Introduction

Trade lifts stocks but most of the good news is priced in. With the two sides nearing an agreement it is questionable how much further the major indices can advance. Today's action saw the broad market open higher but struggle to hold the gains.

Market Statistics


Today's trade news includes a report from the FT that U.S. and Chinese negotiators were closing in on a deal. Mnuchin, Lighthizer, and He have been able to overcome most issues with only a few sticking points left to be worked out. The major hurdle is what to do with current tariffs and enforcement; China wants the U.S. to remove all tariffs imposed since the trade war began, Washington wants some assurances China will stick to its promises.

The situation developing now is this; what kind of deal will be struck, and what will be left for Trade War Part II. Chinese views on intellectual property and hacking are at the core of the remaining issues and likely not to be resolved with the first deal. The good news is that, according to Kudlow, Chinese officials have begun to acknowledge we have a point when it comes to IP theft, forced tech transfers, and hacking, a development that helped move the trade talks along. Vice Premier Liu He is in Washington now talking with Mnuchin and Lighthizer.

In political news, Senator Elizabeth Warren has introduced a new bill that would make it easier to charge and jail executives for the wrongdoing of their companies and employees. While it is a good idea to hold people accountable the bill would open a can of worms, unleashing attack dogs on corporate America, and raises the question of double jeopardy. In her bill execs of companies with more than $1 billion in annual revenue, if found guilty of a crime or who have entered into plea agreements/settlements, would be liable.

Brexit drama wears on. The MP's have reached no consensus, Theresa May is unable to garner support for her deal, and the new Brexit deadline is next Friday. Without direction or a deal, May will have to ask for another extension and the EU will have to grant it or force the hard-Brexit.

Economic Calendar

The Economy

Today's data was good but subdued. Both the labor and PMI figures were lighter than expected and point to slowing and slowdown in the U.S. economy. On the labor front, the ADP report on payrolls says U.S. job creation totaled 129,000 last month. This is about 60,000 below expectation and about 60,000 below the consensus for Friday's NFP figure. Small businesses created almost no new jobs while mid and large-sized businesses both created 60,000+ new jobs. Manufacturing jobs shrunk by -6,000 led by a decline in construction jobs (probably weather related) while services job increased 135,000. There was also some weakness in the revisions, January was revised up by 14,000 but that was more than offset by a -36,000 decline in the December read.


Mortgage applications soared in the last week as interest rates continue to fall. The rate on a 30-year mortgage made its biggest decline in years hitting 4.36% in the last week. The total number of applications jumped 18.6% for the month, up 28% YOY, with most of the increase attributed to refi's. Refi applications jumped 39% MOM and 58% YOY while applications for mortgages to buy a house rose only 3.0% and 10% YOY. Regardless of the breakdown this is good news. On the one had apps for new houses are on the rise providing fuel for home sales while on the other, millions of Americans are locking in lower payments providing fuel for the consumer economy.

The Markit Services PMI was slightly better than expected at 54.6 but still down from the previous month. The read alleviated some fear of slowdown but not all and was offset by the ISM report. The ISM report on non-manufacturing PMI says activity slowed and more than expected. The headline index came in at 56.1%, expansionary, but down from 59.7% and less than expected 5.1%.

Activity, New Orders, and Employment are all positive but Activity and New Orders both slowed considerably. Employment edged up 0.7% to hit 55.9%. Prices paid also edged higher gaining 4.3% to hit 58.7%. The good news is that the economy expanded, the bad news is that acceleration is slowing faster than expected and prices are moving up again. The only data tomorrow is jobless claims and the Challenger report on layoffs.


The Dollar Index

The Dollar Index fell from yesterday's shooting star and has confirmed the top of the trading range. The move is driven by today's weaker than expected PMI data and compounded by strong data from abroad. In the EU PMI was hotter than expected and coupled with better than expected retail sales while in Australia retail sales were also above consensus and the trade surplus unexpectedly grew. If this situation persists, weak data at home and strong data abroad, the dollar is going to retest the bottom of its range in the not-too-distant future. The indicators are consistent with a top and the top of the range so sideways to downward movement is expected in the near-term. There is not a lot of data due out tomorrow but the ECB will be releasing its minutes and that could move the euro.


The Gold Index

Gold prices moved lower despite the falling dollar. The move is likely tied to the trade deal and growing likelihood a deal will be made soon. The spot price looks like it is consolidating for another move and that move is most likely lower. Price action is below my support/resistance target at $1,300 and forming a flag pattern that could send spot price down to $1,280. $1,280 is still a decent target for support; if it is broken though, a much deeper move becomes possible.


The Gold Miners ETF tried to rebound in today's session but met resistance. The ETF formed a small doji shooting star within the near-term downtrend and looks like it is heading lower. The indicators are consistent with a move lower but the decline might not get much further. The $21.50 level is a target for strong support; if that gets broken the long-term moving average is just below.


