Commenting on today’s trading Gorilla Trades strategist Ken Berman said:
While stocks retreated following two bullish days today, the losses were minuscule in most of the sectors, and bulls could soon erase last week’s sell-off. Last week was all about the possibility of a global recession and the likely rate cuts by the Fed, but today, stocks showed stability even as Treasury yields bounced back, and the outcome of the trade talks remained a mystery, proving their resilience yet again.
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The major indices all finished in the red following a very choppy session, as stocks settled down following Friday’s furious short-covering rally on Wall Street. The Dow was down 96, or 0.4%, to 26,478, the Nasdaq gained 26, or 0.3%, to 7,956, while the S&P 500 fell by 13, or 0.5%, to 2,939. Decliners outnumbered advancing issues by an almost 3-to-2 ratio on the NYSE, where volume well below average.
Investors had to digest contradicting reports regarding the trade talks, but looking at the performance of the key sectors today, most participants seem to be cautiously optimistic. The stocks most exposed to the Chinese market performed in line with the major indices, and tech stocks, which have been vulnerable to the negative trade developments, were among the strongest issues. Lower-level talks started today in Washington, meaning that volatility could already pick up tomorrow, and traders should expect sudden spikes across asset classes, as the negotiations unfold.
Besides the weak European economic numbers, the Brexit saga also continues to pose a serious risk to investors. Even though Prime Minister Boris Johnson put forward a ‘final’ proposal to the European Union (EU) to manage the debated issues, the threat of a no-deal Brexit remains very real. Analysts agree that another extension to the October 31 deadline is still the most likely scenario, and since the EU will likely reject the UK’s latest proposal in the coming days, we could be in for another tumultuous and volatile week for European assets.
Although last week’s weaker-than-expected wage growth figure means that inflationary pressures are likely easing, tomorrow’s Producer Price Index (PPI) could still have a major impact on financial markets. Looking at the trends in Asia and Europe, a global manufacturing recession might already be underway, and in the wake of the two negative ISM manufacturing PMIs, a weak PPI reading could mean that the sector sliding into contraction in the U.S. as well. The NFIB Small Business Index and the IDB/TIPP economic optimism number will also be out tomorrow, while the German industrial production report will highlight the pre-market session.
Trading activity was very light today, and with Friday’s strong rally in mind, this low-volatility consolidation is just what the doctor ordered for bulls. While a lot of investors likely took a step back because of the looming trade talks there were plenty of reasons for stocks to decline. The major indices held on to their gains from Friday in the face of the negative European headlines and the mixed trade-related reports, and since tech stocks and small-caps were stronger than the broader market, the pullback might already be over. Stay tuned!