and earnings release calendars).  Traders will look at personal incomes, spending, and PCE deflators for signs of inflation and their impact on Fed policy.  Good vibrations should carry markets this week before the Labor Day Holiday but those vibrations can easily be disrupted by release surprises.

daily chartbook 2018-08-27

earnings releases 8_27

econ numbers 8_27

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