The Oil Index

Bearish inventory data had little effect on oil prices today. The EIA says U.S. crude stockpiles grew an unexpected 7.2 million barrels in the last week. While bearish, and compounded by rising U.S. production, it is also offset and mitigated by other data. On the production side of the equation, the EIA says U.S. drillers pumped 12.2 million barrels per day in the last week, a new record if confirmed.

Offsetting and mitigating the jump in crude supply is a larger than expected drawdown in gasoline (-1.8 million barrels) and distillates (-2.0 million barrels). Additionally, much of this weeks increase in crude reserves is due to downtime among gulf refiners. WTI moved up to set a new high but fell back by the close to post a small loss.


The XOI Oil Index fell in today's action shedding about a half a percentage point. The index fell from the long-term moving average and may move lower but support is just below at the short-term moving average. The index is being squeezed in a tighter and tighter range between the two moving averages and getting ready to pop. The indicators are perfectly neutral showing very little momentum or direction in prices. It looks like the market still can't make up its mind what to do but, with oil prices rising on OPEC support, a move higher is a more likely outcome. The caveat is in the data, slowing data is capping demand outlook and they may weigh on prices in the near term.


In The News, Story Stocks and Earnings

The chipmakers were among today's hottest sectors after a series of bullish reports hit the market. Analysts see a significant increase in business for Intel, AMD, and TSMC. The general consensus is factors over the past 2-3 months have tightened supply (after fear of oversupply had reached a peak) and the slowdown in shipments has bottomed. The Semiconductor Index advanced roughly 3.0% and set a new high but there are some red flags. First and foremost is the indicators which are both highly divergent from this new high. Second, the candle is very shooting star-like and price action looks frothy.


Constellation Brands is set to report before the opening bell tomorrow. The stock corrected harder than most at the end of last year and has yet to really recover despite a history of revenue and earnings growth. Based on today's action I think someone else thinks the company will report well tomorrow, the stock gained 1.7% and looks ready to move higher. Analyst sentiment is bullish, 19 of 27 who follow the stock recommend a buy, so upward movement is likely over the long-term.


The VIX moved up in today's session. More than that, it is confirming the presence of support at my target level of $13.40. It may be nothing but, in light of recent activity, the VIX looks like it could be reversing. The indicators are consistent with growing support at this level, if crossovers were to form here, I would consider it a strong signal. Until then we may see fear trend to the side as the market digests data, trade developments, and waits on earnings. If fear has entered a range the top is near 17.80, a move above that would be bullish for fear and bearish for the broad market.


The Indices

The indices advance but the move is timid and without commitment. The biggest move of the day was made by the NASDAQ Composite, 0.59%. The tech-heavy index was supported by today's move in semiconductors but, like the semis, the candle is not strong. Today's action shows resistance to higher prices and uncertainty among the bulls. A fall in tomorrow's trading would confirm it as a shooting star. The indicators are bullish so it is possible the index will move higher, the indicators are also significantly divergent from the high which suggests weakness and potential for correction. If the index falls my first target for support is 7,800.


The broad-market S&P 500 posted an advance of 0.21% and formed a spinning top doji. The candle is red bodies and sitting on potential support so the rally may continue. The risk is that today's is the second of two spinning tops which suggests a third is on the way. The indicators are weakly bullish but bullish which supports rising prices, the caveat is that they are diverging from the new high and reveal underlying weakness in prices. A move lower, a solid move lower, would confirm resistance at the key level of 2,873 and a previous all-time high.


The Dow Jones Transportation Average is showing resistance at the top of a two-month range. The index formed a tombstone doji after setting a new high confirming resistance at 10,685. The indicators are bullish so resistance is likely to be tested again; if it is broken a move up to 11,000 is possible. Notably, the short and long-term moving averages are forming a bullish crossover so there may be more to this move than meets the eye.


The Dow Jones Industrial Average made the smallest advance at 0.14%. The blue-chip index formed a small doji spinning top after setting a microscopically small new high. The indicators are bullish so higher prices are expected, the risk is that divergences are present here as well and that is never a good thing. The next target for resistance is at the all-time high, just shy of the all-time high.


The market looks like it will move higher. The problem is that the Vee-bottom correction is so extended, the market is so highly valued, resistance targets so immediate, that it's hard to get too excited about it. Factor in hope, the fact that hope is a major player in the Vee-bottom correction, and the cause for hope (trade talks) is so close to resolution, and the odds this bubble will burst soon grow exponentially. I'm not saying you shouldn't be bullish on near-term market movement, just not to expect too much out of it and be wary, I fear a correction is on the way. I am neutral for the near-term but still firmly bullish for the long-term.

Until then, remember the trend!

Thomas Hughes