Added To The List

Added to the list.  Stocks posted a mixed close ahead of the extended holiday weekend.  A weak outlook from China held stocks back but traders managed to erase earlier losses, fueled by optimism that the US is slowly coming back to life. 

N O T E W O R T H Y

The year of the rat.  2020 is the year of the rat on the Chinese zodiac calendar.  Despite its negative connotation in American culture, the zodiac animal represents wealth and surplus for the Chinese.  2019 was a challenging year for China as it was faced with a cyclical slowdown in economic growth which was made worse by a trade war with the US.  Things started to look up as a partial trade deal was agreed upon late in the year causing Chinese stocks to rally on optimism.  The so-called Phase One trade deal was finally signed on January 15th of this year, just as the Coronavirus was beginning to take hold in Wuhan and it has been a bumpy ride for China ever since.  In China, the partial lockdown knocked the wind out of its economy but its quick containment of the virus gave traders the buy signal they were looking for.  You might recall that during the height of the trade war between the US and China, economists were worried about supply problems.  With stalled trade, many were worried that products manufactured in China would become overpriced and possibly caught up in a broken logistics pipeline.  Once the Coronavirus broke out, the supply problem was worsened when factories were shuttered causing many other global producers who were reliant on Chinese-manufactured parts and sub-assemblies to stall or shutdown their assembly lines.  When the virus spread across the globe, the supply problem became a demand problem as assembly lines were halted to protect workers.  Sheltering consumers are purchasing less and a spike in global unemployment have further diminished demand. Planners in China meet once a year and set economic targets for the country.  On Friday, Beijing dropped its growth target for the year citing uncertainty.  In other words, it pulled its forward guidance not unlike many companies in the US.  After all, the Chinese economy contracted in the first quarter, marking its first drop since the data was recorded (1992).  Further compounding its challenges, the Administration is stepping up the pressure by threatening fresh sanctions and adding some 33 Chinese companies to a blacklist.  Last week, lawmakers enacted new rules forcing foreign companies listed on US exchanges to follow US accounting rules and guidelines.  The move is expected to directly impact Chinese companies which rely on American capital markets as a source of financing.  Though the Shanghai Composite Index has recovered some of its losses from earlier in the year, these latest developments threaten to derail China’s recovery, weakening the zodiac calendar’s predictive success.  For a point of reference, 2008 was the last year of the rat. In that year the Shanghai Composite Index fell by -65%.

Outbreak.  The S&P500 recently broke out with some closes above a key Fibonacci resistance line at 2947.  The index was confined in a range for a month prior and closes below the bottom of the range would be considered bearish signals while closes above the high end are bullish signals.  Unfortunately, there remains a very powerful resistance level just above Friday's close which is marked by the round number 3000.  More importantly the index’s 200-day simple moving average is just around 3000 as well.  The 200-day moving average is used as a long term trend indicator and if the index is able to post some closes above it, many systematic and algorithmic traders would view it as a buy signal.

THE MARKETS

Stocks had a mixed close on Friday on hopes that the easing of restrictions could mark the beginning of a slow recovery.  The S&P500 climbed by +0.24%, the Dow Jones Industrial Average slipped by -0.04%, the Russell 2000 added +0.59%, and the Nasdaq Composite index rose by +0.43%.  Bonds advanced and 10-year treasury yields fell by -2 basis point to 0.65%.

NXT UP

- Chicago Fed National Activity Index (April)  is expected to come in at -3.5, slightly better than the prior reading of -4.19.

- FHFA House Price Index (March) is expected to have grown by +0.5%, slower than last month’s +0.7% growth.

- New Home Sales (April) may have fallen by -23.4% after falling by -15.4% in the prior month.

- The Conference Board’s Consumer Confidence (May) is expected to be 87.0, up slightly from April’s read of 86.9.

- Dallas Fed Manufacturing Activity (May) is expected to come in at -61.0 compared to last month’s -73.7.

- In the remainder of the week we will get more housing data, additional regional Fed data, GDP, Durable Goods Orders, Personal Income, Personal Spending, PCE Deflators, University of Michigan Sentiment, and the Fed Beige Book.  Please refer to the attached economic and earnings calendars for details.

daily chartbook 2020-05-26

econ numbers 5_26

earnings releases 5_26xlsx