A round of positive data and hope for trade helped drive global equities higher on Monday, but the news isn't all good. There was plenty of negative data to counterbalance today's raft of positive reports, the market just chose not to think about it. The most positive news came from China, both the Caixin and Official Manufacturing PMI readings came in above expectation and positive. This makes the first month in four for China's broad manufacturing sector to expand and a sign stimulus efforts are working and, by extension, helping stave off a global recession.
That data was backed up by positive reads on U.S. manufacturing and inventories but offset by weakness in retail sales. Additionally, the EU produced a round of weaker than expected data including PMI and CPI. European manufacturing PMI came in at 47.5, down from the previous month, as the sector continues to contract. The EU equities markets were able to produce a fairly strong up day despite the weak data as stronger U.S. and Chinese activity suggest activity in Europe will soon follow.
Much of the contraction in EU manufacturing is due to global trade relations but the Brexit can't be ruled out. The UK Parliament is expected to vote on some more measures today but the purpose is unclear. Theresa May is expected to reintroduce her deal in a lighter version tomorrow. The UK has only two weeks to figure something out or else its hard-Brexit for sure.
In trade news, Chinese Vice Premier Liu He is expected in Washington this week to continue last week's round of negotiations. Hopes are high a deal will be reached soon and it may. China's pledge to continue suspending auto tariffs past April 1st is a sign progress is still being made. The talks are likely to continue supporting the market while they are in progress; when they conclude it may be a different story.
The Retail Sales figures for February were released at 8:30 AM. The data was not only weaker than expected it was downright terrible. The only mitigating factor I can think of is that the government shutdown had some kind of carryover effect on consumer habits. Regardless, headline sales fell -0.20% versus an expected rise of 0.30%. The only area of strength was gasoline sales, retail sales ex-gas and autos fell -0.60%. Core retail sales were also weak at -0.40%. The good news is that sales are still up YOY, +2.2%, and supported by strong labor markets and rising wages.
The ISM report on Manufacturing came in much better than expected. The headline index came in at 55.3 showing expansion and acceleration within the manufacturing economy. This makes the 119th month of expansion within the sector. The strength was driven by new orders, production, and employment which all came in positive and rose from the previous month.
Employment was the strongest sub-index of the ISM report with a gain of 5.2 points. According to the report, delivery times are still falling but at a slower pace, backlogs are rising, inventory of raw materials are rising, and customer inventories are still too low. All in all this report shows acceleration within an expanding economic sector with fundamental conditions set up to drive activity over the next few months.
Business Inventories, for December, echo the message told by the ISM report. Business inventories are on the rise and outpacing sales but still low relative to past recoveries. Business Inventories rose 0.8% in January following a 0.8% gain in December, inventories are up 5.3% YOY. Total trade sales and shipments from manufacturers increased by 0.3% for the month and 2.8% for the year. The inventories to sales ratio rose in the last month but is still below the 2016 peak.
Construction spending figures for February were also above expectation. The caveat is that the 1.1% increase in monthly spending is primarily due to non-residential and government spending. Residential spending fell -3.6% in the month while non-residential rose 4.8% and total public spending rose 11.5%.
Moody's Survey of Business Confidence rebound in the last week. The survey jumped 2.5 points to hit 14.8 and the highest level in six weeks. Despite the rebound, sentiment is still hovering near long-term lows and consistent with an economy operating below its potential. The US/China trade war and Brexit are cited as the two number one causes of concern but that is not a surprise. What is surprising is that South American businesses are benefiting from troubles in the northern latitudes.
The Dollar Index
The Dollar Index was supported by today's data but it wasn't able to make an advance. While the data is positive there are still areas of weakness and concern that point to a global slowdown and the underlying causes of the slowdown are still with us. The DXY confirmed support at $97.00 with today's candle and set a new three-week closing high but any additional upside is questionable. The indicators show a range bound asset and one nearing or at the top of the range. It is possible the index will continue to rally but without a close above $97.50, I am skeptical it will get very far. This week's data, particularly the labor data, could alter the situation but until then the DXY is inside a trading range and looks like it will stay there for the near-term at least.
The Gold Index
Gold tried to edge higher but wasn't able to overcome resistance. The spot price moved up above $1,300 but only briefly and only long enough to attract sellers. The metal fell from that level confirming resistance targets at the $1,300 and short-term moving average that may send prices down to $1,280. The indicators are bearish and suggest falling prices with the caveat momentum is weak and stochastic is near oversold. A move lower would be bearish and may reach my $1,280 target quickly, a break below $1,280 could be very bearish.
