Market Overview

Neutral Zone: Stocks, Bonds Both Up As Next Moves In Trade War Anxiously Awaited

Neutral Zone: Stocks, Bonds Both Up As Next Moves In Trade War Anxiously Awaited

After a “turn-around Monday,” Tuesday dawns with stocks looking stuck in neutral. The bond market might end up being front and center as the day continues, with strength there pushing yields back toward last week’s lows.

Though action was mixed to slightly higher overnight in overseas markets, caution appears to be on the upswing here at home. The 10-year Treasury yield begins the day just above 1.5%. Stock futures made some light gains before the open, but yields arguably could be the bigger theme if they keep falling. 

It’s one of those weird days when both bonds and stocks are higher as people try to figure things out. One thing that’s nice is to wake up and not see futures moving 100 points or more. That’s a little different.

With so much riding on factors beyond the control of typical market fundamentals like earnings, data, and even the Fed’s next move, this is a market where it’s important to be agile if you’re an active participant, and consider keeping things small if you do make any moves. Volume could start to fall by late this week ahead of the Labor Day holiday next Monday, and low volume can sometimes make things even more topsy turvy. Caution remains the watchword.

On a corporate note, it’s interesting to see Health Care stocks gaining after Johnson & Johnson (NYSE: JNJ) received a big fine from a judge in an opioid case. Media reports suggest the fine was smaller than expected. Health Care is near the bottom in sector performance over the last year.

Apprehension Evident Despite Monday’s Gains

Monday’s nice little bounce following the sell-off on Friday doesn’t mean we’re out of the woods. When you look more closely at price action, stocks remain well below last week’s highs and might still be a tweet or a tariff away from more losses. That said, the G7 meeting appeared to go well. There was a bit of waffling about where exactly where things are on trade, and as long as the situation with China exists, we’ll probably continue to have volatility.

Investors appear aware of this, judging from the way volatility hung in there so well throughout Monday’s session. The Cboe Volatility Index (VIX) was just below 20 near the end of the day, a level that often signals rising fear. By early Monday, VIX was down a bit, trading just below 19.

Any move in the 10-year yield below 1.5% or in the 30-year yield below 2% (it traded at 2.03% late Monday) might be the kind of psychological drop that raises even more caution in an already apprehensive market. Gold also remained above $1,500 an ounce Monday, another sign of the “flight to safety” mentality that continues to grip many investors. People weren’t buying Monday’s stock market rally lock, stock, and barrel.

Stocks put up a decent showing Monday amid more positive trade talk, but nothing has been solved. The news we heard Monday is basically just confirmation that talks will continue. There’s no sign yet of major progress. Until there is, gains could continue to be capped.

That trading range we keep talking about between 2800 and 3000 for the S&P 500 (SPX) appears to be the place where people are comfortable, and we’ll likely need some actual good trade news to see stocks break out to the upside and revisit those July highs above 3000. 

That said, stocks did appear to gain a little traction in the last minute of Monday’s session. That’s a positive sign, but follow-through isn’t guaranteed. Meanwhile, on the lower end, the 200-day moving average of 2803 for the SPX lines up pretty nicely with the bottom of the trading range (see Fig. 1 below).

In fact, ever since the SPX rallied above the 200-day back in February, that chart point has provided decent support. Two attempts to break below the 200-day—most recently in early June—found plenty of buying interest. That’s not to say history will necessarily repeat, but it could mean there’s money waiting on the sidelines to come back in if the market falls back to that area. Look how quickly things came back, for instance, when SPX futures briefly fell below 2800 earlier this month.

Busy Week for Data, With Scattered Earnings, Too

Data pick up as the week continues, with consumer confidence today, gross domestic product (GDP) on Thursday, and Michigan sentiment and personal consumption expenditure (PCE) prices on Friday. The PCE number could be especially interesting to watch, because there’ve been signs of inflation creeping up even as the Fed comes under pressure to lower rates.

Some analysts think the Fed’s idea at Jackson Hole was to float the idea of no rate cut next month, but there’s growing sentiment now that the central bank might have no choice in the aftermath of the market’s tariff flop on Friday.

Earnings season is on the back nine, but a few important retailers are on the calendar this week, including Dollar General Corp. (NYSE: DG) and Dollar Tree, Inc. (NASDAQ: DLTR). Both bargain retailers report Thursday, and often get watched for a sense of how shoppers near the budget end of the income scale are doing.

