Our President’s Comments

8/22/17

  • S&P indexes are in the green, following gains in European and Asian shares, after the cash index climbed on Monday for the first time in three days as volatility tumbled amid abysmal trading volumes. Meanwhile, European stocks joined an Asian stock rally following three days of losses, pushed higher again by mining shares as Antofagasta rose 5.5%, hitting a 4 year high on strong H1 earnings. Safe havens such as bonds, gold, and the yen declined despite the latest warning from Bridgewater’s Ray Dalio who said yesterday he was “reducing risk”, although not even he could offset the return of the VIX clubbing.

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  • Despite increasingly cautious rhetoric from iconic market investors, traders have again gotten over some of the sensitivity that characterized the past few days following political turmoil in Washington, fresh terrorist attacks in Europe and ongoing tension between the U.S. and North Korea. Nonetheless, Dalio said he’s “tactically reducing” risk because he’s concerned about growing internal and external conflict “leading to impaired government efficiency” in the U.S., according to a LinkedIn post Monday.
  • The Stoxx Europe 600 Index rebounded from the lowest in more than a week as miners and chemical makers led gains across almost every sector. Even with today’s rally, the Stoxx 50 is nearly 200 points below Wall Street’s year-end consensus target just above 3,600.
  • The DXY dollar index retraced yesterday’s entire push lower as EUR, GBP and AUD all continuously grind lower against USD amid little news. Dalian iron ore futures close above 600 yuan/ton for first time since March as rally in metals markets extends further. Italian BTPs sell off aggressively, with some noting summer related carry trades being unwound; UST curve bear flattens with focus on the strength in the USD, Bloomberg notes.
  • The US dollar rose against most Group-of-10 peers amid profit-taking on short positions and as fresh long exposure was added before the Jackson Hole symposium later this week.  The Bloomberg Dollar Spot Index rose by 0.3 percent in early trading, following a drop of 0.6% since Friday. Some investors trimmed their short exposure in the greenback after the gauge hit a three-week low on Monday, according to traders in Europe quoted by Bloomberg, looking to add again should the rebound in place start losing steam. Leveraged accounts were also seen adding fresh long positions as they see upside risks into Federal Reserve Chair Janet Yellen’s speech at Jackson Hole, Wyoming on Friday. Even as the dollar gauge looks to erase Monday’s losses, the medium-term outlook was little changed. The downtrend this year remains firmly in place, with August’s trading pattern resembling more of a consolidation phase than a significant rebound. Bloomberg’s fear and greed indicator suggests bulls are in control this month, yet the U.S. currency trades just 0.4 percent higher.
  • In commodities, London copper echoed moves in China, and rose to a three-year high while zinc held close to its highest level in a decade while nickel logged a fresh annual peak. BHP Billiton, the world’s largest miner, reported a surge in underlying full-year profits and said it would exit its underperforming U.S. shale oil and gas business. “Commodity prices are holding firm, particularly base metals,” said Sue Trinh, FX strategist at RBC Capital Markets. She cautioned that commodities have mostly firmed “on speculative Chinese investment flow from the wealth management industry, so we question the real demand.”
  • Crude advanced before U.S. government data forecast to show stockpiles fell. West Texas Intermediate crude climbed 0.3 percent to $47.38 a barrel. Gold fell 0.5 percent to $1,285.18 an ounce, the largest fall in a week.

Economic Calendar Releases

  • Redbook: Previous store sales y/y change was 2.5%, the current actual is at 3.2%.
  • FHFA House Price Index: The FHFA house price index came in at a very soft 0.1 percent increase in June, well short of Econoday’s consensus for 0.5 percent and low estimate of 0.3 percent. This is both good news and bad news, as slowing price appreciation should help affordability for home sales but will also limit growth in household wealth. Despite June’s weakness, year-on-year prices remain very strong, at plus 6.5 percent which is nearly a percentage point above Case-Shiller’s data. Watch on next week’s calendar for June data from Case-Shiller.
  • Richmond Fed Manufacturing Index: The prior level was 14 vs a consensus of 11. The current consensus range is 9 to 12.
  • 4-Week Bill Auction

 

Our Analyst’s Technical Commentary

SPXDaily Chart

  • The S&P 500 saw some buying at lower levels, which helped it to close in the green at 2428.4, a gain of 0.12% over the previous day’s close. The total intraday range was 13.2 points.
  • Though the index bounced from the support levels of 2420, the pullback was not very convincing. Nevertheless, the index can rise to 2450 levels where it is likely to face considerable resistance, both from the moving averages and the downtrend line.
  • We expect the market to try and form a base around the 2400-2420 levels. On the other hand, the pressure is to break down this critical support zone and extend the downfall to at least 2320 levels. We expect to see some volatile moves in the next few days. Due to the uncertainty, we remain cautious. We will start investing once we see a bottom formation in the markets.