The GDX gave it up today, the market capitulated on gold's uncertainty and fell -2.5%. This move is bearish but only brings the ETF down to the bottom of the trading range so any further downside is questionable. The indicators are bearish and have room to run lower so a move to $21.50 or just below to the long-term moving average is likely. A close below $21.25 would be bearish and may lead the ETF down to retest the bottom of the longer-term trading range near $18.00.
The Oil Index
Today's data was enough to stiffen demand outlook for oil and that (on top of the OPEC+ tightening scheme) sent WTI up about 2.5%. WTI is now trading well above the $60 level with bullish indicators and looks like it could touch $64 with little effort. A move above $64 would be another trigger to buy and may get the price up to $68 over the next few weeks to two months. Longer-term I don't think that OPEC or Russia will open the spigots until WTI is back above $72. Why would they?
The Oil Index is still not following its commodity higher. The XOI made a green candle today but it is small and within the near-term consolidation range. The indicators are becoming bullish which is a good sign but there is no indication of when a break to the upside may come. With oil prices on the rise, it is inevitable the index will follow, it's just a matter of time. The only risks I can see is if the trade talks fall apart, or if OPEC starts pumping again, or if Venezuela comes back online, but at least two of those three things are unlikely to happen soon.
In The News, Story Stocks and Earnings
IPO darling Lyft gave up all of its opening day gains today. The stock fell -22% from its intraday high on 44 million shares and may be a harbinger of doom for the broader stock market. With companies like Uber, Slack, and Pinterest on tap debut in public trading there is a new fear the IPO market could sap liquidity from the market.
The Financials were today's leading S&P sector with a gain near 2.5%. The sector was lifted by rising bond rates which helped to further widen the spread between the 10-year note and the 3-month bill. The spread has re-flattened, there is still some inversion, but the 10-year is above the 3-month.
The financials created a long green candle moving up and through both moving averages so looks stong. The indicators are showing a decent but not strong bullish entry signal so upward movement is expected in the near-term. Resistance at $27.00 may be strong going into earning season so caution is recommended.
The broad market made a seemingly strong move higher in today's session and yet the VIX fell a mere -2.26%. The fear index created a small red candle moving lower and that is bullish for the market. The warning I give is that today's action halted at what I see as a significant point of potential support while the S&P 500 set a new high. I could be ducking from shadows but better to be cautious than broke. A drop below 13.40 might negate my negative outlook on fear.
The indices, despite my best misgivings, continues to move higher. Today's action looks just like a strong trend-following bounce from long-term trend lines and was led by the Dow Jones Transportation Average. The transports advanced 2.26% forming a large green candle moving up toward a key resistance level. Resistance is just above today's close at 10,685 and may be broken in the next day or so. It may also not be broken so waiting for another confirmation signal is a good idea. The indicators are solidly bullish, both forming crossovers simultaneously with today's candle, so upward movement is expected. A break above resistance would be bullish and likely take the index up to 11,000 or higher.
The NASDAQ Composite gapped up at the open and moved slightly higher to form a small green candle. The price action looks a little frothy but is bullish and supported, weakly, by the indicators. The indicators are rolling into a bullish crossover but momentum is very weak and stochastic is meandering lower so not a reliable signal. A move above the high set two week's ago would be bullish and might get the index up to 8,000 in the near to short-term.
The Dow Jones Industrial Average posted the third largest advance at 1.27%. The blue-chip index created a medium-long green candle that gapped above 26,000 and closed near the high of the day. The index set a new high in the process and is accompanied by bullish crossovers in the indices. The crossovers are on the strong side as both %k and %d are moving higher in stochastic and from a higher low. A move higher may make it to 27,000 but I think resistance may set in closer to 26,750 and the all-time high.
The S&P 500 posted the smallest advance at 1.15%. The broad market index formed a medium-sized green candle extending last week's bounce from support. The indicators are weakly bullish and indicate higher prices with the caveat a resistance target is just above today's high. A move above this level, the all-time high set in January last year, would be bullish but even that might not get very far.
The indices all look bullish and yet most are facing resistance and all suffering from weak momentum. The gaps that formed this morning are also a warning sign, a warning that bulls are chasing prices and that is not a good thing, eventually those greater-fool traders are going to get left high and dry. Speaking technically, a wild push higher could cross one of my resistance targets and unleash a round of profit taking we haven't seen in about five months. The indices are up more than 20% and ripe for profit-taking; when it starts it could get wild. The signals are bullish but I am going to maintain my cautious, neutral stance on near-term market positions, I am still firmly bullish for the long-term.
Until then, remember the trend!