Straighten Up and Fly Right

Straighten up and fly right.  Equity markets proved that the trade worries monkey cannot easily be thrown from its back on a wild Friday flight.  Markets started the day in euphoria mode resulting from the mere hint of positive trade sentiment on Thursday and as traders began to confirm their weekend plans, President Trump announced that he was still in favor of raising tariffs on the $200 billion in Chinese imports.  Yes, those are the ones he has been threatening for the past few weeks.  And yes, those are the same ones that many economists and corporate leaders are publicly claiming will cause a markable slowdown in corporate profits and the GDP.  Recently, traders and writers of daily markets notes have been faced with the daily task of deciding what parts of the trade rhetoric are just bluster and what parts can actually affect the economy.  It is a bit frightening at times but heretofore the impacts on the domestic market have been negligible and much of the trade speak has been just that, speak.  Emerging markets have not faired as well as the US and there has been a noticeable divergence in returns.  The move, which has been brewing for some time, has been accentuated by the impacts from tariffs.  China now represents a significant weight on the MSCI EM index and its economy has been in a rut in recent quarters.  Well, in any case traders seemed to take Trump’s announcement seriously as the Dow Jones quickly dropped into negative territory on the news.  The announcement came just as news was spreading that Paul Manafort, former Trump associate, cut a plea deal and was going to cooperate with the Mueller team (which should not have any real impact on corporate earnings or the GDP).  The “fear” of trade and any specter of political risk seemed to fade as the markets rallied late in the session, closing mixed.  It was, indeed a wild Friday session!  The S&P500 closed marginally higher in a very comfortable position above 2900, in striking distance to its all time high at 2916. Support for the index will be at 2864 and momentum is strong (see chart 4 in my attached daily chartbook).  The VIX index has settled back into complacency in the lower end of its recent range, which should be a warning sign for traders, as complacency typically leads to a pullback in the S&P.  The Dow Jones Industrial Index is hanging tough closing up slightly and just below a strengthening level of resistance at 2616 (see horizontal blue resistance lines in the top panel of chart 6 in my attached daily chartbook).  Closes above the line increase the chances that the Dow will finally follow the other indices to new highs.  The Russell 2000 made some headway in a relief rally on Friday after languishing for the week.  Traders will need to gain some momentum in order to drive the index back to new highs.  The NASDAQ 100 was unable to claw back into positive territory on Friday after doing most of the pulling in the week’s earlier sessions.  This index will try to consolidate and look to gain some momentum in order to follow through back up to its highs.  The NASDAQ will receive strong support below at 7400 (see chart 8 in my attached daily chartbook).  All equity indices are constructive.  10 year yields rallied trading briefly with a 3 handle in Friday’s session making this its 3rd attempt at breaking out since 3% debuted in late Spring.  As I have mentioned here before, bonds start to become a factor for equities as they approach and possibly breach the 3% level.  The reason is that lower risk, fixed income securities compete with the riskier equity securities as the differential between asset class returns get wider.  To be clear it is, as so many other things in the markets, also a psychological number.

The week ahead will bring economic numbers that will give investors a view into the status of the housing and mortgage markets.  As mentioned here in the past, the housing market is watched closely at beginnings and ends of recessions as it is considered a leading indicator.  The logic is simple: higher costs of borrowing make it more difficult for builders to finance projects and home buyers to purchase homes.  If home building slows down jobs are lost and commodities such as lumber go down in value affecting materials producers.  We aren’t there yet, but we need to pay close attention to this industry as rates continue to rise.  We will also get some regional manufacturing numbers this week and the Manufacturing PMI this Friday.  Manufacturing and Industrial production have been showing some signs of growth in recent releases, most likely the result of the trade policy and more lax regulation.  These numbers are usually not market movers but in a week of minor releases, they can be a stimulus if they come in with large deviations from estimates.  The mid-week holiday, which is typically lower volume, combined with new trade rhetoric and minor economic releases is sure to add some volatility in sessions to come.  Remember that the quarter ends in just two weeks and the Fed is expected to raise rates (94% probability and now a 79% probability for December), so throwing that monkey off the back may not be as simple as it may seem.

daily chartbook 2018-09-17

earnings releases 9_17

econ numbers 9_17