 

Market Data

  • 1486 stocks advanced on the NYSE; 1441 stocks declined. 51 stocks made new 52-week highs;  145 stocks made new 52-week lows.
  • 1241 stocks advanced on the Nasdaq; 1607 stocks declined. 34 stocks made new 52-week highs; 109 stocks made new 52-week lows.

 

Intraday Chart

  • On the intraday chart, the index is range bound between the 2420 and 2440 levels. The index is likely to remain volatile between these two levels.
  • If the index breaks out of 2430 today, it can rally to 2440 where it is likely to face some resistance. On the other hand, a breakdown below 2420 will extend the downtrend to at least 2410 levels.

Glossary:

  1. Ascending Channel – An ascending channel is the price action contained between upward sloping parallel lines. Higher pivot highs and higher pivot lows are technical signals of an uptrend. Trendlines frame out the price channel by drawing the lower line on pivot lows, and the upper line is the channel line drawn on pivot highs. Price is not always perfectly contained but the channel lines show areas of support and resistance for price targets. A higher high above an ascending channel can signal continuation. A lower low below the low of an ascending channel can signal trend change.
  2. Ascending triangle pattern– is a bullish formation that usually forms during an uptrend as a continuation pattern.
  3. Bearish Engulfing pattern – chart pattern that consists of a small white candlestick with short shadows or tails followed by a large black candlestick that eclipses or “engulfs” the small white one.
  4. Break– a rapid and sharp price decline
  5. Breakdown– price movement through an identified level of support, which is usually followed by heavy volume and sharp declines
  6. Breakout– a price movement of a security through an identified level of resistance, which is usually followed by heavy volume and an increased amount of volatility.
  7. Candlestick– a chart that displays the high, low, opening and closing prices of a security for a specific period. The wide part of the candlestick is called the “real body” and tells investors whether the closing price was higher or lower than the opening price.
  8. Correction – a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation; generally temporary price declines interrupting an uptrend in the market or an asset; shorter duration than a bear market or a recession, but it can be a precursor to either.
  9. Descending Triangle pattern– A bearish chart pattern that is created by drawing one trendline that connects a series of lower highs and a second trendline that has historically proven to be a strong level of support.
  10. Doji – candlesticks that look like a cross, inverted cross or plus sign; forms when a security’s open and close are virtually equal for the given time period and generally signals a reversal pattern for technical analysts
  11. Double top – technical analysis to describe the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop.
  12. Gravestone doji – a type of candlestick pattern that is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.
  13. Head and Shoulders pattern – a chart formations that predicts a bullish-to-bearish trend reversal; believed to be one of the most reliable trend reversal appears. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end.
  14. Inside Day formation– A candlestick formation that occurs when the entire daily price range for a given security falls within the price range of the previous day. Inside day often refers to all versions of the harami pattern and can be very useful for spotting changes in the direction of a trend.
  15. Long legged doji – a type of candlestick formation where the opening and closing prices are nearly equal despite a lot of price movement throughout the trading day. This candlestick is often used to signal indecision about the future direction of the underlying asset.
  16. Relative Strength Index – (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally RSI is considered overbought when above 70 and oversold when below 30.
  17. Resistance – a price point on a bar chart for a security in which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level.
  18. Rounding Top pattern– is identified by price movements that, when graphed, form the shape of an upside down “U”; may form at the end of an extended upward trend and indicates a reversal in the long-term price movement; considered a rare occurrence.
  19. Support Level– refers to the price level below which, historically, a stock has had difficulty falling. It is the level at which buyers tend to enter the stock.

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8/21/17

  • Thursday’s commencement of the annual Jackson Hole Symposium seemed to be a natural place for Mr Draghi to signal that exit from QE was soon to be accelerated. However, a combination of still soft global inflation data and the Euro’s recent ascent has made it unlikely that the event will be a watershed moment. Expect him to be upbeat on the economy but the hawkish/dovishness indicator might be swayed one way or the other on how much attention the Euro gets in his remarks. Draghi is expected to speak on August 25, with remarks focusing on the themes of the conference. Before then, Mr Draghi is speaking at the Lindau economics symposium in Germany on August 23.

