Paused

Paused.  Stocks took a pause yesterday with a mixed close as traders await some news on the trade war.  Early in the session gains melted away as gulf tensions and the ongoing trade war overtook rate cut optimism.

MY TWO CENTS

1.  Divergence in markets may be a warning.  The large cap Dow Jones and S&P 500 indexes are both sitting just below all time highs which may lure in sidelined investors hoping for a bull rush.  Looking beyond the most cited indices, a different story is emerging.  The Russell 2000 is a small cap index which is made  up of the bottom 2000 capitalized stocks in the Russell 3000, which is a broad market index.  Small cap stocks represent a more realistic view of the economy as their health depends on current economic conditions.  That is why many quantitative models use the Russell 2000 as an input to gauge longer term market health.  That said, if you look at the past 12 months performance of the Russell 2000 versus the S&P 500 you will notice a divergence (charts 4 and 7 in my attached daily chartbook).  That is to say that the small caps are going the opposite way of the large caps.  The divergence can be an indication that any upside move from here will not be sustainable.

2.  Fed data continues to underwhelm.  In yesterday’s note I pointed out the weak manufacturing data that has been coming in, specifically in the regional Fed activity reports.  Yesterday, we received the Dallas Fed Manufacturing Activity Index which gauges sentiment amongst manufacturers in Texas and the outlook is dim.  The Index came in with a drop of -12.1 worse than expectations.  The number represents the fourth straight monthly drop and is at a three year low.  This morning we will get a similar report from the Richmond Fed.

THE MARKETS

Markets went nowhere in a lower than average volume session of trading.  Now that the Fed report is behind us, all eyes are on trade once again with many traders hoping that President Trump is able to makes some positive progress in a meeting with President Xi scheduled for later this week at the G-20 summit.  Despite all the hope, many on Trump's team are playing down expectations that something big will result.  Still, the President has the ability to quell markets while keeping China in hold as he can announce a delay of the already announced tariff hikes.  This is a more likely scenario than a large breakthrough and should be well received by the market.  Still the market is set up for disappointment if nothing comes of the talks.  Yesterday’s sideways trade had the S&P 500 trading off by -0.17%, the Dow Jones Industrial Average moving up marginally by +0.03%, the Russell 2000 dropping by -1.26%, and the NASDAQ 100 slipping by -0.07%.  Bonds ascended slightly yesterday and 10-year treasury yields fell by -4 basis points to 2.01%.

WHAT’S NXT

- The FHFA will release its House Price Index which is expected to show a +0.2% gain after last month’s +0.1% increase.

- The Richmond Fed will release its Regional Manufacturing Index which is expected to have contracted to 2 from 5.

- The Census Bureau will report on New Home Sales which are expected to have grown by +1.6% after last month’s -6.9% decline.

- The Conference Boards will release Consumer Confidence which is expected to be 131.1, down from last month’s read of 134.1.

- Fed speakers include NY Fed’s John Williams, Atlanta Fed Raphael Bostic, Chairman Jerome Powell, Richmond Fed President Thomas Barkin, and St. Louis Fed’s James Bullard.  Lot’s of good Fed speak today.

- Lenar and FacSet Research both beat earnings estimates this morning. Micron is slated to release before the bell and Fedex will announce earnings after the close.

daily chartbook 2019-06-25