Best Foot Forward

Best foot forward.  Markets behaved the way they are expected to yesterday responding to a series of strong earnings reports before the bell.  The rally was actually sparked on Wednesday as Microsoft and Tesla announced strong earnings after the market closed.  The positive sentiment carried the markets through the overseas sessions giving way for another collection of strong releases in yesterday’s pre market.  Twitter (the company everyone loves to hate or hates to love) had an upbeat release helping the stock wing its way up 16% on the session and helping its tech cousins and the tech-heavy NASDAQ 100 to soar by +3.35%.  You may recall that the very same index was down -4.63% in the prior day's trade.   Also notable was a positive release from Ford.  Many expect the automobile sector to slow as a result of rising rates.  Consumers of autos rely heavily on consumer credit to make purchases and if you haven’t heard, the cost of borrowing is going up.  So, contrary to the growing number of politicians and money managers who are criticizing the Fed for raising rates, Ford had an upbeat release yesterday helping the markets pile up some gains.  Speaking of the Fed and rising rates, you may have noticed that many people, chief amongst them our Commander in Chief, have been decrying the Fed’s recent moves in an attempt to pressure them onto a more subtle path of rate hikes.  This is quite common and it usually has no impact on the Fed’s independent decision making.  In fact, this past week featured many Fed Governor speeches, which were all overshadowed by the markets’ volatility, and the message seemed clear that rates will continue to rise.  Currently, there is a 73.6% probability of another 25 basis point rate hike in December.  It was a touch higher a few week’s back but 73.6% is still some pretty good odds in favor of the hike.  Will the Fed factor in the recent market volatility?  Yes, of course, but that is only one small factor and with the economy running hot with full employment the Fed will ultimately have to act.

The S&P500 rose +1.86% in yesterday’s session bringing it back over its 2688 Fibonacci line and slightly above the magical 2700 number.  However the index is still below its 200 day moving average as well as its 50% Fibonacci line at 2748.  The S&P will get support at 2700 and 2688 and resistance will be 2736 (see chart 4 in my attached daily chartbook).  The Dow Jones Industrial Average also posted an impressive +1.63% rise yesterday but it was unable to close above its magical 25000 number nor could it bring itself back over its 200 moving average.  The Dow will get support from its 24873  Fibonacci line and will get resistance above from 25000 as well as its 200 day moving average (see chart 6 in my attached daily chartbook).  The Russell 2000 also gained some ground yesterday but the index remains in a technically challenging spot near its lows of the year.  I have said it many times but it is important to recognize that the Russell is a really strong indicator of overall equity sentiment and it needs to recover in order for the broader markets to get back to stronger growth.  The small caps that make up the Russell have really been under margin pressure this fall.  Even though many believe that the smaller cap companies would not be sensitive to trade issues, however these companies are in many cases, highly reliant on overseas production and materials.  The cost of those is going up causing margins to get squeezed.  As mentioned above, the NASDAQ 100 had an impressive session yesterday recovering quite a bit of its prior session loss.  The index managed to close above its magical 7000 number but fell short of regaining its 200 day moving average.  The NASDAQ will get support at 7000 and 6893 and it will get some resistance from its 200 day moving average and its 7083 Fibonacci line (see chart 8 in my attached daily chartbook).  All of the equity indices remain risk off.  Bonds eased back yesterday in response to the equity rally with 10 year yields closing at around 3.11%.  Yields have since eased back a bit and will start this morning’s session at 3.08%.

This morning we will get another rush of earnings before the bell, however badly received releases form Amazon and Alphabet/Google in last night’s post market may contribute to a weaker open and will most likely overshadow the other morning releases.  In the case of Amazon, they beat earnings but announced that they were expecting a softer holiday season and that their AWS cloud service business growth slowed a bit causing the stock to trade off as much as -10% in after market trade.  Alphabet announced that revenue growth from their core advertising business slowed somewhat causing its shares to trade off as much as -4% in after market trade.  The big release of this morning will be the Bureau of Economic Analysis’ GDP figure.  GDP is expected to have grown by +3.3% with many opinions on either side.  This one can certainly move the market as can some of its components, amongst them the price index which is expected to have grown +2.1% after last period’s +3.0%.  Next week will bring more earnings, the now famous PCE Deflator (the Fed’s favorite gauge of inflation), consumer confidence, and the monthly employment situation.  Today will be another day of volatility but the good news is that we will have the weekend to regain our balance... in preparation for next week.

daily chartbook 2018-10-26