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  • The running theme of this year’s symposium is “Fostering a Dynamic Global Economy” and the full line up of speakers and presentations will be released at 4PM EST on Thursday. It seems that Yellen will be speaking Friday morning at 10AM EST on financial stability. Some strategists noted that in the US there is a tension between softer inflation an easy financial conditions and given the topic of Yellen’s speech is ‘financial stability’ she may lean towards prioritizing one side or the other. Overall the market will probably be most sensitive as to whether a December hike is more or less likely after her comments. The imminent halting of reinvestment seems to be considered a fine deal.
  • This morning in Asia, markets have broadly softened following leads from the US on Friday. Trading volumes are thin, with the Nikkei (-0.41%) and Kospi (-0.10%) slightly down, but Hang Seng (+0.52%) and the Chinese bourses were up 0.3%. The long planned joint South Korean-US military drills  are taking place today, but it’s remarkable how quickly the North Korean situation has calmed down and also quite interesting that markets still closed notably lower last week.
  • US equities were initially higher on Friday on reports that President Trump’s controversial Chief strategist, Steve Bannon had resigned, but ended the day slightly down, with the S&P (-0.18%), the Dow (-0.35%) and the Nasdaq (-0.09%). Within the S&P, the utilities and energy (+0.57%) sector posted modest gains, but was broadly offset by losses in real estate, telecommunications  and discretionary consumers names. European markets were also lower, with the Stoxx 600 down 0.71% with all sectors in the red, led by the real estate              (-1.25%) sector, the Dax (-0.31%) and FTSE (-0.86%) declined modestly, but the Italian FTSE MIB reversed the trend, to be up +0.12%.
  • University of Michigan’s consumer sentiment index was higher than expectations at 97.6 (vs. 94), the highest reading since January. The return in confidence should be supportive for consumer spending growth going forward. The Atlanta Fed’s GDPNow estimate of Q3 GDP growth currently stands at 3.8%, while the NY Fed’s estimate closed the week at a more restrained 2.1%. Sitting between those estimates but at the higher end, the St Louis Fed’s model has growth pegged at 3.5%. Elsewhere, Germany’s July PPI was higher than expected, at 0.2% mom (vs. 0% expected) and 2.3% yoy (vs. 2.2% expected) and Canada’s July inflation was in line at 0.0% mom and 1.2% yoy.
  • USD dollar index weakened 0.2%. The Euro gained 0.3% against both the USD and Sterling, while Sterling/USD was broadly flat. In commodities, WTI oil was up 3%, with the OPEC’s full technical committee scheduled to meet today to discuss compliance with production targets. Iron ore continued to increase, up 3.4% following signs of stronger steel demand from China. Elsewhere, precious metals were slightly down on Friday (Gold -0.3%; Silver -0.4%). Other metals were modestly up (Copper +0.6%, Aluminum +1.1%) and Zinc was up 2.7% following reports that LME stock had fallen to the lowest level since 2008.
  • The UST 10y increased 1bp across the curve (2Y: +1bp; 10Y: +1bps), but core European bond yields fell 1bp at the longer end of the curve, with bunds (2Y: +0.3bp; 10Y: -1bps) and French OATs (2Y: -0.4bp; 10Y: -1bp), but Gilts (2Y: +1bp; 10Y: unch) were unchanged. Elsewhere, Italian BTPs (2Y: +1bp; 10Y: +1bp) were slightly higher in yields.

Economic Calendar Releases

  • Chicago Fed National Activity Index: Held down by flat readings throughout, July was surprisingly weak based on the national activity index which came in at minus 0.01 to indicate fractionally lower-than-normal growth in the month. July’s production component fell to minus 0.02 from plus 0.03 in June as manufacturing production dropped slightly; the employment component, at plus 0.09, was the strongest contributor in the month though down from 0.13 in June; the consumer & housing component fell 0.06 as permits fell back once again; and sales/orders/inventories sank to minus 0.01 from plus 0.06. Manufacturing production and housing permits once again undercut what was otherwise a solid month for the economy.
  • 4-Week Bill Announcement, 3-Month Bill Auction, 6-Month Bill Auction

 

Our Analyst’s Technical Commentary

SPXWeekly Chart

  • The S&P 500 fell for the second consecutive week and is now close to the 20-week EMA. The index has not broken below the 20-week EMA since end-October of last year. A break below the 2405 levels can take the index to the trendline support. Once the index breaks below the trendline, it should signal a deeper correction.
  • On the other hand, if the 2405 levels hold, the index is likely to become range bound for a few weeks.

