- US, China trade tariffs. Market struggles, but holds up very well. - Economic data pretty good, some not so great, but all of it a shadow of what it once was and could be again. - Has the redefinition of a strong economy fooled the Fed? - Index action Friday suggests most of the move was just position shuffling at expiration. - Still good patterns after the 'week from hell' for the markets. That bodes well for the upside to continue.
Trade had to get back into the picture at some point, knew it would. The week's rally was under the White House threat of Friday tariffs on China. Friday that threat became reality. The White House announced $50B in tariffs on Chinese goods via a 25% tariff rate. China vowed a response and in the first hour of trade delivered it: soy beans, whiskey, beef and some other US products. While it was hoped this stage of the trade reformation talks could be avoided, they are now here.
Stocks struggled as the possibility became reality. Futures opened sharply lower. When the session bell rang stocks opened lower but then dove lower after the first half hour as China announced its tariffs.
That sharp 10 minute drop was met with equally sharp buying, snapping the indices right back up. Didn't turn positive, but immediately jumped back into the range. Stocks range-traded into mid-afternoon. Then at 2:00ET buys hit and jumped stocks to session highs, trading basically flat from the Thursday close. The move waffled some into the close but managed to hold a decent part of the bounce.
All indices managed a very solid move off the session lows that frankly were never that low. Keep in mind it was expiration Friday and that means holdings will be shuffled to position for next expiration. The tariff news was fortuitous in a way as it assisted some in the shuffle. Then the market showed a rebound to near flat: the dip was bought. Fairly clear expiration shuffling and positioning with the assist from the tariff news.
Most stocks managed a rebound though not all. Our positions mostly recovered, but those that did not we exited. Many stocks showed a dip then a rebound on strong volume. Some of these were the industrial stocks that have lagged and you would think would have been hammered lower and nailed the floor on the trade issues managed very nice price recoveries with volume. HON, UTX, DE, EMR are just a few.
The leaders from other areas showed less drama. Software was up in many cases. AMZN, FB, NFX, GOOG, NVDA, BABA all held up just fine. SQ, QRVO, ATHM, LSCC, BRKS, BIDU, TXN and many other stocks rallied, some quite nicely.
It was not carnage for the leading groups of stocks. It was not carnage for the indices either. It was a day off for the growth indices. It was another day of testing, and perhaps a shakeout, for the lagging indices. Despite the 'horrors' of a trade war as China called it, the market rode out the news and expiration, holding their relative positions.
Of course, that leaves the large cap NYSE indices still looking for a break higher, but as noted above, the action has the look of a shakeout that could provide that spring upside for a new breakout.
NEWS/ECONOMY
A mountain of data and news on the week. FOMC decision to add another rate hike in 2018. ECB decision to possible end QE by 2019 but has no intention of hiking rates. Retail sales rather solid. Atlanta Fed hopping up its current quarter GDP estimate to 4.8%.
Friday it was tariffs. It was New York PMI at 25.0 over 20.1 in May. It was Michigan Sentiment at 99.3, up from 98.0 in May. All solid enough.
Note, however, that Industrial Production and Capacity Utilization for May fell and missed expectations.
Industrial Production: -0.1 vs 0.2 expected vs 0.9 prior (from 0.7)
Capacity Utilization: 77.9 versus 78.1 expected versus 78.1 April
Good and not so good, hot and cold.
Then there is the yield curve. The Fed is hiking the short end while longer term bonds rally, pushing yields lower. That is flattening the curve, an indication that economics are slowing or that the Fed is overreacting to the economic pickup.
This is interesting. As you may recall, from the early stages of the 'recovery' under the Obama administration I said that the recovery would not be good by historical standards, but, because it had been so long since we had really good economic growth and because everyone was so starved for improvement, that mediocre numbers would be described as 'great,' 'strong,' and the like. That is exactly what happened, and a lot of people allowed the story line to be skewed that way, allowed themselves to believe that 1.5% annual growth with 3 or 4 quarters spaced out over 8 years hitting the high 3% level was a 'great' recovery.
Is the Fed a victim of the propaganda it helped underwrite? While growth is vastly improved versus the Obama years, it is still well, well off 'strong' or 'great.' Those words describe what was the recovery under Reagan: 4%, 5%, 7%, 11% quarterly GDP growth, massive capital investment, millions upon millions of high quality (not food industry) jobs in tech, industrial, mining, construction, and other sectors.