We’ll hear how the “other half live” tomorrow with results from Tiffany’s & Co (NYSE: TIF). More on that below. Best Buy Co Inc (NYSE: BBY) is also in the weekly earnings mix, reporting Thursday.

Monday saw some leadership from Technology and semiconductors, both of which got beaten down on Friday. However, with gains of 1% to 2% for many of the semis, shares remain below where they were on Thursday. These stocks have huge exposure to China and have been acting like a barometer for trade issues. 

The same could be said of Apple Inc (NASDAQ: AAPL) and Caterpillar Inc. (NYSE: CAT). Shares of AAPL aren’t far from recent highs, but CAT remains under a lot of pressure and is approaching its 52-week low.

Crude fell Monday, potentially reflecting headlines about possible talks between Iran and the U.S., as well as more access opening up to the U.S. Permian Basin. The U.S. oil rig count fell again last week and is down more than 100 from a year ago, according to Baker Hughes. Low crude prices and falling global demand growth might explain some of that. 

By Tuesday morning, crude moved 1% higher. Like AAPL and CAT, crude could be a good barometer of the market’s hopes for a trade deal. It’s been under pressure most of the year amid worries that a trade war could blunt demand.

FIGURE 1:  BATTING “200”: This year-to-date chart of the S&P 500 Index (SPX) shows  a blue line that marks the 200-day moving average. That level now rests at just above 2800, and could mark key technical support, analysts say. Previous drops below the 200-day average have met with buying, as the chart shows. Data Source: S&P Dow Jones Indices. Image source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

What “Recession Indicator?” One thing to keep in mind is that despite all the recession talk, data continue to look solid. Durable goods on Monday were the latest to come in above expectations, though not everything in the report looked perfect (see more below). A lot of people seem to think a recession is coming, but the numbers don’t really back that up. Also, though many economists talk about inverted yield curves signaling past recessions, something to consider is that fundamentals were very different when those recessions happened. Interest rates tended to be a lot higher than now, both here and overseas.

Those earlier inversions were also characterized by a spike in the short-end of the yield curve—less of a factor this time. It’s unclear if inversion is still a recession indicator when rates are negative overseas and so low here, but until U.S. economic numbers start to come in steadily weaker (which you can’t rule out, but hasn’t happened yet) it’s all academic. Also, remember that old saying about economists predicting 12 of the last eight recessions.

All That Glitters...: Tiffany’s becomes the latest retailer to report when it unveils earnings on Wednesday. It’s been an unfruitful year so far for TIF shareholders, with the stock about flat. Concern remains squarely on China after several other major retailers reporting earlier in the quarter said revenue from foreign tourists was down. For instance, Macy’s Inc (NYSE: M) M said sales from foreign travelers fell 9% in its latest quarter after a 3.1% drop in the previous one. The company cited declining international tourism. Ralph Lauren Corp (NYSE: RL) also reported foreign tourist weakness.

About 689,000 mainland China tourists visited the US in Q2, down from more than 717,000 in Q2 2018, according to the U.S. Commerce Department. Some analysts say Chinese travelers seem more inclined to buy luxury goods at home rather than abroad, The Wall Street Journal reported recently. Maybe this is fallout from bad feelings associated with the trade war. Also, the Chinese government is cracking down on the gray-market practice of buying goods abroad and reselling them at home, the WSJ said. Does all this have ramifications for TIF? We’ll find out tomorrow.

Wheels Down: The transportation sector and small-caps are often viewed as potential signs pointing to where the broader market might be headed. Remember how in mid-2018 the Russell 2000 (RUT) small-cap index started retreating about a month before the S&P 500 (SPX) and Nasdaq (COMP) suffered sharp losses? If you see RUT and the Dow Jones Transportation Average ($DJT) as predictive, things might not seem too good right now. The RUT is down 7% in less than a month, far worse than the SPX’s 4% drop. Over the same time period, the $DJT is off nearly 9%.

On the plus side, both remain well above their December lows, and strong demand from U.S. consumers could boost revenues for transport companies like railways that deliver goods. The worrisome thing that’s been weighing on transports, mainly, is slowing demand from businesses. While durable goods yesterday did come in above expectations, it wasn’t necessarily all flowers and rainbows from a transport perspective, as new orders for primary metals, fabricated metal products, and machinery all declined in July, noted.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Image Sourced from Pixabay


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