 

Daily Chart

  • The S&P 500 fell 0.18% on Friday to close at 2425.6. The total intraday range was 19.6 points.
  • The index has formed an inverted hammer candlestick pattern on Friday. This is a bullish reversal pattern, but for it to play out, the index will have to open with a gap and sustain the upmove today.
  • The broad market was in an equilibrium on Friday; the number of stocks at new 52-week lows continued to climb higher. This shows that the market is in no mood to let go of the current opportunity to sell the index.
  • The index is close to its support zone, a small pullback can’t be ruled out at the current levels. However, the question is whether the pullback will sustain.
  • We are of the opinion that the pullback should face resistance at the downtrend line, as shown in the chart. A breakdown below the 2400 levels will form a bearish rounding top pattern, which should signal a correction to at least 2320 levels. We remain cautious at these levels and are holding on to our cash. We are likely to start investing once the index stops falling.

 

Market Data

  • 1563 stocks advanced on the NYSE; 1361 stocks declined. 38 stocks made new 52-week highs; 162 stocks made new 52-week lows.
  • 1452 stocks advanced on the Nasdaq; 1401 stocks declined. 29 stocks made new 52-week highs; 122 stocks made new 52-week lows.

Intraday Chart

  • The index could only manage a pullback to the 38.2% Fibonacci retracement levels on Friday. This shows that the selling pressure is strong. Today, the market will either attempt to hold the 2420 levels and breakout of 2440 or it will seek to breakdown below the 2420 levels and extend the fall to 2400 and lower. We should see some volatility with both directions start establishing supremacy.

Glossary:

  1. Ascending Channel – An ascending channel is the price action contained between upward sloping parallel lines. Higher pivot highs and higher pivot lows are technical signals of an uptrend. Trendlines frame out the price channel by drawing the lower line on pivot lows, and the upper line is the channel line drawn on pivot highs. Price is not always perfectly contained but the channel lines show areas of support and resistance for price targets. A higher high above an ascending channel can signal continuation. A lower low below the low of an ascending channel can signal trend change.
  2. Ascending triangle pattern– is a bullish formation that usually forms during an uptrend as a continuation pattern.
  3. Bearish Engulfing pattern – chart pattern that consists of a small white candlestick with short shadows or tails followed by a large black candlestick that eclipses or “engulfs” the small white one.
  4. Break– a rapid and sharp price decline
  5. Breakdown– price movement through an identified level of support, which is usually followed by heavy volume and sharp declines
  6. Breakout– a price movement of a security through an identified level of resistance, which is usually followed by heavy volume and an increased amount of volatility.
  7. Candlestick– a chart that displays the high, low, opening and closing prices of a security for a specific period. The wide part of the candlestick is called the “real body” and tells investors whether the closing price was higher or lower than the opening price.
  8. Correction – a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation; generally temporary price declines interrupting an uptrend in the market or an asset; shorter duration than a bear market or a recession, but it can be a precursor to either.
  9. Descending Triangle pattern– A bearish chart pattern that is created by drawing one trendline that connects a series of lower highs and a second trendline that has historically proven to be a strong level of support.
  10. Doji – candlesticks that look like a cross, inverted cross or plus sign; forms when a security’s open and close are virtually equal for the given time period and generally signals a reversal pattern for technical analysts
  11. Double top – technical analysis to describe the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop.
  12. Gravestone doji – a type of candlestick pattern that is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day.
  13. Head and Shoulders pattern – a chart formations that predicts a bullish-to-bearish trend reversal; believed to be one of the most reliable trend reversal appears. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end.
  14. Inside Day formation– A candlestick formation that occurs when the entire daily price range for a given security falls within the price range of the previous day. Inside day often refers to all versions of the harami pattern and can be very useful for spotting changes in the direction of a trend.
  15. Long legged doji – a type of candlestick formation where the opening and closing prices are nearly equal despite a lot of price movement throughout the trading day. This candlestick is often used to signal indecision about the future direction of the underlying asset.
  16. Relative Strength Index – (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally RSI is considered overbought when above 70 and oversold when below 30.
  17. Resistance – a price point on a bar chart for a security in which upward price movement is impeded by an overwhelming level of supply for the security that accumulates at a particular price level.
  18. Rounding Top pattern– is identified by price movements that, when graphed, form the shape of an upside down “U”; may form at the end of an extended upward trend and indicates a reversal in the long-term price movement; considered a rare occurrence.
  19. Support Level– refers to the price level below which, historically, a stock has had difficulty falling. It is the level at which buyers tend to enter the stock.

Follow us on Facebook and Twitter for timely market information.

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