Those were strong numbers. What we are seeing now are decent. If this quarter turns out to be 4.8%, THAT is strong. We will see, but those of us who lived through the Carter years and the Reagan years know that even this improvement in the economic condition is far from what our system is capable if we get rid of all the socialist remnants from Bush and Obama.
I always find it revolting to hear purported experts say that capitalism does not work in this world because of the income inequities generated the past 10+ years. That is nonsensical. I heard the same thing in the Carter years, about how America had a good run, but the world had changes and its system just could not produce the same gains as in the past.
No the problem is under Bush and Obama we have careened well off the capitalism course. Free enterprise works IF you have free enterprise. We have handcuffed our system. Reagan showed what happens when you free up our entrepreneurs, free up capital, remove restraints on investment and risk taking. Trump is trying, but the Congress his party controls will not act on his agenda to rid us of the ACA and other socialist restraints. If they were gone, yes we could again post those dramatic gains.
And the meaning is . . .
Okay, so back to the current Fed. Is it drinking the Kool-Aid of the economy growing too fast and being too strong? With 95.9M working aged people still out of the workforce? With average GDP growth still in the 2's? Seriously? Yet, that is what we hear, meaning the Fed would like to stymie growth in the 2% range.
Thus, the yield curve, a measure of true economic strength, is not happy with the Fed cracking down on economic growth at these economic output levels. It is telling you that the Fed risks overtightening -- something it always does, sadly -- and the decent-ish economic growth we see right now will be put at risk long before the economy ever has a chance to show what it can really accomplish.
THE MARKET
CHARTS
Not bad action given the 'horror' of a trade war with China. As noted below, even with this scenario and SP500 and DJ30 weighted with stocks that will not like trade wars, they both held up remarkably well.
NASDAQ: After a new all-time high Thursday, NASDAQ opened lower, held 7700 on the low, and rebounded to a modest loss. NASDAQ shows good upside volume, very good leadership, and Friday did nothing to change the strength of the move higher.
SOX: This remains an enigma in this market, even more so than SP500 and DJ30. SOX rallied quite well into early June, still shy of the March all-time high, then tested a week back. It has held the 10 day EMA, but is unable to break higher. Thursday as tech and growth rallied it bumped higher, but nothing impressive. Still at the 10 day, and very important for the market.
RUTX: Not exploding higher on the week but put in new highs yet again. Thursday a new high, Friday a test intraday down near the 10 day EMA, then a rush back upside for a most modest loss. Still very strong, still doing well in a tariff fight environment.
SP400: Brushed a new high, just putting in one, but that was the extend of the move. Not surprising given SP400 rallied 2 weeks to get to that point. Wednesday was a little wild, but it calmed down nicely Thursday and Friday, showing a pair of doji with tail, holding the 10 day EMA on the close. Touched a new high then tested to consolidate the rally, now in good position to move to a new high and this time make it stick.
SP500: Similar to SP400, a rally from late May into this week. Spent the week rounding out the move and fading to test the 10 day EMA, holding above it on the close. Nice shakeout action. Many big names have tested and held on. We will see if the reach lower and recovery was indeed a good shakeout.
DJ30: Also rallied, moving past the May highs with a solid break two weeks back, rounding out the top then fading to the 10 day EMA Thursday. Friday a gap lower, a test of the 20 day EMA, then a rebound to the 10 day. Shakeout here as well? Again, it will show if that is the case, but here is the point: even with the 'worst case' scenario for trade the Dow held its breakout over resistance.
LEADERSHIP
FAANG: As noted Thursday, all posted nice gains but AAPL. Friday they all held good patterns, again except AAPL. It broke below the 20 day EMA and we just did not want to mess with it anymore. AMZN tested modestly with a doji. FB ditto. NFLX ditto. GOOG was actually up. These look fine.
Chips: QRVO, LSCC, BRKS, AVGO continued upside. Still some strength here. NVDA doji tested. ON is in great shape. MU may have found its test bottom. AAOI looks good in its test. There is promise here though many are struggling.
Software: Some impressive moves in the circumstances. FFIV up again. GLUU up. DATA solid upside. EA as well. RHT, VMW look excellent to move higher again.
Industrials: EMR, UTX, HON all tested lower, rebounded nicely. CAT gapped rather large and did not get back. TEX has to make a 50 day MA stand. MMM is interesting and looks as if it is about to turn the corner upside. Still possibilities here.
Metals: Very mixed action. NUE, STLD down. SCHN exploded higher. CLF reached lower, recovered a lot of ground to show a doji holding the 10 day EMA.
China: BABA faded Friday after a Thursday break higher. Holding the 10 day EMA and still solid in its uptrend and breakout. ATHM pushed higher, HTHT looks solid to break higher. IQ, after a huge move, threw a doji Friday. SOHU showing a nice move to end the week. NTES looks interesting to turn the corner back up, perhaps SINA as well.
Drugs/Biotech: Still some looking good. EXAS added to a week of good gains. Others not so good. ARWR fell to the 10 day EMA rather abruptly. IMMU is back at the 20 da after a bounce didn't keep running. BLUE jumped Wednesday and Thursday but reversed those moves sharply Friday.
Internet: AKAM enjoyed a good week and was up 1.37% Friday; not bad. LLNW still setting up for a move higher.
MARKET STATS
DJ30 Stats: -84.83 points (-0.34%) to close at 25090.48
Nasdaq Stats: -14.66 points (-0.19%) to close at 7746.38 Volume: 3.04B (+39.45%)
Up Volume: 1.35B (-20M) Down Volume: 1.64B (+865.56M)
A/D and Hi/Lo: Advancers led 1.02 to 1 Previous Session: Advancers led 1.35 to 1
New Highs: 167 (-27) New Lows: 44 (+9)
S&P Stats: -2.83 points (-0.10%) to close at 2779.66 NYSE Volume: 2.36B (+153.80%)
A/D and Hi/Lo: Decliners led 1.1 to 1 Previous Session: Advancers led 1.33 to 1
Bulls up 5.5 points over the past three weeks, bears -1.4 over the same period. After dropping rather sharply during the stock rebound, bulls finally feel the upside a bit. Likewise, bears rallied into the selling, now tailing off after a few weeks of upside. That is the way it works.
Bulls: 55.5 versus 52.9
Bears: 17.8 versus 17.7
Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.
Bulls: 55.5 versus 52.9 versus 50.0 52.9 versus 50.0 versus 49.1 versus 46.6 versus 43.1 versus 43.6 versus 48.0 versus 43.6 versus 42.2 versus 49.5 versus 55.5 versus 54.9 versus 48.6 versus 48.1 versus 48.5 versus 41.9 versus 54.4 versus 66.00 versus 64.7 versus 66.7 versus 64.4 versus 61.9 versus 64.1 versus 64.2 versus 62.3 versus 61.5 versus 63.5 versus 64.4 versus 63.5 versus 62.3 versus 60.6 versus 60.4 versus 57.5 versus 54.3 versus 50.5 versus 47.1 versus 49.5 versus 49.5 versus 48.1 versus 50.5 versus 57.5 versus 60.0 versus 60.2 versus 57.8 versus 50.0 versus 52.5 versus 54.9 versus 51.5 versus 50.00 versus 55.8 versus 50.00 versus 51.9 versus 58.1 versus 58.7 versus 58.5 versus 54.7 versus 51.9 versus 56.3 versus 55.8 versus 49.5
Bears: 17.8 versus 17.7 versus 19.2 17.7 versus 19.2 versus 19.2 versus 19.4 versus 19.4 versus 20.6 versus 20.8 versus 19.6 versus 19.8 versus 18.6 versus 17.5 versus 16.8 versus 15.7 versus 15.5 versus 14.4 versus 14.6 versus 14.4 versus 15.5 versus 12.6 versus 12.8 versus 12.7 versus 13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1 versus 15.1 versus 15.4 versus 15.4 versus 14.4 versus 14.4 versus 15.1 versus 15.2 versus 15.1 versus 17.0 versus 17.1 versus 19.0 versus 20.2
OTHER MARKETS
Bonds: 2.922% versus 2.933%. Bonds stemmed the selling on the week, worked laterally long the 50 day MA's. Then they started to rally post-FOMC. Fed raises rates and bonds rally, dropping yields? Again, not much faith shown in the bond market that the Fed has a clue.
Historical: the last sub-2% rate was in November 2016 (1.867%). 2.933% versus 2.977% versus 2.963% versus 2.952% versus 2.948% versus 2.928% versus 2.974% versus 2.935% versus 2.944% versus 2.902% versus 2.86% versus 2.857% versus 2.79% versus 2.931% versus 2.992% versus 2.982% versus 3.063% versus 3.056% versus 3.06% versus 3.123% versus 3.096% versus 3.069% versus 2.997% versus 2.97% versus 2.966% versus 3.006% versus 2.952% versus 2.948% versus 2.968% versus 2.954% versus 2.959% versus 2.975% versus 3.0245% versus 3.00% versus 2.962% versus 2.96% versus 2.914% versus 2.867% versus 2.83% versus 2.829 versus 2.825% versus 2.781%
EUR/USD: 1.1607 versus 1.15678. After a gut punch plunge Thursday from the 50 day MA to almost the May low, the euro recovered just a bit. Nothing major on the upside for the euro.
Historical: 1.15678 versus 1.17973 versus 1.17454 versus 1.17761 versus 1.17737 versus 1.17987 versus 1.1774 versus 1.1762 versus 1.1697 versus 1.166 versus 1.16993 versus 1.16643 versus 1.15446 versus 1.17148 versus 1.17096 versus 1.17022 versus 1.17826 versus 1.1786 versus 1.17714 versus 1.1802 versus 1.1811 versus 1.18272 versus 1.19358 versus 1.19411 versus 1.1913 versus 1.18533 versus 1.18672 versus 1.19150 versus 1.19619 versus 1.1983 versus 1.1978 versus 1.19896 versus 1.20741 versus 1.21291 versus 1.21788 versus 1.2163 versus 1.22232 versus 1.22094 versus 1.22876 versus 1.23464 versus 1.23748 versus 1.23712 versus 1.238532 versus 1.23313 versus 1.23299 versus 1.23720 versus 1.2359 versus 1.2311 versus 1.22812 versus 1.2247 versus 1.2285
USD/JPY: 110.668 versus 110.578. Dollar enjoyed gains all week but Wednesday, the FOMC announcement day. Looked dead in late May. Quite the comeback.
Historical: 110.578 versus 110.247 versus 110.381 versus 110.314 versus 109.466 versus 109.705 versus 110.164 versus 109.878 versus 109.90 versus 109.53 versus 108.767 versus 108.699 versus 108.699 versus 109.385 versus 109.667 versus 109.502 versus 110.833 versus 110.95 versus 110.76 versus 110.935 versus 110.376 versus 110.246 versus 109.693 versus 109.384 versus 109.40 versus 109.746 versus 109.038 versus 109.022 versus 109.08 versus 109.175 versus 109.628 versus 109.91 versus 109.354 versus 109.051 versus 109.28 versus 109.373 versus 108.894 versus 108.728 versus 107.645 versus 107.404 versus 107.409 versus 107.027 versus 107.010
Oil: 65.06, -1.83. It had to happen. After a 2 week climb back up to the 50 day EMA after breaking it in late May, oil rolled back over. Surging dollar pushing it lower as well.
Gold: 1278.50, -29.80. Bombing lower as well, indeed breaking below the May lows. That corrects the Thursday upside action that I called bizarre.
MONDAY
The 'week from hell' for the financial markets is in the books and NASDAQ, RUTX and SP400 managed to put in new highs on the week before a bit of a late week fade. SP500 and DJ30, the indices you would expect to get hammered, while not coming close to new highs, held up very well, setting themselves up for a new move higher despite news that most would have predicted would scuttle any idea of an upside move. What doesn't kill you makes you stronger, right?
SP500, DJ30 start the week in position to make good upside moves if the conditions merge. Many tech stocks remain positive in their moves, not extended after starting good upside breaks. Still like many of the patterns out there. We are in several, and will look to be in more if they can make good on the patterns in place. Thus far tech and growth have done so and we will look at those hard. Don't forget, however, the industrials. As noted before, if they could survive the back and forth dueling tariffs and hold their patterns, it behooves you to keep a watch on them and when they break higher, pick up the positions.
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